ANNUAL REPORT concerning the financial year 1994 (95/C 303/01)

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

André J. MIDDELHOEK (President)

Constantinos ANDROUTSOPOULOS

Daniel STRASSER

Bernhard FRIEDMANN

Maurice THOSS

John WIGGINS

Giorgio CLEMENTE

Barry DESMOND

Patrick EVERARD

Armindo de Jesus de SOUSA RIBEIRO

Antoni CASTELLS

Jan O. KARLSSON

Hubert WEBER

Aunus Olavi SALMI

Joergen MOHR

TABLE OF CONTENTS

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Introduction 5

Part I: OBSERVATIONS ON THE COMMISSION'S REVENUE AND OPERATING APPROPRIATIONS AND ON THE EUROPEAN DEVELOPMENT FUNDS

Chapter 1 - Own resources 21

Chapter 2 - The European Agricultural Guidance and Guarantee Fund, Guarantee Section (EAGGF-Guarantee) 57

Chapter 3 - Common policy on fisheries and the sea 90

Chapter 4 - Regional sector 100

Chapter 5 - Social sector, stimulation of enterprises (SMEs) and training 131

Chapter 6 - The financial instruments for the environment: LIFE and its predecessors 161

Chapter 7 - The European Agricultural Guidance and Guarantee Fund, Guidance Section (EAGGF-Guidance) 175

Chapter 8 - Financial instruments and banking activities 176

Chapter 9 - Research 187

Chapter 10 - Measures in favour of the countries of Central and Eastern Europe, the Newly Independent States (former Soviet Union) and Mongolia 201

Chapter 11 - Cooperation with developing countries and third countries (except for Central and East European countries) 229

Chapter 12 - European Development Funds 252

Part II: OBSERVATIONS ON THE ADMINISTRATIVE APPROPRIATIONS OF THE INSTITUTIONS AND ORGANIZATIONS OF THE EUROPEAN COMMUNITIES

Chapter 13 - Commission 296

Chapter 14 - Court of Auditors 313

ANNEXES

Annex I - Reports and opinions adopted by the Court of Auditors during the last five years 314

Annex II - Annex in respect of the abbreviations and symbols used in the report and background information on the general budget 323

THE COMMISSION'S REPLIES

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Part I: OBSERVATIONS ON THE COMMISSION'S REVENUE AND OPERATING APPROPRIATIONS AND ON THE EUROPEAN DEVELOPMENT FUNDS

Chapter 1 - Own resources 45

Chapter 2 - The European Agricultural Guidance and Guarantee Fund, Guarantee Section (EAGGF-Guarantee) 83

Chapter 3 - Common policy on fisheries and the sea 98

Chapter 4 - Regional sector 120

Chapter 5 - Social sector, stimulation of enterprises (SMEs) and training 147

Chapter 6 - The financial instruments for the environment: LIFE and its predecessors 170

Chapter 8 - Financial instruments and banking activities 184

Chapter 9 - Research 197

Chapter 10 - Measures in favour of the countries of Central and Eastern Europe, the Newly Independent States (former Soviet Union) and Mongolia 218

Chapter 11 - Cooperation with developing countries and third countries (except for Central and East European countries) 245

Chapter 12 - European Development Funds 274

Part II: OBSERVATIONS ON THE ADMINISTRATIVE APPROPRIATIONS OF THE INSTITUTIONS AND ORGANIZATIONS OF THE EUROPEAN COMMUNITIES

Chapter 13 - Commission 307

SUMMARY OF DIAGRAMS (D)

Page

D I. General budget 1994 - estimated revenue 10

D II. General budget 1994 - estimated expenditure - appropriations for payment 11

D III. General budget 1994 - appropriations for commitment 12

D IV. Appropriations for commitment available in 1994 and their utilization, by sector and by institution 13

D V. Appropriations for payment available in 1994 and their utilization, by sector and by institution 14

D VI. Financial perspective: breakdown of appropriations for commitment available from the 1994 budget and implementation; total appropriations for payment available from the 1994 budget and implementation 15

D VII. The consolidated revenue and expenditure account and the balance calculated for the 1994 financial year 16

D VIII. Payments made in 1994, by sector and by Member State 17

D IX. Evolution and utilization of appropriations for payment for the period 1990-94, by sector 18

D X. Utilization rates of appropriations for payment from 1990 to 1994, by sector 19

D XI. Annual payments during the period 1990-94 by sector and by institution 20

D XII. Estimated and actual revenue in 1994 54

D XIII. Actual own resources in 1994 55

D XIV. Actual own resources, by Member State (1990-94) 56

D XV. EAGGF-Guarantee - payments made in 1994, by market and by Member State 89

D XVI. The Structural Funds: commitments entered into and payments made in 1994, by Member State 159

D XVII. Structural aid - commitments entered into and payments made in 1994, by Member State and by objective 160

D XVIII. Aid to the countries of Central and Eastern Europe - the PHARE and TACIS programmes 227

D XIX. EC loans for the benefit of the countries of Central and Eastern Europe up until 31 December 1994 228

D XX. Basic information on the European Development Funds (EDFs) 285

D XXI. The sixth EDF - allocation, financing and distribution of aid, overall utilization 286

D XXII. The seventh EDF - allocation, financing and distribution of aid, overall utilization 287

D XXIII. The sixth EDF - aid by type and by recipient country 288

D XXIV. The sixth EDF - aid by sector and by recipient country 289

D XXV. The seventh EDF - aid by type and by recipient country 290

D XXVI. The seventh EDF - aid by sector and by recipient country 291

D XXVII. The sixth and seventh EDFs - utilization of aid by economic sector 292

D XXVIII. The seven EDFs - evolution of annual payments (1960-94) 293

INTRODUCTION

0.0. TABLE OF CONTENTS Paragraph reference

The general context of the 1994 annual report 0.1

Structure of the annual report 0.2 - 0.3

Principal findings of the 1994 audit 0.4 - 0.24

Benefits from improved financial management 0.25

Implications of the Statement of Assurance 0.26

Commission staff management 0.27 - 0.28

The Court of Auditors' role with regard to fraud 0.29 - 0.32

THE GENERAL CONTEXT OF THE 1994 ANNUAL REPORT

0.1. This report is being published as the first year of the new Commission draws to a close, a year of enlargement of the Community and of a 12% increase in the size of the budget. At its first meeting on 25 January 1995, the incoming Commission decided to initiate a reform of its internal management, with the necessary analysis and reflection in three phases (consolidation and rationalization of the existing system; reform of structures and rules; search for closer partnership with Member States), each to be followed by concrete proposals. The Court welcomes this financial management improvement programme and, while recognizing that a particular corporate culture cannot be changed overnight, finds the initial steps taken within the Commission's services encouraging. The third stage envisaged (implying measures to improve Member States' management of EC funds) may take longer to achieve significant progress, but it is equally vital. The examples of waste and mismanagement of EC funds that are to be found in numerous Court audit reports are ample evidence for the need for a concerted effort to complete the Commission's improvement programme and convert a rather lax 'spend the budget` approach into one which emphasizes value for money and rigorous financial and accounting management with clear attribution of responsibility for success and failure.

STRUCTURE OF THE ANNUAL REPORT

0.2. The financial year 1994 is the first for which the provisions of the Maastricht Treaty have significantly affected the content and presentation of the Court's annual reporting. The Treaty requires the Court to draw up a statement of assurance as to the reliability of the accounts and the legality and regularity of the underlying transactions. The statement and an accompanying special report are issued at the same time as, but separately from, the annual report so that all three documents can be taken into account in the discharge procedure for 1994 together with the other special reports made by the Court since the 1993 discharge procedure ().

0.3. As a result of the new arrangements for the Statement of Assurance, there is no longer any general chapter on financial audit of the Commission's revenue, operating expenditure and accounting and of the consolidated accounts in this annual report. Material which in previous years would have appeared in such a chapter now finds its place in the statement of assurance and the related special report.

PRINCIPAL FINDINGS OF THE 1994 AUDIT

0.4. Throughout this 1994 annual report the Court mentions examples of financial management weaknesses that are often closely similar to those mentioned in its previous reports, even though many of the examples are drawn from audits of specific measures which have not previously, or at least not recently, been audited by the Court. This is further evidence of the need for substantial change in what might be termed 'the financial management culture` which administers and controls the collection and utilization of budgetary resources, at Commission and Member State levels.

0.5. Evidence of the problems to which this financial management culture gives rise can be seen in budgetary planning far in excess of the Commission's real ability to plan and; in weak management of available funds (which are paid out without regard to the legislator's objectives and/or without sufficiently clear targets being specified for achievement through the expenditure in question, and often without sufficient attention to cost-effectiveness); and in failure to act quickly and vigorously to recover funds wrongly paid or overpaid.

0.6. There is a striking example of underspending in the Structural Funds, which results mainly from failure to anticipate difficulties in the first year of a reformed approach, despite such difficulties having occurred at the time of the last such reform six years previously.

0.7. The employment of funds without policy objectives being achieved is described in most of the chapters of the report. This situation arises both where - as in the areas of agricultural guarantee and development aid - it is the Commission's exclusive responsibility to specify the objectives of expenditure, and where - as in the case of the Structural Funds - the objectives have to be agreed between the Commission and the member governments sponsoring the programme. In Chapter 2 the inadequate results of the common market organization for fruit and vegetables are mentioned. Chapter 3 concludes that aid for tunny fishing has no clear justification. Chapter 4 shows that the Interreg programme has not significantly stimulated cross-border partnership in frontier areas, while Chapter 5 demonstrates that the results of European Social Fund actions in favour of small and medium-sized enterprises, where they can be measured at all, fall far short of the objectives.

0.8. With regard to development aid from both the budget (structural adjustment support programmes in four Arab countries) and the European Development Fund (regional cooperation), the Court concludes that objectives fixed were so vague or general that it is very difficult to make satisfactory comparisons between what has been done and what was intended. In various areas of expenditure on the Community budget, the Court has found that imprecise regulations (which are generally silent as regards requirements for accounting and financial management) have enabled Member States to interpret differently eligibility criteria which should be equally applicable to all. Such imprecision inhibits effective monitoring and audit of programmes by national authorities, the Commission and the Court.

0.9. Cases where management had failed to take timely and vigorous action with a view to the recovery of funds owing to the Community are reported in Chapters 1, 2, 4, 5, 6, 8 and 10. Failure to take such action may make it difficult or impossible subsequently to recover the amount due from the debtor.

0.10. This report, like its predecessors, draws attention to significant weaknesses in mechanisms for planning, approving, monitoring, controlling and evaluating Community actions. The audit of the common market organization for fresh and processed fruit and vegetables revealed that Member State inspection and approval of producer organizations, which play a major role in market management, were very weak and that many producer organizations, despite nearly 30 years of encouragement and assistance, had insufficient working capital for intervention purposes.

0.11. In Greece, France and Italy payments were made for withdrawing from the market produce which did not meet the quality standards for Community aid. Controls on citrus processing in Italy and Greece and on tomato processing in Spain, Italy and Greece were so weak that there could be no assurance that aid paid was justified. There were overpayments of aid for nuts in Spain, while in Greece claims for aid for dried grapes were wrongly presented and not subject to any check independent of the beneficiaries. The yield levels set for eligibility for aid of dried grapes provide no incentive to quality improvement and facilitate irregular sales to the fresh fruit market. Control of aid per hectare without a land register and with a very large number of growers (who often omit to notify changes of ownership) is impossible.

0.12. The aid for processors of oranges, peaches and tomatoes is high when compared with the minimum prices paid to growers and the high level of support for orange processors has encouraged investment in capacity to process produce which is not competitive with imports. Moreover, the costly system of withdrawals and destruction of surpluses to relieve the market of excess production and ensure a minimum income for producers both encourages overproduction and pollutes the environment.

0.13. Audit of fisheries policy expenditure showed that the aid for tunny, paid in respect of ships registered in Spain, Portugal and France, was without any clear economic justification, and risked benefiting the canning industry rather than the fishermen. Moreover, the rules for the management of the aid took no account of the fact that many of the ships fish only in distant oceans and that their catch is rarely landed directly at EU ports.

0.14. In a significant number of the Regional Fund programmes' projects audited, irregularities found underline the extent to which, six years after a major reform, improvements are still needed to ensure the legality and regularity of Structural Funds operations. Member State declarations of expenditure should be better presented and controlled. The Commission needs to insist on more rigorous application of the funds regulations and the financial regulation; it should also define more clearly the criteria for eligibility for aid. Weaknesses in contract award procedures for public sector infrastructure increase the risk of irregularity, while the Commission could do more to check that environmental aspects are properly considered during both planning and execution of programmes.

0.15. For profitable investment projects the Commission ought to examine the possibility of replacing grant aid by loan finance so as to encourage final beneficiaries to behave more responsibly. The use of 'global` block grants to stimulate local economic development needs to be reconsidered; in particular there is not enough transparency about the role of intermediary organizations who can decide without any clear criteria which enterprises should receive assistance and whether that assistance should take the form of grants or loans.

0.16. The Social Fund chapter of this report again draws attention to the way in which the accounts by regarding advance payments as definitive expenditures overstate the real impact of expenditure on the underlying operations. It also mentions that whenever checks conclude that an action undertaken is ineligible for Community financing, the Member State can simply substitute some other action, often for retrospective financing, so that there are no effective sanctions against Member State authorities which fail to ensure that Community funds are used only for approved purposes and within the terms of previously agreed plans.

0.17. The LIFE programme and its predecessors call for careful project selection in pursuit of agreed EC environmental objectives, so as to ensure maximum impact from the limited funds available. In practice the innovative character which should distinguish many of the projects has not been demonstrated, and there has been insufficient coordination between and within the Commission and the Member States to ensure proper monitoring, control and the exploitation of the results. Member State authorities could play a greater role in the preparation and presentation of project proposals for financing, while better coordination between LIFE projects and numerous other environmental projects aided from other EC sources is clearly required.

0.18. In the 'Human capital and mobility programme` (part of the third framework programme for Community research) weaknesses in contract monitoring and supervision were observed, together with problems of coordination between Commission departments. The beneficial effect of the expenditure in terms of its objectives was difficult to assess.

0.19. The examination of aid to Central and Eastern Europe leads the Court to conclude that a more substantial part of the PHARE programme has to be devoted to helping to prepare beneficiary countries' administrations for entry to the Community (in line with the conclusions of the Essen summit). In 1994, PHARE largely and TACIS essentially continued to finance technical assistance and studies provided by private consultant firms, with limited concrete results, particularly in terms of investments. Coordination between Commission services (in Brussels and the beneficiary countries) and the other sources of external aid and the beneficiary countries themselves remains insufficient.

0.20. The Commission still has no autonomous evaluation system after six years of PHARE and four of TACIS. Although the Court noted positive results (such as the programme for restructuring and privatizing collective farms in Belarus and a successful food operation in the Caucasus), implementation remains slow and the management capacity of the Commission both in Brussels and on-the-spot in its delegations has to be strengthened to improve coordination, preparation and monitoring of programmes and supervision of consultants.

0.21. The Community support for the structural adjustment programmes in south and east Mediterranean countries needs to be better adapted to the particular economic and budgetary situations of those countries. Unnecessary constraints and conditions on use of funds (such as extensive documentary checks when the foreign exchange provided is only a very small proportion of imports acceptable for financing) should be avoided. The Commission should satisfy itself that each beneficiary country's budget strategy is consistent with the economic reform programme. Quantitative and qualitative targets for priority sectors (including objectives for specific projects or programmes) should be included in financing agreements and form the main focus of monitoring.

0.22. As objectives of regional cooperation under Lomé III were formulated in very general terms, proper comparison between objectives and results is impossible. Financial and accounting management is poor and Commission monitoring has been neglected in several regions. The regional character of projects is often not evident.

0.23. Malfunctions of the systems in the field of own resources, particularly concerning customs duties, are described in Chapter 1. In the context of the Community transit arrangements, a significant number of irregularities resulting in financial loss to the Community and Member States were noted. The Court has also observed that the controls implemented by the national customs authorities in the field of transit are deficient and that the Commission's coordinating role in this area is inadequate. Regarding mutual assistance between the Member States and the Commission in the detection and prevention of fraud, it is emphasized that both the monitoring by the Commission and by the Member States must be improved and that certain provisions of the Community customs regulations must be adapted in order to make them consistent with the existing Community or national legislation.

0.24. Regarding the VAT resource, Chapter 1 sets out the results of an initial evaluation of the VIES (VAT information exchange system) system, which has been introduced so as to make it possible to implement the transitional arrangements. Although the system's development and functioning are noteworthy, the data declared require a significant degree of correction. In addition, the need for a policy of effective sanctions to be introduced by the national administrations in the event that operators fail to observe the proper procedures was also noted.

BENEFITS FROM IMPROVED FINANCIAL MANAGEMENT

0.25. There is clearly considerable potential for improving the way Community finances are managed in all the main areas of activity mentioned above and thus ensuring that public money is being properly used to achieve, in an efficient and effective way, the objectives laid down by the legislator. It is, of course, not possible to quantify with any certainty the real benefits that could result from more efficient and better targeted financing. There are, however, throughout this report, mentions of specific audit findings which give some indication of the scale of potential benefits which more rigorous financial management and control could achieve, in terms of amounts which should be recovered, payments for activities which were not eligible for aid or expenditures which were not demonstrably useful in achieving policy objectives, even if they could not be considered as entirely irregular. Given the limited extent to which the Court, with the number of auditors at its disposal, can audit financial management in any one year, it is clear that there is great scope for improvement and that any costs incurred in securing such improvement would be recovered in a very short time.

IMPLICATIONS OF THE STATEMENT OF ASSURANCE

0.26. The Statement of Assurance for 1994, issued at the same time as this report is published, contains significant reservations concerning the reliability of the accounts (mainly about presentation and disclosure) and draws attention to many errors affecting the legality and regularity of the underlying transactions for payments. This result represents further evidence of inadequate financial administration, by both the Commission and Member State bodies, of a significant part of the Community budget, in a wide variety of areas. The application of the principle of subsidiarity does not, of course, imply any diminution of the Commission's responsibility for the proper execution of the budget. A serious, concerted effort by the Commission and Member State authorities is urgently needed in order to raise the quality of the performance of responsible management at all levels.

COMMISSION STAFF MANAGEMENT

0.27. Commission staff management problems are also an important factor in achieving sound financial management. Audits of agricultural market organizations have repeatedly shown that the number of staff allocated by the Commission to audit and monitoring expenditure is very seriously inadequate. This report mentions the rapid turnover of staff responsible for administration and control of the Social Fund and the high number of vacant posts in that area. Chapter 10 draws attention to the transfer during the course of a single year of two-thirds of the permanent staff of a Commission delegation and to long delays in replacing them. It also notes that key management functions which should be carried out by Community civil servants are being performed by contract staff or third parties. Chapter 11 points out that insufficient staff resources were allocated (both in delegations and in Brussels) to supervision of structural adjustment support programmes for Jordan and the Maghreb countries.

0.28. The Court considers that better qualified staff resources need to be allocated to the management and control of existing policies and to improving the financial management environment both within the Commission and in Member State bodies responsible for Community operations.

THE COURT OF AUDITORS' ROLE WITH REGARD TO FRAUD

0.29. The Essen European Council concluded that fraud, waste and mismanagement of Community resources needed to be tackled with the utmost vigour, and recalling that the Treaty on European Union had given new powers to the European Parliament, the Council, the Commission and the European Court of Auditors, called for concerted action by these institutions and the Member States.

0.30. The primary responsibility for prevention, detection and investigation of fraud lies with those who manage and supervise policy execution in the Commission and the Member States. They have to ensure the existence of adequate systems of internal control, including segregation of duties, proper authorization procedures and an effective internal audit function and ensure that intentional irregularities (whether fraud or gross negligence) are detected, investigated and sanctioned.

0.31. The Court, as external auditor, has to review critically the arrangements made by management. It has always done this to an appreciable extent and Court annual or special reports have consistently drawn attention to weaknesses in legislation, in accounting and in financial management systems and indicated the risks involved as well as concrete cases involved. Although the Court, like other audit institutions, does not have the power to investigate crime (a task for the police and judicial authorities) but it plays its part by paying due attention to the prevention and deterrence of irregularities in general (whether intentional or not) and stimulating effective action by the appropriate authorities when audit indicates that some fraud may have possibly occurred or circumstances have arisen which are particularly favourable to the potential fraudster.

0.32. The Court has responded to the Essen Council's conclusions by reviewing those aspects of its audit methodology that relate most closely to the area of fraud. It has adopted specific objectives for the critical examination of legislation and associated management and control systems, the systematic identification of high risk areas (including the possible involvement in irregularities of people working within or directly for the EC institutions) and the development and implementation of general procedures for appropriate audit testing in high risk areas. In performing this task, the Court will remain in touch with all the bodies concerned.

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PART I Observations on the Commission's revenue and operating appropriations and on the European Development Funds

CHAPTER 1 (*) Own resources

1.0. TABLE OF CONTENTS Paragraph reference

General introduction 1.1

Implementation of the budget 1.2 - 1.3

Financial management 1.4 - 1.11

Financial management in the Member States 1.4 - 1.11

Mutual assistance in the context of combating customs fraud 1.12 - 1.44

Introduction 1.12 - 1.13

The use of mutual assistance 1.14 - 1.16

The monitoring of recoveries by the Commission 1.17 - 1.19

Monitoring of recoveries by the Member States 1.20 - 1.29

Need to adapt the Community customs regulations 1.30 - 1.38

No supervision of national recovery instruments by the Commission 1.39 - 1.40

Conclusion concerning mutual assistance in the context of combating customs fraud 1.41 - 1.44

The Community transit system 1.45 - 1.89

Introduction 1.45 - 1.49

Recorded delays in assigning a customs-approved treatment or use to goods brought into the customs territory of the European Union 1.50 - 1.53

External transit system 1.54 - 1.68

Simplified procedure for external transit operations 1.69

Risks associated with the assignment of a customs-approved treatment or use to goods presented to customs (external transit system) 1.70 - 1.78

Computerization of the Community transit system 1.79 - 1.80

Examples of dysfunction 1.81 - 1.85

Conclusions concerning Community external transit 1.86 - 1.89

VAT on intra-Community trade 1.90 - 1.111

Introduction 1.90 - 1.91

VAT revenue 1.92 - 1.94

The VIES 1.95 - 1.103

Use of recorded data and development of control strategies 1.104 - 1.105

Commission supervision of the new transitional arrangement 1.106 - 1.108

Conclusion concerning VAT on intra-Community trade 1.109 - 1.111

Gross national product 1.112 - 1.131

Introduction 1.112 - 1.113

GNP estimates 1.114 - 1.116

Statistical GNP 1.117 - 1.127

Conclusion regarding the GNP 1.128 - 1.131

GENERAL INTRODUCTION

1.1. The first part of this chapter discusses the budgetary out-turn for own resources and the results of the Commission and Member States' review of their management of them; this is followed by observations concerning mutual assistance in the fight against customs fraud and the implementation of the Community transit system. As regards VAT, there then follows an initial assessment of the VIES (value-added tax information exchange system), based on an enquiry carried out in cooperation with the national audit institutions. The final part of the chapter discusses the gross national product (GNP), with particular reference to forecasting and establishing it.

IMPLEMENTATION OF THE BUDGET

1.2. As can be seen from Table 1.1:

(a) actual revenue in 1994 amounted to 66 002,1 Mio ECU, which is 96,2% of the revenue specified in the final budget; there was no significant increase in actual revenue compared with 1993, when it amounted to 65 672,7 Mio ECU;

(b) traditional own resources, net of collection costs, amounted to 13 252,2 Mio ECU, or 20,1% of actual revenue. The gross equivalent is 14 724,6 Mio ECU. The traditional own resources in question comprise:

(i) customs duties of 12 420,0 Mio ECU gross, which is equivalent to 84,3% of traditional own resources;

(ii) agricultural levies of 922,5 Mio ECU gross, or 6,3% of gross traditional own resources;

(iii) sugar and isoglucose levies of 1 382,1 Mio ECU gross, or 9,4% of the gross figure for traditional own resources.

The initial forecasts of customs duties and agricultural levies were overestimated by 12,9% and 10,9% respectively;

(c) the VAT own resource (after inclusion of balances and adjustments) amounted to 33 217,9 Mio ECU, or 50,4% of actual revenue;

(d) the GNP resource (after inclusion of balances and adjustments) amounted to 17 674,5 Mio ECU (including reserves of 292,0 Mio ECU), which is the equivalent of 26,8% of actual revenue.

1.3. Supplementary and amending budget No 2 for 1994 includes a new Article 302 - Estimated surplus for the financial year 1994 - against which is entered an amount of 1 500 Mio ECU (the real surplus, which is shown in the consolidated revenue and expenditure account for 1994, is 6 540 Mio ECU). This entry complies neither with Article 7 of Council Decision 88/376/EEC, Euratom of 24 June 1988 (), nor with Articles 6 and 32 of the Financial Regulation. The heading, in fact, represents appropriations which will not be utilized (800 Mio ECU not implemented for the European Agricultural Guidance and Guarantee Fund (EAGGF Guarantee Section), 400 Mio ECU of appropriations not implemented and carried forward and 300 Mio ECU earmarked for structural measures but not utilized). Reducing the total appropriations entered in the budget by 1 500 Mio ECU, rather than creating the new Article referred to above, might have been the regular solution to the problem.

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FINANCIAL MANAGEMENT

Financial management in the Member States

Accounting procedures

1.4. Under Article 6(2) of Council Regulation (EEC, Euratom) No 1552/89 of 29 May 1989, the own resources that are to be made available to the Community are established entitlements that have been recovered or for which security has been provided. These entitlements are entered in the accounts known as 'the A accounts`. Where established entitlements are not entered in the A accounts in accordance with Article 6(2) of Regulation 1552/89 they must be entered in a separate system of accounts known as 'the B accounts`. The accounts in question are for entitlements that have not been recovered and for which no security has been provided. At Member States' discretion, these accounts may also include entitlements for which security has been provided, but which have been challenged.

1.5. The Court carried out audits in eight Member States (DK, D, F, GR, IRL, I, NL, UK). Under the national rules in Denmark, the basis on which revenue from customs and levies is made available is the date of entry in the accounts. In principle, they must be entered within five working days after the date on which the declaration is accepted. In the course of audits in two customs regions this deadline was found not to have been respected in approximately 30% of cases. As a result, approximately 10% of established amounts were made available late, when the delay occurred at the end of the month. In response to the Court's observations, the Danish central departments undertook to comply with the deadlines for entering amounts that are specified in the Community regulations.

1.6. It was found that in some cases there was a risk of interruption in the rate of recoveries. Under the period entry system in the United Kingdom, for example, there were substantial delays in the procedures for reconciling importers' declarations to the accounting departments with their declarations to the department responsible for managing the system. Thus, as of October 1994, only declarations made up to May 1994 had been cross-checked. In May 1995 the British authorities informed the Court that they had taken steps to eliminate any further delays.

1.7. The object of the separate accounts () (B accounts - see paragraph 1.4) is to enable the Member States and the Commission to monitor more closely action taken by Member States to recover own resources, especially where the resources concerned are exposed to the risk of fraud or irregularity.

1.8. In two Member States (GR, UK), it was necessary to adjust the balances on various offices' B accounts in 1994. Furthermore the B accounts were practically unaudited and, in some offices (UK), were far from full and complete, in that they included only amounts in excess of 10 000 ECU. At the beginning of 1995 the British authorities pointed out to the offices concerned the necessity of improved bookkeeping for the B accounts.

1.9. At the end of the first quarter of 1993, in Hamburg, there was a transfer of 26 Mio DM from the A accounts to the B accounts under the heading of agricultural levies, because the importer had contested the classification of the goods. Examination of the file showed that the Hamburg customs authorities had suspended the recovery procedures in March 1994, but there was nothing to show whether a guarantee had been requested in order to cover the sums in dispute. The Community Customs Code () (Article 244) permits the guarantee to be waived only if payment of it would be likely to cause serious economic or social difficulties, owing to the debtor's circumstances. In this particular case, however, it was noted that the authorities responsible had not made any enquiries to check whether the debtor was, in fact, experiencing serious economic or social difficulties.

Control procedures

1.10. In general all the Member States apply control procedures, usually based on an analysis of the levels of risk encountered, in order to validate customs declarations. In some countries analytical tests are carried out via a computer system in order to cross-check the details entered in declarations. Member States' use of control software and risk-analysis systems should be stepped up, in line with the guidelines issued by the Commission.

1.11. In addition to the controls on individual declarations, internal control procedures are in existence in the countries visited by the Court. In Ireland, most of the internal control activities concerning traditional own resources were suspended temporarily from November 1994, because of staff reallocations following a tax amnesty, and were not resumed until March 1995.

MUTUAL ASSISTANCE IN THE CONTEXT OF COMBATING CUSTOMS FRAUD

Introduction

1.12. Council Regulation (EEC) No 1468/81 of 19 May 1981 (), as amended by Council Regulation (EEC) No 945/87 of 30 March 1987 (), establishes the procedures for mutual assistance between the customs authorities of the Member States and for cooperation between them and the European Commission in order to ensure that customs regulations are correctly applied.

1.13. The Court reviewed the problems which the Commission had encountered in coordinating and following up enquiries at Community level as well as problems that had arisen in the carrying-out of enquiries by the Member States, within the mutual assistance framework (), with the aim of detecting and preventing customs fraud.

The use of mutual assistance

1.14. Under Regulation (EEC) No 1468/81, the Member States provide direct mutual assistance, either spontaneously or by request, by supplying any information or documents that are considered useful for the detection and prevention of fraud.

1.15. The competent authorities of each Member State and the Commission also exchange relevant information concerning goods that have been or are suspected to be the subject of illicit transactions. The information exchange also includes details of methods and processes used or suspected of having been used fraudulently, as well as any weaknesses or shortcomings in the legislation.

1.16. The number of cases involving customs fraud and irregularities (either suspected or established) that have been the subject of exchanges of information under Regulation (EEC) No 1468/81 between the Commission and the Member States has risen from 33 in 1988 to a grand total of 534 in 1994 (114 new cases in 1994). On the basis of statistical information and customs data, the Commission estimated that the total amount of traditional own resources at stake in these cases was more than 600 Mio ECU as of 31 December 1994, including some 275 Mio ECU for 1994 alone - the equivalent of around 2% of the net traditional own resources collected at the Union's frontiers with non-member countries each year (13 252,2 Mio ECU in 1994) ().

The monitoring of recoveries by the Commission

1.17. In order to monitor the recoveries effected by Member States, the Commission maintains a central record (), on the IRENE database (), of all the cases of fraud and irregularities involving own resources of more than 10 000 ECU in amount notified to it by Member States by means of 'fraud forms` under Article 6(3) of Regulation (EEC) No 1552/89. In principle, the cases in question are cases that have been detected, or cases where the Member States have established amounts which they must try to recover and make available to the Commission. With a view to subsequent monitoring of recoveries, the Commission also systematically records in IRENE cases that are currently under investigation within the mutual assistance framework, insofar as they have financial repercussions. In January 1995 the total number of records on the IRENE system was about 5 000, some 100 of which concerned mutual assistance cases (under Regulation (EEC) No 1468/81). Eleven of the latter were selected by the Court for an on-the-spot audit of files at the Commission.

1.18. The Commission has set up a pilot project of sample tests. The sample was constructed in accordance with risk analysis criteria, with the aim of testing the effectiveness of the national systems for recovering evaded customs duties. The Commission selected five mutual assistance files to form the first batch processed in 1994: bovine animals from former eastern bloc countries, milk powder, tuna from the Seychelles, shrimps/prawns from the Faeroe Islands and Turkish television sets. The sample covers evasion of approximately 80 Mio ECU of duties.

1.19. The recoveries are to be monitored by sending queries to Member States on a case-by-case basis at regular intervals. The Member States are confronted with the problem of reconciling data relating to disputes with the data in the A and B accounts (see paragraph 1.4). The time taken for them to reply varied between one and five months. Table 1.2 shows the position at 31 December 1994 for recoveries relating to the five mutual assistance files selected by the Commission.

Monitoring of recoveries by the Member States

1.20. Article 2 of Regulation (EEC) No 1552/89 states that Member States must establish the traditional own resources as soon as the debtor is known and the amount of the entitlement can be calculated (see paragraph 1.16). Examination of the mutual assistance files showed that Member States do not always apply this rule (see paragraphs 1.25 to 1.29). As of 31 December 1994, the Commission had not taken action for infringement against Member States that had not applied the provisions of this Article scrupulously.

1.21. The systems of preferences which apply to developing countries and other beneficiaries proved to be particularly susceptible to fraud and irregularities. The Commission acts as coordinator of the action taken by Member States and, in particular, arranges Community administrative and investigative visits to third countries. The visits are carried out 'in coordination and close cooperation with the competent authorities of the Member States` (). In principle the conclusions reached are binding on all the parties.

>TABLE>

1.22. The regulations (system of generalized preferences - SGP) provide that if, in cases of reasonable doubt, no reply has been received from the third country in question within a maximum of 10 months, or if the reply does not contain sufficient information to allow the authenticity of the certificate of origin or the actual origin of the products to be determined, entitlement to the preference scheme is to be refused ex post facto, except in the case of force majeure or in exceptional circumstances (). When the 10-month deadline expires, the Member States must accordingly recover the duties on the imports in question ex post facto, if necessary, by calling in the guarantees in final discharge of the duties, provided that the imports were effected in the three years which preceded the date of issue of the recovery order, and without prejudice to an extension of the deadline in the event of fraud.

1.23. One case audited by the Court concerned imports of tuna from Thailand, which had been declared as bonito tuna. It illustrates the lack of cooperation encountered by the Commission, in collaboration with the Member States, when it took steps to confirm or refute the validity of certificates of origin. This case is one of a sample of cases selected by the Commission for more detailed follow-up. A Community delegation (Commission, D, UK) carried out an on-the-spot inspection in September 1991 and established that the product (70 000 tonnes) imported into the Community between 1989 and 1991 under cover of SGP certificates of origin as 'preserved bonito (Sarda spp.)` could not have been manufactured from fish of that species in view of its availability of fish in Thai waters and in the waters fished by Thai vessels. It was not possible to determine the exact nature of the product at the time of importation into the Community as the necessary scientific evidence was not available at the time. However, all the available data concerning fish species normally found in the area in question (including information supplied by the competent Thai authorities) indicate that the product must have been preserved tuna (not covered by the SGP and subject to 24% duty) and not bonito (Sarda spp.) (covered by the SGP and eligible for the preferential rate of 18%).

1.24. The Community delegation asked the Thai authorities to confirm that more than 5 000 certificates of origin were invalid and to withdraw them. The Thai authorities' reply (supplied exactly 10 months later - at the end of the maximum time limit allowed) confirmed that 800 certificates were invalid. Not until 15 months after the request and following an oral warning from the Commission, threatening to exclude Thailand from the SGP, did the Thai authorities announce that they were unable to prove the validity of the other certificates.

1.25. The importer Member States concerned (DK, D, NL and UK) stated in May 1993 that, for various reasons, they had not initiated recovery vis-à-vis the third countries until the end of 1992 - more than one year after the findings of the audit visit. In the United Kingdom, traditional own resources estimated by the Court, on the basis of the data available at the Commission, to amount to more than 1,0 Mio ECU, have become irrecoverable because any action is now time-barred. In January 1995 the Commission was still unable to set a figure on the losses incurred in the other Member States up to 31 December 1994.

1.26. In the case of imports of tuna from the Seychelles, the irregularity lay in the inclusion of non-originating tuna in preserved fish exported to the Community. It is estimated that own resources of 1,5 Mio ECU were evaded in this way. The results of the audit carried out on-the-spot in December 1992 by the Community delegation were notified to the importer Member States (B, F, IRL, NL and UK) in May 1993 with a request that they should effect recovery.

1.27. In Belgium no action for recovery was taken until December 1993. At the same time the British authorities informed the Commission that they had suspended any recovery, on the grounds of the approach being made to the Commission by the Seychelles government (), and Ireland's attitude was the same. In France, the country most affected by the imports, recovery had still not begun in July 1994.

1.28. The case of imports of Turkish television sets illustrates the slowness of the decision process at Commission level. The Commission warned the Member States concerned (all Member States, with the exception of Ireland and Luxembourg) of suspected irregularities as long ago as 1988. The irregularity lay in the fact that the television sets contained imported components on which the Turkish authorities had charged neither Turkish customs duties nor a compensatory levy corresponding to the Community rates of duty when the finished products were exported to the Community. As a result, the products were not in free circulation in Turkey when they entered the Community customs territory and were not eligible for preferential treatment under the Agreement. The total amount of duty evaded was estimated at 45 Mio ECU. Owing to the lack of cooperation on the part of the Turkish authorities, who delayed the arrival of a Community audit visit for two years, the Turkish authorities did not recognize the irregularity until February 1993. Evidence of the situation with regard to the goods was not obtained until October/November, during a Community audit visit.

1.29. The Member States then effectively introduced a requirement for guarantees on their subsequent imports of Turkish television sets. Ex post facto recovery of the customs duties that were not affected by limitation was, however, delayed by a further one and a half years because of differences between the Commission and the Member States concerning the recoveries. The Commission did not, in fact, close the file until 25 November 1994, when it invited the Member States to effect recovery. Some 30 Mio ECU on import transactions between 1987 and 1991 was lost when they became time-barred. Approximately 15 Mio ECU, for imports between 1992 and 1994, was still outstanding at the time of the Court's enquiry (December 1994).

Need to adapt the Community customs regulations

1.30. The review of the mutual assistance files and the recovery problems which they revealed showed that the Community regulations, in certain areas, needed to be amended, so as to protect the own resources more effectively. The comments that need to be made on this subject concern, in particular, time-barring, the taking of security after goods have been discharged, guarantees in the context of the Community transit procedures and the length of time for which the documents needed to verify certificates of origin should be kept.

Time-barring

1.31. Under Article 221(3) of the Community Customs Code, the general rule is that a customs debt ceases to be enforceable three years after the date on which it was incurred. There is no possibility of a longer period, unless the customs authorities of the Member States have been unable to determine the exact amount of duties legally due because of an act that could give rise to criminal court proceedings, and in so far as national law permits.

1.32. The Community Customs Code makes provision neither for an extension of the period of time-barring nor for entry of an estimate of the duties in the accounts. In the Court's opinion such a possibility ought to be available, particularly in cases where an enquiry is started with respect to transactions which are suspected to be irregular or fraudulent, and, at the latest at the time when the suspicion proves to be well-founded.

1.33. In several Member States, national law provides for the possibility of extending the period beyond which a customs debt is time-barred. It does not exist in the United Kingdom or Denmark. Furthermore, the United Kingdom extends the time limit only if the case concerned has actually given rise to criminal proceedings. These practical variations can result in inequality of treatment and trade-flow diversions, which are incompatible with the principles of the internal market.

Absence of guarantee at the time of ex post facto checks

1.34. Article 248(1) of the Regulation implementing the Customs Code provides that the lodging of security may be required 'where the customs authorities consider that the checks which they have undertaken may enable an amount of customs duties higher than that resulting from the particulars made in the declaration to be assessed` ().

1.35. The above provision applies only at the time when the clearance formalities are being carried out. The customs regulations make no provision for the possibility of requiring security to be lodged in cases where the goods have been discharged, but, in the opinion of the customs authorities, ex post facto checks that have been, or are to be, carried out are likely to result in an increase in the amount of duty. In consequence, recovery may ultimately prove to be impossible because the debtor is insolvent, which can happen at any time during the investigation.

Transit securities insufficient

1.36. A comprehensive guarantee document allows the holder to carry out an unlimited number of transit operations by road simultaneously. If transit rules are contravened, the comprehensive guarantee often proves to be insufficient to cover the risks. Customs investigation procedures may, in fact, last for several months, sometimes as long as three years, without reaching a conclusion or being wound up. At present, however, no further guarantee is required between the time at which the presumption of irregularity is established and the time when the duties owed are recovered. In consequence, there is a shortfall, or even absence, of real security on new operations carried out under cover of a comprehensive guarantee, part, or even all, of which has already been committed on account of one or more earlier operations which have not been discharged.

1.37. Moreover, there are special rules concerning guarantees for products that are deemed to present an enhanced risk on account of the customs duties at stake when they are placed under the transit system. There are three different lists of enhanced-risk products in the Regulation: the list of goods which give rise to an increase in the flat-rate guarantee, the list of products which give rise to an increase in the comprehensive guarantee () and the list of goods to which the guarantee waiver does not apply. Owing to the fact that the customs regulations contain three different lists concerning the level of guarantee required (see Table 1.3) there is a risk that the level of guarantee for the same product may vary considerably, depending on the guarantee method chosen by the trader, and that in the case of fraud or irregularity it may have negative implications for the Community's finances.

Period for which documents must be kept

1.38. Under certain systems of preferences, a country which issues a certificate of origin is required to keep a copy of the certificate and the relevant export documents for at least two years, for the purpose of subsequent checks. This period of two years is not consistent with the three-year limitation. It is, in fact, possible to submit to the customs office of import a certificate of origin issued several months earlier (e.g. 10 months () in the case of the African, Caribbean and Pacific (ACP) countries and for the countries which qualify for the system of generalized preferences(SGP)). In view of this 10-month period, the conservation period should be three years and 10 months.

No supervision of national recovery instruments by the Commission

1.39. In established cases of irregularity or fraud, the outcome of recovery action is closely related to the number and nature of the national legal instruments available to each Member State and, more especially, the possibility of suspending or interrupting the period of time-barring, establishing an estimated amount, imposing a time limit of more than three years, preventing the barring of a debt that has already been established or requiring a security if there is justified doubt based on ex post facto checks.

1.40. The Commission still does not have a list of such legal instruments, for each Member State. It is, therefore, difficult for the Commission to evaluate the extent to which a Member State is meeting its recovery obligations before initiating any necessary infringement proceedings.

Conclusion concerning mutual assistance in the context of combating customs fraud

1.41. Enquiries by Member States under the mutual assistance framework concerning customs fraud and irregularities cannot really be considered to be successful unless the amounts in question are actually recovered within a reasonable period of time.

1.42. The follow-up with regard to recoveries was found to be inadequate. The Commission is not able to obtain quick and accurate information on the progress achieved by Member States in connection with the recoveries for which they are responsible. The IRENE database is a very useful documentational tool, but, in the case of recoveries, it is incomplete. For it to function more effectively the financial information which it contains would need to be updated systematically and at regular intervals, in collaboration with the Member States.

1.43. Customs duties are collected in the Member States in accordance with national legislation. The Commission should therefore check systematically whether it answers the requirements of the Community regulations. Moreover, in the case of the Community regulations and the preference agreements (and arrangements) concluded with third countries, it is up to the Commission to propose the textual improvements that are essential in order to provide increased protection against fraud and evasion for the Union's traditional own resources.

1.44. Under Article 209a of the EC Treaty, which aims to protect the Community's financial interests against fraud, the Commission is to establish close and regular cooperation with national customs administrations. In the context of their cooperation with the Commission, the latter do, in fact, play a vital role in combating the fraud and evasion of regulations that are detrimental to the financial interests of the European Union.

THE COMMUNITY TRANSIT SYSTEM

Introduction

1.45. The Community transit system makes a distinction between internal transit and external transit. The internal transit system allows the movement of Community goods, without any change in their customs status, between two points in the customs territory of the European Union, via the territory of a third country. The external transit system allows, firstly, the movement of non-Community goods within the territory of the European Union without their being subject to import duties or commercial policy measures, and, secondly, the movement within the territory of the European Union of Community goods subject to measures whereby they must be exported to third countries after the completion of customs formalities. It is thus possible, under the external transit system, for non-Community goods to enter the territory of the European Union and either to cross it to a final destination in a third country or to be carried to a final destination in a Member State, where they are released for free circulation or transferred to other customs arrangements. The aim of the external transit procedure is, inter alia, to ensure that import duties are collected if a customs debt arises in connection with third-country goods placed under this system. Similarly, in the context of the CAP, the system is used in order to ensure that refunds are paid only when the qualifying goods have been transferred to approved arrangements (export).

1.46. With effect from 1 January 1993, goods are now carried under the Community transit system within the European Union, without any checks at internal frontiers, until they reach their final destination, where they are placed under other customs arrangements - usually free circulation - following payment of import duties and charges. Customs duties and agricultural levies on transit goods are collected either when the goods have reached their final destination and been placed under customs arrangements which include collection of duties and other charges, or, if they have not been discharged within the time limits specified in the regulations, when they are recovered.

1.47. In its communication on fraud in the transit procedure (), the Commission estimated the number of Community transit operations at around 18 million. The majority are carried out in accordance with the current Community rules; nevertheless, some 1 000 000 transit operations are not discharged regularly and are the subject of an enquiry. The Commission estimated at the end of 1994 that since 1990 duties to a value of 750 Mio ECU had been evaded under the transit procedure. Of that total, 320 Mio ECU corresponded to traditional own resources and 430 Mio ECU to VAT and excise duties, representing a net loss of around 300 Mio ECU to the Community budget. The number of recoveries effected after a request for information on the discharge of the transit operation (see paragraphs 1.56 to 1.61) has increased since 1990, as has the number of cases of irregularities and fraud perpetrated under the transit procedure. The Commission estimates that they represent a potential financial loss to the Community and the Member States of some 200 Mio ECU annually.

1.48. Following the establishment of the internal market, the transit system continues to be one of the cornerstones of the Customs Union. Care must be taken to ensure that the system continues to function efficiently. Some shortcomings have become apparent in recent years, however, especially in the case of transit controls (see paragraphs 1.55 to 1.61, 1.64 to 1.67 and 1.82 to 1.85). Member States do not give adequate priority to this area. As a result of these shortcomings, the transit system has become more vulnerable to fraud. For that reason very careful attention must be given to the large-scale problems of fraud that may arise within this system. As the Commission pointed out in the communication on fraud in the transit procedure, fraudulent transit operations mainly concern goods which are subject to high rates of duty or are highly profitable in terms of the level of protection afforded by Community policies. This type of fraud operates mainly in the following ways:

(i) goods are not presented at the customs office of destination and are released for circulation within the Community without payment of the duties and charges due (see paragraph 1.82);

(ii) the presentation of the goods at the office of destination is counterfeited, for example by means of stolen or forged stamps.

1.49. The Court carried out enquiries in six Member States (D, GR, F, I, NL, UK) in 1994, to examine the functioning of the customs transit procedure () and, more especially, the discharge procedure, the recovery procedure followed in cases of irregularities, and the customs procedures followed before goods are assigned to this procedure.

Recorded delays in assigning a customs-approved treatment or use to goods brought into the customs territory of the European Union

1.50. Goods introduced into the customs territory of the European Union are subject to customs supervision from the time of entry () and must be presented to customs by the importer, carrier or forwarding agent. A summary declaration covering the goods presented to customs must be lodged with customs not later than the first working day after the day on which they are presented (). When the goods have been declared, they must be assigned a customs-approved treatment or use, within 45 days in the case of goods carried by sea, or 20 days in all other cases (). Until that is done, they have the status of goods in temporary storage (). Goods in temporary storage must be stored in places approved by the customs authorities under the conditions laid down by them (). If the requisite formalities are not observed, the customs authorities must take all necessary measures without delay. This may include selling the goods ().

1.51. In practice, the 20-day deadline imposed for goods carried by air is not always respected. In Germany (Frankfurt Airport), the customs authorities entered import duties in the accounts on the basis of the summary declaration, but the goods were not assigned a customs treatment or use according to the appropriate procedure. Thus, the duties to be levied on imports of hundreds of batches of goods were recovered only a year, or even a year and a half, after the date on which the goods entered the territory of the Union. Similar delays were noted in Italy (up to 18 months at Malpensa) and the United Kingdom (up to eight months at Heathrow).

1.52. In the case of goods carried by sea, the 45-day deadline was systematically exceeded at Genoa. At Naples some 3 000 containers of goods in temporary storage were not even in a customs-approved store. Instead the containers were held in a container park which the customs had refused to approve, because they were unable to guarantee adequate supervision. Supervision of goods entering and leaving the container park was totally inadequate. The last reconciliation of warehouse lists and carriers' waybills by the customs authorities went back to March 1993 and concerned the year 1988.

1.53. Delays in reconciling entries and exits to and from temporary storage were also noted in the United Kingdom (up to a year at Felixstowe). It is not possible to evaluate the implication of the above observations for the collection of own resources, for the reasons set out in paragraph 1.68.

External transit system

Application of the external transit system

1.54. In its Annual Report concerning the financial year 1987, the Court highlighted the negative effect on own resources of delays or failure to respond to an enquiry notice (). In its communication of 29 March 1995 on fraud in the transit procedure, the Commission again expressed its concern that '... the transit systems... are again in crisis`, '... the quality of these controls has fallen progressively over the last few years...` and 'enquiry procedures regarding outstanding movements are not initiated at a sufficiently early stage, and are not pursued with sufficient priority and vigour. Legislation and administrative provisions are not always applied by Member States in such a way that good management is guaranteed. The consequence is that failure in any part of the system jeopardizes the whole.`

1.55. In the six Member States that were visited, the Court again found that, as a result of failure to observe deadlines at every level of the customs authorities, collection of the own resources in question was delayed, in some cases by as much as three years.

1.56. In the Netherlands, available statistics for transit operations passing through the port of Rotterdam (some 600 000 operations per year) showed that, in some 3% of cases, operations had still not been discharged approximately six months after the transit declaration was registered, even though offices of departure are required to make enquiries after four months. For that reason, when some procedures (e.g. requests for assistance) are being applied, the deadlines set take into account the actual delays recorded by offices of departure () (e.g. two months) which is contrary to the current regulations.

1.57. In Germany, on the basis of a sample drawn from two different customs offices, the Court found that approximately 85% of recoveries were from the consignees of goods which had not been presented to the customs office of destination (), contrary to the customs regulations. Furthermore, one of the customs offices visited justified the systematic suspension of replies to enquiry notices for at least nine months on the grounds of staff shortages. At other offices enquiry notices were shelved for a year or more, if the party to whom the notice was addressed (e.g. the office of destination, principal (), etc.) did not reply to the first one. At another customs office, 16 219 enquiry notices were still outstanding, of which 9 439 were almost two years old. Around 10% of the notices were being dealt with by the authorities. In some cases the delays in forwarding documents between customs offices were so great that the deadlines specified by the Community rules could no longer be respected without an effort to catch up in view of the accumulated backlog.

1.58. In Greece, the Court noted that replies to several thousand enquiry notices on the destination of goods carried under the transit system had been pending for more than 10 months. Some offices applied their own rules in the matter of deadlines, contrary to the Community rules and the national customs authorities' instructions. A not insignificant percentage of goods carried under the transit system were so-called 'sensitive` goods (tobacco, alcohol).

1.59. In France, there were fewer enquiry notices, but that did not prevent waits of more than a year for replies to some notices, essentially because enquiries were not set in motion until four to six months after the notice had been received. As regards the length of time before offices of destination set enquiries in motion, in its reply to the observations forwarded to it after the audit the Member State in question undertook to adopt appropriate measures for improving the situation.

1.60. In Italy (Naples) there were found to be delays of eight or nine months at the different stages of both the mutual assistance and the recovery procedures.

1.61. In the United Kingdom, hundreds of enquiry notices that had been forwarded to the central office by offices of departure remained unanswered for up to seven months, or had been awaiting distribution to offices of destination for more than seven months.

Recovery of own resources

1.62. Under the present Community or national provisions, in the event of irregularity, responsibility for recovering duties and other charges on goods in transit rests with the Member State where the office of departure or the office of entry into the Community is situated (), unless it can be established that an offence or irregularity was committed in another Member State, in which case the latter must effect recovery. If the transit document remains undischarged, the office of departure must inform the principal () as soon as possible and, in any case, not more than 11 months after the goods entered the transit system. If, within three months, the principal is unable to prove the regularity of the transit operation or to furnish proof of the place where the irregularity was committed, the office of departure must take steps to recover the duties that would have been due at the time of importation.

1.63. In the case of goods that have been placed under the road transit system, the principal must provide a guarantee to ensure payment of any customs debt or other relevant charges (). The guarantor is released from his obligations 12 months after the date of registration of the transit declaration (T1 document) unless, within that 12-month period, the customs authorities of the Member State of departure advise him that the transit document has not been discharged. In addition, the guarantor is released from his obligations if he has not been informed of the amount for which he is liable within three years of the date of registration of the transit operation. The guarantee may take the form of an individual guarantee, a flat-rate guarantee or a comprehensive guarantee.

1.64. In Germany, some customs offices have eliminated the stages of the procedure which seek to recover the amount from the principal. Recovery is essentially directed towards obtaining payment at the end of the three-year guarantee period without any sustained attempt to recover it from the principal or other parties (importers, consignees) at the end of the first year following the admission of the goods to the transit system. In this way the recoveries against hundreds of undischarged transit operations remain outstanding for up to three years after the time when the goods entered the transit system. In one of the customs offices visited (D), the Court found that in 5% of the cases examined guarantors had not received advice of the non-discharge of transit operations before the end of the three-year period. Consequently, they had been released from their obligations, even though the transit documents had not been cleared.

1.65. In Italy (Malpensa), recoveries are effected with delays of up to four months after receipt of the reply from the office of destination.

1.66. In the Netherlands (Schiphol) data are transferred from one computer system to another at six-monthly intervals. During each transfer, around a hundred undischarged transit operations (112 operations for the first six months of 1994) are rejected because of uncorrected errors that were made when the basic information concerning the transit operations was entered. It is still not clear how many such operations are rejected and ultimately not discharged.

1.67. In Greece, the Community transit procedures are applied only in cases where goods are in transit to another Member State of the European Union. In all other cases, often contrary to the Community rules, the Greek customs apply a different transit procedure which does not require any guarantee. Several hundred transit operations that were effected under the alternative transit procedures have not been discharged, thus jeopardizing the collection of the corresponding own resources. During an on-the-spot visit (November 1994) the Court was not given access to the files on operations that were carried out under the Community transit system concerning goods that had left the port of Salonica for destinations in neighbouring countries to the north of Greece. Examination of the files which the Greek national authorities forwarded to the Court in April 1995 at the latter's request showed that, starting in November 1994 (the date of the Court's visit), the Salonica office of departure had initiated the procedures for obtaining information on undischarged transit declarations for 1993 and 1994.

Quality of the data supplied on transit declarations (T1 document)

1.68. When the information needed for the assessment of import duties cannot be obtained from the principal or other debtor, the search for the information by which to determine the customs debt is often hampered by a practical problem - it is not possible to obtain sufficiently precise details of the goods from the information given on the transit declaration. Firstly the number of boxes that must be completed on the transit declaration is kept strictly to the minimum and, secondly, carriers and forwarding agents do not take enough care to provide the small amount of information that is required. For example, the combined nomenclature (CN) code is often omitted from declarations. Lack of precision in the name or description of the office of destination is often the cause of delays in searches concerning consignments of goods in transit through the major European ports (Rotterdam, Hamburg, Felixstowe, Le Havre) where more than one customs office is responsible for supervision. As a consequence of the lack of precision in the description of the office of destination, 35% of the requests for assistance received by one customs office that was visited in Hamburg did not concern that office.

Simplified procedure for external transit operations

1.69. Most transit operations which involve air or sea transport are carried out without any guarantee, under the simplified procedures provided for in the Community customs regulations. There are two possible levels of simplification. At the first, the goods carried under the internal or external transit system must be detailed on separate manifests (transport documents) for each transit category (simplified procedure I). At the second, which was designed to facilitate frequent large-scale operations, subject to certain conditions, authorized operators (airlines or shipping companies) may move goods without any checks being made by customs offices at the time of the operation (). The Court examined the latter: the simplified procedures which may be used, at their request, by large airlines and shipping company operators.

Risks associated with the assignment of a customs-approved treatment or use to goods presented to customs (external transit system)

1.70. In the United Kingdom (Felixstowe and Ipswich), there was some confusion as to the responsibilities of the various customs offices as regards checks on operators using this simplified procedure at seaports. The checks that are carried out are not, as provided in the Community regulations, based on a perceived risk analysis. More particularly, in cases where use of the simplified procedure had been authorized, the issue of the authorization was not followed up within a relatively short interval by a check to ascertain whether the system employed was functioning satisfactorily. Where checks necessitated a search for further information, the search was not completed or was unsuccessful.

1.71. In Germany (Frankfurt), hand-written corrections concerning the origin of goods had often been added to manifests and transport documents and it was not possible for the Court to identify the author of the additions. In some cases the details of origin specified under separate headings of the same transport document were contradictory. Yet, it is the details of origin given on this document that give rise to the collection of Community own resources where appropriate.

1.72. In Italy (Malpensa), the Court verified the origin of goods in 10 consignments selected from a batch of 20. There were eight consignments in which the origin of the goods was stated as the Community, even though the goods had originated in third countries.

1.73. In Greece (Athens International Airport), goods moved under the simplified procedure applied by 11 airlines were checked by customs according to the traditional procedures. On the other hand, the origin of goods carried by courier services was not verified if the goods were thought to be of Community origin. An error on the part of the airport of departure could thus have negative implications for the Community's own resources.

1.74. In the United Kingdom (Heathrow), although ex post facto checks partly concentrated on imports only, they revealed errors which necessitated modification. However, the customs authorities have not followed up the observations which resulted from the checks.

1.75. In the Netherlands (Rotterdam), the Court found a number of cases where the item concerning the Community origin of goods carried by sea from Spanish or Portuguese ports under the simplified procedure contradicted the details that appeared on the transit documents forwarded separately by post. If the posted documents arrived when the goods were no longer under customs supervision, the own resources due were not collected when the goods entered the customs territory and the transit documents were not discharged.

1.76. The Court found that, in general, in the Member States visited (see paragraph 1.49), the customs authorities omitted to supervise and check transit operations carried out under the simplified procedure. In general, ex post facto checks were carried out without any preliminary risk analysis; the frequency of the checks and the coverage of the operations to be verified did not achieve the objectives specified in the national control programmes which the Community legislation requires national authorities to prepare.

1.77. In response to the observations concerning ex post facto customs checks published by the Court in its Annual Report concerning the 1993 financial year, the Commission replied that the effectiveness of checks depended on the adoption of methods based on risk analysis and that the implementing rules for the Customs Code already included such a method for the verification of air and sea transit operations.

1.78. In the Court's opinion, the checks to which the Commission referred offer, at most, a theoretical example. In the above context of mandatory checks on transit procedures, the application of these procedures in the Member States visited leaves something to be desired.

Computerization of the Community transit system

1.79. In its 1987 Annual Report, the Court recommended the programmed computerization of transit operations at Community level from 1998 onwards. The Commission acknowledged the importance of this suggestion at the time and computerization finally became one of the priorities in the Commission's work programme for combating fraud in 1994 ().

1.80. As a result of this computerization, fraud and irregularities committed in the context of the transit system will show up more quickly, insofar as hitherto national authorities' disregard for deadlines, discharge procedures and requests for mutual assistance have made it difficult to detect and take appropriate action against cases of fraud or irregularity. Whilst the Court must emphasize that the establishment of such a network is absolutely essential, it is nevertheless of the opinion that merely computerizing the data to be supplied under the transit system is unlikely to resolve all the problems encountered in the procedures for obtaining information from traders (principals, consignees, etc.), or improve the recovery procedure deadlines.

Examples of dysfunction

1.81. The transit system's vulnerability to fraud and the necessity of improving the implementation of Community rules are illustrated by the examples described in the following paragraphs. These specimen cases provide pertinent illustrations of the problems encountered at the level of recoveries and administrative deadlines when transit documents are not discharged within the specified time limits.

1.82. In 1992 and 1993 the German customs authorities discovered four substantial cases of fraud in connection with the transport of cigarettes of non-Community origin. The cigarettes had been placed under the Community external transit system or were covered by TIR carnets (). The transit operations in question were never discharged and were carried out, on the one hand, under cover of 119 TIR carnets departure Hamburg (HZA Hamburg-Ericus), destination Barcelona, and, on the other, under the Community external transit system (two operations), departure Hamburg (HZA Hamburg-Waltershof) and destination Poland, the office of destination being Frankfurt-on-the-Oder. In every case, the goods were not presented to customs at the offices of destination and it was not possible to trace them. Contrary to the Community rules, the transit operations had not been discharged. The competent customs office (Hamburg) must, therefore, recover the duties due on importation either from the principal or from the security. The customs authorities' files on these transit operations showed that at the time of the on-the-spot visit in July 1994, a total of 38,3 Mio ECU () by way of customs duties remained to be recovered.

1.83. Around 70 Community external transit declarations for the transport of 1 420 tonnes of bananas that entered through the free port of Hamburg and were registered in November 1993 at the office of departure (ZA Zweibrueckenstrasse) for various destinations (Community or other) had still not been discharged as of 20 July 1994. The files in question were examined and showed that the competent office of departure (HZA Hamburg-Ericus) had sought information about the further progress of the operation from the principal concerned, but had not sent a request for assistance to the customs office of destination. The amount of duties for collection is estimated at 1 469 562 ECU ().

1.84. In October 1994, the Salonica office (office of destination) had still not initiated the follow-up of the requests for assistance issued by various offices of departure, between April and June 1994, i.e. some seven months after the start of the transit operation. These Community external transit operations were registered in 1993 and involved the following 'sensitive` products: 14 consignments (12 352 cases) of spirits destined for Bulgaria and Albania, comprising 10 consignments of whisky which had received export refunds on the basis of the cereals content, two consignments (1 958 cartons) of cigarettes, one consignment (840 cartons) of butter and one consignment (488 bales) of tobacco.

1.85. On 12 March 1991 a consignment of 25 tonnes of pasta of Argentinian origin was registered by a customs office at Genoa (Ponte Eritrea) as a Community external transit operation with Naples as the destination. More than three years later, on 23 June 1994, the Genoa office took steps to effect recovery from the principal.

Conclusions concerning Community external transit

1.86. In the Court's opinion, the recovery procedures must be reformed by restoring the focus to the principal's responsibility, in order to improve discipline in that area and to apply the rules more strictly, so that where an irregularity is established recovery of the own resources in question may be concluded not later than six months after the registration of the transit declaration.

1.87. The provisions laid down within the transit system framework must be strictly enforced and any infringement of this principle must be punished with effective penalties. The present regulations do provide for penalties (), but they are practically never applied. The Community regulations are laid down and implemented through the Member States' own national legislation, and the Commission must ensure that the penalties for which the Community regulations provide are scrupulously applied in all the Member States according to harmonized rules.

1.88. In its communication of 29 March 1995 on fraud in the transit procedure (), the Commission gives an account of the measures that have already been adopted (Section 5 of the communication), as well as the steps which it proposes to take to combat fraud in the transit procedure (Section 6.3.2 of the communication), including, in particular, a start on the computerization of the Community transit system, which the Court has recommended speeding up. Furthermore, the Court wishes to emphasize the need for the Commission to take steps so that:

(a) the Member States put into effect in a consistent and harmonized manner the Community provisions concerning the respective responsibilities of offices of departure and offices of destination;

(b) the accumulated delays in discharging declarations, which threaten the security and reliability of the system and lead to delays in the collection of the Community's own resources, are eliminated;

(c) cases of irregularity are detected as soon as possible, so that the the duties owing are recovered more quickly;

(d) Member States impose penalties in every case where transit rules are infringed, especially when goods are not presented to customs at the office of destination;

(e) Member States implement the specified controls, and especially the ex post facto checks that are neglected at present in the context of the simplified procedure; the Commission receives periodic reports on the checks made by Member States and the findings obtained during them; at the same time it must be possible to retrace the checks that have actually been carried out at any time during subsequent verification by Community institutions.

1.89. Insofar as the Member States retain 10% of traditional own resources they collect to cover their collection costs, they thereby implicitly undertake to provide a quality service which, to a very large extent, must protect the Community financial interests that are at stake. Improvement is needed in this area, in order to bring the quality of the service up to standard and restore the transit system to the level of reliability and the confidence level that are essential for the protection of the European Union's financial interests and the expansion of trade within it.

VAT ON INTRA-COMMUNITY TRADE

Introduction

1.90. The establishment of the Community internal market opened up an area without internal frontiers, in which the free movement of goods, people, services and capital is guaranteed. The abolition of fiscal frontiers means that VAT on intra-Community acquisitions is collected in the Member State of origin, instead of the State of destination. Pending the introduction of the definitive system, transitional arrangements were introduced for the period between 1 January 1993 and 31 December 1996. Under the latter system, the VAT is still levied in the country of destination, but the associated customs formalities and frontier checks between Member States have been abolished and replaced by fiscal declaration procedures applicable to each of them.

1.91. An information exchange system, known as VIES (VAT information exchange system), has been set up in order to make it possible to apply the transitional arrangements and thus offset the risk of fraud which the abolition of fiscal frontiers has entailed.

VAT revenue

1.92. Audits were based on audit visits to five Member States (DK, F, I, NL, UK) and a questionnaire that was sent to the remaining seven.

1.93. Table 1.4 shows the variations in VAT revenue collected, by Member State, for the period 1989 to 1993, in absolute values and as a percentage of GNP at current prices. It can be seen from the table that:

(a) in general there was a steady, parallel rise in VAT and GNP during the period before 1993;

(b) although GNP has continued to rise in all the Member States, the variation in revenue between 1992 and 1993 shows that for five Member States (DK, E, F, NL and P) revenue decreased by between 1,5% and 10,3%; for the other seven Member States (B, D, GR, IRL, I, L and UK) revenue rose by between 0,3% and 10,3%.

1.94. In 1993 VAT revenue for the Union as a whole was 359 600 Mio ECU, which was slightly lower than 1992 ( P0,1%), although Community GNP continued to increase (+0,8%).

The VIES

1.95. The main objective of the VIES is to inform the tax authorities of each Member State of the intra-Community supplies of goods declared by traders in their respective countries, so that the tax levied on the intra-Community acquisitions can be verified. Each Member State is accordingly required to establish an effective system for the storage and electronic transmission of the data collected from intra-Community suppliers in that country concerning the general level of their trade with other Member States. The computer system is essentially constructed around two databases managed by each Member State: one for traders, the other for intra-Community supplies. All the databases are linked on a network.

1.96. Under Article 6(4) of Council Regulation (EEC) No 218/92 of 27 January 1992, persons involved in the intra-Community supply of goods or services are authorized to obtain confirmation of the validity of the identity number of the other party to the transaction. Each Member State therefore has a database ('the trader database`) containing the register of its taxpayers, with a VAT identity number, which can be accessed by the competent authorities of the other Member States, via the VIES network.

1.97. The information on the summary statements is recorded in the VIES by the authorities. It must be forwarded automatically to the other Member States within three months of the end of the quarter to which the data refer. In practice, Member States respect the deadline laid down by the Regulation. At most, there have been delays of a few working days.

1.98. Regarding the databases of intra-Community supplies, the quality of the information which they contain is relative. The procedures for recording data and carrying out initial validation differ from Member State to Member State and accurancy and completeness are not always guaranteed. Caution is needed as regards the up-to-dateness of the data as between 10% and 20% of records are entered after the statutory transmission date.

1.99. The procedures for the recording and initial validation of the data vary according to the Member State. Although the information that was recorded complied with the regulations, it was not identical in all Member States. For example, in Germany there was no obligation to indicate triangular traffic. In Denmark, Ireland, the United Kingdom and the Netherlands there are special annual arrangements for certain categories of trader (e.g. small businesses), whereby the value of the supplies is not specified and thus cannot be sent to the other Member States.

Traders' compliance with procedures and data input management

1.100. Under Article 4 of Regulation (EEC) No 218/92, Member States must ensure that the databases are up-to-date, complete and accurate.

1.101. The information on the accuracy of the various items of data declared in the summary statements is not very reliable. In 1993, the Court reviewed the information supplied by the Commission for all the Member States. This review showed that the Member States estimated that more than 10% of the data forwarded by traders was inaccurate initially, and around 5% of it was still inaccurate at the beginning of June 1994.

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1.102. The correction procedures vary according to the Member State. The available information showed that the number of items requiring correction rose from 265 514 at the end of June 1993 to 608 387 at 6 June 1994. France and the Netherlands were not taken into account, because there was no information concerning the data awaiting correction. A single Member State (UK) accounted for almost 50% of the 608 387 corrections to be made. Procedures for verifying the completeness and accuracy of declarations of the value of supplies varied from one Member State to another. Some Member States (GR, NL, DK) validated data before sending it to other Member States.

1.103. A general agreement was initially concluded among the national authorities concerned, to the effect that the tax authorities ought to adopt a conciliatory approach if traders did not follow the procedures. The tax authorities usually sent letters pointing out the probability of a fine. As of June 1994, no fines had actually been imposed in the majority of Member States, although thousands of traders had been at fault on several occasions. It would be advisable to introduce an effective policy on penalties.

Use of recorded data and development of control strategies

1.104. In one Member State (NL) where there was comprehensive validation, 85% of the national VAT declarations recorded intra-Community acquisitions but, even allowing for approximation, the amount specified differed from the amount declared for intra-Community supplies by foreign suppliers. The system made it possible to detect other irregularities and omissions in Member States such as, for example, France and the Netherlands.

1.105. Through VIES, it is possible for the authorities in one Member State to request information on a trader or specific transaction for purposes of comparison with the data which they hold. Member States' use of the results of such comparisons is very variable. At the time of the audit (April 1994), local offices in some Member States (D and NL) were still not in a position to make such requests. The number of requests has risen considerably and, thanks to this instrument, it has been possible to detect cases of fraud, as in the United Kingdom, for example, where it was possible to correct VAT to the value of 200 000 UKL.

Commission supervision of the new transitional arrangements

1.106. On 23 November 1994, the Commission submitted a report on the operation of the transitional arrangements for charging VAT on intra-Community trade pursuant to Article 28 of Council Directive 77/388/EEC of 17 May 1977. The Commission's assessment was that, overall, the system was operational and answered the requirements of traders, consumers and Member States. The main difficulties which remained concerned the harmonization of certain arrangements, the function of the tax representative, the special arrangements and the unreliability of Intrastat, (a system of statistical information concerning intra-Community trade).

1.107. In the case of tax controls, the report stated that this area was primarily the responsibility of the Member States and that it was for them to make the best use of the information available, supplemented, if necessary, by any other appropriate statistical or economic information. It also highlighted the need for increased administrative cooperation between Member States.

1.108. The Commission was to present, before July 1994, general guidelines with a view to determining the extent of Member States' commitments as regards special requests for further information (Regulation (EEC) No 218/92, Articles 5 and 7). As of 31 March 1995, the guidelines had still not been drawn up.

Conclusion regarding VAT on intra-Community trade

1.109. The technical aspects of the introduction of VIES have been carried out satisfactorily. The databases exist and are operational. The new procedures appear to have been readily accepted by taxpayers. The results as such are positive and without them it would not even be possible to go on to the stage of making full use of the system. It is in the Member States' interest to ensure that VAT revenue is collected efficiently and they are making increasing use of VIES for that purpose.

1.110. As regards the trader databases, the system is functioning, but the level of utilization varies, according to the Member State. VIES is used in very different ways by the various Member States: systematic cross-checking of data, updating of information with a view to individual checks, risk analysis and analysis of intra-Community trade.

1.111. So far there has been no indication that the change-over to the new arrangements has had a negative impact on Member States' VAT revenue. The Commission should still monitor the trend of VAT revenue carefully, however, in order to detect any problems that might be associated with the change-over from the present arrangements to the definitive arrangements.

GROSS NATIONAL PRODUCT

Introduction

1.112. In 1994, the volume of GNP-based resources amounted to 19 796,4 Mio ECU (see Table 1.1), comprising 19 725,5 Mio ECU entered in the budget by way of the GNP resource and 70,9 Mio ECU that was entered as the United Kingdom rebate. In 1989 the volume was 3 906,1 Mio ECU. As a proportion, the budgetary volume accounted for by the GNP resource represented 8,7% of the total revenue entered in the Community budget for 1989; in 1994 it rose to 29,0%. The role of Member States' aggregate GNP as a parameter for determining the total own resources of the European Union has been described in previous annual reports ().

1.113. The Court continued its systems audit of the GNP in 1994. It analysed the procedure for establishing the GNP forecasts, as well as the differences between forecasts and statistical observations. In the field of the statistical GNP, it examined the forwarding of GNP data by the Member States, as well as management and validation pursuant to Articles 6 and 7 of Council Directive 89/130/EEC, Euratom of 13 February 1989 () and Article 19 of Council Regulation (EEC, Euratom) No 1552/89 of 29 May 1989 ().

GNP estimates

Forecasting

1.114. As a follow-up to its observations () on the absence of rules for establishing GNP forecasts, the Court carried out a review of the procedure by which the forecasts are established. In the course of this procedure, the independent forecasts of the Commission and the Member States are examined by the Advisory Committee on the Communities' Own Resources. The Commission takes maximum account of the opinions of the Committee in order to establish the final estimates.

Differences between forecasts and statistical observations

1.115. Table 1.5 shows the differences between statistical observations and the definitive GNP estimates, for the period 1989 to 1993. It gave rise to the following observations:

(a) in the case of the European Union the 5,6% underestimation found in 1989 diminished in subsequent years (-4,8% in 1990, -1,4% in 1991); it was then reversed, to producing an over-estimation of 0,3 in 1992 and 3,4% in 1993; this can be explained by the fact that forecasts tend to be undervalued during periods of economic expansion and overvalued at times of recession;

(b) for four Member States (GR, IRL, L, P) there was systematic and, at times, substantial underestimation throughout the period between 1989 and 1993. Although there was a tendency towards improvement in the case of Ireland, Luxembourg and Portugal for the years 1992 and 1993, the level of difference has remained unchanged in the case of Greece; thus, for the Member States in question, the balances and adjustments to the relevant balances paid in 1994 because of this underestimation were 32,6 Mio ECU (GR), 10,6 Mio ECU (IRL), 4,0 Mio ECU (L) and 32,1 Mio ECU (P), which is 14,6% (GR), 9,6% (IRL), 10,2% (L) and 12,8% (P) of their GNP resources payments for 1994;

(c) in consequence, even if the bias is corrected when the balances are calculated, the provisional financial obligations of the four above-mentioned Member States, whose VAT bases were capped at 55% of GNP for the whole of the period in question, were underestimated for these five years in respect of the VAT resource, GNP resource and financing of the United Kingdom rebate, because the GNP figures were underestimated.

1.116. The Commission should update the GNP forecasts at the final stage of the budgetary procedure, when economic trends in some Member States make it clearly necessary.

Statistical GNP

Forwarding of data to the Commission

1.117. Under Article 3 of Directive 89/130/EEC, Euratom, the statistics for Member States' GNP and their components must be sent to the Commission before 1 October each year. The figures provided are expressed in the national currency and are for the previous year, with any corrections to the figures already provided for the three previous years. In 1994, the Member States forwarded the figures for 1993 and the changes for the period 1990-1992 without any significant delay.

1.118. Under Article 2 of Directive 89/130/EEC, Euratom, the figures may be presented from the three points of view specified in the European system of integrated economic accounts (ESA), namely output, expenditure and income. According to the Commission, all the Member States were in a position to present the three views of GNP as of 1 October 1994. The Court audit showed that not all the Member States had presented the three points of view.

1.119. In the context of this presentation of the statistics forwarded in 1994 according to the three viewpoints, there were still omissions in the breakdown of gross domestic product (GDP). They concerned, for example, output of goods and services and intermediate consumption (B, D, GR, UK), details of final household consumption on the economic territory (L), or the remuneration of employees and the net surplus of the economy (P). It was also noted that, for Denmark, the production viewpoint did not include any taxes on imports apart from VAT. Ireland did not give the amount for consumption by private non-profit institutions from the expenditure viewpoint.

1.120. As regards the definition of 'economic territory` for the purposes of Directive 89/130/EEC, Euratom, France observed it at the level of the total GNP amount, but did not apply it consistently for either GDP and its components or for the transition from GDP to GNP. This problem has already been mentioned on several occasions.

Commission validation of GNP calculations

1.121. In 1994, the Court continued its review of the checks carried out by the Commission, in cooperation with the Member States, on the GNP data forwarded to it by the latter. Since the entry into force of Regulation (EEC) No 1552/89, on 1 January 1989, the Commission has combined its on-the-spot checks in two Member States (Greece, Portugal) with attendance at the statistical institutions in those Member States in the work of auditing the national accounts.

1.122. The aim of the Commission's checks was to examine progress achieved in the work of harmonizing the GNP, especially on the subjects on which the Commission expressed reservations in 1992 (). The relevant audit reports highlight the variety of effort that is needed in order to remedy the shortcomings that have been detected in Member States' national accounts.

1.123. In 1994 the Commission notified to the German authorities 11 new reservations concerning the procedures and statistical bases for the new Laender and five new reservations to the Portuguese authorities on the statistical procedures. Under Article 10(8) of Regulation (EEC) No 1552/89, the retroactive effect of the reservations notified in September 1994 is limited to the 1990 year and thus precludes any correction of the 1989 data for Portugal.

Harmonization of GNP data

1.124. When Directive 89/130/EEC, Euratom was adopted on 13 February 1989, the declarations by the Council and the Commission stated () that the GNP Committee should concentrate its work on improving the degree of coverage of the so-called parallel economy in the national accounts. On 22 February 1994 the Commission adopted Decision 94/168/EEC, Euratom () imposing in the Member States specific measures for improving the coverage of GNP, with the precise timetable to be observed in producing the reports that are sent to the Commission. The action plan laid down by the decision has fallen behind schedule. Only two of the four topics initially specified as the subject of reports () were examined by the GNP Committee in 1994; furthermore the study did not include all the Member States.

1.125. In 1994, for the first time, the GNP Committee examined a report concerning the agricultural component of GNP. The documents concerning this study show that the Committee concluded that analysis of this component was still incomplete and, in particular, that information on sources and methods of estimating the account of agricultural production for some Member States (GR, E, I, L, P, UK) was not precise enough.

1.126. In 1994 the conclusions of the GNP Committee concerning the treatment of certain crucial problems that had been identified since the completion of the inventories in 1992, such as, for example, the transition from GDP to GNP, the treatment of financial institutions, the distinction between final and intermediate consumption and the treatment of general government and private non-profit institutions () had not been implemented in all Member States.

1.127. The absence of a solution to these problems is delaying the achievement of the objectives of completeness, reliability and comparability for the GNP aggregates sent to the Commission by the Member States, which the Commission and the Member States have described as a matter of priority.

Conclusion regarding the GNP

1.128. The Commission establishes the forecasts of Member States' GNPs used in the budget procedure on the basis of its own proposals and those put forward by the Member States.

1.129. Comparison between the final forecasts for each Member State and statistical observations revealed substantial systematic bias throughout the review period for some Member States. Correction of such a phenomenon requires forecasts to be updated as necessary at the final stage of the budgetary procedure.

1.130. As regards statistical GNP, the last problems raised by the Court, concerning the presentation of data, should be resolved finally when the 1994 figures are forwarded by the Member States.

1.131. The Commission's validations of the Member States' own GNP calculations show that there are still shortcomings in some national accounts, which have given rise to the notification of new reservations. The work of improving GNP data, especially in the matter of completeness, is not achieving the defined objectives and implementation of solutions to major methodological problems has still not been carried through. The work of improvement is nevertheless helping to increase the reliability of the GNP as a measure of the contributory capacity of the Member States.

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REPLIES OF THE COMMISSION

IMPLEMENTATION OF THE BUDGET

1.3. In its letter of amendment to preliminary draft supplementary and amending budget No 2/94, the Commission entered the 1993 balance of ECU 971 million as well as unutilized EAGGF-Guarantee Section appropriations of ECU 1 678 million.

These entries were approved unchanged by the budgetary authority. In order to offset the difference between the negative VAT/GNP balances for 1993 refundable in 1994 (an estimated ECU 4 080 million) and the entries proposed by the Commission, the budgetary authority also entered the forecast surplus for 1994 (ECU 1 500 million) under the new Article 302.

FINANCIAL MANAGEMENT

Financial management in the Member States

Accounting procedures

1.5. The Commission will approach the Danish authorities with a view to obtaining the payment of interest due under Article 11 of Regulation (EEC, Euratom) No 1552/89.

1.6. The Commission considers that a delay in recovery following checking need not entail delay in making own resources available. The Commission will look into the situation pointed out by the Court in the course of a future inspection.

1.8. During its inspections of own resources in Greece in 1992 and 1994 the Commission noted the same failings as the Court and its reports to the Member State suggest appropriate remedies. Action along these lines will continue.

As regards the United Kingdom, the Court's comments confirm the Commission's own observations when carrying out inspections of own resources in 1994 and 1995. The Commission has approached the United Kingdom authorities with a view to resolving the problem.

1.9. The Commission does not currently have sufficient information to judge whether the transfer from the A accounts to the B accounts and the waiver of the guarantee were justified. The German authorities will be contacted to clarify the situation and determine what steps, if any, need to be taken.

MUTUAL ASSISTANCE IN THE CONTEXT OF COMBATING CUSTOMS FRAUD

The use of mutual assistance

1.16. The figures of ECU 600 million and ECU 275 million are simply statistical reconstructions. They give an idea of the scale of the problem but do not represent a precise debt.

The monitoring of recoveries by the Commission

1.17. The communications made by the Member States under Regulation (EEC, Euratom) No 1552/89 rarely tie in with the information exchanged under the mutual assistance arrangements (mutual assistance forms - Regulation No 1468/81). This means that the IRENE database does not yet contain all the information that would be needed for it to be used systematically in the financial monitoring of cases of fraud and irregularity. This situation will be remedied once the proposal for an amendment to Regulation (EEC, Euratom) No 1552/89 is adopted, the effect being to broaden the information communicated by Member States and to oblige them to update it (indicating whether a case is being dealt with by the administrative or the judicial authorities).

Monitoring of recoveries by the Member States

1.20. The files in question are currently the subject of discussion with the Member States. The Commission will take whatever action is needed including, if necessary, the opening of infringement proceedings.

1.25. The Commission informed the Member States on 25 August 1992 that the deadline for reply referred to in paragraph 1.22 had passed and that they should proceed to recover the duties accordingly.

The Commission will raise the matter with the United Kingdom and the other Member States concerned and try to establish what amount is time-barred and whether the failure to establish entitlements is attributable to the Member State concerned. The Commission will then take the appropriate action.

1.26 1.27. In response to the Commission's requests, the Member States concerned have informed it that the amount of own resources entered in the accounts exceeds the ECU 1.5 million mentioned by the Court:

- ECU 422 588 have been recovered by Ireland, the Netherlands and the United Kingdom;

- ECU 1 417 275 are in the process of being recovered by Belgium, France and the United Kingdom. In France the sums owing are the subject of an appeal which is before the Customs Conciliation and Evaluation Committee.

1.28 1.29. The Commission informed the Member States of the findings of the Community mission on 25 November 1993 and sent them the evidence allowing an irregularity to be formally established, which they would need to effect recovery, on 18 March 1994 - and this should be taken as the date on which the investigation was concluded.

Subsequently the Commission informed the Member States on several occasions of the implications of the mission's findings in terms of recovery. As the regulations currently stand, the Member States did not need to be specifically requested to effect recovery once the mission's findings had been made known.

In any event, the Commission has taken steps to speed up its internal decision-making procedure to deal with this type of situation.

Need to adapt the Community customs regulations

Time-barring

1.31 1.33. The Commission agrees entirely with the Court's observations and shares its concern. Aware that the three-year deadline may prevent action against irregularities in some cases - for example when ex post facto controls entail more detailed investigation, the Commission has drafted a proposal to amend the Community Customs Code.

The amendment would allow the national authorities to enter the duty in such cases in the accounts directly, before the precise amount legally due has been determined. This would make customs legislation both fairer and more effective.

Absence of guarantee at the time of ex post facto checks

1.34 1.35. The Commission will look into this matter and any amendments thought appropriate will be submitted to the Customs Code Committee.

Transit securities insufficient

1.36. The Commission is aware of the problems raised by the Court. The rules on transit securities have already been strengthened by Regulation (EEC) No 3254/94 of 19 December 1994, amending in particular Articles 360, 361 and 368 of the provisions implementing the Community Customs Code.

A draft Commission regulation to further strengthen the rules, which goes some way towards addressing the Court's concerns, is being discussed by the Customs Code Committee (transit section). The Commission is also proposing additional measures regarding obligatory itineraries and the prohibition on changing the destination office when sensitive goods are being transported.

1.37. The Commission appreciates the potential difficulties posed by having different lists of goods, and the draft Commission regulation now under consideration by the Customs Code Committee (transit section) addresses the problem.

Period for which documents must be kept

1.38. It is true that under some agreements or preference arrangements documents must be kept for at least two years, whilst under others the period is three years. The Commission realizes that this period should match the time allowed for post-clearance recovery and has therefore proposed that provision for a minimum period of three years be incorporated in the agreements being renegotiated as well as in unilateral arrangements (as with the generalized system of preferences since 7 January 1995).

No supervision of national recovery instruments by the Commission

1.39 1.40. In the autumn of 1994 the Commission sent a questionnaire to Member States on their enforced recovery procedures. The authorities concerned will be contacted again as their replies are scrutinized.

The study should be completed by the middle of 1996 at the latest and the Commission will then be in a much better position to judge the extent to which Member States are meeting their recovery obligations.

In addition, any request by a Member State to write off irrecoverable debts must be backed up by sufficient evidence for the Commission to assess the effort made to recover the sum.

Conclusion concerning mutual assistance in the context of combating customs fraud

1.42. In December 1992 the Commission, mindful of the need to improve Member States' communications regarding recovery, proposed an amendment to Regulation (EEC, Euratom) No 1552/89 which would make it easier to follow up recoveries. In the meantime the Commission monitors a sample of recoveries selected using risk analysis criteria.

1.43. When it carries out its annual control programme, the themes of which are determined by means of risk analysis, the Commission verifies whether national provisions and rules satisfy the requirements of Community regulations. If any are found to conflict with those regulations, the Commission insists that they be amended accordingly. In 1993 and 1994, for example, Member States amended their national provisions at the Commission's behest in 22 instances.

All draft Community regulations which have an impact on own resources, as well as preferential agreements and arrangements, are discussed within the Commission, which ensures that the financial interests of the Community are protected by proposing any amendments it deems necessary.

The Commission has already improved some legislation, such as the new GSP system that entered into force on 1 January 1995 (Regulation No 3281/94), which allows for the temporary withdrawal of preference in cases of fraud or lack of administrative cooperation from the beneficiary country in checking certificates of origin form A.

The Commission has also amended Article 900 of the Customs Code implementing provisions, clarifying it so as to rule out the possibility of preferential treatment being granted retrospectively to goods that have been the subject of fraud or irregularities.

In the course of the Commission's own resources inspections, a practical problem has come to light concerning the concept of 'reasonable doubt`, which the Member States may invoke to ask beneficiary countries for ex post facto checks to be carried out on the validity of the certificates. The Commission, working in close collaboration with the Member States, will take appropriate steps to ensure that they all apply this concept in a similar manner.

1.44. The Commission is working closely with the Member States to identify customs irregularities on the basis of the Community Customs Code and its implementing provisions, as well as by type and degree of seriousness. The objective of the exercise is to establish how much harmonization is required to ensure that businessmen are treated equally and that the Community's financial interests are adequately protected.

The Commission would also point out that the proposal for a Parliament and Council Decision adopting an action programme for Community customs ('Customs 2000`) now under discussion (COM(95) 119 final) provides a sound legal framework for the measures already being undertaken. The programme would involve strengthening cooperation with the customs authorities of non-member countries, expanding the number of Community missions to them, and computerizing customs services at Community level to allow them to focus controls at the external border on high-risk sectors.

In 1994 the Commission monitored Member States' control procedures at the maritime border and in free zones. Monitoring activities were also carried out under the textile anti-fraud initiative (TAFI).

COMMUNITY TRANSIT SYSTEM

Introduction

1.47. The figure of 1 000 000 transit operations quoted by the Court as being carried out irregularly comes from a Commission survey of Member States. It should, however, be pointed out that 90% of those operations were subsequently regularized so that only 100 000 were actually irregular.

The figure for duties evaded under the transit regime, which includes ECU 320 million of traditional own resources, was arrived at by adding up the estimated financial losses involved in transit infringements that are notified via mutual assistance forms. These statistically reconstructed figures give some idea of the scale of the problem, but are not meant to represent the exact amount owed.

Recorded delays in assigning a customs-approved treatment or use to goods brought into the customs territory of the European Union

1.51 1.53. The Commission will request the Member States concerned to provide more information so that it can assess the implications in terms of own resources and, where appropriate, claim interest on late payments.

External transit system

Application of the external transit system

1.54 1.61. Following publication of the report referred to by the Court, the Commission reminded Member States that they should observe the deadlines specified in the administrative arrangements.

The Commission has also put forward a proposal to extend the range of alternative evidence in cases where the copy is not returned to the office of departure. The proposal is currently under discussion in the Customs Code Committee (transit section).

1.55 1.57. In the course of its own resources inspections in the Member States concerned the Commission has come up against the same problems as the Court. It will look into the matter further and if necessary apply Article 11 of Regulation (EEC, Euratom) No 1552/89 (payment of interest) where delays in recovery have entailed delays in making own resources available.

1.58. In their reply to the Court's comments, the Greek authorities agreed that there had been delays. The Commission will be monitoring the situation.

Several requests for information have not been acted upon by the Greek authorities because some Community customs offices, contrary to Community customs legislation, issue transit documents for non-Community goods despatched by sea to a free zone in Greece's maritime ports (Piraeus and Thessaloniki).

The Commission has already warned some national authorities of the problem and will be issuing an official communication.

1.60. The Commission will be requesting further information from Italy to enable it to evaluate the impact, if any, on own resources.

1.61. When the Commission carried out its inspection in the United Kingdom in March 1995, it found that the situation described by the Court had improved because various transit procedures had been centralized at Harwich. The Commission will continue to monitor the situation.

Recovery of own resources

1.64. The procedure that the Court observed in Germany has also been noted by the Commission in the course of its inspections. The Commission agrees with the Court that it does not comply with Community rules and will therefore be monitoring the situation, particularly as regards the financial implications.

1.65 1.66. The Commission will look into these matters more closely when it receives replies from the Member States concerned; it will then take the appropriate action.

1.67. It would appear from the Court's description that the procedure followed by the Greek authorities is contrary to Community rules, since it is likely to jeopardize the collection of own resources in cases of non-recovery. The Commission will be monitoring the situation, and the financial implications in particular.

Quality of the data supplied on transit declarations (T1 document)

1.68. During its own resources inspections, the Commission has noted that the information on transit declarations is often insufficient. It has pointed out in its reports that the declarations should contain all the information required by the regulations so that the goods can be properly identified.

The Commission attaches considerable importance to the programme for computerizing the Community transit procedure as this would resolve the problems referred to by the Court. In particular, the study on computerization takes account of the fact that the 'goods` code must be entered and the destination office clearly identified so that it can be sent any messages concerning the transactions it has to deal with.

Risks associated with the assignment of a customs-approved treatment or use to goods presented to customs (external transit system)

1.70 1.75. Like the Court, the Commission considers that Member States should tighten up their checks on the customs-approved treatment of goods transported under the simplified procedure for external transit operations.

The Member States concerned will be asked for additional information in cases where the shortcomings noted by the Court could have implications for own resources.

1.76. The procedure whose application the Court criticizes in its report was a totally new one. At its February 1995 meeting, the Customs Code Committee (transit section) adopted an administrative arrangement which deals with ex post facto checks of such procedures. This should help improve the situation.

Computerization of the Community transit system

1.80. Like the Court, the Commission appreciates that computerization is no panacea. It does, however, offer a solution to problems involving the discharge of transit operations and will therefore be of help in recovery (the office of departure will be able to start proceedings more rapidly). But since it will take time to implement, the Commission is looking into the possibility of using existing systems such as the system customs enforcement network (SCENT) to deal with the most pressing cases.

Examples of dysfunction

1.82 1.83. The Commission will raise the cases mentioned by the Court with the Member States concerned.

1.84. The reply given at paragraph 1.58 above is also applicable here.

1.85. The Commission will raise the cases mentioned by the Court with the Member States concerned and will take steps to monitor the situation. If necessary, it will claim payment of interest.

Conclusions concerning Community external transit

1.86. The Commission appreciates the importance of restoring the focus to the principal's responsibility, but considers that other measures could also improve the system's operation.

The Commission has recently proposed some amendments, including:

- allowing a greater degree of flexibility so that the use of comprehensive guarantees can be prohibited throughout the Union for sensitive products where the risk of fraud is particularly high;

- prohibiting any change in the office of destination in the case of sensitive products (or, at least, making any authorization of such a change conditional on agreement to abide by conditions that would allow the transport operation to be monitored);

- introducing compulsory itineraries.

The Commission is also looking at other proposals to improve and tighten up the rules, including:

- introducing an accelerated procedure for returning and discharging transit documents concerning sensitive products and, possibly, identifying these documents in some special way;

- shortening deadlines and the length of the stages in the investigation process.

1.87. The Commission is working closely with Member States to ensure that they impose effective penalties, not just in relation to transit but in other customs sectors as well. It is now in the process of completing the identification of customs irregularities on the basis of the Customs Code and its implementing provisions, as well as by type and degree of seriousness. The aim of the exercise, which was begun in early 1994, is to establish exactly what needs to be done to harmonize penalties so that traders are treated equally and the Community's financial interests are protected effectively. The Commission will waste no time in submitting any legislative proposals it deems necessary.

1.88. (a) The Commission appreciates the need for the transit procedure to operate smoothly and will be reminding Member States of the respective responsibilities of offices of departure and destination.

1.88. (b) The Commission will request Member States to make up the delay accumulated at various stages in the discharge and search procedure (return of copy No 5 to the office of departure, search procedures launched after four months), as well as to ensure that debts are recovered within 14 months. When late recovery causes delay in making own resources available, the Commission will claim interest.

1.88. (d) The Commission agrees with the Court that administrative penalties should be imposed in cases of fraud or irregularities as this helps protect the Community's financial interests. That is why in 1994 the Commission proposed a regulation on the protection of the Community's financial interests and a Convention to introduce Community administrative penalties.

1.88. (e) The Commission will review the situation regarding ex post facto checks carried out by the Member States under the simplified procedures. It will request them to indicate the checks they have carried out in their half-yearly reports under Article 17(3) of Regulation (EEC, Euratom) No 1552/89.

VAT ON INTRACOMMUNITY TRADE

The VIES system

1.98. During the running-in period some delays have occurred in loading data. The Commission and the Member States continue to monitor the evolution within the framework of the Standing Committee on Administrative Cooperation (SCAC). Should the need arise, the Commission will propose appropriate action in that context.

1.99. The divergences among Member States quoted by the Court do, as the Court notes, conform to the existing Regulation, and no significant problems have so far been identified in the functioning of the system.

Traders' compliance with procedures and data input management

1.101 1.102. Since the Court's audit, the situation regarding items needing correction has improved. For the first two quarters of 1993, the number of incorrect items remaining is 155 853, or 2% of the total of 7 358 241 items declared by traders, while for the six quarters to June 1994, the number of incorrect items remaining is 431 228, or again 2% of the total of 22 345 154 items declared by traders.

The UK have also informed the Commission bilaterally that almost 50 000 of their remaining incorrect items relate to supplies where the value is less than UKL 100 (ECU 119).

The Commission shares the Court's opinion that the current situation regarding incorrect items is unsatisfactory. From the beginning, Member States agreed that they would systematically check the data submitted by their traders to try to eliminate manifest errors and would only transmit information to other Member States once it had been corrected. In practice, this means that they weed out implausible value-added tax identification numbers (i.e. those not conforming to the Member States' construction rules). Furthermore, Member States are not obliged to systematically cross-check the intra-Community supplies declared by traders on periodic VAT declarations with the information declared on recapitulative statements, which, because of differences in reporting periods, would be impossible for some Member States.

The Commission and the Member States continue to monitor the evolution of the number of incorrect items within the framework of the Standing Committee on Administrative Cooperation (SCAC) and will take, if necessary, appropriate measures.

1.103. The Commission will remind Member States that they are obliged to take all necessary steps to ensure that traders make accurate declarations.

Commission supervision of the new transitional arrangements

1.108. The requirement contained in Article 7 of Regulation (EEC) No 218/92 for the Commission to submit general criteria for the definition of the scope of Member States' commitments under Article 5 of the Regulation reflected the concerns of Member States at the time of the negotiations on the Regulation that they might be overwhelmed by requests for information. This in practice proved not to be the case, and the number of requests received to date has been manageable.

The Commission and the Member States have so far taken the view that there has been no basis on which to propose criteria which might have the effect of unnecessarily limiting those commitments.

The Commission and the Member States should keep the situation under regular review. The Commission, should the need arise, will make the relevant proposals.

Conclusion regarding VAT on intra-Community trade

1.111. The Commission will bear the Court's comment in mind.

GROSS NATIONAL PRODUCT

GNP estimates

Differences between forecasts and statistical observations

1.115. As regards the differences mentioned by the Court, the Commission notes that the GNPs of the Member States in question together account for less than 3.5% of the Union total. Nonetheless, the Commission will look into the reasons for these differences, particularly in the case of Greece.

1.116. In the Commission's view it is better as a general rule to have a stable financial and macro-economic framework throughout the budgetary procedure and to update only in exceptional circumstances.

The Interinstitutional Agreement of 29 October 1993 on budgetary discipline reflects the desire for a stable framework. Under paragraph 9 of the Agreement, the Commission, acting ahead of the budgetary procedure for year t+1 (effectively in February), makes technical adjustments to the financial perspective in line with movements in GNP and prices on the basis of the most recent economic data and forecasts available. No further technical adjustments are to be made in respect of the year concerned.

Any attempt to revise the underlying economic forecasts at the end of the procedure might well complicate, or indeed jeopardize, the budgetary debate without necessarily guaranteeing that the new forecasts would be any more reliable. This is the case at present with exchange rate movements, which are one of the major causes of variations in the national economic aggregates expressed in ecu.

In any event, the regulations provide for forecasting errors to be corrected during the course of the following year, which allows the effective outturn for the preceding year to be taken into account as well.

In such exceptional circumstances as the accession of the three new Member States, the Commission revised the underlying economic data and forecasts since the new data were definitely known and would have a considerable impact on the budget.

Statistical GNP

Forwarding of data to the Commission

1.118. Only Greece has not yet carried out the calculation from the point of view of output. The Commission considers that the information Greece has provided is sufficient to verify the calculation's validity. It will, however, remind Greece that it would be helpful if it presented the GNP calculation from all three points of view in the 1995 questionnaire.

1.119 1.120. The Commission takes care to ensure that the omissions in the breakdown of GDP do not affect the comparability and representativeness of GNP at market price (GNPmp).

In the 1995 questionnaire, the Commission will be asking those Member States whose GDP breakdown still contains technical omissions to supply the information needed to correct this state of affairs.

Commission validation of GNP calculations

1.121. A detailed examination of the procedures and statistical bases used in Greece and Portugal to calculate GNP and its components was undertaken as part of the GNP Committee's work during 1994. As a result, the Portuguese authorities were notified of several new reservations.

1.122. The Commission's reservations concerning GNP were notified to the Member States so that they could take the necessary steps to remedy the shortcomings found in their national accounts. The Commission checks what progress each Member State has made when it carries out its inspection visits.

1.123. After reviewing the latest information provided by Germany and Portugal, the Commission notified them of its new reservations in September 1994 in accordance with Article 10(8) of Regulation No 1552/89. The Commission could not have notified these reservations any earlier than it did.

Harmonization of GNP data

1.124. The Commission fully appreciates the importance of the work being done to improve the coverage of that area of the economy which is not included in the GNP figures in the national accounts. The GNP Committee discussed an initial report dealing with employment and fiscal audits in December 1994. The two other subjects - adjustments and income in kind and tips or gratuities - were discussed in June 1995 along with a detailed plan of action.

At the end of 1995, the Commission will be presenting a report on the effective degree of harmonization achieved as regards the calculation of national GNP. The report will be accompanied by a work programme which, with the help of the Member States, will be geared to achieving the complete harmonization of all 15 GNPs, taking full account of that particularly thorny statistical problem, the black economy. The programme should be completed by the end of 1998, at the same time as the revision of the statistical bases provided for under the revised ESA (ESA-95).

Discussions in the GNP Committee between the Commission and Member States led to the conclusion that the effort to take the black economy into account should be linked to the implementation of the new ESA; a proposal for a regulation was presented by the Commission on 16 December 1994 and is currently before the Council.

1.125. As regards evaluation of the agricultural component of GNP, the GNP Committee has decided to give the working party on economic accounts for agriculture (EAA) a list of questions for estimating agricultural value added with a view to improving the accuracy of the estimates in this sector.

Once the working party has delivered its opinion, the GNP Committee will reconsider the subject of agriculture.

1.126. The Commission would point out that the issues mentioned by the Court are horizontal matters which the GNP Committee has already studied. In 1994 it drew up its findings and set a timetable for Member States to carry out the work. With regard to the transition from GDP to GNP, a task force has been set up to carry out a study on collective investment institutions (CII). The findings will be presented to the GNP Committee in October 1995.

1.127. See reply to paragraph 1.131 below.

Conclusion regarding GNP

1.130. The Commission will draw Member States' attention to the importance of presenting a complete breakdown of GDP from all three points of view when forwarding the 1994 figures.

1.131. The Commission considers that the shortcomings and inaccuracies still contained in Member States' GNP aggregates - despite its efforts to get them to come up with solutions - do not necessarily impair the reliability or the comparability of national GNPs overall. Nonetheless, the Commission will be monitoring Member States' responses to the problems identified by the Court. As regards the completeness of national GNPs, this will not be attained until the black economy is fully incorporated in the accounts (by the end of 1998).

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CHAPTER 2 (*) The European Agricultural Guidance and Guarantee Fund, Guarantee Section (EAGGF-Guarantee)

2.0. TABLE OF CONTENTS Paragraph reference

Budgetary expenditure Table 2.A Table 2.B

Organization and management of crop markets: selected measures in the common organization of the market for fresh and processed fruit and vegetables 2.1 - 2.135

Introduction 2.1 - 2.9

Examination of the implementation of specific measures in the Member States 2.10 - 2.76

Review of financial and economic information 2.10 - 2.14

Audit scope 2.15 - 2.17

Withdrawals 2.18 - 2.36

The role of producer organizations 2.19 - 2.20

Approval of producer organizations 2.21

Absence of producer organization intervention funds 2.22 - 2.25

Examination of produce withdrawn 2.26 - 2.36

Citrus processing into juice 2.37 - 2.45

Processing of tomatoes and canned fruit 2.46 - 2.60

Frequency of audit visits 2.48 - 2.52

Minimum price 2.53 - 2.56

Stocktaking 2.57 - 2.58

Sampling and analysis 2.59 - 2.60

Improvement plans for nut producers 2.61 - 2.68

Timing of payments 2.62

Inflation factors 2.63 - 2.65

Changes to plans 2.66 - 2.67

Additional plan 2.68

Hectare aid for dried grapes 2.69 - 2.76

Applications for aid 2.70 - 2.71

Verifications on the spot 2.72 - 2.75

Payment of aid 2.76

The management of the market 2.77 - 2.124

Farmers' income 2.78 - 2.80

The cost of support 2.81 - 2.83

Market balance 2.84 - 2.92

Quotas 2.89 - 2.90

Thresholds 2.91 - 2.92

Setting and monitoring quality standards 2.93 - 2.97

Quality standards 2.93 - 2.97

The setting of prices and aid 2.98 - 2.113

The aid for free distribution 2.98 - 2.100

Minimum prices and production aid 2.101 - 2.105

Aid for dried grapes 2.106 - 2.110

Aid for nuts and locust beans 2.111 - 2.113

The Commission's monitoring of producer organizations 2.114 - 2.117

Environmental impact of withdrawn produce 2.118 - 2.120

Irregularities 2.121 - 2.124

Conclusions 2.125 - 2.135

BUDGETARY EXPENDITURE

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ORGANIZATION AND MANAGEMENT OF CROP MARKETS: SELECTED MEASURES IN THE COMMON ORGANIZATION OF THE MARKET FOR FRESH AND PROCESSED FRUIT AND VEGETABLES

Introduction

2.1. The Community is the world's biggest producer of fruit and an important producer of vegetables, with 8,8 and 10% of world production respectively. It is also the world's biggest consumer market, which makes it a net importer of fruit and vegetables. On average, for the years 1988 to 1993, the Community imported 4,83 Mio tonnes (6 260 Mio ECU) against 2,14 Mio tonnes (1 930 Mio ECU) of exports, a trade deficit of 2,69 Mio tonnes (4 330 Mio ECU) per year.

2.2. The quantities of fruit and vegetables traded between Member States are much larger than those traded externally. Between 1988 and 1993, intra-Community trade went up from 10,32 Mio tonnes to 13,06 Mio tonnes, representing an average annual increase of about 5% which is still increasing. The most important exporting Member States are France, Spain and Italy, while Germany is the largest import market for fruit and vegetables produced within the Community.

2.3. Fruit and vegetables are seasonal and perishable. These characteristics have led to a market support system with a flexible import policy in order to maintain supply outside the harvest seasons. The common organization of the market (COM) was introduced for fresh products in 1962 and the present basic Regulation dates from 1972 (). Another COM for products processed from fruit and vegetables was first established in 1977 (). The main objectives of the COM are to secure a balanced market, to encourage specialization and to secure farmers a fair income. To achieve this the Council fixes basic prices annually based on proposals from the Commission. These price levels have to cope with oversupply of the market in harvest seasons and with imports of competing produce.

2.4. The main measures which receive Community funding are:

(a) withdrawal - fruit and vegetables being perishable, the traditional instruments of intervention (purchase and storage) are not appropriate for day-to-day management; thus, the main instrument for price support of fresh produce is withdrawal; producer organizations may withdraw their members' produce from the market and receive financial compensation from the Community via intervention agencies at a price which is fixed as a percentage of the basic price; the quality and packaging of the produce withdrawn are also taken into account; produce withdrawn may be disposed of in many ways cost-free (to charities, hospitals, schools, etc.), as animal feed, or for distillation but, in practice, most is destroyed;

(b) processing - in order to increase outlets for producers in the Community and to help them to compete with lower priced imports, aid is available for processing certain fresh fruit and vegetables (e.g. citrus juices, canned tomato products, and peaches and pears in syrup or natural juices), part of which is passed on to the producers in the form of minimum prices; with the entry of Greece, support was extended to dried grapes and figs.

2.5. More recently the basic Regulation has been amended to include aid for the following additional products:

(a) for certain nuts and locust beans, producers receive Community aid under the condition that they participate in development plans to improve quality and marketing;

(b) for dried vegetables, a per-hectare aid is granted to producers of certain pulses.

2.6. In addition and under the same budget chapter, aid for bananas has been introduced outside the COM for fruit and vegetables; the aim of the aid is to compensate Community producers for loss of income following the introduction of common marketing standards and for cessation of production.

2.7. There are other measures which receive aid under the COM, the most important of which is export refunds for certain fresh and processed fruit and vegetables. Further market support is provided by measures which do not directly incur Community expenditure. The major one affecting the internal market being a quality grading system. This is of considerable importance, as withdrawal prices are based on the variety, packaging and quality of produce and minimum qualities are set for produce for processing; furthermore, abuse of the quality and origin labelling system may lead to a breakdown in the market with knock-on effects for marketing and withdrawal. There is also a system of reference prices and counter- vailing duties which regulate Community trade with third countries.

2.8. In 1980 the Court published an initial special report concerning withdrawal measures (). A more comprehensive audit of measures under the COM for fruit and vegetables was undertaken in 1987/88 and the results were published in Special Report No 2/89 (). In that last study, which excluded Spain and Portugal, the Court criticized, in particular, weaknesses in the constitution and operation of producer organizations (POs) in Italy, and stressed the need for increased control over withdrawals and processing.

2.9. In July 1994 the Commission communicated a reflection paper to the Council and Parliament entitled 'Development and future of Community policy in the fruit and vegetables sector` (). This recognizes some of the weaknesses indicated by the Court in this report.

Examination of the implementation of specific measures in the Member States

Review of financial and economic information

2.10. Table 2.1 shows the Community expenditure on the fruit and vegetable market. Between 1988 and 1994, Community expenditure on the COM rose from 708,2 Mio ECU to 1 556,8 Mio ECU which was partially due to the progressive implementation of the COM in Spain and Portugal. This increase concerns expenditure on export refunds and withdrawals and the new measures for nuts and bananas. The aid in respect of the processing of tomatoes and withdrawals of produce accounts for about 50% of the total of the COM.

2.11. Indeed, in the last two years (1993-94) withdrawals have become the most expensive support measure in this market. If one includes the subsidies for processing citrus, a measure which was also designed to relieve the fresh market, the stabilization cost of the fresh market represents about 35% of the total expenditure of the market, with peaks at 534 Mio ECU in 1990 (43% of the total) and 776 Mio ECU in 1993 (46% of the total). However, expenditure is concentrated on a few problem areas: 83% of budgetary costs on fresh fruit are incurred in nearly equal shares on citrus for processing and withdrawals of peaches, apples, and nectarines.

2.12. Production aid for tomato-based products is financially the most important item in the sector of processed fruit and vegetables. However, this sector did not experience the same increases as the fresh produce sector.

2.13. The expenditure by Member State is shown in Table 2.2. In 1988 Italy accounted for 385,9 Mio ECU (54,5%) of expenditure. In 1994 it accounted for 341,7 Mio ECU (21,9%). This decrease in share of expenditure is due to the increases in Greece and Spain which were 440,9 Mio ECU (28,3%) and 421,1 Mio ECU (27,0%) respectively. Expenditure has also risen in Belgium and the Netherlands to 19,8 Mio ECU (1,3%) and 44,4 Mio ECU (2,9%) respectively.

2.14. The most important developments are those in the nuts sector, where expenditure rose rapidly since the introduction of the scheme in 1989 to over 90 Mio ECU in 1994, and in the banana sector, where in 1994, the first full year of application of this scheme, expenditure reached 138 Mio ECU. The aid for dried grapes remained stable at a little over 100 Mio ECU during the same period.

Audit scope

2.15. The overall objective of the present audit of this market organization was to re-examine whether expenditure has been incurred in a lawful and regular manner, and whether the financial management has been sound. The selection of the measures, products and Member States to feature in this examination was based on the proportion of total expenditure that they account for and the perceived risk areas.

2.16. In each of the Member States examined, the audit consisted of an examination and assessment of the procedures adopted by the paying agencies to verify and pay claims. The work was undertaken at the paying agencies, at the various regional inspection and management organizations charged with the day-to-day supervision of the measures and on the spot at claimants' premises.

2.17. This approach covered Greece, Spain, France and Italy where 92% of all expenditure under this COM is spent. It concentrated on withdrawals of citrus fruit, peaches and nectarines and the processing of citrus fruit, peaches and tomatoes. The preventive withdrawal of apples was examined in France and the hectare aid for dried grapes, in Greece. The audit at the Commission examined the management information systems for farm incomes, market balance and quality standards and, in addition, the setting of aid and compensation and the Commission's management and monitoring of the various support measures.

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Withdrawals

2.18. The withdrawal of fruit and vegetables from the market is triggered by a decision of the relevant producer organization that prices have fallen (or will imminently fall) below the withdrawal price. One or more withdrawal centres will be opened where produce, surplus to market requirements, can be withdrawn from the normal (commercial) market and disposed of without disturbing prices. Table 2.3 gives an overview of the importance of withdrawal operations in the main producing Member States for the main products. While the average percentage of produce withdrawn for all products and all Member States is about 5%, the table shows that this average over the last three marketing years covers a wide span, from 58,7% for nectarines in Greece to 0 for cauliflowers in the Netherlands. Of the produce withdrawn (4,3 Mio tonnes) in 1992/93, 60% (2,6 Mio tonnes) was destroyed, while only 2% was disposed of for charitable purposes. Use as animal feed reached 14% while industry took 24%, mainly for distillation.

The role of producer organizations

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2.19. Producer organizations within the fruit and vegetable market play an important role. They should be set up at the producers' own initiative, approved by national authorities and subjected to regular inspection. The Community provides aid for the establishment of the POs and they should fulfil the following conditions ():

(a) promote the concentration of offers and regularization of prices;

(b) provide technical assistance to members for packing and marketing;

(c) the members total produce should be sold through the PO; however, some quantities may be sold directly with the PO's approval; this exception does not exist for citrus fruit for which the whole of the members' production must be placed on the market by the PO;

(d) have rules in relation to production and marketing with the aim of improving quality and adapting offer to demand;

(e) maintain special accounts in relation to their operations as a PO.

2.20. If POs decide to withdraw surplus produce from the market, they are required to compensate their members at a price which cannot be lower than the fixed withdrawal price. For financing these withdrawal operations, the POs are required by the Regulation to have constituted an intervention fund. This should be set up by contributions from the members based on the quantities delivered for sale. The payment of the financial compensation to their members should normally take place before the POs submit their claim for compensation for withdrawal to the paying agency of the Member State.

Approval of producer organizations

2.21. In Spain responsibility has been devolved to the regions. In response to observations from the Court, the central authorities have said that agreements have been concluded with the regions to establish criteria for the coordination of inspections and the approval of POs. In Greece a proper inspection plan was either not in operation, or, as in France and Italy, had been achieved only in part. In addition, in one main region of production in Greece, members did not market all their oranges through the producer organization. Indeed, over 10% of citrus was not marketed through the PO. This is in contravention of the requirements of the Regulation.

Absence of producer organization intervention funds

2.22. While the POs visited by the Court's auditors in the Member States generally complied with the conditions for approval set out in paragraph 2.19, none of them had set up and used a properly constituted intervention fund. In many cases there was no fund or, if there was, it was insufficient to meet market management needs. Frequently contributions were not paid by all members on the volume of their produce marketed, but only on the volume of their produce withdrawn. Thus the efficiency and effectiveness of POs in managing their respective markets are severely impaired.

2.23. Where such funds do not exist in Italy, POs take out bank loans to allow them to pay their members. While the cost of financing withdrawals is borne by all members, the loss in income for the produce withdrawn is borne only by the producers of the produce concerned.

2.24. In Greece many POs have a precarious financial state and therefore have not been able to constitute an intervention fund to compensate their members for withdrawals. Instead, claims are submitted by the POs to the paying agency (Didagep), which transfers the Community financial compensation to the Agricultural Bank of Greece. The Bank then makes payments to farmers whose produce has been withdrawn. Not channelling payments through the POs emphasizes the fact that, in Greece, POs act mainly as a conduit for claiming EC funds.

2.25. In France and Spain many (but not all) POs have not set up a fully operational intervention fund to finance their withdrawal operations. Claims are submitted to the paying agency (Oniflhor and SENPA respectively) and only when they are paid are producer members compensated. Thus, in these Member States, also, the cost of withdrawal operations is borne by the producers concerned rather than all members of the PO.

Examination of produce withdrawn

2.26. The examination of fruit being withdrawn from the market varied from Member State to Member State. In Spain the control system for withdrawing and disposing of produce was found to be satisfactory.

2.27. In Italy the Court's auditors found it difficult to examine the functioning of the control systems for withdrawals. Two of the three POs which had notified their intention to withdraw ceased withdrawing produce when the audit was announced and no withdrawals were witnessed. At the third, 16 lots of peaches were presented for withdrawal in the presence of the auditors. Of these, 75% were rejected by inspectors for failing to meet quality requirements. On the previous day, when the auditors had not been present, 29 lots had been presented for withdrawal, and five (17%) had been rejected. This had been the normal pattern for acceptance of fruit for withdrawal. The circumstances accompanying the audit and the substantial difference between the acceptance rate for the day of the audit and other days cast doubt on the Italian authorities thoroughness when executing quality controls.

2.28. In France the customs authorities are responsible for carrying out checks on fruit withdrawn, principally apples. At the beginning of the apple harvest, withdrawals are usually 'preventive`. The quantities eligible for such withdrawal are fixed by the Commission () for each Member State, as a percentage (30 to 50%) of the expected production surplus. Once this identified surplus has been withdrawn from the market, 'normal` withdrawals take place to cope with day-to-day fluctuations in market supply. The rate of financial compensation paid for preventive withdrawals is the average of that applying from October to December, and, as such, is slightly higher than the monthly rate in the first two months. Thus preventive withdrawals are financially more attractive than other withdrawals. The French authorities allocate the quantities concerned to the individual POs. In practice, all withdrawals at the beginning of the market period were considered to be preventive; only when the PO's 'quota` was exhausted were 'normal` withdrawals made. Fruit withdrawn later in the season is normally already sorted according to size; however, preventive withdrawals take place in boxes containing mixed sizes.

2.29. Officials examine each lot put up for withdrawal and establish a quantity eligible for withdrawal by subtracting the percentage of ineligible fruit. During the audit the inspectors assessed the size of the apples by examining a sample taken from the lot, sorting the fruit into two sizes, those over and those under 70 mm (i.e. Classes Extra and II), and extrapolating the result to the whole lot. The quantity over 70 mm in size has a Community coefficient of 1 applied to it whereas the quantity under that size has a coefficient of 0,65 when calculating the financial compensation. The French authorities have confirmed that this procedure does not comply with the legislation () as a specific coefficient of 0,65 is laid down for mixed sizes. The paying agency has said that the Customs Service was instructed to apply the 0,65 coefficient for mixed lots. The audit found, however, that this was not done, and it has led to an overpayment of compensation of about 3,1 Mio ECU in 1994. In addition, the presentation of unsorted lots to the authorities encourages producers and POs to present all fruit which might conceivably pass a quality examination in the hope that low-quality fruit will not be detected.

2.30. In France, at the time of the audit, there was no on-the-spot check on the free distribution of produce withdrawn. The check prior to payment of aid relied on the provision of a certificate by the receiving body. There were no systematic official checks to ensure that the produce certified as being received was used by the recipient and was additional to any normal purchases. Although the French authorities have informed the Court that the checks have been introduced, the failure to operate checks before was irregular.

2.31. In Greece peaches and nectarines are collected in the fields in plastic crates weighing about 20 kg each. They are delivered to the premises of the PO where they are placed in the same crates in cool stores awaiting dispatch. Any sorting of the fruit for quality and its subsequent packing in cartons or wooden boxes of 5 to 12 kg takes place just before dispatch to the market.

2.32. At the various POs visited, the fruit is withdrawn in the plastic crates in which it had been collected. According to official and trade representatives, this practice is generally applied. These plastic crates are not a final presentation for the market (), and, as such, a coefficient of 0,65 should be applied and not the 0,90 coefficient used by the Greek authorities which is applicable for a commercial presentation after sorting and packing has taken place. This has led to a consistent overpayment of compensation for peaches and nectarines. The amount involved is about 30 Mio ECU for both 1993 and 1994 ().

2.33. Commission Regulation (EEC) No 3596/90 of 12 December 1990 () sets clear quality criteria and tolerances for nectarines and peaches:

(a) fruit which is rotten should not be included;

(b) up to 10% of undersized fruit may be accepted;

(c) up to 10% of fruit may be below the relevant quality criterion for such elements as skin coloration, superficial marks, etc.

2.34. The national authorities failed to issue clear instructions on quality control to the executing staff. Therefore, decisions on minimum samples, tolerances to be accepted and adjustments to be made were left to the discretion of the latter. As a consequence, the inspectors at the POs audited erroneously included rotten fruit in the tolerances. Furthermore, the tolerances accepted for substandard fruit varied from one inspector to another and thus from one PO to another. There is a particular risk of rotten or damaged fruit when peaches and nectarines are withdrawn as they have a comparatively short life (about 7 to 10 days after picking). The practice of accepting rotten fruit has led to overpayments which cannot be quantified.

2.35. The Greek inspectors do not record the quality tests and the results obtained. Thus, there is no evidence that the checks really are executed and that the basis on which the withdrawal operations are approved is correct. The quality inspectors said that from time to time produce presented for withdrawal is rejected on quality grounds but records are not kept of these occasions. There is also no control or documentation of the eventual disposal of produce rejected, in order to ensure that it is not re-presented.

2.36. A withdrawal of peaches witnessed by the auditors serves as an example of the laxness of control in Greece. The agronomist responsible for quality control had inspected and approved the quality of a total of 60 tonnes of peaches and 42 tonnes of nectarines that morning. Most of the fruit had been dispatched for destruction but about 20 tonnes of nectarines remained to be loaded, weighed and destroyed. At the auditors request, a number of boxes were selected for examination from the 20 tonnes. This examination revealed that a high percentage of the fruit was badly bruised or rotten and unmerchantable. It is obvious that the original quality inspection had been unsatisfactory. Following the examination in the presence of the auditors, the PO elected to destroy the remaining 20 tonnes of fruit at its own expense and to withdraw the claim for financial compensation. Such poor controls can be costly for the Community budget. The PO had withdrawn, destroyed and received compensation for nearly 40 000 tonnes of peaches and 6 000 tonnes of nectarines in 1993. Compensation for these quantities would be in the region of 6,9 Mio ECU.

Citrus processing into juice

2.37. About 20% of oranges and 30% of lemons are processed into juice. The most important Member States involved in citrus processing are Greece, Spain and Italy, with 18,7 Mio ECU, 68,4 Mio ECU and 42,4 Mio ECU, respectively, in 1994 (). The Court examined the key elements of the scheme, i.e. whether the minimum price had been paid by the processor to the producers, whether the weight and minimum quality of the raw material had been properly established and whether the yield and concentration of juice had been checked in order to verify the quantity processed.

2.38. In Spain an agricultural inspector, who is present whenever loads are received by processing plants, supervises weighing and takes samples to establish the quality of the fruit, its size and the yield in juice. The receipt of fruit and its subsequent processing was witnessed at five processing plants. The controls exercised by the inspectors were satisfactory, except in one respect - that of checking juice yield and concentration for each lot delivered. Three premises were not properly equipped to obtain official samples and it took up to one hour to take one sample. This calls into question whether samples are systematically taken or whether other controls are weakened due to the time spent on sampling.

2.39. In Italy there have been a number of significant changes to the control system for the intake and processing of citrus fruit with effect from the 1993/94 marketing year. The old control system was criticized in the Court's previous special report on this market () for being too inflexible. The control committees at that time worked during normal working hours only, with the result that the processing industry was limited to about eight hours of work per day. The Italian authorities changed this so that the then existing three member committee of officials was replaced by a representative of the producers' associations and one representing processors, working in shifts round the clock.

2.40. This change in the control procedures considerably undermined the independence of the control system. Following observations from the Court, the Italian authorities have reviewed controls and have introduced checks by official inspectors at all times when fruit is received and processed.

2.41. The lack of proper official control in 1993/94 was accompanied by a general lack of guidance and written instructions to the trade representatives checking fruit. In both Sicily and Calabria, the main production regions, the quality examinations were perfunctory and the reductions made appeared to have the aim of arriving at rounded numbers rather than a proper assessment. Even mixtures of oranges and mandarins, which are not permitted by the regulations (), were accepted at plants. Differences in size of 1 mm in circumference can lead to the rejection or acceptance of fruit, yet the representatives at the various plants were frequently not equipped with gauges. At most of the plants visited, the rejection rate rose when the auditors were present, calling into question the effectiveness of all checks when they are not present.

2.42. The quality tests, which were claimed to have been carried out, were not documented at any of the processing plants, and therefore no trace could be found of their frequency and the factors considered in fixing the quantity of eligible fruit. Checks on yield and the juice content of the fruit were not performed by the trade representatives on the raw material. They merely took the data from the processors' own records after processing. Similarly, checks were not made on the relationship between input and finished product. Thus, two opportunities for meaningful checks on the quantities of citrus eligible for aid were lost. Taken together, the absence of such checks is a serious weakness which must be dealt with under the new control system.

2.43. In Greece the raw material is weighed in the presence of representatives of the PO, the processor and an official inspector who is also responsible for the quality control of the product. The inspector does not check the minimum juice content (yield), and the size, taste and smell of the fruit, all of which are required by regulation to be established. Until such checks are made, there can be no assurance that payments of compensation are justified as the fruit may not reach the minimum standards laid down.

2.44. Other weaknesses found in the national control procedures are that inspectors are not present at all times when plants are processing, and there is no control over raw material and juice at the end of each day's processing. Thus, there is a danger that produce checked in by the inspector is subsequently removed. There is a clear need to lay down inspection programmes for processors and to record the results.

2.45. An examination of the contracts of eight processors in Italy revealed that there was a very low take-up of contracted quantities (usually less than 50% and in one case 19%); similar problems of take-up were noted in Greece. Undersupply of contracted quantities can facilitate claims for aid on false deliveries.

Processing of tomatoes and canned fruit

2.46. In general about 17% of peach and 45% of tomato production are processed. However, there are in effect two tomato markets, one produces varieties for fresh consumption, the other, the Roma and San Marzano varieties for processing. The quantities of tomatoes processed are governed largely by the fact that a quota applies.

2.47. The audit took place in Greece, Spain and Italy. These three Member States received 87% of the Community aid for tomatoes and 77% for peaches in 1992/93 (). The Court examined whether the minimum price had been paid, the weight and quality of the raw material had been properly established and the weight and quality of the processed product was correct.

Frequency of audit visits

2.48. According to Commission Regulation (EEC) No 1558/91 of 7 June 1991 (): 'Raw materials delivered to processors under processing contracts shall be of sound, fair and merchantable quality and suitable for processing.` According to Article 16, the competent authorities shall, each marketing year, examine the processors' records and carry out random on-the-spot checks on aid applications relating to at least 15% of the quantities of the finished products in question. This examination shall include the verification 'that the quantities of raw material used in processing correspond to those indicated in the aid application` and 'that the raw material complies with the quality requirements`. This implies that each processor should be subjected to physical checks during the processing.

2.49. In Spain, at the beginning of the processing season 15% of processors are selected by the competent authorities to receive detailed checks. To these are added new processors and those where errors have been found in the past. While this approach may result in over 15% of quantities being selected for checks, the selection method does not comply with the Regulation, which requires random verifications on the spot. In addition, as only the selected undertakings will be subjected to control visits during processing and to physical checks, other undertakings will quite quickly realize that they have not been selected for physical spot checks, with the consequent risk of false claims. One of the largest processors has not been selected for detailed checks since 1990, which is a clearly unsatisfactory situation.

2.50. In Italy the Court found that out of seven processing plants, two had not been checked at all, a further two had been checked only once and the remaining three had been checked twice.

2.51. In Greece the situation was little better at the time of the audit. The regional staff make visits to processing plants but the frequency of visits and the checks made are undocumented. Consequently, the Court can form no conclusion concerning the frequency and coverage of these controls. However, from discussions with control staff and the controls witnessed, it is clear that the necessary official checks of the quality and net weight of the raw material for the production of the processed products are either not carried out or if they are, the apparatus for sampling, sorting and weighing samples is not available at the intake points.

2.52. In each of the Member States, control visits rarely take place outside the normal official working hours of the inspectors. Many processing plants work round the clock and it severely weakens control for processors to know that their operations will be physically checked only during a limited part of the day. Thus official control visits should also take place outside normal working hours.

Minimum price

2.53. One of the conditions for receipt of aid is the payment by the processor to the producer of the minimum price. In Spain this requirement was generally respected. Where raw material was rejected on quality grounds, but was none the less processed, adjustments were made to the quantity of processed product for which aid was claimed.

2.54. In Italy, according to an agreement between the national producers' unions and the national processors' associations, the processors make deductions from the weight of raw material delivered for earth, other impurities and non-eligible fruit. Tomatoes entering processing were examined at four processing plants. Regional inspectors identified significant quantities of impurities and ineligible raw material (in one case over 20%), the latter because it was green or rotten. After cleaning, all produce destined for tomato concentrate was processed.

2.55. Where reductions have been made in respect of ineligible raw material, the producer has to bear the loss resulting from the rejected quantity. However, when making concentrate, all raw material is processed (including that which is not sound, fair and merchantable). The processor is paid aid in respect of all processed finished product, including that made from raw material which he has identified as being ineligible under the scheme and for which he has not paid the minimum price.

2.56. A similar situation was found in Greece. Processors' staff examine raw material and it is an accepted practice that 3 to 5% of the consignment is deducted as being unsuitable for processing. Nearly all the raw material was processed in the production of tomato concentrate. Thus aid has been paid to a large number of processors in Italy and Greece in respect of finished products that were produced from raw material which was not eligible. The amounts paid in these two Member States in respect of tomato concentrate are in the region of 151 Mio ECU for 1994. The overpayment is likely to be significant; a 3% overstatement of aid would involve 4,5 Mio ECU.

Stocktaking

2.57. In Spain and Greece the method used to take stock of tomato concentrate was examined. It gave rise to the following comments:

(a) no checks are made to test that the storage drums contain tomato concentrate or, indeed, that they had been filled;

(b) no drums are selected for a check reweighing;

(c) all drums are assumed to contain the target weight;

(d) no reconciliation is carried out between the official stocktaking and that undertaken by the company's own internal and external auditors, nor are such reports inspected as a routine part of the checks on production;

(e) working papers associated with the stock count are not retained by the inspectors as a matter of routine.

2.58. Due to the limited number of on-the-spot checks in the Member States, verification of disposal of production is not carried out in any depth. Such checks become even more difficult where the processor reprocesses the product into other foodstuffs, for example, concentrate into sauces. In such circumstances stock checks are very important. Stock registers must be checked, particularly in view of the present weaknesses of other controls.

Sampling and analysis

2.59. The audit revealed that in Greece and Spain there was no planned approach to sampling and analysing the processed product. In Spain the companies not selected for controls do not have their finished products examined at all. Therefore, there is no assurance that the products comply with the quality standards or indeed that the containers of finished product contain the supposed product. This weakness can mean that the production of a given processor will not be examined for several years. Clearly this is unsatisfactory.

2.60. In Greece, although samples are taken from each processor, sampling does not follow a systematic programme. In addition, the general lack of records of work performed, the low frequency of checks said by staff to be executed and the small sample size of cans examined render the checks meaningless. Furthermore, the officials at each plant responsible for quality control said that there is no official examination of the processor's laboratory register and the results of analysis. Comparison is a requirement laid down in Commission Regulation (EEC) No 1558/91 ().

Improvement plans for nut producers

2.61. The Council introduced with effect from 1989 () measures for the support of Community nut and locust bean producers. Aid is provided to assist the formation of POs, but the main measure is the granting of aid in respect of plans to improve the quality and marketing of nuts. Under this, POs submit plans to the Member State for approval, which, in turn, seeks approval from the Commission. The maximum length of the plans is 10 years (five years at one rate of aid and five at a reduced rate). The Community contributes 45% of the aid on condition that producers contribute 45% and the Member State 10%. To date, Spain is the main beneficiary with 95,5% of expenditure. The two plans, examined in Spain, which concern mainly improvements in cultivation, represented 27% of expenditure on this measure (approximately 29,3 Mio ECU 1990-93).

Timing of payments

2.62. Under the terms of Commission Regulation (EEC) No 2159/89 of 18 July 1989 (), Community aid should not be paid or advanced before the contribution from the Member State. However, the national contributions were consistently paid much later than the EC contributions. In one file examined, the national contribution for year 2 of the plan was paid after an advance of the EC contribution for year 3. This failure to respect the payment requirements is clearly irregular.

Inflation factors

2.63. In addition to the original costed plan, the Commission has allowed the application of an inflation factor to take account of rising costs. This facility is not foreseen in the regulations. It was authorized by the Commission following a simple exchange of letters (), but neither the rate to be applied nor the basis for calculating it were specified by the Commission.

2.64. The Spanish Ministry of Agriculture chose to apply the retail price index (RPI) which had risen by 11,59% by the third year of the plan and the maximum amount of aid payable in year 3 was increased by that percentage. However, in Spain:

(a) agricultural inputs (fertilizers, pesticides, etc.) decreased by 4,7% over the three-year period (source: Eurostat);

(b) over 80% of expenditure under the plan for the largest PO is for labour costs; wages rose by 3,7% per annum during the relevant period.

2.65. Taking into account these two parameters only, for this PO alone, the total increase should have been about 8,3%. Thus unjustified payments of aid have been made. Furthermore, in the two claims examined by the Court an inflation factor of 20% had been incorrectly applied. The Spanish authorities have accepted this and have said that they will examine these two cases and will take any necessary recovery action.

Changes to plans

2.66. The implementation of the plans has varied from the work and costs that were originally set out and approved. In one case examined by the Court a substantial deviation from the adopted values was noted. It shifted the expenditure foreseen for material input (which has to be supported by invoices) to labour costs (which are not evidenced, as they constitute the farmers' personal input). The result was that the amount charged for labour under the plan increased by 25%. By this technique only 17% of expenditure was finally supported by invoices; thus the possibilities of justifying expenditure and establishing the effectiveness of the plans were considerably reduced.

2.67. Member States are required to submit to the Commission an annual report on the implementation of the improvement plans. The reports and data so far supplied by Spain are in general terms and, as such, do not permit an analysis of the economy and effectiveness of the measure.

Additional plan

2.68. The Court also examined the approval and implementation of an additional plan made and approved in respect of new members of one PO. This plan started in September 1992, two years and two months after the original plan had commenced. The aid paid in respect of its first year of operation was not adjusted to take account of the fact that it only ran for 10 months. Thus, while the amounts shown in the plan were annual amounts, it was in operation for only part of the year. The amount overpaid is about 0,73 Mio ECU.

Hectare aid for dried grapes

2.69. The aid for dried grapes relates almost entirely to payments in respect of currants and sultanas in Greece (). Since the last audit of this COM, the basic support measures have changed and the legislative bodies have opted for an aid per hectare for growers and the aid for processing has been phased out. Producers of dried grapes are required to make annual applications for aid, which should include details of the area under cultivation for dried grapes, the vine register reference, the variety and an estimate of the crop. This data should be checked and 10% of claims should be selected for on-the-spot examination (this selection should be increased to 15% if substantial errors are found). Aid is paid at the rate of 2 045 ECU/ha (1993/94). The scheme presents a considerable administrative burden - in 1993 in the nomós of Heraklion, the main region for sultanas, there were over 21 000 claims relating to a total of over 60 000 plots under vines.

Applications for aid

2.70. In the nomós of Heraklion, the applications for aid, the supporting documents, the registration of these, the amendments following on-the-spot inspections and the payment list sent to Didagep were written in the same hand. The Greek authorities should ensure that segre- gation of duties is maintained, as is indicated in their reply to the Court's observations.

2.71. In addition to this serious general weakness, there are further weaknesses, namely:

(a) none of the applications contained an estimate of the crop;

(b) none of the applications contained details of the status and type of occupancy of the vineyard, which is of importance in checking whether duplicate claims have been made.

Verifications on the spot

2.72. There is no central system in Greece for ensuring that a proper sample is drawn for each administrative unit (i.e. nomós) nor any control as to whether the minimum 10% of the applications have been checked as required by Commission Regulation (EEC) No 2911/90 (). The Court examined the sampling rate and the results of the subsequent checks. In one commune, selected at random, only 36 of the 408 applications were presented as having been selected for on-the-spot checks. Of these 36 claims, 21 (55%) were found to be wrong; 13 were over-declared and were adjusted downwards by the inspector, the remaining eight were under-declared and the claims were adjusted upwards by the inspector.

2.73. This calls for the following observations:

(a) given the high failure rate of the sample (which was in any case below the 10% required), it should have been increased to 15% according to the Regulation;

(b) over-claims of more than 25% were not rejected as required by the Regulation;

(c) under-claims were adjusted and paid in full, although the Regulation requires that aid should be paid on whichever is the lower of the area claimed or the actual area;

(d) no action was taken to recover the amounts paid in previous years for the 13 areas over-claimed.

2.74. The amount wrongly paid following the 36 checks on the spot was approximately 10 800 ECU. This systematic error indicates that there have been substantial overpayments in respect of previous years. Errors detected as a result of inspections made on the spot by the national authorities since the introduction of the scheme (i.e. in 1994, 1993 and 1992) were not followed up by the Greek authorities to recover overpayments for previous years.

2.75. The thoroughness of the checks on the spot is also unsatisfactory. An examination of the application from one commune found that two inspectors had checked and measured 50 parcels of land in one day. This is impossible to perform adequately, since a normal maximum would be 10 per man-day.

Payment of aid

2.76. Sometimes aid is paid to the applicants under the written agreement that they will submit certain documents later, for example, an invoice or delivery note proving the existence and the disposal of the harvested produce. This practice is not foreseen by the Community regulations. It includes a high risk for the amounts paid and no security is taken from the beneficiaries to ensure that the undertaking is fulfilled. One payment file contained five cases of conditional payments. Two payments (1,9 Mio DR, 5 227,31 ECU) are still to be recovered because the beneficiaries failed to provide the necessary documents.

The management of the market

2.77. The Court has examined the Commission's market management in respect of the main objectives of the COM; i.e. a fair income to the farmers, a balanced market and the application of quality standards. Finally, the Commission's monitoring of irregularities in this market sector has also been examined.

Farmers' income

2.78. The Commission uses the farm accountancy data network (FADN) in order to monitor trends in production costs and growers' income, where such data are available for the different groups of crops. However, there have not been any studies on costs and income for individual crops. Thus, specific product information, which should be used when making price proposals or managing the market, is absent. The Commission has said that it follows market movements in preparing its price proposals and other management decisions and takes into account the information supplied by Member States through the management committee. This method of market management has led to gradual adjustments to withdrawal prices and financial compensations which have failed to deal with the structural surpluses, with consequent continuing withdrawals of particular products from the market.

2.79. The value of production per hectare of fruit and vegetables varies widely between Member States and between the different crops. It is also greatly affected by whether the produce is grown under glass. Net income per hectare varies in a similar way. The production of fruit and vegetables requires two to three times as much labour input as other crops and a farm is on average three to five times smaller than other farms (). Thus, a comparison of net income per family work unit (FWU), i.e. for each non-salaried worker (family), is a more relevant measurement when examining 'a fair level of income`.

2.80. The net income of farmers producing vegetables, measured as net value-added per FWU, is 14 100 ECU per year or about twice as much as the net income (FWU) of 7 400 ECU of farmers producing other agricultural crops. The FADN figures for the category 'farmers producing fruit and other permanent crops` are the nearest available base data for fruit farmers' income; these show a net income (FWU) of 7 700 ECU, which is in line with the income of other farmers. However, fruit farmers only represent about half of this group; the other crops covered include olives and vines.

The cost of support

2.81. The different forms of financial support under the fruit and vegetables COM, for example, withdrawal, processing, hectare aid, etc., have been spent on a limited number of fruits and vegetables. The average aid per hectare for the period 1990 to 1994 was 321 ECU per hectare for apples, 469 ECU for lemons, 533 ECU for oranges and 699 ECU for peaches.

2.82. The support over the same period for all fruit and vegetables receiving aid under the COM brings the average up to 670 ECU per hectare. This is due to the high level of support for tomatoes for processing, which received 2 996 ECU per hectare during the same period. This makes the support for this product the most expensive after that for tobacco ().

2.83. Products other than those which receive aid have some import protection and most are subject to quality standards. On this basis they are competitive and provide a satisfactory income measured in net value-added per family work unit.

Market balance

2.84. The Commission publishes annual estimates of self-sufficiency () which indicate that the Community's self-sufficiency in vegetables has remained relatively stable at around 105% in the period 1984 to 1991. The self-sufficiency of fruit other than citrus decreased by about 5% to 83%. The products which receive most Community aid are at, or near, 100% self-sufficiency (tomatoes 98%, peaches 103%, cauliflowers 100% and apples 94%). The area under cauliflowers has expanded by 10% and the production of citrus has had a 40% increase in yields and a 5% increase in area. The self-sufficiency in oranges has increased from 65 to 82%(25).

2.85. In its preparation for the reform, the Commission has made an analysis based on a review of existing data () which shows that the average self-sufficiency in the years 1990-92 was 102% for vegetables, including produce used for processing, and 73% for fresh fruit, including both tropical fruit and the consumption of apple, pear and orange juice expressed in whole fruit equivalents. However, limiting the concept of self-sufficiency to Community produced products, the Commission has calculated the rate without juice and tropical fruit, which then becomes 110%.

2.86. Despite this, the Commission has presented a report to the Council, in the context of the reform of the COM, in which it states that the degree of self-sufficiency is less than 40% (). This presents an image of the sector as being uncompetitive and under threat from outside. The Court tried to re-establish this figure but could not find any basis for it either in value or in quantity terms. The Community imported on average for the years 1988 to 1993 4,83 Mio tonnes as against 2,14 Mio tonnes exported, which indeed indicates a severe lack of self-sufficiency. However, the concept of self-sufficiency has to be looked at with care. In the fruit and vegetables sector, there is oversupply in major products during the harvest seasons with consequent important and costly destruction of excess produce, while outside harvest seasons internal demand must be met by expensive imports.

2.87. An examination of the entire market balance, i.e. whether the total supply inclusive of net imports can meet the demand at a fixed price and support level, shows regular and major surpluses which are an indication of poor and expensive market management. Indeed, in the period 1989-93, about 25% of the total expenditure has been spent on withdrawal of about 5% of fruit and less than 1% of vegetables produced. The major surpluses were of nectarines, peaches, apples, oranges and cauli- flowers for which the share of produce withdrawn of the total production has been 12 to 30% for nectarines, 11 to 25% for peaches, 1 to 16% for apples, 3 to 10% for oranges, 1 to 10% for lemons and 2 to 6% for cauliflowers. If the quantities removed from the market by processing are included, the total amount of surplus citrus was between 16 and 25% of the production (). At the same time surpluses of other products are dealt with by the market.

2.88. The permanent surpluses of citrus and cauli- flowers have been partly caused by increased areas. This indicates that the outlets for production, including withdrawal, provide a profitable return. The expansion of the area under cauliflowers with continued withdrawals is interesting as it can easily be substituted with cabbages, broccoli and Brussels sprouts, all of which have no financial aid.

Quotas

2.89. Quotas only apply to processed tomato products (). Maximum quantities of tomatoes on which aid will be paid are set for each Member State which then allocates them to the different processing undertakings. A total of 2% of the quota must be retained for allocation to new processing undertakings.

2.90. Under the existing system, the processors may process more products than are covered by their individual quotas; however, such production is ineligible for aid. In Greece the quantities of tomatoes processed in excess of the quota system are very small. However, the larger processors in Spain and Italy regularly process over the quota, some by as much as 50%, thereby ensuring that they maintain their quota for the next year. In this way the quota system discourages new undertakings from entering the sector as the investment needed to start processing cannot be recouped with the small quota available to newcomers to the scheme. New investment is affected, as is competition and general market flexibility. The Commission services have explained that one of the aims of introducing quotas on tomatoes was to limit the financial effect of fraud, by removing the open-ended commitment to pay aid. While this may be a pragmatic approach in dealing with the risk of fraud, it has the negative effect of maintaining a status quo where productivity and efficiency are not sufficiently recognized.

Thresholds

2.91. The threshold mechanism aims to achieve a balance in the market and to limit the aid granted. It applies to withdrawals of several fresh products and to processed fruit. Basic prices or production aid are reduced in the following year if the quantities withdrawn or the quantities processed exceed the thresholds laid down. The price reductions applied have upper limits but, depending on the product, are meant to reflect the overproduction of the previous year or average overproduction of a number of recent years.

2.92. The Court found that the application of this mechanism to fresh fruit has had no marked effect on the production level in the following year and therefore on the quantities withdrawn. The market management effect of the system for fresh fruit production is also doubtful as it has an inherent weakness. The reduction in prices is applied only for the following year and is not consolidated in new price levels. As the quantities produced and withdrawn vary from one year to another, the temporary changes in prices are insufficient to encourage producers to cut their production of permanent crops such as citrus, peaches or apples.

Setting and monitoring quality standards

Quality standards

2.93. The basic Regulation () lays down quality standards for certain fresh fruit and vegetables. These standards were last updated generally in 1989, but satsumas and nectarines were reviewed in 1990. The standards apply to all sales of the products and greatly facilitate trade in fruit and vegetables without the physical presence of the buyer. The criteria laid down are:

(a) the definition of the product,

(b) the variety,

(c) the quality (minimum requirements for each class),

(d) the size,

(e) the tolerances,

(f) the presentation (packaging),

(g) the labelling (identification, origin, nature).

2.94. No quality standards have been laid down for nuts. The absence of such standards greatly complicates the measurement of the effectiveness of the Community aid scheme to improve the quality of nuts and locust beans by means of improvement plans.

2.95. Member States are required to carry out checks to ensure that the standards are respected and to punish contravention. However, the regulations do not require Member States to provide information on the results of quality controls. Council Regulation (EEC) No 1319/85 of 23 May 1985 () permits joint Commission and Member State enquiries to ensure, inter alia, that the quality standards required by the COM are respected.

2.96. The Commission's own quality control body in Directorate-General VI, representing the Commission in the joint enquiries, has been subject to staff cuts. The quality controls under Council Regulation (EEC) No 1319/85 were supposed to start in 1990, yet the controls only started in 1992. There were five controllers and 20 control visits were executed. In 1993 staff was reduced to two and only seven inspections were completed. From July 1994, the active number of staff was one and in 1994 the number of inspections fell to five. In view of the weaknesses detected, the lack of commitment of resources is regrettable.

2.97. Regulation (EEC) No 1319/85 also requires that the Commission presents an annual report to the Parliament and Council on the application of quality rules. Only one report has been issued, that for the two years 1992 and 1993 (). The report outlines the deficiencies in the withdrawal, processing and price recording required under the COM. The Court concurs with the main observations which showed abuses of the quality criteria, a lack of proper control and the non-imposition of penalties for abuses. In its paper entitled 'Development and future of Community policy in the fruit and vegetable sector` (), the Commission expresses the view that strict enforcement of standards will reduce intervention quantities. While this is almost certainly true, this statement underestimates the observations in its own control report (32). A more effective method of achieving this aim would be to lower financial compensation for withdrawals.

The setting of prices and aid

The aid for free distribution

2.98. In the Court's last report on fruit and vegetables it was recommended that free distribution for charity should be encouraged. While producer organizations are now making more attempts to find outlets for produce withdrawn, rather than destruction, the take-up for charity, etc., is still small (2%). This is somewhat surprising as an examination of the cost in 1994 for the free distribution of oranges revealed that aid granted for packing and transport of the produce withdrawn was significantly more than the value of the produce itself.

2.99. While the financial compensation for oranges is 11,68 ECU/100 kg, the aid for handling and packing is 13 ECU/100 kg. Added to this is the aid for transport. If the charitable organization is over 500 km away (which it frequently was at one PO visited in Spain), this amounts to 5,98 ECU/100 kg.

2.100. The aid for handling and transport was thus 61% higher than the price at which the fruit had been withdrawn and more than the prevailing market price. The favourable aid had encouraged the PO to send a sales representative to seek charitable outlets some considerable distance away. Nevertheless, such a financial stimulus has not materially affected the free overall distribution of fruit.

Minimum prices and production aid

2.101. In order to be eligible for aid, processors must pay the minimum price to producers for the raw material. The various minimum prices are fixed each year by the Commission. That for citrus is fixed at the highest withdrawal price. For other produce the new minimum price is based on the previous price adjusted by the movement of basic prices and the need to ensure normal market outlets for the fresh products. The amount of the production aid is calculated and fixed as the difference between the Community minimum prices and the prices of the raw material in producer third countries.

2.102. A comparison between minimum prices and production aid for the main processed products shows that in 1993/94 the aid represented about 30% for peaches, 59% for tomato concentrate and 80% for oranges of the minimum price. Thus, the level of support given to the processors offers them a high degree of protection against competition from third countries.

2.103. Although the aid granted to tomato processing decreased by 17% and the minimum price by 10% during the period 1990-94, the aid still appears to be generous. The level fixed is sufficient to allow efficient processors to produce up to 50% over quota (i.e. without aid), even though several of the processors visited still paid the minimum price for non-quota production. Furthermore there is little competition from imported processed tomato products on the market. The indications are that minimum prices could be substantially cut (with corresponding safeguards to prevent increased withdrawals) and, in turn, aid could be cut by at least this amount.

2.104. The outlook for peaches is not so clear. However, given the high level of aid to the purchase price and the fact that most of the processors audited believed that a cut in aid (perhaps of 10%) could be borne, the minimum prices and aid should be reviewed. Indeed, all processors stated that their competitors on both the Community market and the world market are other Community manufacturers of processed products rather than those in third countries.

2.105. Citrus, especially oranges, presents a different picture. Processing aid was originally a temporary measure introduced as an outlet for fruit that would otherwise have been withdrawn. As such, the Community processes eating oranges which have a lower yield (about 18 kg for 1 litre) than the processing varieties used in third countries (12 kg for 1 litre). Producers and processors face other additional costs when compared with those in the main competitor country (Brazil). There, there are economies of scale and labour costs are cheaper. Thus, this measure, which aimed at relieving problems on the fresh market, has led to a situation where, even with massive amounts of aid, Community juice production cannot compete.

Aid for dried grapes

2.106. The Community measures to support the production of certain varieties of grapes for drying have the objective of rendering them competitive in both quality and price with those from third countries. These measures have failed to achieve their objective. Although this failure may be attributed partly to phylloxera in Crete, it is certainly also due to the fact that a premium was paid under the COM for vines and vine products when areas cultivated with grapes for drying were abandoned.

2.107. The average annual production of dried grapes in Greece in the mid-1980s, i.e. shortly after the Community aid scheme was introduced, was 149 400 tonnes. The average annual production had fallen to 75 800 tonnes by 1990-92. Self-sufficiency is now 30% instead of the 70% when Greece first operated the aid scheme. Thus, there is no evidence to show that the measure has been effective despite annual expenditure of over 90 Mio ECU.

2.108. Originally, aid was paid to help processors but, from the marketing year 1990/91, a hectare aid for producers was introduced. The processing aid has been steadily cut while the aid to growers has increased. From the marketing year 1994/95, it has totally replaced the processing aid. The Court has described in paragraphs 2.69-2.76 the impossibility for Greece to control properly the hectare aid scheme at present. The economic effect of the irregularities will increase as the amount of aid per hectare increases and with the length of time that the measure is applied.

2.109. The aid is only granted for the area cultivated with grapes destined for processing. A crucial control element is the minimum yield per hectare fixed by the Commission as it should reflect the minimum yield to be expected from normal production of grapes for drying. The minimum yield of 1 000 kg/ha fixed for sultanas until the marketing year 1993/94 was unrealistically low. This has allowed growers to take the advantage of attractive prices on the fresh market and irregularly dispose of a part of their production as table grapes.

2.110. Commission Regulation (EC) No 2475/94 of 13 October 1994 () attempts to legalize this practice from the marketing year 1994/95 by allowing growers to dispose of 10% of their production on the fresh market. At the same time, the minimum yield has been increased and differentiated between the areas affected by phylloxera and those unaffected but is still low (1 300 and 2 500 kg/ha) compared with the average yield (1986-90) of 3 044 kg/ha, i.e. before the hectare aid was introduced but when phylloxera was prevalent. This change complicates an already uncontrollable system.

Aid for nuts and locust beans

2.111. The aid is granted in respect of improvement plans. The maximum aid was originally 300 ECU/ha but this has been increased to 475 ECU/ha representing the Community and Member State contribution. This leads to a relatively high level of support of 0,22 ECU/kg, using approximative yields and the current rate of aid.

2.112. The improvement plans aim mainly at improving quality yet, as stated in paragraph 2.94, quality standards have not been laid down for nuts and the reports from Spain are insufficient to allow a valid check on the achievement of the plan's objectives (paragraph 2.67).

2.113. The difficulty in measuring results is particularly serious as the plans concern a 10-year period. The fact that, for the plans examined, over 80% of the costs to be reimbursed were in respect of normal farming operations, unsupported by vouchers, make the introduction of a yardstick against which to measure the plans essential.

The Commission's monitoring of producer organizations

2.114. The Member States are required to submit annual reports on the results of their inspections of POs. The Commission has acknowledged that at present the reports are not supplied on time and do not include sufficient detail for them to be used to ensure that:

(a) the work carried out by the Member States is satisfactory with regard to the approval and monitoring of POs;

(b) a record is maintained of POs which are properly constituted and correctly run.

2.115. In the Court's view, the absence of intervention funds by POs means that the COM can never operate as originally intended. The Commission has failed to detect the extent of the problem and to follow up what the Court considers to be a major weakness. The vast majority of POs, which at present are able to commit the Community to expenditure, do not meet this criterion for recognition.

2.116. In fact, the Commission does not have an up-to-date list of the POs approved by Member States. In 1989 it obtained such a list but, since then, it has only updated the list when the Member States have submitted details. Thus, the Commission cannot be sure that Member States have fulfilled their inspection obligations nor that all POs operating in the market are correctly constituted and operating properly.

2.117. In 1989, in Special Report No 2/89 (), the Court criticized the Member States and the Commission for not having met these obligations properly since the establishment of the COM in 1962. Despite this criticism the situation has continued.

Environmental impact of withdrawn produce

2.118. In general 60% of the produce withdrawn is destroyed. The method used is that the products are tipped into trenches and covered with earth or denatured with oil or crushed. The repetition of this practice for many years and the enormous quantities of produce buried have caused a problem of environmental pollution in the areas where destruction of withdrawn produce has regularly taken place.

2.119. The rotten fruit has polluted the surface and underground waters in the regions concerned. Heavy investment is required for remedying the problem by building special plants. In addition, some regions have introduced environmental taxes to be used to assist disposal. Furthermore, the rotten fruit is, in itself, a source of pollution as it attracts various insects which infest and damage the surrounding crops.

2.120. Thus it becomes even more important to find outlets for produce that would otherwise be destroyed. Apart from continuing encouragement of disposal for charity, animal feed and industry, other uses should be examined. The audit revealed that processors would welcome the opportunity to purchase fruit at low (e.g. withdrawal) prices for processing into jams and juices. Clearly additionality would have to be assured, i.e. access to such raw material would be conditional on a processor fulfilling his normal level of contracts at minimum prices.

Irregularities

2.121. According to Council Regulation (EEC) No 595/91 of 4 March 1991 (), the Member States must provide the Commission with quarterly information on irregularities relating to expenditure by the EAGGF. Table 2.4 shows the irregularities reported in the fruit and vegetables sector for the period 1988 to 1994, as well as the amounts involved and recovered for this period by Member States. However, when interpreting this table one has to bear in mind that it presents the known irregularities. Although the number of the reported cases logically depends on the frequency of the occurrence of irregular payments, it is also influenced by varying reporting practices and the scope, frequency and efficiency of controls in the Member States (). As regards the EAGGF-Guarantee expenditure, the Member States are not obliged by the Regulation to keep accounting records of the amounts detected and not recovered. Therefore, it is necessary to be prudent in drawing conclusions.

2.122. In the period examined, Italy accounts for 37% of expenditure under the COM for fruit and vegetables. One also notes that 5,1% of this expenditure was unduly paid, representing 95% of the total amount of irregularities reported and 57% of all irregular cases in the Community. In view of their importance, the Court undertook a closer analysis of the 173 cases reported by Italy. It reveals that about 64% of the irregular payments discovered by the Italian authorities concern processed tomatoes, followed by citrus processing with 17% (see Table 2.5).

2.123. Most of the irregularities were detected by examination of commercial and fiscal records after the payment was made. This confirms the Court's findings not only in Italy but in the other Member States audited. The registers and records laid down by the Community regulations are maintained separately by beneficiaries from their fiscal and commercial records, and are established with the sole purpose of satisfying the verification requirements set out in the Community regulations.

2.124. For most Member States, the level of recoveries is modest. Although Italy recovered the highest amount with 3,3 Mio ECU, it only represents 2% of the irregularities reported by this Member State. For Spain and Portugal the recovery rate in this sector is even lower. The recovery rate largely depends on the rapidity of proceedings under national law against the wrongdoers, but the effectiveness of such proceedings is heavily influenced by the time elapsed since the making of the undue payment and its detection, which can leave the people responsible for the irregularities enough time to cease trading and to transfer their activities to other areas. However, the financial consequences of sums not recovered are borne by the Community budget, unless non-recovery is due to a Member State's negligence. In the Court's opinion, and more generally in the frame of the common agricultural policy, the regulations in this respect should be strengthened and should increase the responsibility of the Member States as regards the detection and notification of the irregularities.

Conclusions

2.125. The system for the inspection and approval of producer organizations by the Member States was very weak and should be strengthened. There is a need to ensure regular and consistent monitoring of the operations of POs so that they can properly fulfil the duties of market management (paragraph 2.21).

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2.126. Without active and financially healthy POs to develop production and marketing, the COM will not achieve economy, efficiency or effectiveness. After nearly 30 years of operation, encouragement and assistance, producers and their organizations find it difficult to set up proper intervention funds and to play their part fully in the COM. The Commission should therefore re-examine this question (paragraphs 2.22-2.25).

2.127. The control and management by Greece, France and Italy of withdrawal operations were poor, and led to unjustified payments. Produce was accepted which should have been rejected and wrong coefficients have been applied (paragraphs 2.27-2.36).

2.128. The control of citrus processing is particularly weak in Italy, and there can be no assurance that the aid was correctly paid. In Greece, also, basic controls were not carried out, calling into question the validity of payments (paragraphs 2.38-2.44). The Commission and Member States should seek ways of ensuring that the quantities contracted are genuine (paragraph 2.45).

2.129. In the three main producer Member States, the frequency of raw material checks, stocktaking, sampling and analysis of products manufactured from fruit and tomatoes needs to be improved. Due to weak controls, the correctness of claims for aid relies largely on trust. In effect, control has been left in the hands of the most interested parties - the claimants (paragraphs 2.48-2.60).

2.130. The management of the support scheme and the payments in respect of nuts in Spain has led to overpayment of aid and difficulty in measuring results (paragraphs 2.62-2.68 and 2.111-2.113).

2.131. Similarly, the management of the aid for dried grapes in Greece has been ineffective. The Greek authorities must take the necessary steps to ensure that claims are properly presented and checked independently. The minimum yields fixed for eligibility under the scheme give no encouragement to improvement in quality and permit illicit sales on the fresh market (paragraphs 2.70-2.76 and 2.106-2.110).

2.132. In view of the large number of irregularities detected by the auditors when examining the aid for dried grapes, it is the Court's opinion that the introduction of an aid per hectare did not take proper account of the inherent obstacles. It should have been obvious that, where no land register exists, where growers fail to notify changes of ownership, and where the number of growers and vineyards is so high, such a system is uncontrollable.

2.133. The Commission should monitor farm income and market balance more closely. Despite cuts in processing aid and minimum prices, growers of tomatoes for processing still benefit from substantially more support per hectare than other crops, calling into question their level of support. Furthermore, the high levels of aid paid to processors compared with the minimum prices paid to growers for tomatoes, peaches and, more particularly, oranges should be reviewed. The policy for orange processing has forced the Community into granting high levels of aid for produce which is not competitive with imports. This policy has encouraged processors to take investment and development decisions based on a high level of support (paragraphs 2.101-2.105).

2.134. The Commission should have updated the quality standards (paragraphs 2.93-2.97) and reviewed the aid for free distribution (paragraphs 2.98-2.100). 2.135. The seasonal and perishable nature of fruit and vegetables which are greatly affected by weather conditions and which are not generally suitable for storage poses particular problems. Furthermore, the management of the market of perennial fruits by means of the institutional prices fixed is ineffective. In view of this, the present costly system of withdrawals and destruction of surpluses relieving the market of excess production and ensuring a minimum income for producers encourages overproduction, pollutes the environment and has a negative impact on public opinion. It is therefore essential to search for solutions to minimize the negative consequences (paragraphs 2.84-2.88 and 2.118-2.120).

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REPLIES OF THE COMMISSION

ORGANIZATION AND MANAGEMENT OF CROP MARKETS: SELECTED MEASURES IN THE COMMON ORGANIZATION OF THE MARKET FOR FRESH AND PROCESSED FRUIT AND VEGETABLES

Introduction

The Commission has thoroughly examined the Court's analysis and comments in its report on the COM for fruit and vegetables.

It shares most of the Court's conclusions on a large number of points and will be able to draw on them in its deliberations on the reform of the COM which are now at an advanced stage.

Furthermore, as part of the clearance exercise, the Commission will investigate, where the availability of personnel permits, the most outstanding cases referred to by the Court and, where necessary, draw the appropriate financial consequences vis-à-vis the Member States concerned.

In addition to the individual replies set out below, the Commission would like to point out that it considers the Court's report to be important and useful, in terms of the contribution it can make to improving and supplementing its clearance-of-account operations, and the amendments which may prove useful within the context of the COM.

Examination of the implementation of specific measures in the Member States

Withdrawals

2.18. Preventive withdrawals, which are triggered before prices fall, are an essential stability factor. As the Court recognizes, on average approximately 5% of produce marketed is withdrawn, which is acceptable given the nature of the produce (perishable, with wide variations between marketing years, concentration of supply at specific times of the year).

However, in its communication to the Council and the European Parliament of 27 July 1994, the Commission expressed its concern to eliminate structural surpluses and outlined the bases for improving market management through a new approach to enable short-term surpluses to be reduced. This will be proposed as part of the reform, together with measures to reduce withdrawals and, consequently, their destruction.

Withdrawal centres for citrus fruit may only be opened and managed by the POs.

It is true that only 2% of produce withdrawn was disposed of for charitable purposes, but the logistical and redistribution problems involved with fresh produce are inhibitive.

The role of producer organizations

2.20. Producer organization members may receive compensation at prices higher than the withdrawal prices. It is clear that then the Community will intervene only in exceptional cases.

Approval of producer organizations

2.21. The problem of approval and supervision of POs is one of the key elements for sound management of these measures. The Court's comments support the Commission's conclusions in this matter.

As regards the Greek PO in a major orange production region, the Commission has already requested the Greek authorities to open an inquiry into the operation of this PO, because the problems are not restricted to direct sales by PO members. The financial consequences will be assessed as soon as the Commission has received all the necessary information.

Absence of producer organization intervention funds

2.22. Although the Commission agrees with the Court, it found that the use of the intervention fund by the various POs was proportional to the amount of withdrawals as a percentage of the production of the PO members and the rate of interest in the various Member States. In cases where the PO is obliged to withdraw most of its produce, it becomes impossible for the PO to continue to finance withdrawals through its fund.

Pending the reform of the COM, in which specific proposals on the withdrawals system will be put forward, the Commission will pursue discussions with certain Member States in order to improve the management of these measures.

Examination of produce withdrawn

2.26 to 2.36. The Commission's checks in the various Member States produced similar findings.

As regards point 2.27, the Court's comments on withdrawals in Italy describe situations frequently encountered during EAGGF missions (closure of withdrawal centres when Community inspectors were in the area, very high percentage of rejected merchandise on the day the inspectors were present compared with the previous days). These findings do indeed cast doubt on the thoroughness of the quality controls made by the Italian authorities.

As regards the coefficient referred to in point 2.32 to be used for payment for withdrawn produce depending on the form of packaging, in Regulation (EC) No 872/95 the Commission abolished the coefficient 0.90 in order to help overcome these problems. Correct application of the coefficients will make withdrawals less attractive and help improve the present situation.

The various cases referred to by the Court will be investigated thoroughly by the Commission's inspectors and, where appropriate, financial consequences will be drawn when the accounts are cleared.

Citrus processing into juice

2.38. As regards Spain, in addition to the Court's findings, the Commission found that in one case the date of processing contracts had been falsified, which led to financial corrections being made.

2.39 to 2.42. In the case of Italy, the Commission, which has already carried out an inquiry, found that, in addition to the improper application of the system in 1993/94, there were problems with the quality of the produce supplied. The Commission agrees with the Court's comments and will propose the appropriate financial corrections.

2.43 to 2.45. The cases observed by the Court will be followed up closely by the Commission, which has been conducting an inquiry into this sector in Greece and Italy since summer 1994, and, where necessary, will propose the appropriate financial corrections.

Processing of tomatoes and canned fruit

Frequency of audit visits and minimum price

2.48 to 2.56. The Court's comments will be taken into consideration during the checks in the Member States referred to and when the Commission assesses the financial consequences of incorrect application of the regulations. As regards Spain and Portugal, which have already been checked by the Commission, financial corrections have already been proposed for non-compliance with Community regulations on the minimum price to be paid.

Stocktaking

2.57. The Commission takes note of the Court's comments on the method used to take stock of tomato concentrate in these two countries. The mission plan for 1995 provides for a visit to check on the processing of tomatoes in Spain during which the particular aspects raised by the Court will be investigated. As soon as EAGGF staff availability permits, a thorough inquiry will also be carried out in Greece.

Improvement plans for nut producers

2.61 to 2.68. An inspection visit was carried out in Spain from 6 to 9 April 1992 during which some aspects which did not comply with Community regulations were detected. These were communicated to the Spanish authorities by letter VI/32716 dated 23 October 1992. Examples were:

- payment of an amount per hectare greater than the amount laid down in the regulations;

- inclusion of parcels which could be ineligible in the improvement plans.

The Spanish authorities replied and the problems observed were resolved.

The Court's mission in 1994 revealed very serious aspects which it was not possible to see in the first few years of application of this measure. As a result, in 1992 the EAGGF departments concentrated on other aspects of the measure.

Although it was not originally planned to carry out inspection missions for nuts in Spain in 1995, as a result of the facts revealed by the Court, checks will be made, and the consequences drawn in the clearance of accounts for 1993.

Inflation factors

2.63. Community rules (Regulation (EEC) No 2159/89) do not specifically rule out inflation factors in improvement plans. In practice, only a few POs requested them in certain cases.

The Commission did not specify the rate to be applied or the calculation method.

The Commission allowed an inflation factor to be applied to take account of the rise in costs. It gave its agreement to the Spanish request in order to update the cost of the operations indicated in the plans, taking account of actual technical costs. In addition, the Commission pointed out that this should not affect the maximum amount of aid per hectare laid down by the Council in Regulation (EEC) No 790/89.

2.65. The Commission will make sure that the overpaid amounts are recovered.

Changes to plans

2.66. The POs are required to submit invoices for all costs incurred in implementation of improvement plans (Article 19 of Commission Regulation (EEC) No 2159/89). Where a major part of the production costs are not verifiable, the national authorities are required to check that the costs submitted are substantiated.

In this respect it should be borne in mind that Community legislation provides for changes to plans only if they have been communicated to and authorized by the competent authorities of the Member State.

Any changes to plans must involve a reallocation of expenditure to improve their effectiveness, in order to better attain their objectives.

If the change involves a shift in expenditure towards labour costs, this is permitted under the legislation. The objective of all plans is to improve the quality and management of nuts, using all means specifically described in Regulation (EEC) No 2159/89.

2.67. Under Article 9 of Regulation (EEC) No 2159/89, the national authorities must submit a report on the checks made and indicate any difficulties encountered.

As regards the content of the report, current Community rules allow Member States to provide general information, which must include the checks made and communicated to the Commission.

Additional plan

2.68. As announced in points 2.61 to 2.68, inspection missions will be carried out in Spain to investigate, among other things, the case described by the Court in this paragraph, and ensure recovery of any overpaid amounts.

Hectare aid for dried grapes

2.69 to 2.76. The Court's comments have been noted and special attention will be paid to them when this measure is next audited.

The management of the market

Farmers' income

2.78. The present method of managing the market was developed for dealing with short-term surpluses. It has proved to be a cost-effective instrument.

It should be borne in mind that the main causes of expenditure are structural imbalances, which, it must be said, have always existed. These imbalances are influenced by factors other than economic factors (social and political).

One of the main objectives of the future reform of this COM will be the gradual elimination of structural surpluses.

The cost of support

2.82. Although the aid for processing tomatoes is relatively high, the social aspects of this industry, involving more than 100 000 workers, should not be overlooked. However, the Commission reduced the aid granted by more than 17% over the period 1990-94. The downward trend will continue.

In this context, it should be borne in mind that the market management measures are severely affected by currency devaluations, which increase prices in national currency, exceeding by far the minimum price reductions adopted.

Market balance

2.85 and 2.86. Given the fluctuations in production, due mainly to weather conditions, the degree of self-sufficiency can change considerably, depending on the reference years taken as the basis for calculation.

2.87. Most surpluses are structural surpluses. Short-term surpluses are attributable to seasonal or annual variations in production and depend to a large extent on weather factors. Constant attention is paid to management of short-term surpluses, drawing on lessons learnt in the past.

The Commission does not share the Court's view that regular and major surpluses are an indication of poor and expensive market management.

Setting and monitoring quality standards and coefficients

Quality standards

2.93. The group of experts on quality standards has not been working since December 1993. Since then, and although the group has not been meeting, major changes to the regulations on standards for apples, pears and tomatoes have been made, as they had become necessary.

2.94. No quality standards have been laid down for nuts and melons. It is planned that, after the reform, the group of experts on quality standards will be reconvened.

2.95. As regards trade with non-member countries or other Member States, under Article 11 of Regulation (EEC) No 2251/92, the Member States must provide information on the results of the quality controls they make in cases where the results do not comply with the regulations.

Furthermore, they must also inform the Commission of the lots of imported fruit and vegetables that have been rejected.

On the basis of Regulation (EEC) No 1319/85, the Commission and Member States must conduct joint inquiries to verify quality controls in the sector.

2.97. The Commission remains convinced that strict enforcement of quality standards will make it possible to reduce intervention quantities, although this will make it necessary to step up controls. Concrete measures will be put forward when proposals for the reform are submitted.

The setting of prices and aid

Minimum prices and production aid

2.104. The main peach exporting countries (Australia, Chile, RSA and USA) export approximately 100 000 tonnes to the world market.

Aid for dried grapes

2.106 to 2.109. The increase in the minimum yields required for payment of the aid should provide an incentive to increase yields. However, the conversion in 1990 from the aid per quantity in force since 1981 to aid per hectare was a political choice which already took account of a possible fall in yields.

2.110. Traditionally, Greek producers have always sold part of their sultana grape production to the fresh market, or for wine-making, depending on the price.

Aid per hectare makes it possible to maintain this traditional system on a small scale or at a low level. The 10% limit reflects that objective.

Aid for nuts and locust beans

2.111 to 2.113. Although Regulation (EEC) No 2159/89 makes no specific provision regarding completion, improvement of the plans is examined under dual control by the Member States and the Commission, in order to ensure that the activities planned are in accordance with the rules. However, the Commission realizes that it would be better to have more detailed information on the degree of completion, and proposes that the Member States should include other data on certain parameters (production, marketing outlets, increase in price for finished product, etc.) in the annual report which they must send it.

The Commission's monitoring of producer organizations

2.114 to 2.115. In the reform of the COM, the Commission will propose measures to improve controls, including the control measures arising from the Member States' obligations.

2.116 to 2.117. All national authorities are obliged to notify the Commission of any changes made to PO recognition declarations. A database on all POs exists, and updating is provided for. The Commission regularly draws the Member States' attention to their obligation to send it their list of approved POs.

Environmental impact of withdrawn produce

2.118 to 2.120. The Commission is aware of the serious environmental problems caused by the destruction of fruit and vegetables in certain regions, and is currently studying the possibility of finding other ways of disposing of this produce.

Irregularities

2.124. It is difficult to make the Member States' responsibility more explicit as regards the detection and notification of irregularities than what is laid down in Article 8 of Regulation (EEC) No 729/70 and in Regulation (EEC) No 595/91, and the Commission is constantly reminding the Member States to comply with these provisions. However, as the Court notes, it does not always obtain the desired results.

Conclusions

2.125. The Commission considers the system for the inspection and approval of POs set up by the Member States to be an essential element for the proper functioning of this COM. Within the framework of the reform, it intends to propose that it should be strengthened and that monitoring should be improved.

2.126. This question is part of the discussions which the Commission is having with certain defaulting Member States in order to improve management.

2.127. The Commission shares the Court's opinion, since its checks in these Member States revealed similar findings. As indicated in points 2.27 to 2.36, and in other replies throughout the report, the financial consequences of these failings will be drawn when the accounts are cleared.

2.128. In the case of Italy, the Commission has also found that the control committees, responsible for verifying the quality of fruit for processing, have not been rigorous in the application of the reductions to be made for fruit not meeting the quality standards required by Regulation (EEC) No 920/89.

The Commission's inspectors do not consider the verification of the quality of lots of citrus fruit to be an exact science and, with the exception of the assessment of the size of produce, decisions on eligibility in accordance with the minimum quality requirements are often subjective.

Similarly, it is obvious that it is extremely difficult for processors to take out precisely the rejected quantity during sorting operations prior to processing.

The Commission will ensure that the Greek and Italian authorities comply with Regulation (EEC) No 920/89, i.e. that the fruit meets the quality requirements of Class III with a quality tolerance of 15% and a size tolerance of 10%, and that any rotten fruit is excluded. Lots which do not meet these minimum requirements must be rejected completely.

2.129. The Commission has requested the main producing Member States to tighten up their controls. The reform will reinforce this requirement.

2.130. As regards the facts described by the Court in points 2.62 to 2.68, inspection missions will be carried out and the financial consequences drawn in the clearance of accounts for 1993.

2.131. The Commission is conducting in-depth discussions with the Greek authorities in order to establish an effective management and control system in the fruit and vegetables sector. The dialogue is continuing, and the management of aid for dried grapes is part of the discussions.

Commission Regulation (EC) No 2475/94 allows the traditional system of the sale of sultanas to the fresh market in quantities not exceeding 10% of production to be maintained.

2.132. When the proposals for the reform of the COM in fresh fruit and vegetables are put forward, the Commission will decide whether or not the current system for dried grapes should be maintained.

2.134. As explained above in points 2.93 and 2.94, a group of experts worked until December 1993 on quality standards and proposed amendments which have now been made. Subsequently, other amendments to the standards on apples, pears and tomatoes have been introduced.

The coefficients have been adjusted when this has proved necessary. For example, adjustments were introduced in 1993 and 1995 in the case of peaches and nectarines.

It is planned for the group of experts on quality standards to be reconvened after the reform. The question of coefficients will have to be dealt with in discussions on the reform.

2.135. Within the framework of the reform, the Commission will make every effort to improve the system protecting fruit and vegetables, and its management and control, in order to strengthen it and make it more effective.

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CHAPTER 3 (*) Common policy on fisheries and the sea

3.0. TABLE OF CONTENTS Paragraph reference

Introduction 3.1 - 3.2

The allowance for tuna intended for the canning industry 3.3 - 3.8

Observations on the economic impact of the measure 3.9 - 3.23

The economic sector 3.9 - 3.16

Assessment of the effectiveness of the allowance 3.17 - 3.21

The special case of Madeira and the Azores 3.22 - 3.23

Observations on the administrative management of the measure 3.24 - 3.38

Recognized producers' organizations 3.24 - 3.29

Sale of tuna 3.30

Proof of the Community origin of the tuna 3.31 - 3.34

Checks at canneries 3.35 - 3.37

Lack of checks by the Commission 3.38

Conclusion 3.39 - 3.42

INTRODUCTION

3.1. Table 3.1 shows the availability and utilization of appropriations in 1994 in respect of the common policy on fisheries and the sea. This chapter deals, mainly from the point of view of sound financial management, with expenditure on the allowance for tuna intended for the canning industry charged to heading B1-261 ('Intervention for fishery products`) of the general budget.

3.2. Table 3.2 shows, for the financial years 1990-94, EAGGF-Guarantee expenditure on the allowance for tuna intended for the canning industry. In 1994, the allowance accounted for 34% of EAGGF-Guarantee expenditure on the fisheries sector and 2% of total expenditure on the common policy on fisheries and the sea. The Court's audit concerned the system for managing the measure at the Community and national levels in the three Member States concerned, to wit, Spain, France and Portugal. In Portugal, the audit was carried out jointly with the national external audit institution.

THE ALLOWANCE FOR TUNA INTENDED FOR THE CANNING INDUSTRY

3.3. The common organization of the market in the fishery products sector, which was established in 1970, has since been amended several times and is currently governed by Council Regulation (EEC) No 3759/92 of 17 December 1993 (hereinafter referred to as 'the basic Regulation` (). It provides, amongst other intervention measures, for an allowance for tuna intended for the canning industry (hereinafter referred to as 'the allowance`). This measure, which was implemented for the first time in 1986, was the subject in 1988 of provisions fixing ceilings for the quantities of tuna to be taken into consideration and the size of the allowances to be granted 'in order to discourage an abnormal increase in tuna production` (). The allowance scheme is defined by Articles 17 and 18 of the basic Regulation, the content of which was amended, with effect from 1 January 1995, by Council Regulation (EC) No 3318/94 of 22 December 1994 ().

3.4. According to the recitals of the basic Regulation, the aim of the allowance is to offset the disadvantages which the arrangements for free importation into the Community of tuna intended for processing may create for Community producers. In order to enable the Community processing industries to benefit from conditions of supply which are comparable to those of their competitors in non-member States, tuna imports are subject neither to customs duties nor to levies: a fall in the price of imported tuna may thus reduce the price of tuna sold by Community producers, thereby affecting their income.

3.5. Before the start of each fishing year, the Council fixes a 'Community production price` for tuna (ECU/tonne). Where, in a given calendar quarter, the Commission notes that the average sales price on the Community market and the import price have been lower than 93% of the Community production price ('the triggering threshold`), the Commission grants the compensatory allowance.

3.6. The size of the allowance may not exceed the difference between the average sales price and the triggering threshold, or 12% of this threshold. The allowance applies to quantities sold on the Community market which do not exceed the average quantities sold during the corresponding quarters of the three previous fishing years.

3.7. Between the end of each calendar quarter concerned and the time the Commission adopts its Regulation on the granting of the allowance, a period of six to 11 months elapses, owing to the need for the Commission to obtain, analyse and process the data on market conditions relating to the quarter in question. The national bodies responsible for payment disburse the allowance no later than three months after the Commission Regulation has been adopted.

3.8. According to the Regulations, the allowance may only be paid to recognized producers' organizations in the fishery sector, as defined under Title II of the basic Regulation.

OBSERVATIONS ON THE ECONOMIC IMPACT OF THE MEASURE

The economic sector

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3.9. The species of tuna covered by the allowance may be defined collectively as 'tropical tuna` because they are fished in tropical or subtropical areas of the Atlantic and Indian oceans. The main species concerned are the Albacore tuna (thunnus albacares), the big-eye tuna (thunnus obesus), the skipjack tuna (euthunnus (Katsuwonus) pelamis) and the long-finned tuna (thunnus alalunga). Tropical tuna is generally frozen immediately after being caught: according to the Regulations, long-finned tuna may only be considered for the allowance in the frozen state but in the case of other species this express condition is not stipulated. However, owing to the length of the fishing seasons and the distance between the places where the fish is caught and the canneries, the tuna cannot, in any case, be processed when fresh. The only exception to this general rule is some of the tuna caught in the waters of the Azores near canneries, which can be processed when fresh as soon as it has been unloaded.

3.10. Tropical tuna is fished by French and Spanish freezer boats permanently based in ports in non-member States and which fish both in international waters and in the waters of non-member States that have concluded fishery agreements with the Community. Portuguese non-freezer boats also fish for tuna off Madeira and the Azores.

3.11. In 1994, the fleet of Community freezer tuna-boats comprised 44 Spanish boats and 35 French boats. The Portuguese fleet comprised about 30 boats registered in Madeira and 36 registered in the Azores. The quantities caught in 1993, the most recent year for which comprehensive information could be gathered, total 228 936 tonnes for the Spanish tuna-boats, 162 580 tonnes for the French tuna-boats, 4 725 tonnes for the boats from Madeira and 10 676 tonnes for the boats from the Azores (). It is clear from these data that the French and Spanish freezer boats account for almost all of the sector of tropical tuna intended for the canning industry. The fact is that, in Madeira and the Azores, fishing for tuna intended for processing is of purely local economic importance, exclusively concerns the supplying on an almost day-to-day basis of the canneries located on these islands and remains outside the world market for frozen tropical tuna. In view of the nature of this sort of fishing, it cannot, therefore, be compared to fishing by freezer boats.

3.12. The market for frozen tropical tuna produced by Community vessels is the world market, at the express wish of the Community, which, for the reasons set out in paragraph 3.4., does not aim to guarantee for this product a scheme of 'Community preference`. Tropical tuna caught by the Community boats is transferred to cargo-vessels and dispatched both to the Community and to non-member States (mainly Thailand and the United States), depending on market circumstances (specific demand and prices offered, immediate possibilities for transport, trade relations with certain customers etc.). In 1993 about 49% of the production of the Spanish boat-owners was sold in non-member State markets, and about 70% of the production of the French boat-owners.

3.13. As tropical tuna is fished outside Community waters, and therefore, inter alia, outside the Community system for managing fishing resources, by vessels which are not based in and do not put into Community ports, and as it does not benefit, unlike other fishery products, from Community customs protection and price support, the only justification for describing it as a 'Community product` is the fact that it is fished by vessels registered in the Community. Furthermore, this justification is more formal than economic, as it may very well be in the interests of a Community shipowner to operate some of his boats under the flags of non-member States. Community Regulations even encourage this practice by granting premiums for transferring vessels to non-member States or for the setting-up of mixed companies, thus requiring a change of flag, in particular within the framework of fishery agreements.

3.14. The Community Regulations refer to two categories of economic operator with conflicting interests: tuna fishermen, who suffer loss if the selling price of their catch falls, and canners, who, in contrast, may benefit from a fall in the purchase price of their raw material. However, a single group of companies often catches and processes tropical tuna.

3.15. According to the information gathered on the spot, 20 French tuna-boats (i.e. 68% of the tonnage of the fleet registered in France) and 11 Spanish tuna-boats (i.e. 21% of the tonnage of the fleet registered in Spain) belong to industrial groups which are active in both the shipping sector and the canning sector. In the Azores, tuna fishing is in the process of being reorganized and developed by the main Portuguese canner, whose fleet of 14 vessels already makes almost half of the catches in the waters of these islands.

3.16. The Community Regulations governing the allowance recognize only one category of beneficiary: producers. However, producers of tropical tuna are not all in the same situation. The fact is that the consequences of a fall in world tuna prices are not the same for a shipowner who is only a shipowner as for a shipowner-canner. Even if a group's fishing and processing activities are separate, it benefits, as a processor, from a fall in tuna prices which may be detrimental to its fishing activities. Furthermore, it is always difficult to check whether the costs of transfers within the group are determined by market forces.

Assessment of the effectiveness of the allowance

3.17. An aid measure is effective insofar as it achieves its objectives. Assessing the effectiveness of the allowance is problematical as the Regulations do not clearly define the aims of the measure. Furthermore, neither the Regulations nor the proposals for these Regulations submitted by the Commission provide economic justification for aid which seems to be based on the assumption that a fall in the selling price on the Community market for certain quantities of tuna will automatically lead to a reduction in incomes. However, other factors could affect the validity of such an assumption: in particular, the income resulting from a possible increase in the quantities sold, the variation, in terms of the size of catches, of the marginal cost of each tonne fished in each fishing year, improvements in the productivity of the tuna producers as a result, inter alia, of Community aid for the construction and modernization of vessels and, lastly, compensation for falls in income when prices are low by increases obtained when prices are high: variations in rates are, after all, a common phenomenon in most markets for raw materials. Furthermore, the Court notes that 55% of all French and Spanish catches are sold on the world market and thus do not receive the allowance provided for by the Community Regulations.

3.18. Analysis of the impact of the allowance on the actual situation of tuna fishing companies reveals that, when tuna is sold to a purchaser located in the Community, the producers cannot know whether the price they obtain will entitle them to an allowance because the allowance will be paid, where applicable, on average only one year after the sale has been made. The allowance received will always be financially advantageous but will not offset the disadvantages of low prices during the quarter in which the tuna was sold. As the Court was able to observe, this time-lag sometimes results in the allowance being paid to the creditors of enterprises which have already gone bankrupt or to former shipowners who have since scrapped their boats.

3.19. The allowances which tropical tuna producers receive are modest as a proportion of their overall turnover. In 1993, the turnover of French tuna-boats totalled approximately 114 Mio ECU () and allowances paid amounted to approximately 3,5 Mio ECU. In the same year, the turnover of Spanish tuna-boats may be estimated at approximately 143,4 Mio ECU () and total allowances paid amounted to approximately 10,2 Mio ECU. However, if sales in the Community alone are considered, the allowances received become far from negligible and may be put, for the same year and on the basis of the overall quantities sold, at over 10% of the 'Community` turnover of Spanish and French shipowners.

3.20. In a report submitted to the Council in 1994 () in preparation for a possible reform of the measure, the Commission points out that freezer tuna-boats also benefit from other Community expenditure, put at approximately 9 Mio ECU per year, on aid for the construction of vessels and for fishery agreements with non-member States and recommends that a competitive Community tropical tuna fleet should be preserved.

3.21. The allowance is viewed differently by producers of tropical tuna, depending on whether they are part of an integrated fishing and processing structure or not. In the case of shipowners who do nothing else and whose income depends mainly on selling the tuna they catch, the payment of additional amounts - the compensatory allowance - for quantities sold in the Community provides a measure of protection against falls in world tropical tuna prices. In contrast, membership of a processing network shifts the impact of variations in tuna prices. The fact is that, in this case, overall income depends rather on the selling price of the end product (tinned fish). The allowance is thus not a fair means of compensation because it is granted equally to all shipowners, regardless of the extent to which they are integrated into the canning network.

The special case of Madeira and the Azores

3.22. A processing industry was set up in Madeira and the Azores so as to exploit the specific resources of the waters around these islands and to produce quality canned produce characterized by the origin of the raw material ('Azores quality` tuna processed where the fish is caught, according to the canners' advertising slogans), a fact which is confirmed by the canners' dominance of the tuna-fishing sector. Although the recent expansion of these processing facilities, which has been encouraged by Community structural aid, could result in the local industry starting to use imported tuna, the quantities imported thus far have been very small and tuna from Madeira and the Azores has not been subject to competition on the world market.

3.23. The Community considered it appropriate to provide financial support for tuna fishing in the Azores and Madeira. A specific measure was introduced but its application hampers the functioning of the allowance mechanism. The fact is that, within the framework of the programme of options specific to the remote and insular nature of Madeira and the Azores (known as Poseima), the Commission decided () to grant, for 1992 and 1993, aid for each kilo of tuna caught and delivered to the local industry. This measure was revoked for the 1994 fishing year by a Council Regulation (). In 1992, the aid was given by the local authorities entirely to the industry but, from 1993 onwards, it was divided between fishermen and canners. Consequently, the industry reduced the purchase price of the tuna by the amount the producers receive in Poseima aid, leading to a fall in the price of tuna which was taken into consideration when the allowance was being granted.

OBSERVATIONS ON THE ADMINISTRATIVE MANAGEMENT OF THE MEASURE

Recognized producers' organizations

3.24. In keeping with other aid measures provided for by the common organization of the market for fishery products, the allowance may only be paid to producers' organizations recognized by the Member State on the territory of which their registered office is located (). Recognition may only be given to organizations which play a direct marketing role (by selling members' produce) or an indirect role (by drawing up common rules for marketing). In the case of tropical tuna, two organizations were recognized in Spain, one in France and two in Portugal (one in Madeira and the other in the Azores).

3.25. With the exception of Madeira, where the recognized organization is a cooperative which sells the tuna caught by its members to canners, the recognized organizations of producers of tropical tuna do not play any marketing role and are merely formal structures created in order to receive the allowance.

3.26. In France, the majority of shipowners are part of a joint body which transports and markets frozen tuna. However, for the purposes of the allowance, they preferred to create another structure (the recognized organization) which adopted provisions known as 'marketing rules`. These rules were substantially limited to the requirement that members should produce frozen tuna of sound, fair and merchantable quality and should regularly declare to the organization the quantities they have caught, unloaded and sold and the prices obtained. According to the information gathered on the spot, the French shipowners did not ask for their marketing body to be recognized as a producers' organization as defined by Community Regulations because, according to these Regulations (), each member must be part of the organization for at least three years, a requirement which seemed too onerous to them.

3.27. In Spain, shipowners consider that, in view of the relatively low cost of maritime freight, the fixed costs of a joint system for transporting and selling tuna would be too high and, moreover, the particular nature of the world market for frozen tuna would not make it possible to apply joint marketing rules. When Spain joined the Community, it created recognized organizations which receive and distribute the allowance in addition to the existing professional organizations which deal with the shipowners' common interests (access to the resources of non-member States, obtaining fishing licences and trans-shipment facilities etc.).

3.28. When the audit was carried out in the Azores, the recognized producers' organization was unable to fulfil the regulatory requirements.

3.29. If the workings of the producers' organizations recognized by the Member States are examined, it may be concluded that these organizations do not play the role attributed to them by the Community Regulations. The Commission should have ensured that the Member States recognized producers' organizations which met the substantive conditions laid down by the Community Regulations and that they withdrew recognition where these conditions were not met. Furthermore, it should have assessed to what extent the general model for producers' organizations as laid down in the basic Regulation may be profitably applied to the highly specialized tuna-fishing sector and should have proposed, where appropriate, a model for producers' organizations which was better suited to the characteristics of this sector.

Sale of tuna

3.30. The Regulations lay down that the allowance shall be granted in respect of quantities of tuna which are 'sold` to the canning industry. When a given group of companies is active in both the fishing and canning sectors, the vessels and the canneries are usually managed by different companies. In this case, invoices are produced for tuna which is caught and canned by members of the same group, thereby fulfilling the legal criteria for a sale. However, prices may be set within the group in accordance with rules which differ from those applied by independent companies (see paragraph 3.16.). However, one case was noted of a Spanish canner/shipowner who had not kept his fishing and canning activities legally separate and who received the allowance even though the tuna, which never changes hands, was not sold. This sort of situation, which is economically rational but is not provided for by the Regulations, should be looked into by the Commission.

Proof of the Community origin of the tuna

3.31. Proof of the Community origin of the tuna must be provided when the application is made for payment of the allowance. According to the application provisions drawn up by the Commission (), this proof is provided by the submission of form T 2 M, as laid down by Commission Regulation (EEC) No 137/79 of 19 December 1978 on the institution of a special method of administrative cooperation for applying intra-Community treatment to the fishery catches of vessels of Member States (). This form is not geared to trade in frozen tropical tuna as it concerns transshipment between Community vessels, whilst frozen tuna is generally transported by cargo-vessels sailing under the flags of non-member States. The T 2 M forms, several copies of which are issued to each tuna-boat by the customs office in the port of unloading, contain a box in which the captain of the tuna-boat declares, when the catch is unloaded, that he has caught the fish, and other boxes in which the captains of tuna-boats and of 'other vessels of the Member States` declare, when the tuna is first unloaded and possibly reloaded at a later stage, that the catch tallies with the contents of the first box.

3.32. The aim of the document appears to be to establish a continuous chain of responsibility starting from the moment the fish is caught until it is unloaded in the Community. However, this chain is broken if the produce is transported by non-Community vessels. Spanish producers also require captains of non-Community cargo-vessels to complete form T 2 M, but as they are not subject to Community law in this area checking the accuracy of their declarations and penalizing any false declarations is problematical.

3.33. With regard to France, some T 2 Ms, of which only the first box had been filled in, were found in the files of the paying body relating to only one member of the producers' organization. However, the other shipowners had submitted to customs copies of the declarations, from which it was clear that T 2 Ms had been submitted to customs when the tuna was unloaded in the Community by cargo-vessels.

3.34. Proof of the Community origin of the frozen tropical tuna is not provided by the T 2 M system in the case of vessels sailing under the flags of non-member States. The Commission should improve the inspection arrangements by making them reliable irrespective of the flag of the vessel, failing which it should make arrangements so as to make ineligible for the allowance tuna transported by non-Community cargo-vessels which are not subject to the same inspection arrangements as Community vessels.

Checks at canneries

3.35. In its application provisions (), the Commission required 'the Member States concerned` to set up a system of checks comprising direct inspections at canneries with a view to ensuring that the purchased produce was actually intended for processing. However, it did not concern itself with canneries located in a Member State other than the one which pays the allowance. For this reason, French canneries, which process only a third of the tropical tuna sold in the Community, are subject to the aforementioned system of checks but the Italian canneries which process the remaining two-thirds are not.

3.36. The national administrations are aware of the fact that, in order to be comprehensive, the system of checks should also include checks at canneries located outside the territory over which they have jurisdiction. The French authorities indicated in the description of their inspection procedures that checks in respect of the final destination of the tuna delivered to the Italian canning industry should be made by the Italian authorities, in accordance with Council Regulation (EEC) No 1468/81 on mutual assistance between the national administrations of the Member States ().

3.37. However, the provisions of this Regulation concern the provision of information in specific cases, at the request of the authorities of one Member State, or the carrying out, also upon request, of special surveillance in cases where there are particular risks of infringement. This Regulation does not permit the authorities of the Member State which pays the allowance to require the authorities of another Member State to set up a system of regular checks at canneries which process tuna that is taken into consideration before the allowance is paid. This requirement could only be imposed by Community legislation. In any case, when the Court carried out its audit the French authorities had not yet submitted any requests for assistance to the Italian authorities.

Lack of checks by the Commission

3.38. The Commission has never checked, either within the framework of the clearance of the accounts of the EAGGF-Guarantee or as part of an inspection of management, whether the national administrations correctly apply the provisions concerning the payment of the allowance. If the checks had been carried out, the mismatch between certain application procedures and actual market conditions could have been noted. The very small number of companies concerned (currently, 26 shipowners in France and 18 in Spain) would have enabled adequate checks to be carried out as soon as the measure began to be applied.

CONCLUSION

3.39. The regulations do not clearly set out the aims of, or economic justification for, the measure, which resembles aid intended to offset the loss of income which would result from a fall in the price of tuna sold in the Community. However, the validity of such an assumption is called into question by other economic variables which affect income (see paragraph 3.17 above). The effectiveness of the measure should be examined and account should be taken of all of the variables in this market.

3.40. The allowance is paid indiscriminately, to shipping companies which are not part of the canning industry and to those which are part of a processing chain, the produce of which is, in certain cases, used as raw material within the economic structure to which they belong. As the allowance is designed to offset any disadvantage resulting from a fall in the prices of a raw material, the actual extent of this disadvantage should be analysed, taking account of the degree of involvement of the producer of this raw material in the processing industry (see paragraph 3.21).

3.41. As regards the administrative procedures for managing the measure, it was noted that certain rules to which reference is made in paragraphs 3.25, 3.31 and 3.35 were ill-suited to market conditions. As the above observations on administrative management show, the Commission has never carried out checks and thus, in practice, has accepted the application of a number of rules which the Court observed to be inadequate or incorrect. When the measure was first being implemented, the Commission should have checked that it was being consistently applied in the three Member States concerned and should have proposed, where appropriate, the amendments to the Regulations which were needed to take account of market conditions.

3.42. As form T 2 M is not suited to checking the Community origin of the tuna, the Commission should make specific arrangements for cases in which the tuna is transported by non-Community vessels. The possibility should be examined of making quantities transported by non-Community cargo-vessels which are not subject to the same checks as Community vessels ineligible for the allowance.

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REPLIES OF THE COMMISSION

OBSERVATIONS ON THE ECONOMIC IMPACT OF THE MEASURE

Assessment of the effectiveness of the allowance

3.17. The main aim of the compensatory allowance for tuna is to offset the drawbacks for Community producers of the arrangements for the importation of tuna as a raw material for the canning industry.

The Community regulations lay down the conditions for triggering the allowance scheme, based on an economic analysis of the market in tuna and in particular on the quantities delivered to the industry and producer and import prices. From this viewpoint, the decisive factor is not lower tuna prices on their own but a fall below a given level which, based on historical series, will trigger the payment of minimum economic support to Community producers.

This 'triggering threshold` has just been adjusted downwards (from 93 to 91% of the Community producer price: see Regulation (EC) No 3318/94) in order to bring it more closely into line with market conditions. In the Commission's view, price variation remains a valid criterion for an economic assessment of the aid, even if other factors have an impact on incomes.

In this connection the Commission considers that if other factors were taken into account in the basic Regulation, this could render the administration of the measure more complicated.

Lastly, as the report from the Commission on the arrangements applicable to tuna for the canning industry (COM(94) 266 final of 28 June 1994) states, the allowance's effectiveness can also be appreciated in times of crisis, for the measure has enabled several Community fishing companies to stay afloat in very difficult times at a relatively small cost (annual average for 1989-92: ECU 12.8 million).

3.18. The time lapse noted by the Court between sales and the payment of any allowance is an inescapable part of the arrangements, which require official statistics (minimum period equal to six months) to determine entitlement to the allowance.

3.21. The granting of allowances varying with the extent to which fishing companies are integrated into the processing network would only be possible if this did not create discrimination between the economic players carrying out the same type of operations.

The special case of Madeira and the Azores

3.23. During the first half of 1996 the Commission will undertake an inspection visit to check, together with the Portuguese authorities, whether the two schemes interfere with each other.

OBSERVATIONS ON THE ADMINISTRATIVE MANAGEMENT OF THE MEASURE

Recognized producers' organizations

3.24 3.29. The Member States have recognized the producers' organizations concerned and the rules governing the latter do not, on grounds of the features peculiar to the market in tuna, preclude an outside organization from being given responsibility for marketing this species.

However, the Commission does accept that the model for producers' organizations in the basic Regulation on the market in fishery products is a general one. The special features of the tuna fishing industry are nevertheless only relative when compared with other sections of the fishing industry.

Sale of tuna

3.30. The case involving the canner/shipowner who had not kept his fishing and canning activities legally separate will be considered in cooperation with the Spanish authorities in the first half of 1996.

Proof of the Community origin of the tuna

3.31 3.34. Over the last few months, in conjunction with the Member States the Commission has been finalizing a revised version of the T2M form geared more closely to trade in frozen tropical tuna since it will cover cases of transshipment to cargo vessels flying the flags of non-member countries and will thus permit stricter checks of the tuna's origin. The form should be approved towards the end of 1995.

Checks at canneries

3.35 3.37. During the first six months of 1996 the Commission will consider, together with the Member States concerned, the defects in the application of the regulations and/or any shortcomings in the latter and will draw the relevant conclusions.

Lack of checks by the Commission

3.38. Several cases of mismatch between the regulations and actual market conditions have been made good since the reform of the basic Regulation on the market in fishery products was adopted at the end of 1994.

In addition, in partnership with the national authorities, the Commission has made various moves to step up checks in the Member States, including checks in sectors of slight importance in budget terms.

Under the generalized application of the risk analysis method, to date the EAGGF has not considered as a priority objective a measure entailing maximum annual expenditure of ECU 16 million, divided between three Member States.

To remedy this situation, the Commission has planned various inspection visits for 1996 with the Spanish, French and Portuguese authorities, focusing on improvements to be introduced in their systems of administration and controls.

CONCLUSION

3.39. The compensatory allowance is one component of the Community policy on tuna as set out in the report from the Commission of 28 June 1994 (COM(94) 266 final). The main objective is to counterbalance the drawbacks for Community producers of the arrangements applicable to imports of tuna as a raw material for the canning industry. The allowance scheme is based on an economic analysis of the market in tuna. As a result of the situation on that market having improved in 1994, expenditure on the compensatory allowance in respect of deliveries in 1994 will amount to ECU 2.3 million.

Over and above the economic aspects connected with minimum incomes for producers, the compensatory allowance has helped to keep the Community's tropical tuna fleet present in various oceans around the world.

3.40. Allowances varying with the extent to which the fishing companies are integrated into the processing network could only be granted if this did not result in discrimination between the economic players carrying out this type of operations.

3.41. Several cases of mismatch between the regulations and actual market conditions have been made good, in particular as a result of the reform of the basic Regulation on the market in fishery products adopted in late 1994. However, despite action taken in the framework of partnership, the Commission is aware of the constant need to step up checks in the Member States. The series of checks scheduled for 1996 is evidence of that concern.

3.42. An improved T2M form should be approved by the end of 1995. It will in particular cover cases of transshipment to cargo vessels flying flags of non-member countries and will thus permit closer checks of the origin of the tuna.

CHAPTER 4 (*) Regional sector

4.0. TABLE OF CONTENTS Paragraph reference

Introduction 4.1 - 4.2

Budgetary and financial data 4.3 - 4.7

The revision of the reform 4.8 - 4.13

Auditing the declarations of expenditure and the eligibility of the expenditure 4.14 - 4.18

Public works contracts 4.19 - 4.29

The environment 4.30 - 4.38

Global subsidies as an instrument of local development 4.39 - 4.60

The concepts 4.39 - 4.44

The role of the intermediaries 4.45 - 4.50

The choice of the intermediaries 4.51 - 4.54

Administrative procedures 4.55 - 4.60

The inter-regional and transfrontier Community initiative (Interreg) 4.61 - 4.72

Monitoring, control and assessment 4.73 - 4.82

Conclusions and recommendations 4.83 - 4.93

INTRODUCTION

4.1. 1994 was the first year to be affected by the reform of the Structural Funds (SFs). It represents a crucial year in the development of regional policy.

4.2. This chapter summarizes the results of the checks that were carried out by the Court in 1994 in eight Member States selected from among the main beneficiaries of the SFs. The first part presents the budgetary and financial information relating to 1994. In the following parts, the Court concentrated on the revision of the reform, global subsidies as an instrument of regional development, and Interreg, the interregional and transfrontier Community initiative. This examination was effected primarily from the point of view of checks of the intervention methods and of the implementation procedures, procedures for detecting errors and procedures for preventing irregularities. Emphasis was placed on the following aspects: declarations of expenditure, eligibility, public contracts, environment, monitoring, control and assessment.

BUDGETARY AND FINANCIAL DATA

4.3. In order to fulfil the objectives of the Maastricht Treaty, an amount of 155 121 Mio ECU (at 1992 prices) was initially set aside for structural measures for the 1994-99 period (). With the enlargement of the Community, this amount was increased to 160 189 Mio ECU (). The past five years represent the implementation period for the reform of regional policy and the budgetary and financial data for 1994 have been analysed in that context.

4.4. Regional policy and the other Community policies were established and are to be implemented with a view to closer integration. In the case of regional policy, the Maastricht Treaty recognizes the need for increased solidarity and cohesion within the Community as a fundamental condition for continuing economic and social progress. The funds allocated to structural measures will be increased by 45%, from 21 277 Mio ECU in 1993 to 30 945 Mio ECU in 1999 (2). The Structural Funds will therefore have tripled in size compared with the 1989 figure. As these structural measures are co-financed, and in order to ensure they have a real economic impact, the Commission, applying the revised principle of additionality, ensures that the Member States maintain their public or comparable structural expenditure at least at the same level as during the preceding programme period.

4.5. Table 4.1 shows the use made of commitment and payment appropriations for structural measures in 1994. An examination of this table shows that, unlike previous years, the final budget implementation rate for payments was rather low, only 74,65% in the case of the SFs (of which 41,23% for the CIs and 52,54% in the case of the Cohesion Funds (CFs)). As far as the budget implementation rate for commitments is concerned, it must be observed that only 12,92% of CI appropriations were committed. For the whole of the ERDF chapter, the amounts still to be disbursed totalled 9 545 Mio ECU on 31 December 1994, compared with 7 951 Mio ECU at the end of the previous financial year.

4.6. Table 4.2 shows the commitments entered into and payments made by the Commission during the period 1989-94, broken down on a monthly basis. The 1994 data show that there has been no improvement in the situation compared with previous years and that there is still an excessive concentration of commitments and payments at the end of the budgetary year. In fact, 67% of the amounts committed and 53% of the amounts disbursed in respect of the financial year were committed and disbursed during the final quarter, whilst in 1993 the corresponding figures were 54% and 48%.

4.7. Of the 160 189 Mio ECU available for the 1994-99 period, 135 650 Mio ECU are intended for the CFs and 432 Mio ECU for the EEA financial mechanism. The remaining 146 107 Mio ECU have been allocated to financing the SF measures defined in Title 1, Article 3, of the framework regulation concerning the funds for structural measures (). As a result, 96 530 Mio ECU, i.e. 66,1% of the total, have been earmarked for Objective 1 (O1) regions that are lagging behind, and the remainder for the other objectives.

THE REVISION OF THE REFORM

4.8. The Council () adopted the five revised regulations governing the SFs, as well as the new Regulation (EEC) No 2080/93 concerning the financial instrument for fisheries guidance (IFOP), on 20 July 1993. The changes made were less fundamental than those made in 1988 and the main principles - namely, concentration, partnership, programming and additionality - were retained or strengthened. The adaptations were made on the basis of the experience acquired during the previous phase and with a view to increasing the effectiveness of the Funds. The regulation setting up the CFs was adopted on 16 May 1994 ().

4.9. These revisions are also aimed at meeting the objectives of the Maastricht Treaty, which singles out the structural measures as the priority instrument of the policy of economic and social cohesion.

4.10. The revision of the reform, which came into force on 1 January 1994, provides for a new programming period of six years. Similarly, in order to speed up and simplify the planning procedure, there is provision for the Member States to be able henceforth to submit a single planning document (DOCUP), on the basis of which the Commission will take one single decision (). The revision also provides for collaboration among the economic and social partners designated by the Member State to be extended within the framework of regional partnership.

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4.11. 1994 was, therefore, a year of transition during which previous measures were to be closed and the new measures resulting from the revision of the reform started up. The growing number of financing transactions in the form of operational programmes, Community initiatives and individual projects that were included in these interventions were in addition to the previous group of measures (1989-93), which had not yet been closed.

4.12. The national structures had not always been adapted so as to meet the requirements of managing a growing number of programmes. In addition to delays in the completion and starting-up of measures on-the-spot, there was also the fact that it was difficult for the Member State departments concerned to monitor measures on the ground, as all their time was taken up with implementing procedures and documentation.

4.13. Finally, the revision is supposed to facilitate the increasing financing of measures supporting local development, an approach which has been given priority treatment on account of its impact on the employment situation (see paragraphs 4.39 to 4.60).

AUDITING THE DECLARATIONS OF EXPENDITURE AND THE ELIGIBILITY OF THE EXPENDITURE

4.14. Article 21 of Council Regulation (EEC) No 4253/88 of 19 December 1988 stipulates that Community assistance is to be paid to the authority appointed by the Member State concerned. Payment is made when the body responsible certifies, by means of a declaration of expenditure, that the payment conditions have been met. The declaration of expenditure thus constitutes the supporting document for the Commission's payments. The projects audited by the Court were selected in the light of the Court's work programme, taking into account experience already gained and shortcomings discovered in previous years. The inspections once again uncovered shortcomings and highlighted the poor reliability of these declarations, a fact which has already been mentioned in previous annual reports.

4.15. The on-the-spot inspections carried out by the Court in eight Member States covered 30 declarations of expenditure and revealed that only one of these was entirely in order. As these were intermediate, and not final, certificates, there is a risk that any undetected errors will affect the final certificates. As the Court has already stated on several occasions in its previous annual reports, the concept of eligibility of expenditure continues to pose problems because of that fact that it has not been precisely defined. The Commission, in response to an observation in the Court's annual report concerning the financial year 1993, stated that it intended to devise a better definition of expenditure eligible. The controls carried out by the Court in 1994 showed that there had been no improvement in the situation. Steps must be taken as a matter of urgency in order to ensure the reliability of the certificates of expenditure and the eligibility of that expenditure.

4.16. As an example, the following errors were found in the certificates of expenditure and the Commission must take the necessary steps to rectify them:

(a) expenditure effected outside the period of eligibility: Community initiative (CI) 'Telematics` (Spain), involving an amount of 50,1 Mio PTA (315 000 ECU);

(b) expenditure belonging to one financial year declared as having been paid in respect of the previous financial year: operational programme (OP) 'hydraulic resources` (Spain), involving an amount of 773,1 Mio PTA (4,7 Mio ECU);

(c) declared expenditure either in excess of actual expenditure (CI 'REGEN` (Ireland)) or not evidenced by reliable supporting documents: (CI 'Stride` (France) involving an amount of 2,1 Mio FF (0,35 Mio ECU) and CI 'REGEN` (Greece) involving 2 Mio ECU);

(d) subsidies granted to, or transfers of funds to, intermediary public administrations, certified as expenditure actually settled by the final recipient: This was found to be the case on several occasions, e.g. OP 'Attica` (Greece). In the case of the island of Gomera (Spain), the declaration of expenditure included the total amount of the subsidy granted in addition to the actual expenditure (1 Mio ECU);

(e) estimated expenditure sometimes declared as actual expenditure, as in the case of CI 'Interreg` (Greece) and 'Interreg` (Ireland-Northern Ireland);

(f) one single invoice included in declarations of expenditure relating to two different interventions: this was found to be the case in Spain, where one item of expenditure was entered in the accounts in respect of CIs 'Stride` and 'Prisma`, and in France, where the same invoice was charged to both CI 'Stride` and CI 'Interreg`;

(g) in the case of project phases, declarations of expenditure showing amounts corresponding to phases for which no provision had been made: in the case of the major renewal programme in Aviles (Spain), an amount of 4 Mio ECU was declared in this way;

4.17. As the following examples show, numerous cases of ineligible expenditure were found for which the Commission must also take the necessary corrective measures;

(a) in the case of the CI 'REGEN` in Greece, an amount of 24,5 Mio ECU of VAT recoverable by the beneficiary was declared eligible. A similar finding was made during the audit of CI 'Renaval` in France (0, 6 Mio ECU), subsidies in support of Madeira in Portugal and the 'Electricity` OP;

(b) as far as expenditure relating to the programmes implemented in Wallonia (Belgium) is concerned, numerous cases of non-eligible expenditure were found, amounting altogether to 5,4 Mio ECU. For example, expenditure relating to a building intended for small and medium-sized enterprises (SME) but eventually occupied by a multinational company was considered eligible. Expenditure relating to a building used for cargo storage was included in expenditure concerning business centres and temporary premises. In addition, expenditure was declared as having been paid to the final recipient even though the funds were still in the possession of the intermediary body;

(c) banking costs which the Commission considered ineligible, in particular interest charges, were included in the declarations of expenditure. Hence 4 Mio PTA (24 000 ECU) was included in the declaration relating to CI 'Stride` in Asturias (Spain) and 12,5 Mio PTA (74 000 ECU) in the one relating to OP O2 in Cantabria (Spain) (see also paragraph 4.18);

(d) salaries of officials or other employees of public administrations were presented as eligible expenditure. The zoological park project in Cantabria (Spain) is administered by a private-sector company the capital of which was provided by the State. Expenditure amounting to 5,5 Mio ECU includes all the salaries of the officials and local staff who are occasionally called upon to work for the company responsible for ensuring completion of the zoo project.

4.18. In Cantabria (Spain), (OP O2) the only project provided for in respect of the 'Creation and development of productive activities` axis concerned the development of an industrial estate and made provision for an ERDF contribution of 2,11 Mio ECU. During the auditing of the latest declaration of expenditure, for an amount of 740 Mio PTA (4,3 Mio ECU), the Court found that:

(a) the declared purchase cost of 300 Mio PTA (1,7 Mio ECU) for a piece of land in fact represented 100 Mio PTA (0,56 Mio ECU) disbursed in 1991 before the eligibility date and 200 Mio PTA (1,13 Mio ECU) used to repay a loan taken out when the land was purchased and therefore not eligible;

(b) according to the rule applied by the Commission, a maximum of 10% of the total eligible cost is accepted in the case of purchases of land. In this specific case, the purchase price of the land represented more than 40% of the cost of the investment. In spite of repeated comments by the Court (), the declarations of expenditure still contain excessive amounts for the purchase prices of land;

(c) in order to avoid infringing Community legislation on competition, the decision made provision for the resale or leasing out of parcels of land at market prices. The resale price of parcels which had been equipped with infrastructure was fixed at a price considerably lower than the market price;

(d) the fact that this project generates revenue should have led the Commission, in accordance with Article 17(3) of Regulation (EEC) No 4253/88, to determine the right contribution from the Funds, under the terms of the partnership arrangement.

PUBLIC WORKS CONTRACTS

4.19. Community interventions within the framework of the SFs and, more specifically, within the framework of the ERDF, are in part intended to finance infrastructure work, to which the Community procedures concerning the awarding of public works contracts apply.

4.20. The Council has drawn up and approved a group of directives () in order to ensure the transparency and opening-up of the public works sector. The Commission is responsible for examining the texts of the main domestic law provisions adopted at national level by each Member State when these provisions are transposed into national legislation. These transpositions are far from satisfactory (), and even when the basic text is correctly transposed at national level, the application texts, the documents arising from them, and the administrative practices, in particular at regional or even local level, give rise to situations which do not conform with the directives.

4.21. Within the framework of the programmes and measures financed by the SFs and financial instruments, Article 7 of Council Regulation (EEC) No 2052/88 of 24 June 1988 stipulates that these programmes and measures must conform to the provisions of the Treaties and to the Community policies, including those relating to the awarding of public works contracts.

4.22. On 4 May 1988, the Commission implemented a system for checking that the rules concerning public works contracts were being respected, and notified the Member States accordingly (). This control system was based primarily on two instruments:

(a) a payment application form, which had to be adapted in order to include the references to public works contracts published in the Official Journal of the European Communities (OJ), together with a declaration by the Member State certifying that those contracts which had not been published had been awarded in accordance with the directives, and

(b) a questionnaire on public works, which the national authority responsible has to send to the Commission, duly completed, for each public works contract, at the latest when the request for payment of the balance of the SF subsidy is made.

4.23. The Court found that this control system had not in fact been implemented. The 'application for payment` form has not been amended and the 'public works` questionnaire has not been returned by the Member States, nor has the Commission requested it. This shows the inefficiency of the methods adopted and the lack of any form of control.

4.24. It was not until 1992 that the Commission decided to carry out a 'control exercise` relating to a sample of 149 ERDF projects from the 1985-88 period on which the final balance had not been paid. It found that, in Germany, 30% of the structures had been built on the basis of contracts for which the rules concerning publication laid down in the OJ had not been respected. It also found nine cases of infringement (seven in Germany and two in the United Kingdom), 20 cases of structures where irregularities in the publication of the public works contracts had arisen (one in Germany, four in Italy, four in Portugal, seven in the United Kingdom and four in France) and 50 dubious cases.

4.25. As far as the nine infringements were concerned, the Commission decided to recover only the money granted to a project approved in 1985 in Germany (an amount of 2,9 Mio DM (1,6 Mio ECU)). The sum was recovered in June 1993.

4.26. The Commission's report also notes that 19 of the 20 cases where irregularities had occurred had not been followed up and that the infringement procedures and procedures for recovering the monies concerned had not been implemented, as the irregularities had been discovered far too late. In the 50 dubious cases and the other, twentieth case of irregularity, the Commission considered it necessary to suspend the financing until such time as the national authorities concerned had provided the information needed to clarify the situation or taken appropriate measures.

4.27. The Court examined these 51 files. It found that, by 31 December 1994, nine projects had already received part or all of the financing provided. The amounts concerned were: 2,3 Mio FF (0,3 Mio ECU); 10,9 Mio FF (1,6 Mio ECU); 49 558 Mio LIT (23 Mio ECU); 3,2 Mio HFL (1,6 Mio ECU); 389,5 ESC (2 Mio ECU); 198,4 Mio ESC (1 Mio ECU); 28,3 Mio ESC (0,1 Mio ECU); 238,1 Mio ESC (1,2 Mio ECU); and 58,1 Mio ESC (0,3 Mio ECU). These payments were made because the payment office had not been informed that payments had been blocked. In November 1994 the Commission decided to inform the Member States concerned of the decision taken in February 1994 to suspend payments relating to the cases detected. Some payments were, however, made even after November 1994. This highlights the inappropriate management and a lack of coordination.

4.28. Finally, for the 1989-94 period, the Commission had not carried out any specific check that the rules on public works contracts within the framework of the SFs were being respected. The Court takes the view that this lack of control and the shortcomings found are very serious matters. Not only is there a risk that they may result in financial loss to the Community, in that they may result in the co-financing of projects the real cost of which has not been established under normal competition conditions, but in addition, Community financing is being effected using compartmentalized procedures for awarding contracts, which does not conform to Community law. Furthermore, the lack of transparency in awarding public works contracts is not without consequence as regards the risk of fraud and irregularity.

4.29. During its on-the-spot missions, the Court found numerous cases of irregularity in the public works field, for example;

(a) a total absence of tendering procedures in the majority of the projects administered by the regional government in Cantabria (Spain) (estimated amount: 20 Mio ECU). The contracts were awarded to the enterprises directly and by word of mouth. The contracts were only formalized subsequently, sometimes not until after the work had been completed;

(b) amending of offers after the opening of bids following agreements between some bidders and the Spanish railway company awarding the contract;

(c) an increase in the cost of the works, sometimes up to twice the amount initially agreed for the works awarded. There were several cases in Greece where the awarding authority had consented to significant reductions at the outset and had subsequently raised the cost of the work. The Court has already drawn attention to these procedures in its Special Report No 1/95 on the Cohesion Funds (point 5.2) ();

(d) failure to publish in the OJ, as was the case, for example, in the port of Gomera project (Spain) (11 Mio ECU);

(e) unjustified recourse to the direct treaty procedure. In the case of Spain, which lost a case for this reason before the European Court of Justice in 1993, the national procedure had still not been modified;

(f) amendments to projects, sometimes leading to the implementation of a project which differs substantially from the project for which the contract was awarded, as for example in the case of the development of the Lucas estate in Birmingham (United Kingdom) (5,5 Mio ECU) or the Caranga Teverga project in Asturia (Spain) (7,5 Mio ECU);

(g) exclusion of bids considered to be too low, without respecting the conditions set down in the directives, which stipulate that the awarding authority must request details of the bid in writing (first phase of the Gomera airport project - 13 Mio ECU);

(h) failure to award the contract to the lowest bidder, the other criteria being identical (second phase of the Gomera airport project - 3 Mio ECU, Guareña-Almendralejo highway project (Spain) - 5 Mio ECU, the latter bid being only in 15th place);

(i) awarding of the contract to the highest bidder, with the bidder undertaking to carry out additional work, as for example in the construction of a business centre in Seville (Spain) (0,4 Mio ECU);

(j) application as a general rule of the restricted procedure to promote local enterprises in Liège (Belgium).

THE ENVIRONMENT

4.30. The situation concerning public works contracts is mirrored in the situation concerning the observance of Community environmental policy. There are a substantial number of cases where the Member States fail to notify the Commission of national measures to transpose directives, of non-conformity and of incorrect application. This is borne out by the Commission's last annual report on the monitoring of the application of Community law (). The Court also drew attention to these inadequacies in Community measures in its Special Report No 3/92 on the environment ().

4.31. Specifically, Council Directive 85/337/EEC of 27 June 1985 () concerning the evaluation of the effects of certain public and private projects on the environment was at the origin of infringement procedures against seven Member States (B, D, E, IRL, I, L and UK), following the establishment of non-conformity or of incorrect application of the directive. Most of the complaints which the Commission received in the environment field criticized the lack of studies of the impact of projects based on actual projects.

4.32. The implementation of environmental policy rests on the prevention principle. The best policy is thus to avoid, from the outset, causing pollution or damage, rather than to combat these problems subsequently. Numerous projects concerning measures for making good environmental damage are co-financed within the framework of the ERDF. The costs of these projects could have been spared if an accurate assessment of the impact had been made in good time.

4.33. In the case of the OP in Gomera, an island considered to be of great ecological importance whose nature reserve is listed in Unesco's World Heritage List, aid was granted, in the case of six infrastructure projects relating to roadways, the airport and the sea port, on the basis of an assessment of the environmental impact, carried out in advance along the guidelines set out in Directive 85/337/EEC (total ERDF aid earmarked: 27 Mio ECU). Only in the case of two road projects was a simplified evaluation of the project carried out by the authority responsible for environmental affairs. In the case of the other projects, including the one for Gomera airport, a survey only, with no public call for tenders and no evaluation, was carried out by the contractor in certain cases.

4.34. Furthermore, the size and financial volume of the infrastructure investments in Gomera could only be made profitable provided there was a substantial increase in tourism-related activities. The length of the runway was initially planned in the OP at 800 m. Eventually, a runway 1 600 m long was in fact built, contrary to the standards on the basis of which this intervention was financed, and giving aircraft with a far larger carrying capacity access to the island. However, one of the priority objectives of the OP, taking into account the ecological vulnerability of the island, was the selective development of tourism whilst controlling the number of visitors and always taking care to protect the environment (). This objective, as it stands, seems of little relevance in the case of a small island with 16 000 inhabitants which, even before the new infrastructures were completed, was receiving over half a million tourists per year.

4.35. Council Directive 91/271/EEC of 21 May 1991 () concerning the treatment of urban waste water provides for a series of standards for the collection, treatment and discharge of household and industrial waste water, and for the evacuation, recycling and dumping of sludge. It also specifies certain types of treatment (in particular secondary treatment), sampling and analysis of the water discharged. The application of this directive extends from 31 December 1993 to 31 December 2005, depending on the individual case. It is therefore regrettable that co-financed work was undertaken for new purification plants without taking the stipulations of this directive into account. Additional work, entailing an increase in the cost of the investments, will have to be carried out in the very immediate future in order to bring the installations, which have rapidly become obsolete, into line with the standards laid down by the directive.

4.36. Such is the case for the purification plant for waste water in Funchal (Madeira-Portugal), co-financed for an amount of 2,7 Mio ECU. The plant was designed only to carry out an initial treatment of waste water, not a secondary treatment, and it is in particular unable to treat industrial effluents (especially oil) which are discharged into the collecting system and which cause frequent breakdowns in the filtering installations.

4.37. In Greece, the purification plant for used water from the urban area stretching from Athens to Psitalia only carries out an initial treatment. It consists of three sea drainage pipes of a total length of more than four kilometres, the investment cost of which is about 20 Mio ECU. It will be necessary to construct a secondary treatment unit in the immediate future in order to bring the plant as a whole into line with Community standards. This additional investment will result in the three outlet pipes being used less, the expenditure for which could therefore have been put to more effective use by spending it on the building of the secondary treatment unit.

4.38. The only way to ensure that measures financed from the SFs conform to Community environmental policy is to transpose the directives more swiftly and more precisely into the national legislation of the Member States. These directives can only be applied if strict procedures, in particular assessment procedures, are introduced and adhered to. Finally, this policy can only achieve a significant effect if environmental problems and possible solutions to them are given a more global and longer-term consideration. This would obviate the problem of financing investments which rapidly become obsolete, as well as the additional costs related both to inadequate evaluation of projects and to the improvements and corrections which have to be made.

GLOBAL SUBSIDIES AS AN INSTRUMENT OF LOCAL DEVELOPMENT

The concepts

4.39. Significant efforts have been made during recent years to increase understanding of the concept of local development, understood as an economic development policy pursued by local operators and applied to a self-contained area which is generally smaller than a region. Local development is supposed to mobilize forces and financing and constitute an instrument for safeguarding the area.

4.40. After an initial application of the concept, from 1984 onwards, under the heading of the upgrading of the endogenous development potential of the regions, there has been a substantial increase in the amount of finance, via the various forms of subsidy. For the 1989-93 period, more than 3 500 Mio ECU, i.e. more than 10% of the ERDF, was used for measures promoting local development and the sums are due to increase substantially during the 1994-99 period.

4.41. Progress has certainly been made in the direction of enhanced awareness, but, at the Commission as in the Member States, the organization and operation of services does not bear the imprint of any global vision or coordinated management of all the aid intended for local development. In the Member States, the controls carried out by the Court, in a selection of Objective 1 regions and Objective 2 zones, showed that only the traditional types of subsidy continue to be used, except in Italy and, to a lesser degree, Spain, Portugal and Ireland, where use has been made of global subsidies.

4.42. A global subsidy entails the action of one or more intermediary public or private bodies, privileged interfaces between the Commission and the final beneficiary. These bodies are responsible for allocating the Community funds among the final beneficiaries in the form of individual subsidies. A body may suggest initiatives for implementation in the light of its familiarity with the local situation and it may carry out any readjustments or retargeting which may prove necessary whilst measures are being carried out.

4.43. A structure of this kind is supposed to allow more direct financial management than the kind traditionally provided for in the case of other classic types of subsidies and also more rapid adaptation to meet the requirements of the measures agreed on.

4.44. Table 4.3 summarizes the implementation of global subsidies as at 31 December 1994. Table 4.4 gives a breakdown by intermediate body and by form of implementation of these global subsidies.

The role of the intermediaries

4.45. Article 5 of Regulation (EEC) No 2052/88 stipulates that the financial intervention of the funds may be acquired by the 'granting of global subsidies, as a general rule administered by an intermediary, appointed by the Member State in agreement with the Commission, who is responsible for allocating the individual subsidies to the final beneficiaries`.

4.46. During its audits, however, the Court came across several cases where the Commission had allowed the intermediary body to use the global subsidy as an instrument of financial engineering, in particular in the form of loans, even though this is against the rules. Moreover, no specific provision regulates or accompanies this type of intervention, and, as a result, the intermediary body, in addition to the payment it receives to cover its administrative costs, will therefore also receive any interest earned during the loan period, as well as any capital gain of the value of the shares.

4.47. In general, the agreements make provision for the amounts to be cancelled or refunded to the national Treasury or the region after 10 or 20 years, with a view to reinvestment in an O1 region. Nonetheless, in some cases, in Italy and Spain, the agreements do not contain any such clause and no explanation has been given as to why not. In response to the Court's comments, the Italian Ministry responsible stated that it would propose an amendment to the agreement with a view to making provision for the funds to be refunded on the due date.

4.48. The methods for making the subsidy available have also resulted in situations that are open to criticism, as the following Italian case shows. The Commission paid the first advance (50% of the Community subsidy for the first tranche - 13,25 Mio ECU) on the basis of the initial timetable. The timetable for the global subsidy was subsequently amended, which made it possible for supplementary advances totalling 16,65 Mio ECU to be paid out, on the basis of a declaration of expenditure for 0,88 Mio ECU, in addition to the 13,25 Mio ECU which had been paid out automatically.

4.49. In another case, in Portugal, successive payments were made, in accordance with the agreement, on the basis of declarations of expenditure based on hypothetical calculations which did not correspond to the actual state of affairs. When the Court carried out its audits, a regularization document revealed that the result of the hypothetical calculation exceeded the actual expenditure by 5 Mio ECU.

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4.50. The Court's checks also showed that two Italian business and innovation centres were only able to stay in being thanks to the global subsidy, which was used solely to finance their activities. The Commission must take greater care to ensure that the use of Community funds by intermediary bodies is fully in keeping with the spirit of the global subsidy, and it must introduce the necessary control measures to ensure that the intermediary body does not use the Community contributions for its own ends.

The choice of the intermediaries

4.51. Article 16 of Regulation (EEC) No 4253/88 stipulates that, for the global subsidies, 'the intermediaries, who are appointed by the Member State concerned in agreement with the Commission, shall provide adequate solvency guarantees and have the administrative capacity needed for the administration of the Commission subsidies. The intermediaries are also chosen in the light of the specific situation in the Member State or zones concerned. Without prejudice to Article 23, the administration of global subsidies is controlled by the responsible authorities appointed by the Member State`.

4.52. In Spain, the administration of a global subsidy amounting to 46 Mio ECU was entrusted to an intermediary body which, on the basis of the 1991-92 financial data, did not present the solvency guarantees required.

4.53. The Court's checks did not reveal any formal procedure for selecting intermediary bodies. At Member State level, the indications given were very vague. At Commission level, the only formality provided for is an interdepartmental consultation, but the authorizing officer retains the option of ignoring opinions given, without having to explain his reasons and without even having to inform the department which produced the opinion.

4.54. The Court also observed that some situations were not free of a risk of conflict of interest. In Andalusia (Spain), for example, the President of a vocational training centre which had received Community assistance was also on the staff of the intermediary body responsible for allocating funds. In Italy, the Commission, on the basis of an agreement, transferred the administration of 8 Mio ECU of Community funds to a private company established for this purpose. The audit revealed in this context an apparent conflict of interest concerning the management of this 8 Mio ECU operation by a high-ranking Commission official. The matter has been brought to the attention of the Commission. The Court will examine the outcome of this case in the course of its 1995 audit. Moreover, as the Court has already mentioned in 4.47, the agreement is not explict as regards the final use of the 8 Mio ECU. There are also plans to adapt the text of the said agreement because of this.

Administrative procedures

4.55. The specific procedures for the financial management of global subsidies are aimed at increasing the autonomy of the administrators, making funds available more swiftly and adjusting the rhythm of the financing to that of the implementation of projects

4.56. In practice, the Court's checks showed that the procedures for making funds available and for adjusting the programmes were only slightly different from the procedure relating to other forms of intervention. In Italy, the legal obligation requiring that private intermediary bodies be covered by a guarantee ('fide- iussione`) has in general resulted in delays of one year in the starting-up and implementation of global subsidies.

4.57. The checking of declarations of expenditure for projects is too superficial. In Portugal, one global subsidy is aimed at helping the local councils, by means of interest subsidies, to provide their share of the financing for projects co-financed by the ERDF. In an OP, the total Community finance in such a case may not, in accordance with the regulations, exceed 75% of the eligible expenditure. The Court's audits in Portugal showed that, because of the various types of financing and poor monitoring, some projects had received Community subsidies in excess of this 75% threshold. The same audits also showed that two different amounts had been quoted in the global subsidy and in the OP as the total eligible expenditure for the same project. The concept of 'eligible expenditure` has been interpreted very broadly, and the checks carried out by the Court revealed numerous local council costs, such as staff salaries or travelling expenses, as well as estimated amounts and recoverable VAT, that had been included as eligible expenditure for projects. Such practices made it possible to increase the amount of expenditure and the corresponding implementation rate artificially.

4.58. In Spain, an amount of 15 Mio PTA (88 000 ECU) was shown in the global subsidy as corresponding to the financing of a project which was described as innovative but which did not in fact meet the criteria for being described as such. Similarly, the sum of 100 Mio PTA (0,59 Mio ECU) was devoted to a virtual reality project declared under the heading of technological innovation, even though it did not represent any 'innovation` in comparison with existing products.

4.59. In Italy, the Court's checks of expenditure for one global subsidy revealed a case of double charging. One supplier of services had supplied two enterprises with the same service, which consisted of setting up a quality control manual and an automated management system, and had invoiced both for the same amount, namely 40 Mio LIT (18 600 ECU). As a result, the Commission was asked to pay the same amount twice for services which were not even specifically geared to the individual requirements of the enterprises concerned. Following the Court's observation, the Italian ministry responsible stated that it would rectify the situation.

4.60. In paragraph 7.16 of its annual report concerning the financial year 1993, the Court emphasized that it would, in the long term, be more efficient to offer direct financial support to the enterprises requesting the services, rather than to those that supply the service, as is currently the case. Subsidizing bidders distorts competition with the other financial intermediaries, who are unable to offer similar contract conditions. In its reply to the 1993 annual report (paragraph 7.16), the Commission also expressed its growing preference for 'direct financial support to small and medium-sized firms in their demand for services`. The Court believes that greater efforts must be made in this respect.

THE INTER-REGIONAL AND TRANSFRONTIER COMMUNITY INITIATIVE (Interreg)

4.61. The Community initiatives (CIs) are part of the Community's SF measures (). For the 1989-93 period, 14 CIs which had been allocated 3 800 Mio ECU at 1989 prices were designated to complete the measure provided for in the Community Support Frameworks (CSFs). They were aimed at solving specific problems which had a particular effect at Community level. For the 1994-99 period, their funding was increased to 13 450 Mio ECU at 1994 prices and several of them reflect an attempt at continuity, such as the main CI, Interreg.

4.62. Set up on 25 July 1990 (), Interreg is the largest CI. It is intended to prepare frontier regions for the completion of the single market and aims to solve the specific economic development programmes of the Community's internal and external border regions.

4.63. With some exceptions, Interreg is applied in all the border regions eligible for SF support. The special feature of this initiative is the fact that the budget is not allocated by country. Interreg acts, within the framework of 31 OPs approved by the Member States concerned, 10 of which involve non-member States, to strengthen transfrontier partnerships on both sides of a given border.

4.64. The total SF contribution to Interreg during the 1989-93 period was initially estimated at 800 Mio ECU. Additional assistance may also be granted to pilot projects in application of Article 10 of Council Regulation (EEC) No 4254/88 of 19 December 1988, and 25 of the 31 OPs have taken advantage of this possibility.

4.65. Table 4.5 shows that, taking into account the programmes presented, the changes made to them and the use of a deflator, the ERDF contribution to this CI amounts to 966 Mio ECU. O1 regions have received 7,6 Mio ECU via four OPs, i.e.72% of the total. The remainder of the contribution, i.e. 260 Mio ECU, has been given to 27 OPs for O2 and O5b zones. It should be emphasized that the Spain-Portugal OP (395 Mio ECU) and the Greece OP (226 Mio ECU) alone represent two thirds of the total Interreg contribution and account for 90% of the appropriations utilized in O1 regions.

4.66. On 31 December 1994, all the Interreg appropriations had been committed and the corresponding payments on the same date amounted to 630 Mio ECU (89% of the amounts committed) for O1 regions and 182 Mio ECU (70%) for O2 and O5b zones. The methods for paying advances meant that the Member States had, by 31 December 1994, received 812 Mio ECU in Community funding for declared expenditure of 840 Mio ECU. There had, moreover, been no declaration of expenditure for 8 OPs as of this date, and the latter had therefore been paid only 50% in an automatic initial advance. As far as this initial advance is concerned, it should, however, be noted that these payments were made after delays of 1,5 to 8,5 months in the case of 19 of the 31 OPs.

>TABLE>

4.67. The measures agreed within the framework of the 31 OPs do not always correspond to the transfrontier nature of this CI. An examination of the OPs showed that little of the planned expenditure directly related to transfrontier cooperation measures. Most grouped together measures located on both sides of the border and which often did not involve any inter-regional cooperation in their implementation. These projects could have been carried out within the framework of other existing Community interventions.

4.68. When the Court carried out its audit of the CI Interreg IRL/Northern-IRL (UK), it found that only 39 of the 270 projects of which the OP consisted were of a transfrontier nature and were receiving joint financing from two Member States on the basis of this.

4.69. The Spain-Portugal and Greece Interregs included a significant share of highway infrastructure projects situated, for the most part, in zones not immediately adjacent to the borders. The Cabeza del Buey bypass (Spain), situated some 200 km from the border and costing 173 Mio PTA (1,1 Mio ECU), and the Egnatia motorway in Greece, 650 km long, the two most important projects for which are the Metsovo tunnel and the Kavala bypass, may be cited as examples. Even if there is no doubt as to the need for these projects at national level or within the framework of trans-European networks, their transfrontier impact, in terms of the Interreg initiative, still remains to be shown.

4.70. The transfrontier nature of Interreg makes it very difficult to assess the impact of these programmes; such an assessment is only possible with harmonized and precisely defined common assessment criteria. An examination of the various OPs showed that, not only were the indicators not fixed, but the implementation reports did not contain any substantial assessment factors. The compartmentalized administration of the programmes and the lack of joint monitoring committees mean that it is impossible to ensure the complementarity and transfrontier character of the operations carried out.

4.71. Article 14(3) of the coordination Regulation (EEC) No 4253/88 stipulates that the Commission must, as a general rule, decide whether to grant assistance from the Funds within six months of receiving the request, provided that the conditions stipulated have been met. An examination of the Commission decisions showed that this deadline had not been respected in 21 out of the 31 Interreg OPs where all the conditions stipulated appeared to have been met. In four cases, the period set was more than one year.

4.72. All these findings show that significant progress needs to be made with a view to strengthening the transfrontier partnership. The operations under the various programmes could have been completed just as well, if not better, within the framework of a traditional OP. The Commission and the Member States will have to make a major effort to increase awareness and improve monitoring and assessment if the 1994-99 period of this initiative is to have any real transfrontier impact.

MONITORING, CONTROL AND ASSESSMENT

4.73. The relevant legislation () provides for efficient monitoring of the use of assistance from the Funds, irrespective of the type of intervention. The need for ex ante and ex post assessment is reinforced in the revised regulations and is based on a cost/effectiveness approach. The Court's findings show that, in spite of the efforts that have been made in this connection, further improvements are still necessary, especially at the intermediate level of management in the Member States.

4.74. As far as monitoring is concerned, the following findings were made concerning a reform project in Cantabria (Spain), agreed on in 1990 for an amount of 43,1 Mio ECU and for which an initial advance of 7,96 Mio ECU has been paid to the beneficiary:

(a) although the project has never actually started, the Commission accepted two successive requests for the deadline to be changed by 12 months and then by six months, which was not a very realistic period in view of the scale of the project;

(b) when the Court's audit was carried out, in January 1995, i.e. four years after the advance had been paid and six months after the payment deadline, the Commission had not yet undertaken the necessary financial measures provided for in Article 24 of Regulation (EEC) No 4253/88.

4.75. The Court's check of the Cantabria OP, which receives an ERDF contribution of 32,4 Mio ECU, found numerous anomalies - already mentioned in other paragraphs (cf. 4.17(c), 4.18, 4.29(a) and (b)) - showing the inadequacy of the monitoring and controls. Neither the authorities responsible for administering the OP, nor the internal or external audit authorities, nor the Monitoring Committee or the Commission have reacted to the developments in this situation.

4.76. The 1992-93 O2 OP for the district of Liège (Belgium) provides, in order to create 600 jobs, an ERDF contribution of 240 Mio FB (6,11 Mio ECU) to investments totalling 2 000 Mio FB (51 Mio ECU). The Court's check found that:

(a) the investment made was actually 508 Mio FB (13,2 Mio ECU);

(b) of the ERDF assistance of 51 Mio FB, 30 Mio FB was allocated to 10 companies that were trading and which had created 24 jobs, 19 Mio FB to an enterprise which had gone into receivership, and 2,25 Mio FB to an enterprise that had already been declared bankrupt.

4.77. The above examples reflect the poor administration and monitoring of projects, which has led to the agreements, one clause of which stipulates that the beneficiary companies must be in good financial health, being ignored.

4.78. The Monitoring Committee for this O2 OP agreed to include part of a new project within the framework of basic infrastructure works at a total cost of 45 Mio FB (1,15 Mio ECU) - 50% of this being charged to the ERDF - and agreement was given after the deadline of 31.12.1993, i.e. outside the period of eligibility.

4.79. Within the framework of the 'Attica` OP (GR), the Court found the monitoring procedures set up to be inappropriate since they allowed the advances paid to the administrators to be considered as sums actually disbursed. Furthermore, the control procedures did not make it possible to detect several cases of double entry in the accounts of expenditure for one intervention.

4.80. Given that they are co-financed by the Member States and the Community, the implementation of ERDF programmes is subject, in the Member States, to inspection by the national or regional external audit authorities. These checks are carried out according to approaches which vary from one country to another.

4.81. As far as assessment is concerned, and in spite of comments made earlier by the Court () and the changes made to the new regulation, the situation remains in need of improvement. The ex ante assessment is poor and the on-going and ex post assessments, where they exist, are of only limited value. An examination of the implementation reports shows how little interest the Member States pay to this topic, and there is a risk that this same situation will be repeated for the new programme period 1994-99. The revised regulation stipulates that, as far as the ex ante assessment is concerned 'assistance will be granted when an assessment has demonstrated the social and economic advantages to be gained in the medium term in view of the resources mobilized`, but checks of the DOCUP and the OP carried out by the Court show that implementing this approach is often barely operational at the cause-effect level and does not permit an assessment of the social and economic advantages of these programmes.

4.82. The Commission also uses ERDF appropriations to support conferences and seminars intended to circulate information relating to the objectives of and possibilities for regional development. It co-financed a one-day seminar in Mecklenburg-West Pomerania organized by an association of local businessmen. The Land of Mecklenburg-West Pomerania contributed 25 000 DM and the ERDF 75 000 DM (technical assistance) to the total costs of about 320 000 DM (165 000 ECU). The main feature of this meeting was a one-hour speech by a Member of the European Commission. He was hired via a private agency, which charged 40 000 DM (excluding VAT) for the service. The Court's check established that the cost of this event was quite out of proportion to the result obtained. Moreover, the use of agencies or other private bodies to serve as intermediaries in carrying out tasks relating to normal administrative activities should be avoided, as should the payment or acceptance of mission or travel expenses by private third parties on behalf of persons connected with the Institution whilst carrying out their duties.

CONCLUSIONS AND RECOMMENDATIONS

4.83. The projects audited as part of the Court's checks and on which this chapter is based were chosen using selective sampling (), i.e. sampling specific forms, zones and areas of intervention. The fact that there are a significant number of projects whose regularity has, for one reason or another, not been clearly established emphasizes the amount of progress still to be made in order to ensure the legality and regularity of the administration of the SF six years since the reform was implemented. The Commission and the Member States must pay special attention to this.

4.84. The drawing-up of the declarations of expenditure and the checks carried out by the Member States before they send these declarations to the Commission to ensure that they are correct must be tightened up. The Commission must take further steps to ensure that the revised regulations and the Financial Regulation are applied more strictly. It must also define the concept of eligibility and the criteria determining the eligibility of expenditure.

4.85. The ERDF interventions relate mainly to infrastructure investments and it is, therefore, essential that the procedures for awarding public works contracts and environmental standards should be respected. The shortcomings observed during the awarding of public works contracts increase the risk of irregularities.

4.86. Furthermore, the effects on the environment are generally irreversible. The Commission must improve the procedures it uses to check that Community standards concerning the awarding of public works contracts and the environment are respected and to ensure that the procedures are applied during both the planning phase and the implementation phase.

4.87. The Commission should consider whether it would not be better to make more use of financing in the form of loans, possibly with interest-rate subsidies, in order to promote profitable investment projects. This would place greater responsibility on the final beneficiary and would also lead, indirectly, to a reduction in the risk of irregularities.

4.88. In spite of the Commission's efforts to use local operators, the implementation of the global subsidies as an instrument of local development continues to be beset by problems. The lack of transparency in the choice of intermediary bodies, the lack of complete definitions of their role and the difficulties found in the administration of these types of intervention should lead the Commission to reconsider the objectives of and implementation methods for global subsidies. It is preferable to finance applications from local operators, rather than financing services offered by intermediary bodies.

4.89. Within the framework of the Interreg initiative, notable progress must be made in strengthening the transfrontier partnership, as a large part of the financing available is allocated to traditional-type measures. An improved definition of the transfrontier nature of the measures to be financed is essential, as is closer cooperation between the partners in the transfrontier area concerned. The Commission needs to strengthen the role of the Joint Monitoring Committees and encourage the setting-up of joint administration procedures in order to do this.

4.90. The procedures for monitoring, implementing and coordinating measures need to be improved, in particular on the basis of the amended regulations. The inadequate number of meetings of the Monitoring Committees in 1994 does not reflect a determination to define the role and powers of these Monitoring Committees, particularly if one considers that the finalization period for the first generation of programmes represented an ideal opportunity to reflect on the operation and efficiency of these Committees.

4.91. The revised regulation makes provision for an improved ex ante assessment. This is a fundamental element in the administration of the Funds and requires, in particular at Member State level, a precise definition of the objectives to be achieved and of the monitoring and assessment methods to be used to evaluate the impact of the measures.

4.92. The implementation of the reform in 1994 is marked by the same problems as the 1988 reform. The Commission and the Member States found themselves confronted with the same short deadlines for preparing measures and the same difficulties for planning and assessing the programmes planned in advance. This is true in the case of the national measures and initiatives, the regional development plans and the single planning documents, and also in the case of the Community initiatives defined on the basis of the Commission's guidelines. In some regions the services responsible are required to administer some 20 programmes belonging to different generations at the same time. The new programmes start before the previous ones have been completed and before it has been possible to learn all the lessons. In these circumstances, improvement tends to be slow, slower in fact than the growth and diversification of the measures can allow.

4.93. The increasing number of financing transactions in the form of subsidies, the inadequate checking and monitoring procedures, the poor ex ante and ex post assessments and the lack of pecuniary sanctions encourage a lack of responsibility on the part of the final recipients. The ERDF payments, which are mainly paid as advances, have had the temporary effect of an advance to national budgets, at least where these advances are not paid out immediately to the final recipient. This situation does not constitute a guarantee for the best possible use of the resources mobilized.

REPLIES OF THE COMMISSION

BUDGETARY AND FINANCIAL DATA

4.5 4.6. The execution percentages for commitments and payments and the particular concentration of financial operations in the latter part of the year reflect the fact that 1994 was the first year of a new programming period. To take the specific case of the Community initiatives, the Commission's notices on the new initiatives were published on 1 July 1994 and the first proposed programmes did not come in from the Member States until November. This meant that few programmes could be approved before the turn of the year.

However, these circumstances are not expected to prejudice satisfactory budgetary execution over the 1994-99 programming period as a whole.

THE REVISION OF THE REFORM

4.11 4.12. The execution on the ground of the operations launched during the 1989-93 programming period can continue, as a general rule, until the end of 1995. It is therefore normal that 1994 should be a year during which the various actors must concern themselves simultaneously with the operations of two programming periods. The responsible services in the Member States are aware of this situation and need to organize themselves accordingly, maintaining the capacity to monitor progress on the ground.

AUDITING THE DECLARATIONS OF EXPENDITURE AND THE ELIGIBILITY OF THE EXPENDITURE

4.14 4.15. When the Commission carries out inspection visits, one of the points that is always checked is whether the amounts of expenditure certified by the Member State match the figures in the accounts and in documentary evidence kept locally.

In certain cases, the Commission has noted significant disparities between the amount certified and the supporting documents in the hands of the final recipients. To date, the Commission has taken the following remedial measures.

(i) In the course of inspection visits, Commission officials draw the attention of the national authorities responsible for certifying declarations of expenditure to the need to ensure that they are reliable and that they comply with the rules. When errors are detected, Commission departments always ask the competent authorities in the Member State to take the necessary corrective measures.

(ii) In December 1994, when sending the Member States the form for certification of expenditure for the period 1994-99, the Commission departments took the opportunity of reminding them of the need to apply at all levels of administration the revised provisions for financial execution, which are Commission decisions. These provisions specify the nature and content of expenditure declared by the Member State in support of applications for payment.

(iii) The Member of the Commission responsible for regional policy and cohesion sent a letter to all the Member States in May 1995 with a view to stressing the importance which the Commission places on improving the system of financial management of the Community funds, and on control and assessment activities. This letter refers especially to problems detected by the Commission with respect to the reliability of declarations and certification of expenditure. The Member States are asked to take steps to remedy the situation as a matter of urgency. The Commission also offers technical assistance to help the Member States solve this problem. The Commission stresses that the Member States still have full responsibility for the reliability of certification of expenditure.

When considering eligibility, it should be borne in mind that the Structural Fund Regulations and the implementing Decisions already contain definitions, relating in particular to the scope of the Fund, eligible areas, periods, etc. However, a number of complicated problems of eligibility remain, and are being studied in more depth (financing of venture capital, land purchase, purchase of second-hand equipment, interest on bank loans, etc.). A working party set up within the Commission and run by Financial Control to look into these aspects of eligibility of expenditure is shortly to complete its work.

4.16 4.18. The cases mentioned by the Court are similar to those found by the Commission during numerous on-the-spot checks. On discovering such a case, the Commission requests the Member State to submit a corrected certificate of expenditure.

For many of the specific cases mentioned, the Member States concerned have accepted the validity of the Court's observations and have taken the necessary steps to correct the expenditure certified by them. However, in cases where a Member State does not agree with the observations, the Commission cannot take corrective measures before conducting the examination required by Article 24 of Regulation (EEC) No 4253/88 ('Reduction, suspension and cancellation of assistance`). The Commission has initiated this examination, contacting both the Member States and the Court of Auditors for the additional information required for clarification of these cases. Following the examination, the Commission will decide on the financial adjustments to be made.

PUBLIC WORKS CONTRACTS

4.20. The Commission recognizes the problems referred to by the Court relating to the transposal of Directives by each Member State at national level. Numerous infringement proceedings are under way, or have led to Court of Justice judgments recording failure on the part of Member States to transpose provisions. Infringement proceedings have also been brought in connection with problems due to other national provisions or administrative practices. Many of the cases brought automatically relate to situations of which the Commission became aware in the course of monitoring operations in receipt of Structural Fund financing.

4.23. The form 'Certification of expenditure and application for payment` newly introduced for the 1989-93 programming period includes a general but explicit statement that the provisions of Regulations (EEC) Nos 2052/88, 4253/88 and 4254/88 have been respected. This covers, inter alia, Article 7 of Regulation (EEC) No 2052/88, which specifically requires respect of Community rules on the award of public contracts. One certificate may relate to a very large number of projects, so it would not be practicable to include a specific reference to all the public tenders involved.

In view of the disappointing results, the Commission has decided not to continue with the 'public works` questionnaire. The monitoring system introduced in 1988 is under review, and the first stage of the adjustment became operational in 1994.

Henceforth, for work costing more than ECU 25 million, decisions to grant Community assistance will involve a requirement to send the Commission, automatically, basic details on the award of the relevant contracts, including official records of selection of tenders; this will make it possible to monitor major projects systematically and thoroughly, while smaller projects will be monitored on the basis of spot checks.

The effectiveness of the control will depend to a large extent on the attitude of the Member States and the operators concerned, for the Member States themselves are responsible for control in the early stages, to ensure that the authorities awarding the contracts comply with the Structural Fund rules.

4.24. The examination of the 1985-88 projects could not take place earlier than 1992, as the Member States were not required to inform the Commission on the respect of the Community public tendering procedures until the final claim for payment.

4.25. The reasons justifying the Commission's decision to recover money granted in only one of the nine cases of infringement detected were as follows.

(i) In three cases, relating to contracts signed in 1984, the relevant applications for financing in 1985 mentioned the procedure used for awarding the contracts. In the circumstances, the Commission felt that there were no longer any grounds in 1993 for bringing infringement proceedings and recovering funds granted.

(ii) In three cases, where contracts were split up, the Commission decided to apply the 'de minimis` principle, in view, firstly, of the smaller sums involved (projects accounting for less than ECU 2.5 million) and, secondly, of the fact that the legal effects of the contracts were exhausted.

(iii) In two cases, relating to the treatment of waste water, the contracts were awarded before the publication of the Guide to Community rules on open government procurement, which clarified the scope of exemptions for water management projects as provided for in the Directives (i.e. only for contracts relating to drinkingwater supplies). In the circumstances, the Commission felt that it would not be appropriate to initiate proceedings under Article 169 of the EC Treaty, or to seek to recover the financing.

4.26 4.27. The various services involved in the management of Community public tendering procedures carefully examined the 1992 Report on the application of these procedures to the ERDF projects approved under the legislation prior to the reform of the Structural Funds. The complexity of the matter meant that it was only in 1994 that the Commission was able to decide and communicate to the Member States the steps to be undertaken in the individual cases. As for payments made after the decision and communication of the Commission, the national authorities are required to check that the public tendering rules were correctly applied and, if not, to refund the amounts received.

The specific cases mentioned by the Court will be pursued by the Commission under Article 24 of Regulation (EEC) No 4253/88.

4.28. It is in the nature of the system of contributing to the financing of programmes, rather than projects, under the Structural Funds that monitoring of compliance with public tendering rules must take place essentially at the level of the national authorities. The Commission is reflecting on how this control might be improved.

There has, however, been no 'absence of Commission control` of the Member States' compliance with these rules. Each time Commission officials undertake an inspection mission, one of the aspects that is always checked is whether the rules on public procurement have been observed, for projects in receipt of a financial contribution from the Community.

In view of the experience of Commission officials to date, future ERDF control missions will deal more specifically with the general or specific problems detected in the past for each Member State.

After a thorough study of the conditions for improving controls, the Commission proposed in 1993 a revision of Fund Regulations and implementing arrangements, which now include the following provisions.

(i) Pursuant to the second subparagraph of Article 25(6) of Regulation (EEC) No 4253/88, in the context of the application of Community rules on the award of public contracts, notices sent for publication in the Official Journal of the European Communities must specify the projects for which Community assistance has been applied for or granted.

(ii) All applications for aid relating to major projects must include a comprehensive list of all the contracts already awarded and reports on the execution of the award procedures if required by the public procurement Directives. The Commission is sent updated information with the application for payment of the balance for contracts awarded in the meantime. For other projects that come under works of a total cost exceeding the thresholds laid down in Article 16(2) of Regulation (EEC) No 4253/88, reports on each contract awarded must, if required by the public procurement legislation, be made available to the Monitoring Committee and sent to the Commission on request.

4.29. The Commission will make appropriate enquiries into the cases mentioned in the context of Article 24 of Regulation (EEC) No 4253/88.

THE ENVIRONMENT

4.30 4.32. The Commission fully agrees with the Court's approach to the principle of prevention as a basis for the implementation of environmental policy. The application of this principle in the context of the Structural Funds depends mainly on a commitment by the Member States and the regions concerned.

Some costs might be avoided if an appropriate impact assessment was made in good time. This general approach was taken into account when the new CSFs were established; they provide for increased financing in the environmental field to reinforce preventive measures.

4.33 4.34. In view of the ecological importance of Gomera, the Commission has from the outset drawn the attention of the competent authorities to the need to observe environmental requirements.

According to the information available to the Commission, an environmental impact assessment (EIA) was made pursuant to Directive 85/337/EEC, and measures were taken to minimize the impact of certain major infrastructure projects, such as the second stage of the road to the Gran Rey valley and the road to the airport.

As to the airport itself, the Spanish authorities did not consider that an EIA in accordance with Directive 85/337/EEC was needed, in view of the runway length. Under the Directive, an EIA is needed when the runway length is 2 100 m or more. For runways less than 2 100 m in length, an EIA is carried out only if the competent authorities consider it advisable.

Extending the length of the runway from the 800 m originally planned to 1 600 m does not necessarily imply an uncontrollable increase in tourism. Landing safety can be cited as one of the reasons for the extension, without compromising the objective, of the operational programme of selective development of tourism.

4.35. The Commission is aware of the risk of an increase in investment cost due to installations becoming rapidly obsolete, because they do not comply with the standards laid down in Directive 91/271/EEC. With this in mind, studies were undertaken in preparation for the new programming period to assess the cost of applying the Directives in the environmental field. In particular, much more thorough estimates have been made of the investment needed to comply with the standards of the Community Directives.

4.36. When Directive 91/271/EEC was drawn up (date of entry into force: 30 June 1993), paragraph 5 of Article 8 was included to take account of conditions along the coast of Portugal. It provides that discharges into less-sensitive areas of waste waters from agglomerations of more than 150 000 p.e. may be subject to primary treatment instead of the secondary treatment laid down in Article 4 of the Directive as long as detailed studies have shown that the discharges will not affect the environment. The Portuguese authorities took advantage of this option for the Funchal project, designed for 180 000 p.e., and are now in the course of carrying out the required studies.

The introduction of industrial effluent (used oil) into the collecting system does not comply with the requirements of the Directive, since oil should be stored for recycling, and should not enter the waste-water system. The Commission is in touch with the Portuguese authorities to find out what remedial measures have been taken.

4.37. Construction work on the purification plant for used water for the area from Athens to Psitalia began in 1983. The first stage was to install equipment for primary treatment, of which the sea drainage pipes are an integral part, essential to the proper functioning of the project, leading to a 45% reduction in solid matter and a 40% reduction in BOD (biological oxygen demand). Both the ERDF and the EIB contributed to financing this initial stage of the project.

The secondary treatment stage is covered by an aid application to the Cohesion Fund that is at present under consideration by the Commission.

On the basis of available information, after secondary treatment pursuant to Directive 91/271/EEC (70 to 90% reduction in organic matter), an organic pollution load of about 400 000 p.e. (10% of the 4 000 000 connected to the system) will be discharged by the sea drainage pipes. These pipes may also be used in cases of malfunction. Consequently, the investment in these sea drainage pipes will have considerable benefits for the environment at the secondary treatment stage.

4.38. The problem of transposal of environmental Directives into the legislation of the Member States is a general one that is outside the framework of the Structural Funds.

The Commission is trying to take account of the problems of financing investment that rapidly becomes obsolete; it will propose the necessary remedies when the measures financed are executed and monitored.

GLOBAL SUBSIDIES AS AN INSTRUMENT OF LOCAL DEVELOPMENT

The concepts

4.41. On the Commission side, a comprehensive inventory involving full interdepartmental coordination was drawn up as part of the preparation for the Essen European Council (SEC(94) 2199: inventory of Community action to support local development and employment). This approach has continued more recently when the Commission presented a communication to the Council on a European strategy for encouraging local development and employment initiatives (COM(95) 273). The purpose of this communication is to increase the Member States' awareness of local development, while highlighting a concerted approach by the departments concerned within the Commission.

Other Member States, in particular France, have used global subsidies as an instrument for Community initiatives such as Stride and Leader.

The role of the intermediaries

4.46. Article 6 of Regulation (EEC) No 4254/88 does not exclude the possibility of operations in the form of financial engineering, and in particular of loans ('The procedures for the use of global grants shall be the subject of an agreement` which details, among other things 'the types of measure to be carried out`). Moreover, Article 1(c) of the same Regulation explicitly provides that the scope of the ERDF shall include, under the heading of local development, a field eminently suitable for the global grant approach, 'improvement of access for enterprises to the capital market, particularly by the provision of guarantees and equity participation`. The Commission's vade-mecum on global grants provides for this type of intervention and includes provisions for implementation and eligibility of expenditure. The interdepartmental working party mentioned under points 4.14 and 4.15 above is considering the definition of eligibility criteria for such expenditure, including, in particular, the obligation to reinvest any profits in the Fund. Except in the rare cases referred to by the Court, this provision is already applied to global grants of this type: interest earned during the period of the loan, and any capital gains on holdings in the framework of such operations are automatically paid back by the managers into the financial engineering fund concerned, thus increasing the available resources.

4.47. Where interpretation problems arise, it is planned to amend the agreements so as to clarify this requirement on the intermediaries.

4.48. Financial operations have been carried out in compliance with the provisions in force. The share of the ERDF in the global grant referred to by the Court amounts, after re-programming, to ECU 59.36 million, divided into two instalments: one of ECU 0.503 million corresponding to 1992, and one of ECU 58.857 million corresponding to 1993. In November 1993, the Member State declared expenditure of ECU 0.88 million, which enabled the Commission, on the basis of a new schedule, to pay off the balance of the first instalment (ECU 0.503 million). The second instalment was subsequently committed, and an advance payment of 50%, or ECU 29.428 million, was made.

4.49. Following the Court's inspection, the intermediary agency has made an adjustment to remedy the disparity between theoretical calculations and expenditure actually incurred. If necessary, the Commission will be reimbursed.

4.50. The business and innovation centres (BICs) referred to existed before the global grants were available. The Italian authorities, with the Commission's agreement, chose them as intermediaries in preference to other bodies not only because of their special expertise in providing business services, but also because of the partnership they encouraged by involving much of the business and economic community in the area where they operate. The global grant was then granted by the Commission to set up a specific supply of new services (in particular international marketing and financial services) at the request and for the benefit of local businesses.

In this way, the use of Community funds makes possible the production of new services, among other things by enabling studies, surveys and business audits to be carried out at the preparation stage, in addition to those previously provided by the BICs concerned.

The choice of intermediaries

4.51 4.53. It is up to the Member State (although with the Commission's agreement, of course) to appoint the intermediaries. Thus the Member States are primarily responsible for organizing transparent selection procedures. At all events, the Commission has not considered that the choices made by the Member States should be further assessed.

The intermediary body mentioned by the Court is the IFA (Instituto de Fomento de Andalucía), a public body financed by the regional government of Andalusia, whose budget includes, each year, an appropriation to cover its working. From this point of view, the Institute is backed by a regional government guarantee. At all events, it should also be noted that the Member State takes secondary financial responsibility and is the authority appointing intermediary bodies.

The Commission's final decisions on ERDF global grants take full account of the views expressed by the departments.

4.54. The Commission has been informed by the Spanish authorities that the general Regulation of the IFA Act provides, in Article 14, that the functions of the Advisory Council of the IFA (of which the person mentioned by the Court is a member) include neither approval nor granting of assistance. Moreover, in a region such as Andalusia, where it is vital to tap into the resources of human capital, it is reasonable to promote the integration of all those active in social and economic life who can contribute to the economic development of the region (businessmen, unions, financial bodies, etc.).

The Italian intermediary agency to which the Court refers was appointed in the manner prescribed by Article 6 of Regulation (EEC) No 4254/88. The agency was proposed by the national authorities and agreed by the Commission; the operation was put into effect, in the usual way, by a Commission decision and an agreement between the Commission and the agency. It is normal practice for an intermediary agency to be set up specially, by existing companies, for the purpose of managing a global grant.

In the Commission's view, it is clear from the agreement between the Commission and the intermediary agency (in particular Annex 3) that upon expiry of the global grant, the part of the fund not secured for guarantees granted will be paid to the region of Campania, and that the remainder will be paid in total to the region once all the various guarantees have expired.

The Commission considers that its decision to appoint the intermediary agency was proper and justified. However, it notes the remark of the Court about a possible conflict of interest; it will examine the matter carefully. The Commission already intends, in the context of its current programme for improving financial management, to require officials who initial or sign a financial commitment to declare that there is no conflict of interest.

Administrative procedures

4.56. The financial management procedures for global grants aim at, and in general achieve, quicker and more flexible implementation. The Commission recognizes, however, that in certain cases delays may arise, as a result, for example, of requirements imposed by the national authorities in their efforts to ensure sound financial management and a satisfactory control system.

In the specific case of Italy, the Commission is aware not only of the delays in start-ups caused by the system of bank guarantees, but also of how seriously the Italian Government takes its responsibilities.

4.57. According to the information obtained from the intermediary agency, the maximum rate of 75% was exceeded for certain projects. The intermediary agency immediately cancelled the contracts concerned, and recovered all the subsidies that had already been granted. As the agency remedied the situation in good time, no project actually received a rate in excess of 75%. Tighter monitoring and control procedures should enable this type of situation to be avoided in future.

In connection with presenting officials' salaries, travelling expenses, etc. as 'eligible expenditure`, the Member State concerned argues that this was expenditure incurred for 'direct administration` of infrastructure by the municipal authority in the framework of the subsidies granted, which makes this type of expenditure eligible when directly related to the execution of the work.

4.58. The financing in Spain by the IFA of a PTA 15 million innovative project relates to the implementation by firms in the region of technical know-how not utilized and techniques not yet applied there at that time. The declared expenditure was not relevant to the production stage, but to the stage of research into new production techniques. Four Spanish universities were involved in the research.

The technological innovation project (PTA 100 million) relates to a leisure activity likely to lead to further development of new technologies to be applied in the field of leisure and games. This measure meets the criteria laid down in the instrument concerning the global grant approved by the Commission.

4.59. The Commission will check this matter, and if double charging indeed occurred, will ask the agency concerned to recover the excess payment.

4.60. The Commission would point out that its 'growing preference for direct financial support to small and medium-sized firms in their demand for services` was expressed in the context of operations under Objective 2.

Most of the ERDF assistance to businesses takes the form of regional aid, which responds, by definition, to demand for services or financing from the productive sector. This assistance should, however, be backed up by support to generating a supply of quality services, especially in the regions where such a supply is lacking (most of which are in Objective 1 areas). Counselling and support services to businesses are essential to proper use and effectiveness of direct aid which they receive from elsewhere. The content of the SME Community initiative, organized into two main parts, reflects this approach based on achieving balance between direct aid to SMEs and improving/structuring the support services available.

INTERREGIONAL AND TRANSFRONTIER COMMUNITY INITIATIVE (INTERREG)

4.66. The first advance payments are made by the Commission when all the necessary information is available. The time periods mentioned by the Court reflect problems involved in obtaining such information from the Member State (e.g. addresses of recipients, bank details, information on various agreements between Member States on common management of the funds by a local intermediary agency).

4.67. It is true, in the Objective 1 areas, that the bulk of the assistance related to projects relevant to the economic development of the border areas concerned, without having a significant transfrontier content. When Interreg I was negotiated, the Commission was obliged to bring some pressure to bear to ensure a higher profile, on several borders, for genuine transfrontier measures or projects. Some of the Member States felt that it would be premature to develop transfrontier cooperation in their underprivileged regions, and preferable to introduce it gradually, after an initial development stage.

For this reason, Commission Notice C(90) 1562/3 to the Member States provides for exceptions in cases of depopulated regions or areas seriously deficient in infrastructures, so that improving transport and other communications systems within and between border areas by the creation or modernization of infrastructures can be taken into consideration.

The implementation of the programmes shows that even in the areas where there was no tradition of cooperation prior to Interreg, such cooperation could be brought under way, to a modest extent, within about two or three years.

4.68. The reason for the situation described by the Court was the particular difficulties of access across this land frontier, where many former access roads had been closed for security reasons. Interreg I, however, provided the basis for genuine cross-border contacts and for cross-border projects under Interreg II. Three groups, representing local authorities on both sides of the border, now exist covering the entire border area; it is hoped that they will put into effect integrated area plans during the Interreg II period. In addition, the new programme lays much greater emphasis on the priority to be given to cross-border actions. The cessation of violence in Northern Ireland is also giving an added impetus to genuine cross-border activity.

4.69. The Egnatia route is part of the trans-European networks. It runs from the Turkish border to the port of Igoumenitsa. It will thus facilitate traffic throughout northern Greece, by providing an alternative via Italy and the ports of Brindisi and Otranto. It is thus fully integrated into the Interreg II strategy for Greece and Italy. Moreover, in the framework of Interreg II, 'Greece; external borders`, other trunk roads (Ioannina-Kakavia, Siatista-Chrystallopigi, Thessaloniki-Promachon and Alexandroupolis-Ormenio) are planned to link neighbouring countries to this trans-European route. Financing under the PHARE programme is to cover the construction of roads to extend these routes into Albania and Bulgaria.

In the framework of Interreg I, the two important projects mentioned by the Court were considered necessary to remove major bottlenecks on the Egnatia route.

The Cabeza del Buey bypass project in Spain is one of the exceptions for infrastructure works covered by Commission Communication C(90) 1562/3, which explicitly states that exceptions can be made to the limits of eligible areas for infrastructure projects that contribute to the development of the regions if they are in depopulated areas, which applies to the region of Extremadura.

4.70. It is true that the transfrontier nature of Interreg makes it difficult to assess the impact of the programmes. However, it cannot be denied that much has been learned as experience was gained, with benefits in particular for Interreg II. The definition of assessment indicators, which should be quantified as far as possible, is compulsory; the system of assessment has been examined in detail, management will benefit from widely circulated information and know-how, and common monitoring committees will be set up for the entire programme on both sides of a border.

Moreover, Commission departments have set up arrangements for independent external assessment, the results of which are expected for the second half of 1995; this should enable the economic value-added of the programmes, and their contribution to reinforcing local cross-border potential, to be evaluated.

4.71. As this is the first generation of programmes involving, in each case, at least two Member States, the proposals sent by the Member States were often incomplete and insufficiently balanced when first presented. In such cases, lengthy negotiations were needed to improve the quality of the programmes. They took a considerable time to complete, in the framework of partnership. It was more important to produce high-quality programmes than to meet a deadline that was not, in any case, imperative.

4.72. In the Commission's view, account should be taken of the dynamic process generated by Interreg, which, in the space of only two or three years, has made cross-border partnership measures possible where none existed before (e.g. on the Spanish-Portuguese border), and significantly strengthened existing partnerships. The experience of Interreg I has enabled those Member States who were most sceptical about the possibility of a wide range of cross-border measures to adopt a less-reticent attitude to Interreg II. The Commission, for its part, on the basis of an initial assessment, has stressed the need, in Interreg II negotiations, for incentives to the development of cooperation, which should be introduced where they are not already in place, and for a sufficient allocation of measures likely to contribute to this.

On the need for effort to increase awareness and to improve monitoring and assessment, the Commission undertook such an effort in 1993, in particular through technical assistance and awareness measures for businesses in the framework of the LACE pilot project (Linkage, assistance and cooperation for the European border regions).

MONITORING, CONTROL AND ASSESSMENT

4.73. The Commission believes that assessment has improved considerably. The rules have become more specific and stricter. The Commission has spared no effort to ensure proper assessment of Community operations. This has meant:

- at the negotiation stage, generalized independent assessment of all the regional development plans (RDPs) and single programming documents (SPDs) presented by the Member States;

- at the implementation stage, arrangements for on-going assessment, with a view to preparing and carrying out the mid-term review and to preparing the ex-post assessment;

- a determination, repeatedly expressed, to carry out ex-post assessment in due course under optimal conditions.

Monitoring has also been improved by the revised 1993 Structural Fund Regulations, which have strengthened the role of the monitoring committees by giving them powers to make certain programme modifications. Furthermore, the 'horizontal clauses` which apply to Community assistance during the new programming period and which were agreed with the Member States in the multilateral partnership set out in detail the procedures to be followed and the documents to be sent to the Commission when a monitoring committee amends a programme.

4.74. (a) The Member of the Commission responsible for regional policy, visiting Cantabria in 1992, saw the site of the planned infrastructure project and was given full assurances that the work would begin. The regional authorities sent the central authorities and the Commission documents relating to commitments undertaken at national level. In the circumstances, the two applications for extension of payments were accepted, especially as they fully complied with the criteria for extension set out in the decision approving the Community contribution to financing.

(b) The Commission applied to this case the provisions of Article 24 of Regulation (EEC) No 4253/88, which stipulate that when assistance is reduced, suspended or cancelled the Commission must conduct a suitable examination of the case in the framework of the partnership. Following this examination, the Member State made a formal application to the Commission in December 1994 for cancellation of the assistance, and in May 1995 the competent authorities notified the arrangements for recovery. The Commission recovered the money in May 1995.

4.75. During 1995, the Economics Ministry in Madrid included these projects in the 'national control plan`, to be implemented by the General Finance Inspectorate of the central government. The Commission was informed that the declaration of expenditure would be adjusted subsequently.

For the new programming period commencing in 1994, Cantabria, like all the other Spanish Objective 1 regions, will have its own monitoring subcommittee. Moreover, all the Spanish Objective 2 regions will have their own regional subcommittee. These new arrangements will make for more effective control of operations. It should be borne in mind that the Objective 2 operations in Cantabria (1989-93) were monitored only by the monitoring committee for the CSF as a whole, since the central Spanish authorities were totally opposed to applying the Basque and Catalan subcommittee model to other Objective 2 regions.

4.76 4.77. The Commission has been informed in detail by the Court about problems concerning the 1992-93 Objective 2 OP for Liège, as well as about the different position of the Belgian authorities. In order to clarify the issue and reduce or suspend assistance where necessary, the Commission is carrying out, in the framework of the partnership, the examination provided for by Article 24 of Regulation (EEC) No 4253/88.

4.78. This case has been included in the overall examination being carried out by the Commission of the 1992-93 Objective 2 OP for Liège; the appropriate financial corrections will be decided at the conclusion of this examination.

4.79. The Commission is already examining these cases, in the framework of the partnership, under Article 24 of Regulation (EEC) No 4253/88. It appears that the Greek authorities have already carried out the necessary corrections in respect of a number of the cases mentioned by the Court.

4.80. The regulations require the national control mechanisms to be effective, but they are not required to be identical. The Commission requires the Member States to inform it of the control systems in force.

4.81. The Commission admits that, despite its efforts, the results of the first stage of the reform have been only partly satisfactory as far as assessment is concerned. However, the situation has increased appreciably for the new stage of programming, where a distinction should be made between the Objective 1 RDPs/CSFs, on the one hand, and the Objectives 1 and 2 OPs and SPDs, on the other. In the first case, the Commission and the Member States were able to compare resources mobilized with the hoped-for positive effects of the measures in terms of faster growth, job creation, gross fixed capital formation and, eventually, structural change expected in the major sectors of economic activity. At the level of the SPDs, however, owing to problems of methodology related to the small size of the areas concerned, the feasibility of this type of comparison was limited. The assessment of SPDs thus concentrated more on the quality of the regional and social conversion strategy under consideration, on the relevance of the specific objectives of the measures programmed, and on the quantification of effects, mainly on employment.

4.82. The decision by the Economics Ministry of Mecklenburg-Western Pomerania to grant aid provided for later assessment by the Ministry of the appropriateness of the amount of aid.

The Commission has been informed by the national authorities that following this assessment and the audits carried out by the European Court of Auditors and the Court of Auditors of the Land the Ministry withdrew the notification of aid in May 1995 and demanded the repayment of the sums advanced.

The Court moves from remarks on one specific case to overall conclusions which the Commission does not share. In general, the mission expenses of Commissioners or Commission officials are paid for on budget line A 1040 or A 130. The Commission does not object to the acceptance of mission expenses from an external organization in cases where that organization has requested the presence of a Commissioner or a Commission official. Such financing must be agreed to in a transparent and limited way. The Treaty requirements as regards independence must always be respected.

CONCLUSIONS AND RECOMMENDATIONS

4.83. The Commission has noted that the projects inspected by the Court were selected using selective sampling. The situations discovered may well therefore not be representative of the overall situation. Significant progress has certainly been made. The Commission nevertheless attaches importance to the findings of the Court and will follow them up appropriately.

The Commission's task is not, however, to replace the Member States in the management of the operations co-financed by the Structural Funds - that would be impossible - but to take its own responsibilities in such a way as to help maximize the utility of the operations and reduce errors and irregularities to the minimum.

4.84. The Commission recognizes the necessity for improvement of the national systems of management and control of the co-financed operations. Proper management of the operations depends crucially on the Member States. The Commission makes recommendations to the Member States when weaknesses are revealed by its own controls and reminds them of their obligation to keep the Commission informed about the management and control procedures applied at national level. The Commission also insists on the carrying-out of all financial adjustments which are revealed to be necessary.

On the question of eligibility, the Commission has recognized certain difficult cases, which are at present being studied in-depth by the departments concerned.

4.85 4.86. The Commission recognizes the importance of the respect of the public procurement procedures and the environmental rules for all co-financed operations. It again underlines, however, the central responsibility of the Member States in this area. Major progress has been made towards applying Community rules in the initial stages, by closer association of the national authorities with the Commission, and by amending rules in this direction.

4.87. The Commission contributes to the financing of profit-making investments only where these have a special regional development interest and it is clear that they would not otherwise be profitable enough to be attractive to investors. The amount of the grant is fixed at the minimum necessary for the investment to break even (i.e. to give the minimum return required for attracting private contributions).

Moreover, joint financing is a key principle of ERDF operations. In the circumstances, final recipients almost always contribute to financing the operations. Unfortunately, this does not exclude the risk of irregularities.

The Commission will, however, study the possibility of improving the complementarity of forms of financing.

4.88. The Commission does not entirely agree with the Court's conclusions. The main problem facing this type of intervention is in outreach: it may be difficult to persuade Member States to use it. On the choice of intermediary agencies, the Commission would repeat the reply given under points 4.51 to 4.53. On the definition of their role, the Commission thinks it is made sufficiently clear by the criteria in Article 6(1) of the ERDF Regulation, especially those relating to the public interest and to associating the socioeconomic interests directly concerned. On the problems encountered in managing this form of intervention, they are, in the Commission's view, fairly marginal.

On the question of balancing the financing of supply and demand for services for local operators, the Commission would reaffirm the position expressed in reply to point 4.60.

4.89. The Commission would reiterate its reply to point 4.72 on the dynamic process brought under way by Interreg. However, it does agree with the recommendations made, which are one of the major factors in its approach to Interreg II negotiations.

4.90. The 1993 Regulations clarified and strengthened the role and powers of the monitoring committees. It is not clear on what basis the Court takes the view that the number of meetings in 1994 was insufficient, given that in that year commitments relating to the 1989-93 programming period had in general been completed, while in the earlier part of the year the 1994-99 programmes had not yet been launched.

4.91. The Commission has spared no effort to ensure appropriate prior assessment of Community operations. The situation with regard to assessment has improved considerably in the context of the 1994-99 programming period.

4.92. In 1994 two programming periods overlapped. Programmes from the earlier period are still in the course of implementation on the ground; consequently, it would have been impossible to complete ex-post evaluation of those programmes before embarking on operations for the second period. The lessons learnt from ex-post assessments in the earlier programming period will be useful to enrich ongoing assessment (especially at the halfway stage) for the new financing. Indeed, studies of assessment over recent years have already enabled the Commission to propose revised rules and prepare new programming.

4.93. In the light of the foregoing observations, the Commission does not agree with the judgment expressed in the first sentence of the Court's remarks. On the question of sanctions, the Commission has striven to reinforce the protection of the financial interests of the Communities through horizontal proposals for rules and agreements that will soon be adopted, which address this matter of sanctions in particular. As for the transmission of resources to the final beneficiary, Article 21(5) of Regulation (EEC) No 4253/88 has provided since 1993 for beneficiaries to receive advances and payments from the national Treasury as soon as possible, and as a general rule within three months of receipt of the appropriations by the Member State, provided that the beneficiaries' applications fulfil the conditions necessary for payment to be made.

CHAPTER 5 (*) Social sector, stimulation of enterprises (SMEs) and training

5.0. TABLE OF CONTENTS Paragraph reference

General introduction 5.1

Management of the European Social Fund (ESF) 5.2 - 5.65

Introduction 5.2 - 5.4

Budgetary and accounting management 5.5 - 5.25

Budgetary accounts and the authorizing officer's accounts 5.5 - 5.9

Accuracy of the accounts 5.10 - 5.11

Commitments and payments 5.12 - 5.17

Budget estimate 5.18 - 5.20

Carry-overs and extensions 5.21 - 5.24

Exchange rates 5.25

Follow-up by the Commission of the inspections carried out 5.26 - 5.46

Inspections carried out by the Commission 5.26 - 5.29

Coordination of the management of ESF measures 5.30 - 5.32

Follow-up of Commission observations 5.33 - 5.35

Recoveries 5.36 - 5.41

Freezing of payments 5.42 - 5.44

Follow-up of the Court's observations 5.45 - 5.46

Deficiencies observed 5.47 - 5.56

Public co-financing and privatization 5.57 - 5.65

Introduction 5.57 - 5.60

Privatization of State-owned enterprises 5.61

National co-financing following the privatization of the 'Enti Pubblici` 5.62 - 5.65

Small and medium-sized enterprises (SMEs) 5.66 - 5.104

Introduction 5.66 - 5.69

Definition of SMEs 5.70 - 5.72

Community assistance to SMEs through the ESF 5.73 - 5.86

Priority accorded to SMEs, planning and management 5.73 - 5.77

Follow-up, monitoring and impact 5.78 - 5.86

Enterprise policy managed by DG XXIII 5.87 - 5.102

The Euro-Info Centres (EICs) 5.97 - 5.102

The Integrated programme in favour of SMEs and the craft sector 5.103 - 5.104

Social dialogue 5.105 - 5.112

Conclusions 5.113 - 5.118

GENERAL INTRODUCTION

5.1. During 1994 the Court's analysis covered the accounts of the European Social Fund (ESF - budget headings B2 1300 to B2 1900) and those concerning the dialogue between the social partners at European level (headings B3 4000 to B3 4004) and enterprise policy, particularly with regard to small and medium-sized enterprises (SMEs - heading B5 320). Twenty assignments were carried out in the Member States.

MANAGEMENT OF THE EUROPEAN SOCIAL FUND (ESF)

Introduction

5.2. The new regulatory framework for the ESF for the period 1994-99 (hereinafter referred to as ESF 1994-99) was introduced during the financial year 1994, by the end of which 13 Community support frameworks (CSFs), 159 single planning documents (SPDs) and 143 operational programmes had been concluded under the various objectives of the ESF.

5.3. At the same time, the Commission continued to implement the ESFs applying to previous planning periods (hereinafter referred to as ESF 1984-89 and ESF 1990-93) by both undertaking commitments and making payments during the financial year 1994. Each of these periods has its own regulatory framework.

5.4. For the three separate ESF regulatory frameworks, commitments amounted to 5 830,95 Mio ECU out of available commitment appropriations totalling 6 404,99 Mio ECU, whilst payments amounted to 4 422,2 Mio ECU out of a total of available appropriations of 6 135,59 Mio ECU. Table 4.1 in Chapter 4, 'Regional sector`, also retraces the use made of ESF commitment and payment appropriations in 1994.

Budgetary and accounting management

Budgetary accounts and the authorizing officer's accounts

5.5. As already mentioned, at present there are three ESF regulations still in force. However, the budgetary accounts do not enable transactions related to each of these regulatory frameworks (ESF 1984-89, ESF 1990-93 and ESF 1994-95) to be distinguished because there is no separate budget heading for each regulation. Thus, the budgetary accounts do not show that the consumption of the amounts allocated to the 1990-93 regulatory framework was lower in 1994 than the comparable figures for 1993, as a result of a net decommitment of 119 Mio ECU.

5.6. The budgetary accounts do not differentiate between final payments and advances, both being booked as payments chargeable to the financial year. The final payments made in 1994 (408,9 Mio ECU) accounted for only 9,4% of the payments made by the Commission in this financial year, whereas 1994 was supposed to be the year in which the 1990-93 ESF was closed.

5.7. The total amount of the obligations contracted by the Commission in its decisions to grant contributions from the ESF was not systematically recorded in the budgetary accounting system. The commitments represent the potential total obligation only where the latter does not exceed 40 Mio ECU (Article 20, paragraph 3, of Council Regulation 2082/93) or two years' duration. In the other cases, the commitments recorded represent only part of the annual tranche of the obligation. Although the adopted practice of derogation is in conformity with the financial regulations applying to the Structural Funds, the Court considers that the situation should be rectified, either by amending the regulations or by changing the method governing the making of entries in the accounts.

5.8. As regards the 1990-93 ESF, the total amount of the Commission's obligations is not available in the authorizing officer's accounts, which are included in the computerized accounts of the Eurada database, because, as the operational programmes (OPs) have progressed, so the amounts of the estimates have been replaced by those for the completed programmes as declared in the applications for final payment. As regards the 1994-99 ESF, the data in Eurada have improved as far as indicating overall obligations for the period is concerned, since the Commission now records the overall amount resulting from its decisions, so its actual commitments can be monitored.

5.9. Likewise, the only reliable data in the authorizing officer's accounts are the cumulative figures compiled for each operational programme (OP). This is why there is no clear link with the budgetary accounting, which only shows items relating to the financial year, rather than distinguishing between the transactions in accordance with the period of the ESF regulatory framework.

Accuracy of the accounts

5.10. The presentation of the implementation of the ESFs during 1994 in the budgetary accounts (Sincom) differs from the presentation used in the authorizing officer's accounts (Eurada). These differences () are partly due to the fact that the same data are input separately into the two sets of accounts with no checks of the country and budget-heading codes required for the budgetary accounting when the two systems are reconciled each day.

5.11. As at 5 January 1995, the budgetary accounts showed commitments and payments totalling 1 644 Mio ECU which could not be related to any particular Member State. The Court itself detected several errors in the budgetary accounts, where certain transactions had been charged to the wrong budget heading (incorrectly charged commitments amounting to 59,5 Mio ECU and, likewise, incorrectly credited payments amounting to 13,4 Mio ECU and concerning budget headings B2-1300 to B2-1830) or to a Member State that was not concerned by the payments (0,3 Mio ECU).

Commitments and payments

5.12. Advances up to 80% of a programme tranche may be made provided that at least 25% of the programme has been implemented. As a result, the payments recorded in the accounts do not reflect actual implementation, especially when the initial forecasts of programme costs were overestimated.

5.13. As the Court emphasized in its 1993 Annual Report (paragraph 14.10 b), where what is implemented falls short of the estimates, the Commission does not cancel commitments which have not been utilized under the OPs' previous annual tranches, but merely enters into a smaller commitment for subsequent tranches. The result of this failure to cancel unused commitments is that the commitments cease to reflect either the estimates or the implementation in any of the tranches, i.e. neither the low implementation rates of previous tranches, nor estimates for future tranches. This same failure to adjust payments in line with what is implemented means, by implication, that the accounts do not show the proper reasons for the payments either.

5.14. In some cases, the Commission did not reduce its commitment for the subsequent tranche, even though it had been notified of the low level of implementation of previous tranches and, consequently, of the commitments that had become available for re-use. As a result it entered into commitments and paid out amounts which were too high for the subsequent tranches.

5.15. An example of this is the case of the 1990 OP No 1005 E1: a commitment for the fourth tranche was entered into on 9 March 1994 without taking account of the completions figure of 12,6 Mio ECU, instead of the figure of 13,9 Mio ECU initially forecast, even though this figure resulted from the 1992 application for final payment submitted in February 1994. The resulting over-commitment therefore amounted to 1,3 Mio ECU. The advances disbursed under the 1990 OP No 0003 ES1 were too large, so that surplus funds fluctuating between 6 Mio and 13 Mio ECU, which were not authorized under the regulations, were made available to the Member State between December 1992 and December 1993.

>TABLE>

5.16. The ESF's overcommitment as a result of such practices is demonstrated by the size of the amounts cancelled at the closure of the programmes. In 1994, cancellations amounted to 20,7 Mio ECU for the 1984-89 Fund files, and to about 226 Mio ECU for the OPs under the 1990-93 ESF; 170 Mio ECU of these cancellations was accounted for by the United Kingdom (UK), whose OPs were closed in 1993 rather than being carried forward to 1994 (see Table 5.1).

5.17. The extent of the over-payment is illustrated by the high level of recoveries (75,2 Mio ECU) made by the Commission, mainly in the form of offsetting against payments due in 1994, 53,9 Mio ECU of which concerned the UK.

Budget estimate

5.18. Management which observes the regulatory framework described above does not make budgetary forecasting any easier. The 1994 payment appropriations of 6 165 Mio ECU which were set aside for ESF headings were excessive: not only did the transfers made during the financial year amount to some 386,015 Mio ECU, but, at the end of the same year, payment appropriations had been underutilized to the extent of 1 464 Mio ECU, of which 1 244,5 Mio ECU was cancelled. The payments made in 1994 amounted to only 63% and 82,9% of the estimates for the 1990-93 and the 1994-99 ESFs, respectively.

5.19. On the other hand, the Commission's estimates for the 1993 appropriations were too low for it to meet its commitments to the Member States, and in 1994 it was forced to have recourse to the re-use procedure (20,6 Mio ECU for Greece) and to make appropriations available again (21,8 Mio ECU for Portugal), neither of which procedures had been provided for in the financial planning for these projects.

5.20. The appropriations provided (made available again and re-used) in 1994 proved insufficient to effect the 1990-93 ESF transactions. The Commission was obliged to enter into additional commitments amounting to 61,839 Mio ECU in excess of the 1994 appropriations. On the strength of these commitments, the Commission made payments amounting to 27,460 Mio ECU. These commitments and payments were drawn from budgetary appropriations earmarked for the 1994-99 planning period.

Carry-overs and extensions

5.21. In view of the underutilization of ESF appropriations that was characteristic of the years 1990-93, in numerous cases the Member States' Monitoring Committees decided, with the Commission's approval, to carry over the amounts not used in previous years to the estimates for the 1993 tranche, the final year of the 1990 93 ESF.

5.22. These decisions were taken without the budgetary authorities in the Member States or the regions involved always being consulted. The estimates for the final year of the OPs under the 1990-93 ESF were significantly increased, which contributed to the commitment of appropriations, or to the maintenance of existing commitments, which were excessive for this final tranche, since there was no guarantee that any of these commitments would receive sufficient national co-financing. During a joint audit with the Commission in Sicily, for example, no entry in the accounts had been made for an overall national public contribution of the order of 62 300 Mio LIT for the OPs Nos 90 6020 I1 and 90 1007 I2 (approximately 31,5 Mio ECU), whereas the Commission had already committed some 60 Mio ECU. Moreover, as independently observed by the Commission and the Court, one Member State used advance payments received under the new ESF (1994-99) to pay beneficiaries the balance owed for the 1990-93 OPs. This breach of the rules - namely not using the Community payment for the purpose for which it was intended - occurred in Portugal and concerned the sum of 81 Mio ECU.

5.23. The Member States granted an extension to their OPs by the Commission were allowed to submit their 1993 final payment request in June 1995, at the same time as their 1994 balances concerning OPs concluded under the new Fund (1994-99). However, in a large number of cases these new OPs amounted to nothing more than a straightforward extension of previous OPs, the beneficiaries, training actions and objectives being exactly the same. By allowing the same measure to be submitted to two Funds for the same year, the Commission is running the risk of financing the same thing twice.

5.24. The option of entering into legal commitments and making payments as late as 1994 in respect of training courses held in 1993 was not exploited by all the Member States, not all of which applied for this in any case, since they considered that commitments entered into and payments made in 1994 ought to cover the cost of 1994 training programmes. Even when the CSFs or OPs were extended, the Member States did not all succeed in using up commitments undertaken earlier before 31 December 1994, as can be seen from the volume of cancellations indicated in Table 5.1.

Exchange rates

5.25. In addition to the use by Member States of an incorrect method for converting their requests for final payments into Ecus, a matter already pointed out by the Court in its previous Annual Report (paragraphs 6.15 - 6.18), the Commission also accepted conversion rates which did not comply with the Financial Regulation. This was noted by the Court in Greece, which uses an estimated average annual exchange rate to convert its expenditure into Ecus, instead of the rate for the month the expenditure was entered in the accounts by the managing bodies: the resultant discrepancy in respect of all of the Greek OPs between 1990 and 1994 may be estimated at 19,3 Mio ECU (), in Greece's favour. The Commission should take the necessary steps to recover the unwarranted payments from the bodies responsible.

Follow-up by the Commission of inspections carried out

Inspections carried out by the Commission

5.26. The Court examined the Commission's controls of the ESF which are carried out by 11 staff of Directorate-General XX (DG XX) and seven staff of the Audit and Inspection unit of Directorate-General V (DG V).

5.27. The scope and the approach to the audit and the planning and organization of the on-the-spot visits does not differ significantly between the two units. They coordinate the timetable for control visits but do not cooperate either in defining the objectives of the audit, in interpreting the regulations, or in defining concepts such as eligibility criteria or the classification and quantification of errors. It was only during the second half of 1994 that a Committee was set up to consider the definition of eligibility for ESF financing. The work of this Committee should be extended to the definition of other important criteria.

5.28. DG V's inspection reports are sent to the Ministry of Employment in the Member State concerned while DG XX audit reports go to the Ministry of Finance and do not necessarily reach the competent authorities who could take the necessary corrective action. Although there is an exchange of reports between the two DGs, the Commission should coordinate and rationalize the sending of its reports to the national administrations and ensure that they are also sent systematically to the Monitoring Committees.

5.29. At this stage, the audit findings are not presented systematically to the relevant Monitoring Committees. As a result there is no opportunity to present the weaknesses observed and the improvements recommended.

Coordination of the management of ESF measures

5.30. The Community Initiative Programmes (CIPs) are managed by the Directorate responsible for political development and evaluation of the ESF (DG V-B), whereas ESF expenditure on the Objectives is managed by the Directorate for the implementation of the ESF (DG V-C). This means that Directorate DG V-B authorizes, accounts for and audits the expenditure on CIPs.

5.31. In the context of the large number of new CIPs now beginning under the new ESF, the Commission will need to be vigilant in ensuring that the CIPs are integrated with other ESF programmes. Given the increasing decentralization of the implementation of the main ESF programmes under the Community support frameworks (CSFs) and single planning documents (SPDs/DOCUPs) and the resulting reduction in information readily available at the Commission, it is all the more important to devote sufficient effort to achieving effective coordination between these measures and the CIPs, in order to ensure complementarity and additionality and to avoid the risk of double-financing.

5.32. The need for firm central management of ESF programmes is further illustrated by difficulties which have arisen with the Directorate-General responsible for the enforcement of competition legislation (DG IV). The funding of numerous ESF measures, approved in Commission decisions, has been blocked by DG IV. DG IV's objection is based on Commission Decision No 92/C 213 of 2 July 1992 which requires it to approve subsidies of more than 50 000 ECU to SMEs. The problem arises because the new Structural Funds consider the training of individuals threatened by unemployment, in the company employing them, to be eligible for ESF financing under Objective 4. The Commission 1994 decisions on the new Objective 4 programmes do not make reference to the limits imposed on the funding of individual enterprises in the 1992 decision. The Commission should have acted to resolve the problem of 1992 before taking decisions relating to the 1994 programmes.

Follow-up of Commission observations

5.33. Country officers in the Commission, who have been charged with following up control reports, have not been issued with clear guidance or criteria. There was no coordinated system of follow-up within or between DG V and DG XX. The scope for errors, misunderstandings or simply forgetting to make agreed reductions is significant. The Court's examination revealed that the efficiency and coordination of follow-up varied considerably.

5.34. In many cases the control reports produced by the Commission required that follow-up action should be taken by the competent authorities in the Member States. Unless the authorities concerned openly disputed the observations in the control report, the Commission took the certificates provided by the Member State in support of their final payment claim as evidence that the necessary corrections had been made. Given the Court's concerns about the reliability of the Member States' arrangements for certifying applications for ESF financing, summarized in paragraphs 8.63 to 8.66 of its 1993 Annual Report (), the Commission should seek other assurance that account has been taken of the observations in their control reports.

5.35. The Court is concerned about the high turnover of staff responsible for the management and control of ESF programmes, and about the considerable number of vacant posts. Nearly half of those engaged in overall financial planning and control and in managing the CIPs are employed on terms which restrict their stay at the Commission to between one and three years. The same applies to nearly a third of those working on the main national ESF programmes. The result is that DG V finds it very difficult to retain sufficient experienced staff to implement and control the ESF programmes as intended.

Recoveries

5.36. During the financial year 1994, the Commission issued recovery orders totalling 82,6 Mio ECU, 75,2 Mio ECU of which was recovered by means of offsetting against other payments, in particular at the closure of the OP (off-setting of 53,9 Mio ECU in respect of the United Kingdom which closed its OPs in 1994, see paragraph 5.17).

5.37. The high recovery figure for 1994 is due to the closure of the British OPs during that financial year (see paragraph 5.27). The recovery orders issued in 1994 mainly concerned overpayments made a few years previously under the 1990-93 OPs.

5.38. The payments in respect of some recovery claims dating further back have still not been received: 65% of the amount which remained outstanding at 31 December 1994 (43,3 Mio ECU) concerned claims issued more than three years previously. Although interest on arrears is provided for in Regulations Nos 4253/88 and 2082/93, it has not been applied to the recovery orders amounting to 10,5 Mio ECU in respect of the 1990-93 ESF. The Court therefore calls upon the Commission to apply these Regulations systematically when the parties concerned do not make haste to reimburse such amounts.

5.39. On the matter of the only quantifiable errors detected by the Commission during its on-the-spot inspections in 1993 and 1994, of the order of 130 Mio ECU, the Court established that, contrary to the recommended implementation methods (), the Commission did not make a token accounting entry for potential claims.

5.40. From the moment a file has been referred to the courts, a token entry must be made. Examples are two regions in Italy (Tuscany and Sardinia), where it looked likely that the Commission would recover the sums of 307 000 ECU and 869 645 ECU but it did not make a token entry for either of these potential claims.

5.41. It follows that the Commission does not take all of the necessary steps to recover unwarranted payments as quickly as possible.

Freezing of payments

5.42. When substantial errors are discovered in an OP, the Commission temporarily freezes future payments to be made under this OP. Once the Member State has taken corrective actions, the Community payments are unfrozen and passed to the Member State and, where appropriate, unwarranted payments are recovered.

5.43. Out of a total of 651 476 425 ECU frozen at the beginning of the financial year 1995, 456 589 764 ECU (70%) of this amount was already frozen at the beginning of the previous financial year. There was no change in the status of the files concerned during the financial year 1994, which highlights the slowness with which corrective action is taken in the case of files not referred to the courts. The Commission should set a deadline for corrective actions to be taken, failing which penalties should be imposed.

5.44. The size of the sums frozen in respect of Spain and Italy (see Table 5.2) is attributable to the lack of transparency of the OPs managed by the National Institute for Employment (INEM) in Spain, to the legal investigations into various OPs that were being carried out, especially in Lombardy and Sardinia, regarding the ESF unit in Rome, and to the inefficiency of the management of the ESF and its inability to live up to its role as the certificatory authority. The reason why no payments to the United Kingdom and Ireland were frozen was that their OPs under the 1990-93 ESF had already been closed (UK and IRL) and the over-payment to the UK had already been recovered.

Follow-up of the Court's observations

5.45. In its last Annual Report, the Court produced a selection of cases in which overpayments appeared to have been made. During the bilateral discussion procedure, and in its replies (), the Commission undertook to examine the cases, in partnership with the Member States, and to pursue recovery action where appropriate. In a letter to the Court, sent in February 1995, the Commission asserted that it could not recover apparent overpayments without consulting the beneficiaries. In support of its argument, the Commission cites a recent case before the Court of First Instance ().

5.46. The recovery of unwarranted payments made under the ESF is currently governed by Council Regulation No 2082/93 of July 1993 (), which provides that the 'Commission shall conduct a suitable examination of the case in the framework of the partnership` as soon as there is any doubt as to whether the financial assistance granted is fully justified. If the Court's audit calls for further investigation to be carried out, the Commission should act accordingly immediately. The Commission should have carried out a very detailed examination of the cases raised by the Court within the meaning of the Council Regulation and should have taken the necessary corrective action.

Deficiencies observed

5.47. The deficiencies pointed out by the Court in its previous Annual Report, such as the absence of precise eligibility criteria and adequate controls, and the unreliability of the certificates issued by Member States, are still persisting because the 1990-93 ESF systems have not been improved. As regards the new Fund (1994-99), no vade-mecum for controls, no list of eligible costs and no suitable definition of the final beneficiary were drawn up in 1994, and Member States continued to implement the ESF without precise guidelines.

>TABLE>

5.48. During its assignments, the Court recorded a number of mistakes, which were pointed out to both the Member States and the Commission, concerning the eligibility of the measures, the beneficiaries and the expenditure. The mistakes concerning Italy, Portugal, Greece and France () amounted to 81,6 Mio ECU overall. 5.49. The training of nursery or primary school teachers was financed under OP No 90 1037 E1, to the extent of 10,7 Mio ECU, whereas the training provided for these teachers is not eligible for ESF assistance unless they, in turn, provide vocational training, which does not apply in the case of the general teaching provided in nursery and primary schools.

5.50. The training of students (university and postgraduate) who are not available for work on the labour market, and are therefore ineligible, was financed under an Italian OP outside Objective 1 for a total sum of 42,3 Mio ECU. Under two non-integrated programmes in Greece (88,9 Mio ECU), the training of civil servants was in many cases financed in the place of young jobseekers or unemployed persons.

5.51. Non-eligible expenditure was noted, such as inflated depreciation for equipment under OP No 90 1037 E1 (0,6 Mio ECU), as well as for hire deposits and financial charges.

5.52. Expenditure that had not actually been incurred was financed, either because the amount paid by the Commission exceeded what was actually implemented in the field because of the authorities' erroneous statements (OP No 90 2012 I2, 0,65 Mio ECU; OP 90 6010 I6, 0,36 Mio ECU; or OP No 90 1005 E1, 1,2 Mio ECU) or because the appointed authority recovered part of the funds following its own checks but has not reimbursed the Commission to date (0,15 Mio ECU under OP No 90 2012 I2). 5.53. The absence of reliable implementation certificates was also established in France, where the certificate recorded total expenditure of 8,11 Mio ECU and retrospective or subsequent expenditure of 5,4 Mio ECU. The supporting documents submitted for 1,18 Mio ECU were insufficient for the Commission to pay the subsequent advances.

5.54. Expenditure was added retroactively under some POs to make up for the underconsumption of the financial assistance, as was the case with Sardinia (8,6 Mio ECU) and Tuscany (2 Mio ECU).

5.55. As regards the 1994-99 ESF, some advances paid to Member States were not disbursed to the final beneficiaries within three months, as required by the Financial Regulation.

5.56. In the case of OP No 94 3001 UK3, out of 224,5 Mio ECU paid by the Commission on 5 September 1994, only 44,7 Mio ECU had been disbursed by the Member State three months later. The same situation was noted in Portugal (OP No 94 1000 P1), where only 8 Mio ECU had been disbursed out of the 53,3 Mio ECU received. As regards OP No 94 0004 E1, on 21 November 1994 there had been no disbursement by Greece against the 79,9 Mio ECU received on 18 August 1994, since the Commission's various departments had not been able to agree on the date of the first meeting of the monitoring committee, which has to approve the projects to be financed.

Public co-financing and privatization

Introduction

5.57. As part of its analysis of public co-financing, the Court decided to examine the example of the OPs concerning Italian State-owned enterprises.

5.58. The State-owned enterprises and holding companies (IRI, ENI, GEPI and EFIM) and some public-law bodies or bodies considered to be equivalent (Union Camere, Formez, ENEL, Formedil, FS and ICE) () took direct responsibility for paying the national contribution out of their funds. It should first be remembered that the 'Enti Pubblici` were able to benefit from ESF finance on the basis of Article 8.1 of Council Decision No 71/66/EEC, which says: 'Assistance from the Fund shall be granted at the rate of 50% of eligible expenditure in support of operations by public authorities, bodies governed by public law and joint social institutions entrusted with tasks in the public interest.`

5.59. The Commission has always accepted funds allocated for training measures by 'Enti Pubblici` as national public expenditure which is eligible for Community co-financing.

5.60. The Ministry of Labour grouped together the applications for assistance received from the 'Enti Pubblici` under specific OPs. That is why four related OPs were submitted to the Commission for the period 1990-93 (OPs No 901010 I1, 906022 I1, 906030 I6 and 936030 I6) for a total amount of 662,8 Mio ECU, 384,1 Mio ECU of which was to be funded by the ESF.

Privatization of State-owned enterprises

5.61. In 1992, following the Italian Government's political decision to begin the gradual privatization of the 'Enti Pubblici`, the legal status of some holding companies and public law bodies was changed and a number of enterprises belonging to IRI and ENI were privatized. Following one such privatization, the company concerned, the 'Banco di Roma`, carried out a training measure which was co-financed in 1992 by the previous ESF (1990-93) (). In this particular case, IRI took responsibility for the whole of the national contribution, even though the bank was privatized with effect from August.

National co-financing following the privatization of the 'Enti Pubblici`

5.62. Under the new ESF (1994-99), the 'Enti Pubblici` submitted applications for assistance which were grouped into three OPs for a total of 960 Mio ECU () under the aegis of the Labour Ministry. Included in the applications were three enterprises which had just been privatized () and some companies which were due to be.

5.63. However, the new Community support framework (CSF) for the period 1994-95 lays down that the counterpart national contribution is to be provided from the financial resources of the 'Enti Pubblici` and the Labour Ministry's net current assets and guaranteed by the laws applying to financing in that sector. On the other hand, the CSF does not include an option for private bodies to replace the entire national public-sector contribution. The nature of the national co-financing of companies that are being or are due to be privatized, one by one, during the period 1994-99 had not yet been defined in precise terms, by either the Member State or the Commission, despite the fact that the three main financial holding companies had been transformed into joint-stock companies in August 1992. This shortcoming could lead to a precarious situation in the future, where Community finance is being provided without the national contribution having been specified beforehand.

5.64. The Commission should draw up precise provisions concerning national co-financing and should forward them as soon as possible to the national authorities of all Member States to ensure consistency of application of the ESF provisions.

5.65. Meanwhile the position in respect of responsibility for the 'Enti-Pubblici` programmes remains unclear. These programmes are still administered at national level by the Ministry of Labour, despite the fact that Italian programmes, where costs are shared between the ESF and private sector companies, are the responsibility of regional rather than national government. In this situation, there is an apparent jurisdictional conflict between the national organizations responsible for certification (the Ministry of Labour and the Regions) which could have repercussions on the control responsibilities of the national authorities.

SMALL AND MEDIUM-SIZED ENTERPRISES (SMEs)

Introduction

5.66. The economic and social importance of SMEs is a matter on which the economic operators, the social partners, the institutions of the Member States and the European Union are all agreed. At the end of 1993, it was calculated that there were 16,6 million enterprises in the Community which each employed fewer than 500 people, representing 99,9% of the total number of companies (), 71,6% of the labour force and 70,6% of turnover ().

5.67. The organization, in 1983, of the European Year of SMEs and the Craft Sector was the first, founding act of the Community's enterprise policy. The Council approved the first action programme in 1986. The reform of the Structural Funds in 1988 subsequently gave priority to SMEs (). Moreover, the growth initiative and the White Paper (), based on Article 130 of the Treaty establishing the European Community (), formed the basis of the EU's economic policy, one of the main objectives of which is to improve the SMEs and their efficiency. Finally, a Council Resolution () of October 1994 called upon the Commission to propose measures to implement the integrated programme in favour of SMEs and the craft sector.

5.68. The Court's audit covered Community intervention in favour of SMEs under both the ESF and the enterprise policy managed by DG XXIII. The amount allocated to SMEs in 1990-93 from the ESF amounted to 890,7 Mio ECU, based on the number of beneficiary SMEs stated in the Member States' certificates. There is no indication of any order of priority in figures for the measures in favour of SMEs detectable in the preparatory stage of the reform of the 1994-99 ESF, including the 'Initiative for the adaptation of the workforce to industrial change` (ADAPT). In addition to this latter, there are also enterprise policy measures in favour of SMEs managed by DG XXIII, for which there is a financial package of 222,4 Mio ECU for the period 1990-96.

5.69. Bearing in mind the lack of information at the Commission concerning interventions in favour of SMEs, particularly as regards the ESF, the Court sent a questionnaire to the Member States and to SME representative associations. In view of the almost complete absence of programmes specific to SMEs, the Court also carried out on-the-spot audits in Germany, Denmark, Spain, France, Italy and the United Kingdom concerning interventions in which different target groups were involved at the same time.

Definition of SMEs

5.70. The Commission has no official definition of an SME and it therefore interprets the expression in varying ways, even within the ESF, as do the Member States (). It follows that a particular enterprise may be excluded from receiving assistance earmarked for SMEs under one Structural Fund while being eligible for assistance intended for SMEs under another Fund. Similarly, an enterprise might not be eligible for assistance from a particular Fund but would be if it were located in another region. The Commission's 1995 Work Programme includes the formulation of a definition of SMEs.

5.71. The definition of an SME generally used by the ESF is based exclusively on the number of employees (under 500), which is obviously unsatisfactory. For example, an enterprise with under 500 employees where the majority of the capital is owned by a large enterprise may be considered to be an SME. This definition therefore allows companies that are part of large groups to benefit from the advantages reserved for SMEs. Moreover, given that two-thirds of these firms have fewer than 10 employees and 95% fewer than 50, the threshold of 500 employees cannot be considered a genuine criterion for granting ESF assistance, all the more so as firms with under 50 employees experience considerable difficulties in obtaining Community assistance (see paragraph 5.89), and those with fewer than 10 are practically excluded. Finally, improved targeting of Community interventions, based on quantitative criteria (number of persons employed, turnover, balance sheet total and independence) and qualitative standards (operating in a specific economic sector, the enterprise's innovativeness, etc.), would lead to the formulation of transparent definitions and ensure greater cohesion in the overall strategy, fairer treatment of the Member States and, above all, greater efficiency.

5.72. Despite the three-year lapse between the submission of the Commission's report to the Council () concerning the definition of SMEs within the scope of Community measures (29 April 1992) and the reform of the Structural Funds for 1994-99, at the end of 1994 negligible progress appeared to have been made in harmonizing the definitions of SMEs.

Community assistance to SMEs through the ESF

Priority accorded to SMEs, planning and management

5.73. The 1990-93 ESF Regulation gave priority to the employees of SMEs under Objectives 1, 2 and 5b. The new 1994-99 ESF Regulation () extended the field of application of assistance to SMEs within the framework of the new Objective 4 (measures intended to assist workers in adapting to changes in industry and in production systems).

5.74. The OPs for the 1990-93 period were not precise enough with regard to the objectives targeted, the strategies applied and the results expected. So far, this is still largely the case in the new 1994-99 programme and, as a result, the priority given to SMEs is not supported by precise objectives in the OPs. In addition, there is no list of the measures and of the specific financing details concerning SMEs under the ESF. No ex-ante thematic assessment of SMEs was made by the Commission when the ESF was reformed in 1988 and 1993.

5.75. The Court's audit revealed that participation by SME representative bodies in ESF planning is not a formal requirement and is the exception rather than the rule, yet this would increase the SMEs' access to vocational-training and recruitment-assistance measures.

5.76. The ESF's cumbersome administrative procedures and the considerable time-lags involved in forwarding Community and national funds make it difficult, if not impossible, for small enterprises to gain access to Community funds. Delays in national public-sector contributions, in some cases for up to two and three years, have been noted in France and Italy in particular. France is currently introducing reforms in this area.

5.77. Appraisal of the files by the Commission and the Member States in the ESF field is no more than a formality. The implementation of measures to assist SMEs and the specific requirements to be fulfilled are not based on the results of an in-depth analysis of the enterprise's situation. The measures are not checked for their feasibility, and the strategy to be applied and the desired impact are not specified clearly enough. In other words, the measures financed are not viewed as a means of meeting needs arising from the enterprises' planning and strategy, and they provide no guarantee that the real training and employment needs will be met. Finally, assistance is granted without overriding priority being given to the SME target-group.

Follow-up, monitoring and impact

5.78. The Court's audits have shown that, in general, the SME representative organizations have not been active in following up the ESF programmes. Furthermore, they have not been called upon to take part systematically in the Monitoring Committees, which constitute a key part of the management and monitoring of the ESF. The Court does not consider that, in the case of aid to SMEs, the participation of both sides of industry is in itself sufficient to ensure that the interests of the SMEs are properly taken into account and protected.

5.79. The audits carried out by the Court in 1994, like those of previous years, confirmed that there were no suitable follow-up indicators. In fact, the statistical procedures for following up OPs are not conducive to assessing the true impact of Community measures on SMEs. Moreover, the information available is very incomplete and is not utilized at national and Community level.

5.80. The information included in the Member States' certificates concerning the type of beneficiaries, including SMEs, and the level of qualification achieved by the trainees (the ESF's sole qualitative impact criterion) is unreliable.

5.81. One mission to Portugal revealed that the main promoter, the IEFP, classifies trainees without taking adequate account of the size of the companies they work for. The audit of a British OP (No 922018UK2) revealed that the statistics sent to the Commission either recorded large enterprises as SMEs, and vice versa, or presented a combined total as SMEs only. The Commission's failure to detect these errors proves that the figures received from Member States are not scrutinized and that little significance is attached to these indicators. The on-the-spot audits carried out in Spain, France, Italy and the United Kingdom highlighted the fact that part of the assistance to SMEs certified by the Member States went to large enterprises. For example, for two measures within OP No 92 2018 UK2, which is aimed primarily at SMEs, the statistics for 1993 show that only 41% and 1%, respectively, of the beneficiaries were employees of SMEs.

5.82. Because the levels of vocational qualification stipulated by the ESF are imprecise, this situation has given rise to divergent interpretations in the various Member States. For example, France's definition differs from that given by the ESF. As a result, the data forwarded by the Member States can neither be added together nor compared.

5.83. The on-the-spot checks that should be carried out by the Commission and the Member States concerning the eligibility criteria governing the SME target-group are very often not carried out. This was noted particularly with regard to the Rhône-Alpes and Aquitaine regions and in Sicily over the period 1990-93, despite the shortcomings of the management and control system and the low level of implementation.

5.84. The absence of any data concerning national and Community efforts in favour of SMEs, as well as of precise objectives, makes any attempt to assess the impact of ESF interventions in this area particularly difficult. On the basis of the information contained in payment claims submitted to the Commission by the Member States, the Court estimated the number of beneficiary SMEs to be 605 800 for the period 1990-93, i.e. 6,4% of the total ESF and 42% less than estimated initially.

5.85. The figures available show that enterprises with 500 employees or more are receiving a proportion of ESF assistance which is well above the percentage they account for in terms of the overall number of enterprises or the total number of employees. For example, the final payment report for OP No 941001P1, 'Training for work`, in Portugal revealed that 38,5% of those participating in training measures were employed by large companies, but only accounted for 22% of total employment. In the United Kingdom, an examination of the 1993 statistics for all of the Objective 2 OPs concerning the priority measures in favour of SMEs revealed that 36% of employees of SMEs benefited from training. These figures confirm the persistence of the findings of the enquiries carried out in 12 Member States with coordination by a private firm of consultants (). In spite of the lack of reliability of the statistics on this matter, the consultants' 1993 report says that, of the 10 000 Mio ECU reserved for aid to companies under the CSFs, between 2 500 Mio ECU and 3 000 Mio ECU (25-30%) had been allocated to SMEs under operational programmes.

5.86. No ex post thematic assessment of the SMEs has been carried out by the Commission in respect of the ESF.

Enterprise policy managed by DG XXIII

5.87. The main objectives of this policy are to improve the business climate for enterprises, especially SMEs, and to encourage their creation and development. The measures stipulated by the Council () consist of abolishing unwarranted financial, legal and administrative restrictions, providing information on the policies, rules and activities of the Community and the Member States, promoting inter-enterprise cooperation and partnership, and evaluating and developing policy. Since 1993 the Council has added the requirement that the SMEs' interests be taken into account in the various Community initiatives and policies and that the SMEs should be encouraged to adapt to structural changes and to those brought about by the Community internal market. An examination of the main steps taken to implement the measures described above raises the question as to whether the available financial resources and the impact achieved are proportionate to the importance of the SMEs in the Union's economy. The risk of using, in this context, the Commission's administrative and financial resources without achieving any significant results is thus large.

5.88. The main instruments for informing enterprises, as well as for cooperation and partnership, are the Euro-Info Centres (EICs), the Business Cooperation Network (BC-Net), the Business Cooperation Centre (BCC), and the biannual meetings of the representatives of enterprises which are intended to develop partnership at European level (Europartenariat). Only 4,2% of SMEs used at least one of these services in 1993 (4,8% in 1992) ().

5.89. The BCC and BC-Net networks which were set up in 1973 and 1987, respectively, are intended to assist SMEs in finding trade partners to work with at inter-regional or trans-national level. The costs incurred by these services since they were set up are unknown. The BC-Net's budget up to 1993 amounted to 17,2 Mio ECU. The annual budget for the two networks is currently of the order of 800 000 ECU. The number of cooperation profiles of enterprises in the Member States in 1994 represented an annual average of 1,3 of the overall potential target number during the period 1988-94. The number of successsfully concluded agreements is unavailable to the BCC, but stood at 13 for BC-Net in 1992 and 7 in 1993.

5.90. The Council's first decision intended to simplify the administrative, fiscal and regulatory environment for SMEs goes back to 1985. The 1994 budget for this purpose stood at 1,1 Mio ECU. The Commission's most recent report (), dated October 1992, i.e. seven years after the Council's decision, concluded that it was extremely difficult to quantify the progress made in simplifying administration and that business circles estimated that the number of administrative restrictions and the resultant costs had increased in recent years. It also suggests the need for a thorough examination to be carried out by the Commission, so that areas where simplification would produce more significant benefits might be identified.

5.91. Action taken so far to stimulate an improved financial environment for companies has had limited impact. A pilot 'seed capital` project was launched in 1988 to finance the start-up of new enterprises. In 1994, throughout the Union, only 42 had been created (25% less than in 1993) and 14 had failed. Since the instrument was launched, i.e. five years ago, 228 companies have been created (), of which 188 are still trading and have created 2 085 jobs. DG XXIII has provided finance of 6,1 Mio ECU in the form of repayable advances and the ERDF has contributed capital totalling 2,7 Mio ECU. The success of this experiment depends on its ability to attract private capital to this area of activity. A Commission report () confirms that the distinct downward trend in the European seed capital market, which began in the mid-1980s, continued in 1994. Furthermore, not one Portuguese financial institution participated in the operation, in Greece the sole attempt failed and Ireland has benefited only slightly (eight enterprises and 86 jobs created). According to the Portuguese authorities, administrative, legal and other constraints may make it difficult, or even impossible, to implement this instrument in Portugal.

5.92. In 1994, 3,8 Mio ECU was entered under the budget heading 'Observation and assessment of enterprise policy`, i.e. more than 10% of DG XXIII's annual operating expenditure for enterprise policy. This figure does not include assessments in respect of each individual instrument, the costs of which are not known exactly. However, there is no assessment of the impact overall and of each instrument.

5.93. DG XXIII has no management instruments to provide it with information on the amount and nature of the expenditure incurred under the measures since their inception, nor on the expected completion date or the foreseeable cost.

5.94. A Council decision () provided that annual reports on the implementation of the programme (known until July 1993 as evaluation reports) should be drawn up. The content of these reports is sketchy and there is no comparison of what has been implemented with what was laid down in the programmes. Moreover, the reports do not give any explanation of the significant discrepancies between the estimated financial amounts and those made available. Finally, indicators for measuring the performance of the instruments implemented are not included, even when they are known.

5.95. Two reports () on coordination were produced by the Commission at the Council's request (). They are merely attempts at listing measures in favour of SMEs by the various Directorates-General and are especially superficial where the Structural Funds are concerned. They are not really reports on coordination, since they do not refer to any coordination procedures which may have been set up, the results and synergies achieved, the problems detected, the related constraints and the measures taken to overcome them. Scrutiny of the ESF and on-the-spot visits to the Member States have revealed that the coordination carried out between DG XXIII and DG V is insufficient.

5.96. Weaknesses were also detected in the area of the management of appropriations and studies. None of the studies commissioned from contractors outside the Commission were entered in the database in 1994 so as to avoid duplication of effort by the different Directorates-General.

The Euro-Info Centres (EICs)

5.97. The network of EICs is the main instrument used to improve companies' access to information. The budget between 1987 and 1994 was 78,3 Mio ECU, or one-third of DG XXIII's financial resources for the enterprise policy. By the end of 1994, 211 EICs had been set up and the number of client enterprises accounted for 1,3% of the total number in the EU ().

5.98. A preliminary strategy concerning the means for improving the information on Community programmes, coordinated with other Directorates-General, is also lacking. A list compiled in 1992 showed that there were 54 information networks associated with the Commission; it is not certain that they are all necessary and that they operate satisfactorily (). For example, the network of enterprise and innovation centres, which is managed by DG XVI, also has an informative and counselling role. There is no evidence that any thought has been given to the cohesion, complementarity, or the simultaneous need for both of these instruments.

5.99. The geographical scope of the EICs is largely inconsistent and does not conform to any pre-established plan. For example, there are five EICs in Bonn, while Paris has four and London will have two, which will be set up in the same building and managed by the same body, which means that, in operational terms, there will only be one EIC there. Finally, the Portuguese authorities believe that it would be more rational to reduce the number of EICs and that their purpose should be re-defined ().

5.100. In spite of the importance of the role of the EICs as a source of information for EU SMEs, their main objective seems to be far from having been achieved. The SMEs' lack of information persists. The 1994 report by the European Observatory for SMEs observes that access to information and the processing of information represent the main obstacles for the SMEs. Ignorance of the Community departments that exist to aid companies (see paragraph 5.108) constitutes further proof. The number of questions relating to SMEs handled by the EICs was very low (see Table 5.4). Questions put by SMEs account for 48% of the total number, even though the EICs were basically created for SMEs.

5.101. A computerized system has been installed to store questions and answers likely to be of interest to other EICs. The annual operating cost, excluding depreciation, is 934 000 ECU. In 1994, each EIC used the system for an average of one hour and 10 minutes.

5.102. The Commission finances campaigns to promote these instruments. For example, 4,9 Mio ECU was spent between December 1991 and October 1993. A poll carried out in 1993, however, revealed that only 1,2% of company managers mentioned the EICs amongst the Community information instruments with which they were familiar.

The Integrated Programme in favour of SMEs and the craft sector

5.103. This programme, which was adopted by the Commission () on 3 June 1994, contains neither a list of the subprogrammes, 'axes` and measures and actions in favour of SMEs, nor the amounts allocated to the period 1994-99 by the majority of the financial instruments and, in particular, by the Structural Funds. Moreover, the Commission has still not set up procedures to ensure the efficient coordination and cohesion of the implementation of the Community's financial instruments used in the Integrated programme.

5.104. The absence that has already been observed in the audit of the ESF (see paragraph 5.70) of a clear definition of the SMEs is from the start a handicap to a clear definition of the beneficiaries of these Community interventions.

SOCIAL DIALOGUE

5.105. The measures financed by the Commission in this area began in 1974 with the first social programme. Article 118b of the EC Treaty, which goes back to 1987, stipulates that 'The Commission shall endeavour to develop the dialogue between management and labour at European level, which could, if the two sides consider it desirable, lead to relations based on agreement`. These actions were extended in 1989, following the approval of a programme concerning the implementation of the Community charter on workers' fundamental social rights. An Agreement on social policy, annexed to the Treaty on European Union and binding on 11 Member States, also adds that the Commission shall take any measure necessary to facilitate dialogue, whilst trying to ensure balanced support of the parties involved.

>TABLE>

5.106. A Commission communication approved in December 1993 () stated that the measures to be implemented concerned, in particular, the organization of meetings, financial assistance for joint studies and mixed working groups, and technical support. The Commission's contribution to the cost of the measures is not restricted to a specific percentage and sometimes exceeds 90% in the agreements. The Commission's commitments and payments for the period 1990-94 amounted to 115,1 Mio ECU and 77 Mio ECU (), respectively. The Court's audit of the Commission covered the year 1994.

5.107. There is lack of ex ante assessments and specific objectives to be achieved. The only ex post assessments concern information or training measures for employees or their representatives (budget heading B 34004 for the years 1992 and 1993), which account for approximately half of the expenditure in this area. Apart from the incomplete nature of these assessments, they provide no indication of the impact achieved.

5.108. There is no information on the target population of the various measures financed from headings B 34000, B 34002 and B 34004, which represent 90% of the 1994 budget. The number of organizations financed in this field, in particular workers' associations (unions and the like) and employers' associations, at national and company level, is very small compared with the number eligible for direct financing.

5.109. The abovementioned Agreement on Social Policy stipulates that the Commission shall take any measure to ensure balanced support of the parties. In 1994 the measures financed in favour of employers were far from being on the same level as for workers.

5.110. The authorizing officer's checking of the beneficiaries of assistance did not start until 1993. Six organizations were covered in two years and it was confirmed that these organizations had all charged ineligible amounts to the Commission. The final balances, which had already been paid by the Commission, comprised 1 832 120 ECU of eligible expenditure, plus 317 704 ECU of ineligible expenditure amounting to 17,3%. This expenditure comprised costs which were nothing more than estimates, payment for a meeting cancelled by a different contract, interpreting costs which had not been paid, unjustified travelling expenses, and accumulated administrative expenditure combined with lump sums paid for the same reason. Moreover, VAT amounts which had not been quantified by the Commission and had apparently been recovered from the Member State's administration were also included in some of the final balances.

5.111. The extremely low number of measures inspected each year makes the detection of ineligible sums very unlikely. In addition, notwithstanding the irregularities detected in the six cases audited, the organizations involved received new subsidies and only had to repay the amounts they had obtained irregularly. No additional penalty was envisaged.

5.112. A random sample of accountancy records held by the Commission revealed a subsidy of 223 967 ECU, in respect of which an advance of 156 777 ECU had been paid on 15 February 1994. The final balance submitted by the beneficiary in June 1994, four months after the expiration of the admissibility time-limit, contained only supporting documents for expenditure amounting to 57 708 ECU. The Commission should have drawn up an order for the recovery of the total advance immediately after the expiration of the admissibility time-limit stipulated in the agreement. An acceptable statement of the accounts was still being asked for one year later. A new subsidy was granted to this organization in November 1994, even though the over-payment had not been recovered.

CONCLUSIONS

5.113. Much remains to be done at Community level as well as at Member State level to strengthen the financial management and planning of the ESF. The transposition of the differentiation between the three funding periods (up to 1989, 1990-93, 1994-99) to the overall accounting would make the accounts more useful. No information is conveniently available in the published accounts about outstanding multiannual financial obligations to the programmes implemented in each funding period. Some errors were detected in the 1994 accounts in both consumption per country and consumption per budget heading. There is no precise correspondence between the 'reasons` given in the accounts and the type of payment (advances and final payments), or between the tranches indicated and the commitments entered into. In spite of the genuine underconsumption of ESF appropriations that results from the accounts, actual consumption is even lower because the accounting methods lead to an exaggeration of consumption as compared with reality.

5.114. The arrangements for the approval and execution of the programmes which make up the Community support frameworks and single planning documents do not bind the Member States to execute a pre-identified series of measures within a given time-scale. Where measures appear to be ineligible, Member States can simply substitute some other measure, often for retrospective financing. At present there are no sanctions available against Member States who fail to justify Union funding. Equally, the system for recovering from Member State administrations monies wrongly paid to beneficiairies should be improved.

5.115. The priority accorded to SMEs in the ESF regulations has not been reflected in the way they have been implemented. The most salient feature of the enterprise policy in favour of SMEs is its low level of impact on enterprises and the lack of concrete results in general. The new 1994-99 ESF began with the same deficiencies as the previous ESF as regards SMEs.

5.116. A thorough examination should be made with a view to increasing the enterprise policy's impact on SMEs, defining qualitative and quantitative objectives and the target populations, and providing effective means of controlling costs. Duplication of effort should be avoided and all possible forms of synergy with other Community and national instruments should be exploited to the full, as was recommended in the Special Court Report No 5/93 on the EICs ().

5.117. The objectives of the Social dialogue programme should be reformulated realistically, within the amounts available, so that the resulting measures have to satisfy criteria clearly related to the wider objectives of the EU, which can be verified and evaluated. Steps should be taken to bring the existence of measures to the notice of a wider range of representatives of workers and employers so as to achieve a better balance between them in the use of the available money. At the end of 1994, the means available to deter the inclusion of ineligible costs were obviously inadequate.

5.118. Given the large amounts available each year through the ESF - of the order of 6 000 Mio ECU - it is essential that the programmes for the new funding period (1994-99) should incorporate clearly specified, and where possible quantified, intermediate objectives, progress towards which can be monitored by the Commission throughout the period. In particular, the priority attached in policy statements to the development of SMEs needs to be clearly reflected in the specific objectives and actions to be undertaken. The need for tighter financial management is especially urgent in the area of the Community initiative programmes, where transnationality appears often not to have been achieved as intended, and in other areas where minor programmes exclusively administered by the Commission risk continuing indefinitely, to the advantage of a limited number of recipients, without the objectives and priorities being effectively scrutinized.

REPLIES OF THE COMMISSION

MANAGEMENT OF THE EUROPEAN SOCIAL FUND (ESF)

Budgetary and accounting management

Budgetary accounts and the authorizing officer's accounts

5.6. Since 1994 final payments have been marked with an 'S` and advance payments with a figure between 1 and 9 in the Sincom system. The Commission will consider whether the data available in Sincom can be used for the purposes of a similar presentation in the management accounts.

5.7. The Commission prepares annual accounts and records only the commitments made in the accounting system. The financial plans are recorded in the ESF database. See also reply to point 5.113.

5.8. The total amount is consistent with the decisions the Commission has taken in accordance with the partnership arrangements.

Accuracy of the accounts

5.10. It is true that mistakes have occurred in the past with the country codes. The two systems are now reconciled every day automatically; the files are read and lists of anomalies are printed.

5.11. The errors in charging transactions to the wrong budget headings have been corrected insofar as possible.

Commitments and payments

5.13 5.14. The Commission would point out that the ESF closes the accounts for all its annual tranches; this enables it to deal duly with the period when the expenditure was incurred and has improved in transparency considerably.

At all events and subject to possible reprogramming, the commitments in hand are in line with the financing plan for the operations, as parts not used under one tranche are used under subsequent tranches. The solution to the problem raised by the Court will be found by tightening programming and its monitoring within the partnership arrangements with the programme managers in the Member States.

5.15 5.17. It is the monitoring system which deals with any reprogramming in accordance with the stage reached in implementation, so the payment of advances for subsequent tranches is not automatic.

Budget estimate

5.18. Although not challenging the Court's views on the rules governing budget estimates, the Commission would point out that the under-utilization of payment appropriations can be explained by:

- a structural excess of allocations due to the surplus commitment appropriations, all of which could not be transferred to other budget headings in the course of the year;

- almost no payments were made other than the initial advances because of the delay in the adoption of the new types of assistance;

- a sharp drop in payments under the OPs from the previous period due mainly to the fact that the national authorities were concentrating their efforts on preparing new decisions.

5.19. The transactions described by the Court comply with Article 7 of the Financial Regulation and the revised programming for the OPs concerned, as the latter were extended in accordance with the rules in 1994.

5.20. The Commission notes that the additional commitments in question related to OPs which had been extended in accordance with the rules and that the 1994 budget made explicit provision for the rules governing the previous period to be used as a legal basis for implementation of the appropriations under the headings concerned.

Carry-overs and extensions

5.22 5.23. Under the Structural Fund rules, the monitoring and implementation of the programming of assistance falls primarily to the Monitoring Committees which have to take account of numerous factors, both financial and substantive. This is why in a number of cases, because of the imperative closure deadlines, some appropriations could not be used up completely in the field. Subsequently appropriate measures were taken to ensure national co-financing for the appropriations reprogrammed and sound financial management of the transactions.

Exchange rates

5.25. In response to the Court's observations, the Commission has already informed the Greek authorities of the remedial action to be taken to comply with the legislation in force on the ECU.

Follow-up by the Commission of inspections carried out

Inspections carried out by the Commission

5.27. In July 1994 the Commission set up a technical study group on eligible expenditure. This group includes representatives from all the Structural Funds and from Financial Control.

5.28. The departments in question have national correspondents with whom they have agreements on operating procedures and on practical arrangements for the forwarding of information. The ESF departments send their correspondents all the audit reports prepared by Commission departments (ESF audit and Financial Control). The problem raised by the Court is a national matter insofar as the national inspection authorities should refer to the competent national authorities the problems raised by the Commission's Financial Controller.

Following the Court's various observations, the Commission has asked the Member States to send the Monitoring Committees the conclusions of these reports. To ensure proper forwarding of such information, the Commission's representatives in the Monitoring Committees have been instructed to refer to the conclusions of the reports; the national correspondents can thus solutions to the problems raised.

Coordination of the management of ESF measures

5.30. There is no confusion between the activities of the unit responsible for the Community Initiative Programmes on the one hand and the budget and audit unit on the other, although they are both in the same Directorate.

Furthermore, different Commission departments deal with programme management.

5.31. The Commission endorses the Court's views about the need for consistency between the CIPs and the other programmes cofinanced by the Fund. The management of these different programmes is decentralized, but it is also based on a very precise definition of the responsibilities of the Member States and the Commission in terms of management, monitoring and inspection.

Follow-up of Commission observations

5.33. The Commission would draw the Court's attention to the fact that the members of the ESF audit and inspection departments are the auditors of the authorizing department, while Financial Control is the Commission's auditor. The responsibilities of the two departments have been clearly defined and allocated separately. As previously mentioned, reports are exchanged systematically between the departments. In addition, draft reports are finalized after the appropriate consultations between the ESF audit and inspection departments and Financial Control. Since 1994 every audit report has included a follow-up slip giving details of the authorities responsible for solving the problem, the description of the problem, the deadline for solving it and the departments responsible for follow-up. The Commission has also instructed the departments to forward systematically without delay any information resulting from their management which could give rise to suspicion of fraud.

However, the Commission agrees with the Court that the follow-up to the reports has been handled in different ways; it will ensure that this is harmonized.

5.34. The Commission agrees with the Court's observation that certificates of expenditure by the Member States should be based on reliable data and it systematically draws the attention of the national authorities to the need to check the data sent to them by other authorities. At all events, the ESF managing departments have to check whether the corrections have been made, while the audit and inspection department has a computerized system for blocking the flow of funds, which allows the corrections to be made to be closely monitored.

5.35. The reorganization of the Social Fund departments gave rise to major staff changes at the end of 1993 and during 1994. The use of staff on temporary contracts is a choice which is linked to budgetary constraints. All the posts allocated to the Fund's audit and inspection department are now established, and the department's staff has also been increased slightly.

Recoveries

5.37. Recovery orders are issued where the Member States do not use all the appropriations during the last year of an OP.

5.38. The Commission is aware that some recovery orders relating to ESF operations in 1990-93 are still outstanding.

It should be noted, however, that the cases concerned are mainly in dispute or require clarification and lengthy research by the Commission departments and the ministries which receive the recovery orders relating to the above-mentioned ESF operations; they also include outstanding debts to be recovered from bankrupt promoters. The measures to be taken are frequently lengthy and complicated and in some cases require action before the Court of Justice.

The Commission has stepped up recovery of debts by means of offsetting after having given the Member State the opportunity to submit its comments in accordance with Article 6(1) of Council Regulation (EEC) No 2950/83.

The Commission will continue clearing old ESF debts outstanding in the other Member States and will ensure insofar as possible that the reimbursements are made as rapidly as possible in most cases by means of offsetting.

The Commission will look into ways of applying the rules on interest on arrears.

5.39. The departments have been made aware of the problem and encouraged to draw up 'debt estimates`.

5.40. Where action is taken in the courts on a vocational training project cofinanced by the ESF, the Commission departments, on the basis of information gathered on the spot or forwarded by the Member States, work out the amounts relating to the operations under investigation. These amounts are cleared from the balances of the annual tranches submitted by the Member State and are consistently monitored by the Fraud Prevention Unit and by the other departments concerned (authorizing department and Financial Control). The national legal authorities notified the two cases relating to Tuscany and Sardinia. They have been registered in the PRE-IRENE database and the Commission is monitoring them.

5.41. The Commission approves multiannual operational programmes while the Member States are responsible for approving individual operations. If all or some of these operations turn out to be ineligible they are removed from the balance for the year concerned and possibly replaced by other eligible measures save in the final tranche.

Freezing of payments

5.43. The situation described by the Court has occurred because the final balance of the 1993 tranche which was to be submitted by 30 June 1994 at the latest was not submitted as the OPs were extended by one year. Thus, in these cases the balances for the final tranche will arrive at the Commission in June 1995 at the latest. Accordingly, it is necessary to await submission of the application for the balance to check whether the anomalies established have been corrected.

As regards the introduction of a penalty to be imposed for failure to comply with a deadline for corrective actions, the Commission has to consult the Member State before taking any decision to reduce assistance (Article 24 of Regulation (EEC) No 2082/93). The Member State has two months to submit its comments. These comments must incorporate those from the final beneficiary who must be in a position to submit his views in good time. Not until this information is available and if it proves warranted and necessary can a decision to reduce assistance be taken.

5.44. The temporary freezing of files can be traced to numerous reasons relating to the defence of the Commission's financial interests.

Follow-up of the Court's observations

5.46. The Commission has examined in detail all the cases mentioned by the Court. The Commission sent the related analysis to the Court pointing out that only in one case was there any reason for reducing assistance (point 8.40 of the 1993 Annual Report); this will be done in the context of scrutiny of the application for balance for the OP. In all the other cases it was impossible to gather sufficient evidence providing grounds for a well-founded reduction.

In addition, the Commission made additional investigations into a number of the cases raised by the Court. The Commission would point out that adequate reasons must be given for any reduction of assistance and, apart from any Community rules, it must comply with the judgments of the Court of Justice, notably as regards enabling the final beneficiaries to give their opinions in good time. At all events, the Commission undertakes to organize regular meetings with the Court to follow up the conclusions of the mission reports.

Deficiencies observed

5.47. The operations and costs eligible under the ESF are defined in the Social Fund Regulation (No 2084/93). With a view to spelling out the definitions and comparing them with practical situations and interpretations, the Commission set up a working party in 1994; its members included representatives from the four Structural Funds, Financial Control and the Legal Service.

The conclusions of their analysis will not be used to replace clauses in the basic regulations; they will assist in arriving at a common approach to certain fundamental concepts, including eligible costs.

All the CFSs approved by the Commission include clauses on implementation or systematic rules on implementation and they comprise in particular the concept of 'final beneficiary` (point 4 of the financial provisions annexed to the CSFs). Technical clarifications were notified to the Member States in 1994.

As for the inspections which the Court considers insufficient, the Commission would point out that in 1994 the Social Fund audit department carried out some 69 inspection missions relating to 82 different operational programmes. The inspections had to be performed by a team of only seven officials (2 As + 5 Bs). These inspections warranted in particular the freezing of the files listed in Table 5.3 of the Court's 1994 Report.

The Commission will insist again that the Member States consolidate the certification system, particularly in cases where different national and local authorities cooperate on establishing the data to be certified.

5.49. Having analysed the file, the Commission undertakes to check the eligibility of the case mentioned by the Court and to launch - if necessary - proceedings under Article 24 of Regulation (EEC) No 4253/88, having given the Member State the opportunity to submit its comments on the case concerned.

5.51. Amortization of equipment used for training operations is eligible expenditure. It has to be calculated on the basis of criteria for actual use over time with reference to depreciation periods laid down by national law. The Commission undertakes to examine the case to which the Court refers and to reduce the non-eligible amounts if appropriate.

5.52. As a result of a recent inspection in Spain, Financial Control was able to confirm that a Member State had not reimbursed the amounts recovered following further national checks on the payments of the balance. Corrective action is being taken.

5.53. The Commission confirms that situations such as those described by the Court do occur and can be discovered only by means of the on-the-spot checks. The existence of such practices has prompted the Commission to examine very carefully the amounts declared, notably on the basis of information gathered in the Monitoring Committees; appropriate measures are taken in the light of the situation concerned, notably by reducing the rates of the first and second advances.

5.55 5.56. Broadly speaking, the different situations to which the Court refers illustrate a few of the inevitable start-up problems at the beginning of a new programming period based on new regulations.

Nevertheless, in the case of the examples quoted, the final beneficiaries of Community assistance are often selected on the basis of an 'open application` procedure. In that case the Commission considers that the three-month deadline starts to run on the day the beneficiary is actually selected.

Public co-financing and privatization

National co-financing following the privatization of the 'Enti Pubblici`

5.58 5.63. The Commission is closely monitoring the problem raised by the Court and would take the appropriate measures to defend the Community's financial interests.

5.64. Article 13 of Regulation (EEC) No 2481/93 and Regulation (EEC) No 2084/93 set forth the framework of reference for rules on the question of national cofinancing for cofinanced operations.

5.65. The Commission's approval decision specifies who the manager responsible is. The Commission will take great care in looking into this situation.

SMALL AND MEDIUM-SIZED ENTERPRISES (SMES)

Introduction

5.69. The information in the Commission's possession enabled the Court to estimate the ESF assistance for SMEs (see, by way of example, point 5.84).

Nevertheless, the Commission acknowledges that the situation should be improved.

Definition of SMEs

5.70. As pointed out last year, the Commission considers that, from the ESF standpoint, an 'SME` is an enterprise with under 500 employees, the figure generally used in the programming documents.

5.71. The various criteria the Court suggests, particularly those relating to the ownership of capital, are pertinent in theory, but hard to check and control. Accordingly, they were not taken into consideration in the programming documents.

5.72. The Commission is making progress in its aim of proposing a definition for SMEs in the context of Community action. The delay can be explained by the inherent difficulties.

A study has revealed that the very concept of SME is relative according to the branch considered and also the country. This explains the difficulties in harmonizing the definition of SME in the framework of Community operations. For the Social Fund the employment criterion (under 500 employees) is decisive.

Community assistance to SMEs through the ESF

Priority accorded to SMEs, planning and management

5.74. The importance attached to SMEs is a transversal concern which goes beyond the fixing of specific objectives. This concern has been further strengthened by the new rules adopted in 1993.

A prior global assessment was made of Fund assistance for the new period; it gives a better overview and a sum of specific thematic assessments of the different priorities.

5.75. The Commission shares the Court's aspirations that the social partners will take part in Social Fund programming, but it frequently encounters difficulties in the Member States in turning those aspirations into fact, even more so in the case of SME representatives who are less organized for that purpose.

Substantial progress has been made here recently, however, and the Commission can assure the Court that it is determined to achieve positive results.

5.76. The Commission approves the multiannual operational programmes and the Member States deal with the day-to-day management. As soon as problems like those mentioned by the Court are discovered through the monitoring and control system, the Member States are contacted straight away to take steps to remedy the situation.

High-level contacts are in progress in order to overcome the delays in Italy to which the Court refers.

As for France, new procedures have recently been introduced and they should improve the situation.

5.77. Small businesses often have difficulty in gaining access to the various grants available in all the Member States whether or not cofinanced by the Social Fund.

While not overlooking the need for transparency and accuracy, simple rapid procedures are more suited to small businesses which do not have the material and human resources to cope with numerous administrative constraints.

Follow-up, monitoring and impact

5.78. The Commission shares the Court's opinion. However, systematic efforts have been made in the Member States to ensure that the social partners are properly represented on the Monitoring Committees.

5.79. The Commission acknowledges that the follow-up indicators should be improved. In that optic it is continuing its action with the aim of strengthening the monitoring arrangements and including participation by independent assessors who issue reasoned opinions on the measures taken.

5.80. The Commission considers that the certificates cannot constitute the only source of information on the impact of the operations carried out. Statistics produced by the Member States, some of which are financed by the ESF (for example, the statistical department of the Portuguese Employment Ministry), can also be used to assess impact after the event.

5.81. The Commission acknowledges that improvements should be made to check on the eligibility of trainees pursuant to the priorities laid down in the OPs. It undertakes to draw the attention of the Member States to this matter.

The Commission has also noted that the statistics entered on the applications for balance are sometimes incorrect. This does not, however, affect the costs relating to the files, but could result in under-use of amounts allocated to SMEs.

5.82. The ESF uses the five vocational training levels. The problem to which the Court refers is not a matter if interpretation; progress has to be made on harmonization of the concept. The Commission does not underestimate this problem which is of particular importance to assessment of the impact of cofinanced operations. It will accordingly monitor carefully the assessment of the programmes.

5.83. Scrutiny of eligibility criteria and target groups is one of the key components of the Commission's audit missions. It is concerned to check on efficiency, so during audit missions Commission staff look into the eligibility of all target groups, including SMEs.

A mission to the Rhône-Alpes region took place in October 1993. It covered all the priorities in the OP and resulted in a further freezing of fund transfers and a proposal for a reduction of FF 8 million, which was accepted. In the case of Sicily, the inspection missions resulted in a freezing of fund transfers pending reorganization of the regional departments which is underway.

5.84. The ESF co-finances training and recruitment operations under all the objectives of the Structural Funds. At all events, under Objectives 3 and 4, where only ESF assistance is provided, the beneficiaries are young people and unemployed people who do not form part of the labour market at the start of the training course and cannot therefore be linked to SMEs or large companies.

This is why it is difficult to arrive at a precise percentage figure for beneficiaries under training operations for SMEs.

5.85. The Commission acknowledges that the OP managers should take steps to facilitate access by SMEs to ESF assistance, notably by means of information and awareness-raising campaigns.

5.86. Technical assistance has been provided by means of studies financed by the Commission. The studies will result in more precise assessments of all the objectives of the OPs and SMEs will be covered.

Enterprise policy managed by DG XXIII

In addition to the detailed comments to be made point by point in reply to the Court's observations, the Commission wishes to draw attention to the progress made since it was initiated in the 'enterprise policy managed by DG XXIII` and in the method of implementing this policy.

This method gives priority to incentive measures, particularly in the form of support for networks of intermediaries responsible for concentrating the Community's action on SME's and by means of implementing experimental or pilot schemes designed to demonstrate at Union level the feasibility of programmes to meet the needs of SMEs, the development of which is the responsibility either of the Member States or of the business intermediaries.

5.87. The Commission shares the Court's view on the inadequacy of the funds allocated to operations for implementing the objectives of the Community's enterprise policy. It concludes from this that additional efforts should be made to step up operations under this policy, which has shown its usefulness in practice, in order gradually to bring together more and more Community SMEs by Europeanizing business intermediaries.

For example, the Commision is prepared to use a figure given by the French authorities, who estimate that of some 2 million enterprises only 75 000 conduct business more or less regularly outside French territory. Doubling this figure could, for example, constitute an objective which, while it is ambitious, deserves the Community's attention.

5.89. The figures mentioned for the number of agreements actually concluded in connection with BC-Net are derived from replies given by a limited number of members.

5.90. The Council has recognized the reality of the progress achieved in simplifying the administrative and legislative environment () although, as the Commission maintains and as recent work by the OECD has also shown, the results are difficult to measure.

5.91. As regards the seed capital pilot scheme, the Commission does not intend to assess the results until the end of the implementation period, i.e. the time when the repayable advances are recovered ():

- With this in view, the Commission would point out that the external evaluation carried out in 1993 () concluded that the European Seed Capital Fund Scheme represented a valuable and important supplement in view of the scarcity of sources of funding for new technology companies in Europe (page 1) and that, at the time of the assessment, the pilot scheme had had a significant stimulating effect on seed capital, as it had helped raise more than ECU 36 million for this purpose. It was the Commission's financial contribution, together with the credibility that that implied, which backed the efforts of the managers of the scheme to raise funds on the private market (page 12). The Commission considers therefore that the original objectives of the scheme - namely to demonstrate the feasibility of a method for attracting private capital - have been achieved.

- In addition, the Commission considers the results obtained with regard to job creation to be satisfactory in relation to the Community contribution (ECU 8.8 million), since the theoretical cost to the Community budget of ECU 5 170 per job created is well below the usual levels. Moreover, since this is a system of reimbursable advances, the Community contribution will be recovered, leading in fact to an even lower real cost per job created.

- The decline in the European venture capital market since the mid-80s, as mentioned in the fourth progress report on the pilot scheme (), which the Court quotes, confirms the need to take action to promote seed capital.

- Following the implementation of the pilot scheme in Ireland, the Irish authorities have included support for seed capital in the ERDF operational programme for 1994-99. The Commission has terminated the contract with the Greek fund for failure to comply with the selection criteria (contribution to the capital of newly created companies). In Portugal, the selected candidate was not able to raise the complementary capital on the market, but at the same time, under PEDIP (Specific Programme for the Development of Portuguese Industry), two venture capital companies were created (Norpedip and Sulpedip) which cover seed capital activities.

5.92. The item 'Observation and assessment` is made up of five broad categories of expenditure: work of the European Observatory for SMEs, which publishes an annual report (); statistical work carried out by the SOEC in specific fields of responsibility, leading in particular to the publication of the report 'Enterprises in Europe` (); studies, publications and participation in specific events; subsidies to projects carried out by external partners; work on evaluating enterprise policy to be carried out during the financial years 1995 and 1996 in accordance with Article 5 of the decision of June 1993 (), covering both overall assessment of the measures taken and an assessment instrument by instrument.

5.93. The Commission proposes to create a budget unit in DG XXIII reporting directly to the Director-General, one of the tasks of which will be to propose the setting up of management instruments of the type recommended by the Court.

5.94. The implementation reports are intended for the Members of the Management Committee set up under the Decision of 14 June 1993 and present, in concise summary form, the work done by DG XXIII during the past year. They are discussed in the Committee, simultaneously with the presentation of the work programme for the current year. This discussion relates in particular to the comparison between project and results. The Court's suggestions on comparing forecasts and results and analysing any differences, including financial discrepancies, will be incorporated into the next implementation report (relating to 1995).

5.95. The progress made between the two reports mentioned by the Court provides an opportunity for judging the results of the Commission's efforts at coordination over a fairly long period. However, since these reports are the result of a collective endeavour by the Commission's departments, it is not their main aim to highlight the role of DG XXIII in the increasing attention given to SMEs in Community policies.

5.96. See 5.93.

Euro Info Centres (EICs)

5.97. The fact that one third of the enterprise policy budget is allocated to this objective is witness to the priority given to informing SMEs. This Community financing represents only 25% of the total cost of operating the EIC network, the main investment being the responsibility of the host organizations.

Of all the companies in the European Union, the EICs' potential target group is that portion which is aware of the changes in the economic environment brought about by the completion of the internal market without yet being fully involved in a process of Europeanization and internationalization: on the basis of the thorough knowledge of the local industrial fabric which the EICs have, files have been built up on a total number of companies estimated at nearly 2.2 million, of which some 215 000 (i.e. 10%) can be regarded as their clients, in other words those which regularly use the services of an EIC.

In addition, the EICs distribute information on the activities of the Union by publishing articles, notices or proposals for cooperation in regional or local daily newspapers (with nearly four million readers), in specialist periodicals published by the host organizations (nearly 1.5 million recipients) or via information products they produce themselves (sent to some 750 000 SMEs).

5.98. Right from the start the 'European Business Information Centres` pilot project fitted into the Commission's general information policy (). In 1991 DG XXIII decided to ask for a freeze on the creation of networks of all kinds and proposed concentrating the new centres for information of an economic nature set up by this or that Directorate-General as far as possible in a single location (EIC, host organization or related body). The Working Party on relays which drew up an inventory of the networks existing in 1992 proposed, in the Communication on Relay and Network policy (), that there should be effective coordination between networks on the basis of DG XXIII's recommendations. At the same time DGXXIII has strengthened its relations with other DGs (for example, certain EICs are also Value Relay Centres, members of the OPET or EURES networks, contribute to the SIMAP, draw up environmental management guides for SMEs or studies on the impact of the internal market or take part in the VAT Feedback Committee). As regards the example of the EEICs, which have been set up from 1994 onwards with objectives (location in Objective 1 areas, priority given to the promotion of technology transfer) which are substantially different from those of the EICs, there are already certain forms of cooperation in the field.

5.99. The geographical coverage of the network corresponds to the selection criteria put forward in the Commission's communication on the extension of the 'Euro Info Centre` project (), which relate to the nature of the host organization and the willingness to maintain an element of relative proximity (priority for the regional level).

On this basis, the selection of host organizations proceeded by means of a public call for tenders, in the light of contacts established between each Member State and the Commission prior to selection with a view to ensuring observance of the stated criteria (); any duplication in certain capital cities, as mentioned by the Court, results from the existence in these cities of major socio-professional organizations which are in charge of national networks (network heads). However, in the discussions relating to the report on the future operation of the networks which it is to forward to the Council shortly, the Commission will raise the question of the geographical coverage of the network in connection with developments in national situations.

The Commission has not been informed of any change in the situation in Portugal and awaits with interest any suggestions from the relevant national authorities following examination of the above-mentioned report.

5.100. The Commission understands the Court's impression with regard to SME's persistent information deficit but would draw attention to the evaluation report on United Kingdom EICs (), drawn up at the request of the British Government, which considers that despite the objective amountof work that remains to be done, the EICs present best value for money.

The number of questions recorded, which rose from 50 000 in 1989 (the year the network was extended) to 285 000 in 1994, does not reflect the whole range of the EICs' tasks, which are not confined to answering questions but also include stimulating SMEs' interest in Community matters.

5.101. The computerized system for storing questions and answers which was being tried out on a pilot basis was abandoned in 1995, very largely for the reasons mentioned by the Court.

5.102. The Commission wishes to fill out the presentation of the findings of the EOS-Gallup survey of October 1993 (); 15.8% of the managers of SMEs were able to cite spontaneously at least one name of a European Community service intended to help SMEs, with 1.2% citing the EICs and 1% the European Business Information Centre or its national equivalent; on the other hand, in a list of DG XXIII's services (EIC, European Business Information Centre or its national equivalent, BC-Net, BCC, Euro-Partenariat), 43.3% of the managers questioned recognized at least one of these names, with 47.4% recognizing EIC and 41.1% the European Business Information Centre or its national equivalent. In view of the modest level of funds allocated to promoting Community activities in favour of SMEs, the Commission considers that there was no prospect of achieving better results.

Integrated programme in favour of SMEs and the craft sector

5.103. A presentation of Community measures in connection with the integrated programme is annexed to the present document (). The Commission stresses that the integrated programme provides a strategic reference framework which makes it easier to get a picture of action in favour of SMEs under various Community policies and is not intended to be an operational instrument for the direct programming of actions or to create budgetary transfers for these schemes within a single programme.

The Commission notes the Court's remarks on the implementation of effective coordination procedures to improve the coherence of the schemes listed in the integrated programme and will give thought to appropriate proposals to this end.

5.104. The Commission is in the process of drawing up a recommendation to the Member States on the definition of SMEs; this is currently being examined by the Management Committee set up under Article 4 of the Decision of June 1993.

SOCIAL DIALOGUE

5.107. The Commission's promotion of the social dialogue under Article 118b of the Treaty consists in helping the social partners to organize themselves, to get to know each other better, to be better informed and to improve their mutual understanding at European level.

The thematic assessment report for 1994 on the information and training operations with a view to the setting-up of European works councils (item B3-4004) is nearing completion.

5.108. The target groups vary in accordance with the headings concerned. Some are open to all the social partners (4000), while others are reserved for workers' representatives (4001, 4002, 4003, 4004). A study carried out in 1993 identified all the representative European cross-industry organizations. This study will shortly be supplemented by a similar study on sectoral organizations. As for the multinational companies covered by Directive 94/95/EC, studies are now in progress for the purpose of drawing up an inventory of companies which should set up a European works council or initiate an information or consultation procedure.

5.109. The Commission is aware of the situation the Court describes; it results mainly from the fact that the employers submit very few projects.

5.110. The amount of ECU 317 704 will be reduced to account for the part regarded as not eligible subsequent to controls when the additional information requested from the beneficiaries is received.

Reimbursement of the amounts paid in error regarded as definitively not eligible will also be claimed from the organisations concerned.

As for the VAT, some of the organizations controlled can recover it. During the inspection visits none of those concerned had taken steps towards recovery. At all events, the Commission will remind the organizations of their obligations in respect of VAT.

5.111. This year the Commission has taken on two additional persons who take an active part in the meetings and the number of operations checked has thus been increased.

In addition, a guide to the submission of applications contains detailed explanations on eligible and non-eligible expenditure.

5.112. The Commission will recover the difference between the advance paid and the actual expenditure. The further assistance granted will not be paid until the matter has been settled.

CONCLUSIONS

5.113. The Commission will pursue its efforts to improve the ESF financial management and programming. Setting out the total amount of financial obligations entered into by the Commission in its decisions on the grant ESF assistance in the annual accounts as requested by the Court goes beyond (given the rules laid down) the scope of the ESF alone. The Commission notes that the Financial Regulation does not impose any such obligation upon it. However, in the light of broadly-acknowledged accounting principles, presentation of such information could be envisaged for non-balance sheet commitments.

The Commission intends to give consideration to such a move in the context of forthcoming revision of the Financial Regulation.

Although not challenging the Court's analysis of the justification for commitments and payments, the Commission would emphasise that these technical accounting problems have no effect on the transparency of the accounts. Moreover, the Commission acknowledges that there has been some apparent over-consumption of appropriations, but stresses that this problem is relatively minor vis-à-vis the actual under-consumption.

5.114. In accordance with the allocation decisions of the Brussels European Council and the Edinburgh European Council taken in 1988 and 1992 respectively, the Community rules specify that the Commission should approve assistance of a global nature including its aims, a general description of the measures concerned and the expected impact. Within this system, it is the responsibility of the Member State to approve individual operations in compliance with the conditions laid down in the Community decision. If there are any special problems with a particular operation, the Commission takes appropriate measures, notably total or partial suspension of payments of annual tranches or removing operations not eligible from applications for balances. As a result no Community co-financing is granted such operations.

The Commission shares the Court's concern about the need to approve the recovery of monies wrongly paid and will continue its efforts to attain that aim; it would point, however, to the practical difficulties inherent in such action.

The Commission aims, moreover, to reinforce the protection of the Community's financial interests by means of horizontal proposals for regulations and agreements to be adopted in the near future; they deal in particular with the question of penalties.

5.115. The Commission recognizes the difficulties in assessing how training operations improve the competitiveness of companies in general and SMEs in particular, but it notes that substantial monies have been made available to the Member States to train workers in SMEs and that policy is being pursued and strengthened in the current programming period.

5.116. The Court's concerns tie in with those of the Commission: assessment of implementation of Decision 93/379/EEC of 14 June 1993 is to be entrusted shortly to an external consultant following for a call for tender published in the Official Journal of the European Communities. The Commission (and the other Community institutions) will scrutinize the results with a view to the proposals it is to make on pursuit of policy in support of SMEs after 31 December 1996.

The Commission is also drawing up a plan for the future operation of the enterprise policy networks (EIC and BC-NET) for the purpose of in-depth examination of these specific Community instruments and their synergy with other Community instruments.

5.117. The social dialogue is a tool of social regulation. It helps to provide guidance for the Commission's proposals and the Council's decisions. In addition, it is helping to develop a bargaining area laying down rules on working conditions. The essential role of the social dialogue is recognised in the Treaty; it is also mentioned in the Commission's White Paper on growth, competitiveness and employment and more recently in the conclusions of the Essen European Council.

The current, very limited budgetary funds are not in keeping with the crucial political role that the social partners are called upon to play at European level. In this context national operations may be accepted, but they must involve Community added value.

The European employers' and workers' organizations are fully informed about the opportunities available. An intensive advertising campaign in the Member States could bring in an enormous number of applications which could not be accepted because of the limited appropriations set aside for the social dialogue. As mentioned at point 5.111, steps have been taken to improve the management and information on, inter alia, eligibility has been disseminated to applicants and beneficiaries to explain the restrictions applied to the expenditure taken into consideration.

5.118. The Commission agrees with the Court on this matter and notes that the essential aim of the ex-ante assessment of the new CSFs was to improve the targeting of the objectives to be attained; special supervision of CIP transnationality is in hand and is one of the essential factors of the programmes' success. Lastly, the Commission would draw attention to the new system for selecting innovatory measures in which independent experts are involved.

ANNEX Community measures in connection with the integrated programme in favour of enterprises

1 - CONCERTED ACTION

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2 - COMMUNITY CONTRIBUTIONS

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NB: Principal Sources of Finance

Multiannual Programme for SMEs 1993-96: Ecu 112.2 million.

Community Initiative for SMEs 1994-99: Ecu 1 billion.

Objective 4: ADAPT Initiative 1994-99: various projects for SMEs within Ecu 1.4 billion allocation.

Structural Funds 1994-1999: Community support framework and other Community initiatives.

4th Framework Programme RTD-1995-99: various projects for SMEs within Ecu 12.3 billion allocation.

EIB Global Loans: Ecu 1 billion for SME competitiveness.

Interest rates (2%): Ecu 45 million for 1994 - Ecu 22,75 million for 1995.

EIF: Ecu 2 billion for loan guarantees with future possibility of direct participation.

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CHAPTER 6 (*) The financial instruments for the environment: LIFE and its predecessors

6.0. TABLE OF CONTENTS Paragraph reference

Introduction 6.1 - 6.6

Background 6.1 - 6.6

Financial analysis 6.7 - 6.8

Analysis of the system 6.9 - 6.19

Project selection 6.12 - 6.14

The decision-taking process 6.15 - 6.17

Monitoring, control and assessment of projects 6.18 - 6.19

Project implementation 6.20 - 6.36

Delays in carrying out projects 6.20 - 6.26

The innovative nature of the projects 6.27

Coordination and dissemination of results 6.28 - 6.29

Project monitoring 6.30 - 6.36

Conclusions 6.37 - 6.42

INTRODUCTION

Background

6.1. It was only with the Single European Act of February 1986 - which entered into force in 1987 - that environmental issues gained substantial prominence. The inclusion in the actual text of the Treaty of Articles 130r and 130t, which are concerned exclusively with the environment, has enabled the Commission to create a legal and statutory framework that is better suited to requirements and to the actual commitments that have already been adopted in this field.

6.2. Existing Community actions in the field of the environment are specified in different areas of Community legislation. Directives on the protection of the environment contain rules, especially on evaluating the impact on the environment of certain types of projects (). Certain Structural Fund programmes contain environmental aspects within their broader objectives and involve the allocation of substantial funds to projects intended to improve the environment. Expenditure on budget headings devoted entirely to environmental programmes is the responsibility of the Commission's Directorate General XI. This specifically environmental expenditure has been undertaken in the framework of four multiannual action programmes adopted in 1974, 1977, 1983 and 1987 (). Tables 6.1 and 6.2 show specific appropriations for environmental expenditure for the three years 1992-1994; they exclude any expenditure from the Structural Funds. The Court's Special Report No 3/92 on the environment () covers apects of the Structural Funds' activities.

6.3. The Treaty on European Union, which was signed at Maastricht on 7 February 1992, added a new dimension to environmental protection, which became a separate Community policy. The Community programme of policy and action in relation to the environment and sustainable development ('the fifth programme`) (), which entered into force in March 1993, thus takes the Maastricht conclusions and lays the foundations for environmental policies and action. Five sectors of intervention have thus been selected as areas in which action should be taken, namely industry, energy, transport, agriculture and tourism. Within that framework, the aim of the LIFE measures is to protect the natural environment and to restore areas that have been damaged as the result of human activity.

6.4. The LIFE programme (), like its predecessors (ACNAT, ACE, Medspa and Norspa) (), which are also examined in this chapter, allows the development of new approaches and techniques that are directly related to specific environmental objectives. One of the means employed for this purpose is the execution of a large number of projects, many of them on a small scale. One of the general objectives specified by the LIFE Regulation is 'to contribute to the development and implementation of Community environmental policy and legislation`. This objective thus embodies, in terms of aims and funding, the new provisions enshrined in the Maastricht Treaty. An overall budget of 400 Mio ECU was granted for the period 1991 to 1995. The LIFE programme must also apply the 'polluter pays` and subsidiarity principles ().

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6.5. Under the terms of the LIFE Regulation, this financial assistance is to be used for preparatory measures, demonstration schemes, public awareness campaigns and actions providing incentives and technical assistance. It must also contribute to the maintenance and restoration of endangered natural habitats and wild flora and fauna.

6.6. This chapter is a result of audit visits by the Court to the Commission and a number of management agencies and/or beneficiaries in projects that have received finance in five Member States (Germany, Greece, Spain, France and Portugal) under LIFE and its predecessors(4). The observations made concern several aspects of internal management, and more especially the procedures for appraising, adopting, monitoring and auditing projects. They also concern aspects of the coordination between the Commission and the Member States and the results of funding.

FINANCIAL ANALYSIS

6.7. Table 6.1 shows the position regarding the budget appropriations for the environment for 1992 to 1994. Total commitments for the period amounted to 228 Mio ECU. LIFE projects are financed from budget heading B4-3200: the commitment appropriations against this item for 1994 were utilized almost 100%. The position is different for the payment appropriations available for 1994. Of the payment appropriations entered in the 1994 budget (60,5 Mio ECU), only 6 Mio ECU (10%) were used up. Allowing for the amount of payments made against commitment appropriations carried over from previous financial years (23,7 Mio ECU), total payments carried out in 1994 did not exceed 30 Mio ECU. As a result, more than 30 Mio ECU (51% of the payment appropriations entered in the 1994 budget) were carried over. This highlights the weaknesses in the planning and decision-taking procedures in respect of projects to be financed.

6.8. Table 6.2 shows that a total of 189 Mio ECU remained to be settled at 31 December 1994 in respect of LIFE and the financial instruments that preceded it. In 1994, there were 230 cancellations of commitments by the Commission, totalling more than 3,5 Mio ECU. Eight of these cancellations concerned LIFE projects for an amount in excess of 1,6 Mio ECU. This situation reflects the significant difficulties that were noted with regard to the execution of the projects that came before the LIFE programme.

ANALYSIS OF THE SYSTEM

6.9. The Annex to the LIFE Regulation specifies four types of measures to be financed within the territory of the European Union: promotion of sustainable development and the quality of the environment; protection of habitants and nature; administrative structures and environmental services; training and information. 40% of the resources available under this instrument are allocated to the 'promotion of sustainable development and the quality of the environment` and 45% to the 'protection of habitats and of nature`. In order to demonstrate the cross-frontier nature of environmental concerns, 5% of the annual LIFE budget is also allocated to measures outside the territory of the Community.

6.10. The rate of Community contribution ranges from 30% to 100% of the total cost for 'non-nature` projects and from 50% to 75% for 'nature` projects. Examination, monitoring and evaluation of the projects to be financed in the above two areas are the responsibility of two separate departments of the Commission Directorate-General which is responsible for the management of the entire LIFE instrument (DG XI).

6.11. DG XI is assisted in this work by two committees. One, the habitats committee, was provided for by the 'habitats` Directive, No 92/43/EEC (), and gives opinions on measures to be carried out under the 'nature` part of LIFE. The second, the LIFE committee, was provided for in the LIFE Regulation (Article 13) and takes a formal decision on the final list of projects to be financed, for both the nature and non-nature aspects. As the LIFE Regulation makes no provision for any direct link between the two committees, the LIFE committee, in its present structure, simply ratifies the opinions of the habitats committee.

Project selection

6.12. Annually, on 30 September, the Commission publishes a document setting out the priorities for all the areas of activity covered by the LIFE instrument. This guide is sent to the Member States, which distribute it to organizations that are likely to submit projects. In parallel with this, the Commission publishes in the Official Journal a call for expressions of interest. The Regulation gives the Member States responsibility for submitting 'proposals for actions to be financed` to the Commission (Article 9(1)).

6.13. In some Member States (Denmark, Spain, France, Italy, Denmark, Ireland and the United Kingdom), the Commission has concluded contracts with consultants and private organizations which, amongst other activities and services, circulate the guide, advise potential beneficiaries, provide assistance with the preparation of applications, group together future projects and perform ex post facto assessment of the measures carried out. Assisting beneficiaries at the project appraisal stage is incompatible with the tasks of monitoring and assessment, which ought, therefore, to be carried out by an independent organization.

6.14. Through this procedure, the Commission, by carrying out and financing the work which the Regulation entrusted to them, partly replaces the Member States. The role of the Member States is thus limited to formally forwarding lists of projects to the Commission and classifying them according to the predetermined priorities laid down in the document of 30 September.

The decision-taking process

6.15. In addition to its responsibilities concerning the selection of LIFE projects, the non-nature department of Directorate-General XI at the Commission is also responsible, within the framework of the consultation procedure, for examining programmes and projects from other Commission departments and for evaluating the environmental impact studies provided for by Council Directive No 85/337 of 27 June 1985.

6.16. This department has only a small staff and cannot cover the full range of scientific knowledge that is needed for it to be able to give its opinion on the sometimes very technical information contained in environmental impact studies or the information contained in preliminary studies for LIFE projects. In order to mitigate this disadvantage, in 1994 the Commission delegated examination of all the projects submitted for LIFE funding to groups of scientific experts. Under these circumstances, although examination by the department of such documents is fundamental, it is often confined to the purely formal aspects of whether the presentation of reports complies with the regulations.

6.17. Until 1993, each LIFE project was the subject of an individual contract between the Commission and the final beneficiary. Since 1993, every LIFE nature project has been the subject of a decision by the Commission followed by a contract between the Commission and the beneficiary. The non-nature projects are the subject of a decision including 'standard contract terms` applicable to each project. The changes that have taken place since have done nothing to speed up the decision-taking process. In the case of most of the projects approved for the financial year 1994, the LIFE Committee's approval was given late, in October 1994, and the Commission's global decision was taken in December of the same year. The letters to the beneficiaries were sent between October and December 1994. If decisions were taken more quickly, commitments could be validated more efficiently and the volume of payment appropriations carried over would be limited.

Monitoring, control and assessment of projects

6.18. Article 12 of the LIFE Regulation provides for the effective monitoring and control of co-financed projects. In 1994, Commission staff made seven on-the-spot audit visits to Member States so as to check the financial and eligibility aspects of the projects. Measures carried out outside Community territory, which represent 5% of the overall budget allocation for LIFE, have never been subject to on-the-spot audit by the Commission.

6.19. The Commission delegates the monitoring, assessment and technical control of projects to the private consultants referred to in paragraph 6.13. However, these organizations do not have the power to carry out accounting audits of the operations, which, since 1993, have been carried out, for each project co-financed, by an approved auditor hired by the beneficiary (see paragraph 3.3, annex 2, of each LIFE decision). Moreover, the consultants with which the Commission has concluded contracts operate in only six Member States (Denmark, Spain, France, Ireland, Italy and the United Kingdom) (see paragraphs 10.22 and 10.23 of this report). The Commission does not consolidate the assessments, nor does it exploit them systematically. The results of such assessments should, however, form one of the bases for the annual definition of LIFE priorities and for the multiannual programming of the instrument.

PROJECT IMPLEMENTATION

Delays in carrying out projects

6.20. The Court inspected about 20 projects which had received finance from the ACE, ACNAT, Medspa, Norspa and LIFE instruments. Most of the projects were substantially behind schedule, in some cases by as much as five years.

6.21. For national and local administrations, the execution of environmental projects, and the LIFE non-nature projects in particular, is often experimental or innovative, and they do not always have the formal administrative procedures to carry out the projects. The Commission, and the aid beneficiaries, may thus be confronted with a series of difficulties, which cause delays and may result in substantial modifications, which may even extend to the project objectives. In Greece, for example, part of the projects for management of the ecosystem on the island of Salamina involved the installation of a plant for the biological treatment of solid urban waste, for an amount of 995 000 ECU. The project that was finally carried out comprised a system for collecting, compacting and transporting refuse to another site. Similar examples were found in other Member States (Spain and Germany). In all, this problem was encountered in four of the 17 'non-nature` projects inspected in those countries.

6.22. The execution of projects under the 'Nature` part of LIFE often requires land to be available for classification as protected areas or nature reserves. The procedures for the acquisition or compulsory purchase of the land are often protracted and give rise to substantial delays. This problem was encountered in France, where 800 000 ECU was awarded to a project for the purchase and classification of wetlands in the Loire valley. The same kind of problem was observed in Greece, Spain and Portugal. This type of difficulty was recorded in a total of four of the 15 'nature ` projects examined.

6.23. It was noted that the quality of the preliminary work on projects, and feasibility studies in particular, was often poor. This can also be a source of substantial delays. In Spain, a cost/benefit and effectiveness study of a project for the construction of a sewage plant (Community contribution: 800 000 ECU) was carried out while the project was in progress. The results of the study highlighted the fact that the project was unsuited to the requirements, which led to a radical revision of the project and the construction of 11 smaller plants. If projects which have received funding are extensively modified in this way, they should be subject to a new decision from the Commission and the initial project should be formally abandoned.

6.24. In the same Member State, the Commission contributed 1 018 556 ECU towards the purchase of land that was subject to flooding. The land was to be used to set up a nature reserve, on behalf of a private foundation. The Spanish government halted work on the project for two years because, under Spanish law, water remains the property of the State. The foundation which had undertaken the work had omitted to apply for the necessary government authorization to carry out work on public property. The Commission should check in advance that the works which it is financing comply with the regulations in force in the Member States.

6.25. There were also found to be substantial delays in flows of funds. In the case of one LIFE project that was carried out in St Petersburg (Russia) for an amount of 1 200 000 ECU, the delays in the forwarding of Community payments to the final beneficiary (more than eight months between the request for payment of the second advance and the receipt of it by the beneficiary) were such that the completion of the project was in doubt at the end of 1994, because of the lack of available finance.

6.26. All the problems mentioned above are often under-estimated by project managers at the preparation stage. However, the national and Community administrations also under-estimate them during the appraisal of proposals. By their very nature, however, environmental projects are frequently subject to unforeseeable climatic or biological problems which delay the expected effects of projects still further. The accumulated delays may be such that they jeopardise the impact of a project, especially if it is concerned with the protection or reintroduction of an endangered species. The Commission and the Member States should ensure that the quality of project preparation is adequate.

The innovative nature of the projects

6.27. The LIFE regulation lays down that LIFE financial assistance is intended in particular for 'preparatory and demonstration measures` (Article 2). The pilot or innovative nature of these measures helps to distinguish them from other projects of the same kind but concerning infrastructure and which are financed from other Community sources. However, in some cases this remains to be proved, as the Court observed in the case of projects in Greece, France and Italy. The Commission should ensure that such projects continue to be innovative projects, even after the changes that some undergo during implementation.

Coordination and dissemination of results

6.28. Proper implementation of the LIFE programme presupposes effective coordination, in particular between the Commission and the Member States, but also between national and Community departments. Such coordination helps to improve the dissemination of the results of projects carried out. It is also necessary not only to ensure dissemination of information concerning the proper management of the environment but also to ensure that work is not duplicated.

6.29. In Greece, for example, a Community measure provided 373 000 ECU to cover the financing of a study and pilot scheme for solid waste management for the Greek islands. At the same time two similar projects were financed on the island of Salamina, for an amount of 1 280 124 ECU, although the manager of this project had not been informed of the existence of the previous project. Another study which accompanied a pilot scheme on the same subject, for all the Community islands in the Mediterranean and the Atlantic, is being financed by a different department of the same Directorate General.

Project monitoring

6.30. The Court also found weaknesses in the monitoring of projects by the responsible departments of the Commission and the Member States. In France, it was possible to carry out only part of a project for the conservation of aromatic plants, managed by an organization appertaining to the regional prefecture, because the organization went into liquidation in January 1993. Under the circumstances, the Commission should have taken steps to recover the amount of 86 450 ECU which it had paid towards the project, as soon as it was informed that the organization was going into liquidation. It was only in January 1995, however, that it took action in connection with the financial closure of the project.

6.31. The absence of adequate administrative procedures and the lack of involvement of national and local authorities in the implementation and monitoring of projects are also accompanied by insufficient advance information to the public. If a nature reserve or protected site is established without the necessary measures to make it acceptable to the local population, however, the latter may easily perceive it as being counter to their interest, which may jeopardize the success of the project. The unavoidable conclusion is that difficulties of this type are still persisting at the present time, for example, in the case of the restoration of lagoons at Setubal (Portugal), where 600 buildings which had not been authorized but which had previously been allowed by the authorities were demolished without any compensation for the people concerned.

6.32. The role of the Member States remains very limited, even in terms of coordination between their own departments. In Andalusia (Spain), for example, two projects submitted in 1989 and 1990 concerned the improvement of the technology for eliminating the pollutant waste from olive oil extraction. The second project was a continuation of the first. In 1993, aid was granted under the Cohesion financial instrument for a third project with the same objective. The latter project was technologically more efficient and rendered the first two projects obsolete, but the 1990 project was not abandoned until June 1994, whilst the third project had been operational since the first half of 1993.

6.33. The Annex to Council Recommendation No 75/436 of 3 March 1975 provides for the uniform application throughout the Community of the 'polluter pays` principle and the charging to the polluter of the resultant costs 'in order to avoid distortions of competition affecting trade and the location of investment`. The Maastricht Treaty confirms this recommendation and stresses the necessity of not penalizing those enterprises which have most respect for the environment. Even if the Commission is not in a position to secure this result throughout the Community, the 'polluter pays` principle should be applied equitably within each country.

6.34. However, as the Court observed during its audits, this principle is not always observed when projects are carried out. In France, for example, the Commission provided funding of 700 000 ECU for the establishment of a pilot biological treatment plant for the waste water from a cooperative winery. A feasibility study was carried out beforehand by the undertaking which was subsequently awarded the contract to carry out the work, but there were significant technical omissions in the study, which ultimately led to the construction of an inefficient treatment unit, that was expensive, over-sized in terms of the cooperative's requirements and, in any case, not innovative. The excessive construction and operating costs of the unit led to a considerable increase in production costs. The undertaking was then uncompetitive compared with others which produced a similar type of product but had not been obliged to make such an investment. In 1994, the situation was such that the undertaking was obliged to dismiss part of its staff and was placed in a very delicate situation financially. This example is not consistent with the principle reiterated in 6.33.

6.35. The shortcomings that were found with regard to the presentation of projects and the follow-up of them give rise to certain cases that were noted in the Member States, where the eligibility of the expenditure was in doubt. In Germany, for example, the sum of 150 000 ECU was initially earmarked as finance for the creation of an administrative structure to provide the public with information on the environment, but was used to purchase a boat for scientific research. In the same Member State, but for a different project, where Community participation amounted to 200 000 ECU, the nature of the supporting documents gave rise to doubts over the eligibility of the expenditure submitted.

6.36. In France, as part of a project with a total cost of cost of 143 000 ECU for the reintroduction of the griffon vulture, an old sheepfold was made available by an intercommunal association and works on the building were cofinanced by LIFE, with the aim of converting it into a permanent exhibition and information centre. Subsequently the intercommunal association took back the building. In none of these cases were the measures taken in response by the Commission appropriate.

CONCLUSIONS

6.37. In 1992, the European Union laid down a set of environmental protection objectives. These were ratified by the 'fifth programme` and the LIFE Regulation, which provided for an environmental strategy as an integral part of the subsidiarity framework. The strategy in question called for continuous and effective coordination at Community, national and final beneficiary level. In view of the limited financial resources available for the instrument, the realization of these objectives calls for strict discipline at Community level in selecting, implementing and monitoring measures.

6.38. The systems that have been established at Commission and Member State levels do not allow the use of project selection as a means of optimizing Community finance. The establishment of an overall plan to harmonize in part the various management procedures adopted at decision-taking level by the two units (nature/non-nature) is necessary, notably to ensure that the LIFE instrument is not criticized for achieving poor results relative to the administrative effort involved.

6.39. A 'manual of financial procedures` for the specific management of projects and expenditure was introduced in 1990. However this document, in spite of the amendments that have been made since, needs to be updated, in particular as regards follow-up, monitoring and exploitation of the results, so as to increase the efficacity of the user departments in the fields quoted.

6.40. The Member States do not play an adequate role in the preparation and presentation of projects for financing.

6.41. This situation thus limits the possibilities for practical exploitation of the results of some projects, which, according to the LIFE Regulation, were supposed to have a significant innovative content. The central authorities in the Member States are generally poorly informed as to the results of co-financed measures.

6.42. Owing to the nature of LIFE projects and the existence of a large number of other environmental projects that are co-financed by other Community sources, improved coordination between the various financial instruments of the European Union is essential.

REPLIES OF THE COMMISSION

INTRODUCTION

LIFE nature projects are closely linked with the implementation of Community Directives designed to conserve biodiversity (wild birds and habitats Directives). They set out to restore or safeguard habitats and species. Consequently, they have features which distinguish them from non-nature LIFE projects in terms of preparation, implementation, monitoring and completion. Nonetheless, the Commission has adopted measures to make for convergence of the procedures applicable to the two areas, in particular as regards financial monitoring.

The reply to the Court's remarks therefore distinguishes between 'nature` and 'non-nature` projects and takes account of the specific nature of each type of project.

FINANCIAL ANALYSIS

6.7. One of the main reasons for the delay is the decision-making process and the fact that it was impossibe, in 1994, to establishing a proper cycle in the following sequence: fixing of priorities, call for projects, submission of applications, evaluation, financing and payment of advances. In addition, for many of the projects to be carried out by private organizations payment of the advance depends on the presentation of a bank guarantee, which can sometimes take several months depending on the procedures of the financial institutions in the various Member States.

In a recent proposal to the Council designed to extend the LIFE programme for the period from 1996 to 1999 the Commission has tried to avoid these problems by providing (cf. Article 14(a)) for the publication of calls for the proposal of projects in good time for them to be submitted in September. This should make it possible to keep to the schedule for payments by taking account of the time needed to provide bank guarantees.

6.8. Old projects will be completed during the period from 1995 to 1997 and the Commission will gradually reduce these commitments. The cancellations referred to by the Court are part of the constant settling of the balances of projects already completed.

ANALYSIS OF THE SYSTEM

6.11. To prevent the link in Regulation 1973/92 stopping the two committees from operating properly the Commission has decided, in its new proposal for LIFE II, that these two committees should operate entirely separately.

Project selection

6.12 6.14. The consultants engaged by the Commission provided assistance to the Member States and potential beneficiaires with a view to ensuring that the information required for the processing of LIFE-nature projects was complete. The support ensured that technically good projects were not rejected because administrative information was incomplete.

As from 1994, for the LIFE-non-nature projects, the Member States have been associated in the evaluation of projects. This association has been extended to the clean technology projects received directly by the Commission, following a publication of a call for projects. The Member States will be encouraged further to verify that project proposals for LIFE-nature are complete.

The consultants' role will be reviewed ensuring that any potential for conflict of interest is eliminated. The ex-post financial and technical evaluation of projects currently carried out by the Commission will be streamlined further, ensuring the separation of duties.

The decision-taking process

6.16. To cope with the technical diversity of 'non-nature` projects that it receives, the Commission, acting on a suggestion from the Management Committee, delegates technical analysis (degree of innovation, state of research, etc.) to sectoral experts where it feels it does not have sufficient in-house capacity. In no case has the Commission delegated responsibility for final evaluation of projects to outside groups or services.

6.17. In 1993 the Commission took the trouble to draw up a reserve list of eligible projects, in particular for 'nature` activities, for approval in 1994. Thanks to this reserve list the Commission was able to take decisions on projects amounting to ECU 4.7 million in May 1994. An extra effort was made to incorporate the standard clauses of the model contract, the latter being used in the Commission's decision in December 1994, thereby saving two months in time and allowing all the appropriations for LIFE that year to be committed.

With the new procedures in LIFE II it is hoped that the financial appropriations can be committed in the earlier part of the year as from 1996.

Monitoring, control and assessment of projects

6.18. The number of actual on-the-spot audit visits was limited due to lack of staff. The Commission hopes to approve this type of audit along the lines put forward by the Court, and as from mid-1995 an 'audit` sector has been set up within DG XI which will increase the number of on-the-spot controls appreciably.

However, to avoid these problems the Commission has already taken certain initiatives since 1993. It requires, for example, that for all projects for which financial aid is governed by individual decisions the final statement of expenditure should be certified by a fully-fledged auditor enrolled in the respective national register.

6.19. The Commission acknowledges that the network of consultants monitoring the implementation of these projects is incomplete. When the Commission set up this network it focused on the Member States most concerned at the time, given the high number of projects. For the other Member States the Commission does the monitoring itself.

If the appropriations required in the new proposal are granted this network could be completed and the respective sectoral analyses made, thus making for technical evaluation and dissemination of results once they have been utilized by the Commission.

PROJECT IMPLEMENTATION

Delays in carrying out projects

6.20. The Commission's proposal for a Council Regulation amending the Council Regulation establishing a financial instrument for the environment (COM(95) 135 final of 12 April 1995) includes a detailed progress report on the implementation of the LIFE and its predecessor projects. Most of the projects undertaken have a period of operation covering several or more years. For LIFE projects, many of the early projects are nearing completion. Within 1993 and 1994 projects only some are sufficiently advanced to draw preliminary conclusions. For pre-LIFE projects, 68% were completed on time and achieved satisfactory results, 6% were abandoned due to a variety of reasons and 26% are in the final stage of completion. It should be noted that most of the pre-LIFE projects being finalized were commenced in 1991 and 1992.

The Commission welcomes the Court's observations relating to the 25 projects encountering difficulties and will enhance the measures taken to finalize the projects.

6.21 6.22. At present, the Commission monitors the key deliverables included in the contracts. In some instances, due to extraneous circumstances, these deliverables cannot be met. In these cases the beneficiary's request for modifications to the technical element or the duration of the project is reviewed.

For the Salamis Island, the project encountered administrative problems relating to property rights and authority of the Greek Ministry of Agriculture to reforest disused quarries. For nature projects involving the purchase of tracts of land, unforeseen problems relating to rights of access, the examination of ancient covenants, etc. have given rise to delays in the transfer of title deeds necessary for the successful completion of the project.

Notwithstanding the difficulties encountered due to unforeseen circumstances, the Commission notes the Court's remarks and will ensure that the administrative procedures relating to the completion of the projects are reviewed. Where the Member State's completion of administrative procedures are necessary for the success of the project, and where there is uncertainty on these procedures having been finalized, the Commission will endeavour to obtain a statement of assurance from the project proposers that all local administrative procedures have been completed or can be completed.

6.23. As regards the Medspa project E/025/E/01 carried out in Spain, it is indeed true, as the Court states, that, following a study made by Omicron, certain technical aspects were changed with the agreement of the Commission. Since the objective of the project had not changed and given the logistical advantages of the project in the new version, the contract was amended on 20 October 1993 following examination of the supporting documents. In view of this a new Commission decision would not have been justified and would only have added to the administrative procedures without changing the basic context in any way.

6.24. The Commission will look, together with the Member State, at the actual situation as regards this project and take whatever measures are necessary.

6.25. The LIFE project NORDSPA/92/1/D022 has run into difficulty on account of the bankruptcy of one of the partners. Hamburg, which manages projects for St Petersburg, has thus had financial problems which led it to make a request for intermediate payment in April 1994, which was not accepted because the minimum threshold of real expenditure had not been reached.

More information was provided in September 1994, but the full amount required could not be paid for lack of supporting documents. To allow the project to continue the Commission paid a second advance of ECU 100 000 on the intermediate payment, pending clarification of all these problems.

6.26. (and also points 6.17. and 6.20.) The Commission would stress the problem of predicting an accurate deadline for the implementation of projects in areas with a strong biological component and/or where the prior purchase of land is involved. In its experience the Commission feels that these points must be taken into account when the projects are drawn up so that any adjustments can be made to the duration of the projects where this can be justified beforehand by imponderable events. It sends reminders to the beneficiaries in order to speed up implementation of the project.

Innovative nature of the projects

6.27. As far as the Court's observations regarding LIFE project 92-1/IT/05 - Civis Ambiente - are concerned, this project was adequately prepared in line with the rules pertaining thereto.

The project was financed under the arrangements of the old Medspa programme, which was geared less to innovative than LIFE. That said, the extremely innovative and original aspects of the project is not in doubt, and nor is its demonstration and awareness-building nature for the population of Genoa to make for sound management of the urban environment. Furthermore, the complexity of the project has to be recognized since the aim is to clean up, by way of a holistic approach, part of the city centre of Genoa by establishing a coherent link with other connected projects, likewise cofinanced by the Community.

At the present time the project and its sub-components are being implemented and the first results are encouraging. The Commission will ensure that the innovative nature of the project is safeguarded.

Internal and external coordination at both Commission and Member States level is carried out to as great a degree as possible.

In making its assessment the Commission attaches great importance to innovation and demonstration factors in the projects in question.

Coordination and publishing of results

6.28. The Commission confirms that a greater effort is needed - with the appropriate means, in particular financial - to disseminate knowledge concerning sound management of the environment. For this reason the new proposal submitted by the Commission to the Council sets aside 3% of available appropriations to improve the management of LIFE in its various ex ante, in itinere and ex-post phases and to disseminate the results.

6.29. The project (Medspa 91/1/GR/0002/GR/05) referred to by the Court which appears to replicate the innovative character of the project carried out elsewhere in island communities.

In the past this was possible because the activity related to particular islands with specific eco-systems. However, since 1994, the Commission has undertaken precautions to ensure that the same type of project cannot be repeatedly funded.

Project monitoring

6.30. The recovery order was indeed only issued at the beginning of 1995. Prior to that the Commission had tried on several occasions, without success, to find out what the actual position was with the work carried out by the beneficiary before going into liquidation. This information would have enabled the Commission to establish more accurately the costs of eligible work carried out by the beneficiary for the project in question and, as a result, the amount of the advance which the beneficiary would have had, possibly, to return. In the meantime the Commission has stepped up its efforts to close this type of 'problem` dossier more quickly.

6.31. The constructions referred to by the Court had been built illegally on a protected site. In line with the principle of subsidiarity it is for the national authorities to take suitable measures to comply with Union directives. In the Santona ruling the Court of Justice has passed judgment on Union dossiers in this type of case (Ref: C-355/90). Nevertheless, the Commission will examine the file and take the appropriate action to safeguard the Community interest.

6.32. The aim of the Medspa-89 E-178 project in Spain was to assess nine methods of treating effluent from the production of olive oil from a technical and economic viewpoint.

One of the companies, Fuentes Cardona, not funded by LIFE, discovered a method of producing oil without waste. This method turned the market upside down and has been applied in several firms as part of the PITMA programme (of the Ministry of Industry) subsidized by the Cohesion Fund.

The Medspa-90-E-178 project was therefore abandoned once it was found that the 'Fuentes Cardona` method could solve the problem more effectively that the methods of treatment tested. The appropriations were cancelled once the proposer found that the methods put forward were not competitive and he terminated the project.

6.33. The Commission would stress that it attaches great importance to the 'polluter pays` principle although application of that principle should not lead to the rejection of the best technologies for clean and preventive elimination at source of any nuisances and pollution. On the contrary, LIFE sets out to encourage the respective sectors where they use new, high-performance processes which can be transferred to firms in the sector.

6.34. As regards the Medspa 91-1-F/13/F/01 project of the Agrocanet agricultural cooperative, the Commission is not responsible for technical implementation of the work. According to the technical description of the project examined on presentation of the dossier and in the opinion of the French authorities the techniques envisaged had to be considered as innovative. The Commission will ask for additional information from the beneficiary.

6.35. In terms of the ECAT-RIGA project implemented by a joint partnership led by the Land of Bremen, the Commission learnt in November 1994 that the authorities of the Land in question had decided, while retaining the general objective of the project, to offer a boat to ECAT-RIGA to improve its environmental monitoring capacity in the Baltic Sea. The provision of this boat improved the capacity of the environmental centre for administration and technology (ECAT-RIGA).

The Court's observations relating to the accounting treatment of the boat will be examined by the Commission before any further payments are made.

6.36. The Commission will ask for explanations from the French authorities.

CONCLUSIONS

6.37. The Commission shares the Court's concern and will make the necessary changes.

6.38. The changes made since 1993 in the management of LIFE projects, the greater involvement of the Member States in the selection process of 'non-nature` projects (see also point 6.21) and the improvements made in the form of presentation of technical and financial data should make for optimum use of Community financing. The suggestions made by the Court will be incorporated in the new LIFE II regulation.

6.39. DG XI has been updating and consolidating the existing manual of procedures since 1994. The new version is now being finalized and will be available in the autumn of 1995. It will help to improve internal financial management.

As regards better monitoring, a call for proposals, for which a draft has already been examined by the management committee, will be published shortly to permit the monitoring of 'non-nature` projects throughout the Community and in the third countries concerned.

6.40. In the LIFE II proposal the Commission provides for greater involvement of the Member States in the coordination and selection of project proposals.

6.41. With the funds due to be granted by the Council for the second phase of LIFE the Commission plans to disseminate the results of projects on a systematic basis to everyone concerned, including the public administrations.

For the time being the Commission has only been able to promote the incorporation of the main characteristics of projects financed by LIFE in the Cordis database, which is available to all the Member States.

6.42. The Commission agrees with the Court that effective coordination between the various financial instruments of the European Union is essential.

The Commission will try to contribute to the monitoring of projects financed by LIFE and the Structural and Cohesion Funds through active participation in the meetings of the monitoring committees set up by these Funds. This will make for a coordinated approach.

CHAPTER 7 (*) European Agricultural Guarantee and Guidance Fund, Guidance Section (EAGGF-Guidance)

7.0. TABLE OF CONTENTS Paragraph reference

Implementation of the budget 7.1 - 7.6

IMPLEMENTATION OF THE BUDGET

7.1. In 1994, the implementation of EAGGF-Guidance budgetary appropriations was marked by a stabilization of the level of commitment appropriations and a significant decrease in payment appropriations, in comparison with 1993. In addition, a downward trend was observed in the rate of utilization of the appropriations, as regards both commitments and payments.

7.2. The commitment appropriations used amounted to 3 335 Mio ECU in 1994 (compared with 3 133 Mio ECU in 1993). This situation may be explained in terms of a rise in the sums committed to the regions covered by Objective 1 (1 902 Mio ECU, as opposed to 1 516 Mio ECU in 1993), which is attributable in particular to the approval in 1994 of the new operational programmes for the period 1994-99. Similarly, the measures coming under Objective 5a also benefited from an increase in appropriations (1 088 Mio ECU, as against 874 Mio ECU in 1993). In contrast, there was a considerable reduction in the appropriations allocated to programmes in regions covered by Objective 5b (265 Mio ECU, compared with 507 Mio ECU in 1993).

7.3. On the other hand, the utilization rates declined. For example, the rate of utilization of the commitment appropriations fell from 98,8% in 1993 to 97% in 1994. This decrease is due to a very low rate of utilization under the budget headings relating to Community initiative programmes and innovation schemes, because, by comparison, consumption of appropriations under the headings relating to Community support frameworks (CSFs) was close to 100%. It should also be noted that the budget heading for operations in support of the new German Laender shows no new commitments, because these operations were incorporated into the CSF budget headings on 1 January 1994.

7.4. The amount of the payment appropriations used in 1994 was 2 619 Mio ECU (compared with 2 872 Mio ECU in 1993). This situation may be explained by the decrease in the appropriations allocated to operations in support of Objective 5b regions (234 Mio ECU, as against 418 Mio ECU in 1993) and to measures relating to Objective 5a (592 Mio ECU, compared with 838 Mio ECU in 1993). The non-use of appropriations for Community initiative programmes in 1994 is especially significant; these appropriations have, moreover, now been cancelled. In addition, there was a sharp fall in the appropriations allocated to the innovation schemes (54 Mio ECU in 1994, compared with 83 Mio ECU in 1993). By contrast, the allocation of appropriations to operations under Objective 1 rose from 1 306 Mio ECU in 1993 to 1 619 Mio ECU in 1994. This increase, like that of the commitments, is related to the approval of the new CSFs for 1994-99.

7.5. The rate of utilization of the appropriations for payment decreased overall in 1994. This decrease is noteworthy, since the rate fell from 94% in 1993 to 84% in 1994, owing to low utilization under the headings concerning:

- measures in Objective 5b regions (57% compared with 100% in 1993);

- Community initiative programmes (26% compared with 82% in 1993);

- innovation schemes (51% compared with 84% in 1993).

7.6. The EAGGF-Guidance contribution to operations in favour of Objective 1 regions therefore increased considerably in 1994. This increase was paralleled by a decrease in the contribution to operations and measures supported by Objectives 5a and 5b.

CHAPTER 8 (*) Financial instruments and banking activities

8.0. TABLE OF CONTENTS Paragraph reference

Introduction 8.1

Observations concerning the balance sheets and revenue and expenditure accounts of the NCI, Euratom and balance of payments instruments 8.2

NCI loans and interest rate subsidies in Italian regions devastated by earthquake 8.3 - 8.23

Industrial estates project - creation of unutilized capacity 8.3 - 8.12

Schools project - failure to repay wrongly paid subsidies 8.13 - 8.23

The European Investment Fund 8.24 - 8.31

The Guarantee Fund 8.32 - 8.35

The administrative expenditure of the European Investment Bank 8.36 - 8.43

INTRODUCTION

8.1. The European Commission contracts borrowings in order to finance loans under the New Community Instrument (NCI) (), European Atomic Energy Community loans (Euratom loans) () and loans for balance of payments support (BP loans) (). It also contracts borrowings in order to finance loans granted under the Treaty establishing the European Coal and Steel Community (ECSC). The Court of Auditors draws up a separate report () on the activities of the ECSC. The specific aspects of financial activities relating to particular fields of Community policy are presented in the relevant chapters (Chapters 10 and 12). Tables 8.1 and 8.2 summarize the various borrowing and lending mechanisms and show the development of operations during the financial year 1994.

OBSERVATIONS CONCERNING THE BALANCE SHEETS AND REVENUE AND EXPENDITURE ACCOUNTS OF THE NCI, EURATOM AND BALANCE OF PAYMENTS INSTRUMENTS

8.2. The Court examined the balance sheets of the NCI, Euratom and balance of payments instruments as at 31 December 1994, along with the relevant revenue and expenditure accounts for the financial year 1994. Since the Commission's departments presented the accounts for the Euratom and balance of payments instruments late, the Court could not avoid being very late in carrying out its checks. The Court would ask the Commission to ensure, in future, that the accounts concerning the aforementioned instruments are presented as early as possible.

NCI LOANS AND INTEREST RATE SUBSIDIES IN ITALIAN REGIONS DEVASTATED BY EARTHQUAKE

Industrial estates project - creation of unutilized capacity

8.3. Following the earthquake in Southern Italy on 23 November 1980, the Council decided () to empower the Commission to grant loans and interest rate subsidies under the NCI via the European Investment Bank (EIB), acting as the Commission's agent, 'for the purpose of financing investments for the reconstruction of the means of production and the economic and social infrastructure in the regions affected by the earthquake`. The Court presented the results of an audit of this field in its annual report concerning the financial year 1991 ().

8.4. One of the observations referred to a project involving the creation of internal infrastructure for a certain number of industrial estates and stated that the total number of jobs created was considerably lower than the number envisaged. In its reply, the Commission said that it expected 'a net improvement in the coming years resulting from the development of the industrial estates financed from other sources` ().

8.5. As the creation of jobs was the main objective of this project, which received one of the highest levels of funding in the context of this operation (total cost: 349 Mio ECU), the Court followed up this file on a documentary basis in its Annual Report on the 1993 financial year () () ().

>TABLE>

8.6. In December 1994, another joint audit visit was carried out in this field with the EIB's Audit Committee, in application of the new tripartite agreement which had been signed in November 1992 by the Commission, the EIB and the Court of Auditors. First of all, it should be stated that this visit was a decisive improvement over past visits of this sort. Secondly, it enabled the Court to complete its audit of the project in question.

8.7. During this visit, it was found that the employment situation was actually less favourable than the one found in the aforementioned audits and analyses.

8.8. Indeed, as is shown in Table 8.3, in the eight industrial estates visited () (out of the 15 in receipt of NCI/EIB funds), the number of jobs had fallen from 3 268 in 1993 to 3 244 in 1994. Overall, relative to the 7 462 jobs planned, the implementation rate was only 43%. Of the 72 undertakings in the estates visited, only four said they were employing more staff than in the forecasts. Moreover, the number of undertakings actually sited in the eight estates visited fell from 75 to 72.

8.9. The main reason for this was that some of the undertakings to which parcels of land had been allocated never started production and others subsequently went bankrupt. The Italian authorities, however, did not, for legal reasons, reallocate the parcels that had theoretically become available, despite the fact that a number of undertakings had shown interest in them. The Commission and the EIB only discovered this situation when they accompanied the Court on the joint audit visit.

8.10. Another reason was that, in the case of certain industrial estates situated in mountainous areas, the new access routes had not yet been completed because of a lack of funds. Although these access roads were not funded by the NCI/EIB, they were nevertheless a decisive factor in determining the success rates of the industrial estates.

8.11. Against this background, the Court invites the Commission to ask the Italian authorities to arrange for the project to be brought to completion by reallocating unused parcels in the industrial estates. This would enable them to satisfy the numerous applications for sites which the Court observed during its on-the-spot audit.

8.12. Furthermore, the Court could not verify the cost of the industrial estates project because, for 4 of the 15 industrial estates partially funded by the NCI/EIB, the relevant Ministry of Industry files had been seized by the Italian judiciary in connection with national legislation. The Court had already expressed concern regarding the local internal control aspects of the question, and, in particular, with regard to checks as to whether loans and interest rate subsidies had been used for the purposes for which they were intended (see paragraph 12.47 of the Court's Annual Report concerning the financial year 1991).

Schools project - failure to repay wrongly paid subsidies

>TABLE>

8.13. On the occasion of the aforementioned visit, an audit was also carried out of the schools project, which had also been examined in the 1991 and 1993 Annual Reports (see 1991 Annual Report, paragraphs 12.37 - 12.39 and 1993 Annual Report, paragraph 10.29).

8.14. Certain details of the project should be restated. In 1982, 70 000 Mio LIT (or 53,5 Mio ECU) was made available to the Special Commissioner for the financing of repair and reconstruction work in the 1 176 schools damaged by the earthquake of 23 November 1980 in Campania, the total cost of which was 71 200 Mio LIT. A contribution of 1 200 Mio LIT from the Italian State was also provided for, but this obligation was not subsequently honoured.

8.15. The project encountered numerous difficulties during its implementation, as a result of which it was terminated in 1985 instead of 1982. The implementation problems that occurred were chiefly the result of administrative procedures and technical difficulties. Consequently work was carried out on only 1 060 schools, instead of the original 1 176.

8.16. As fewer schools underwent repair work (10% fewer), costs were also lower than expected. Indeed, the total eventual cost of the project was 64 800 Mio LIT, or 9% lower than the original estimate of 71 200 Mio LIT and 5 200 Mio LIT less than the NCI interest rate subsidy that had been made available.

8.17. The difficulties encountered by this project did not involve the implementation aspect only, however, but also the assessment of costs. The fact is that the authorities concerned were not able to supply the information needed for this assessment. Because of these problems, the EIB, for its part, only finished its assessment in March 1992.

8.18. This failure to utilize the 5 200 Mio LIT in question was brought up on the occasion of an on-the-spot audit carried out by the Court in February 1992. Given that the loan had since been repaid, the Court had asked the Commission in the aforementioned Annual Reports to consider recovering the interest rate subsidies (of the order of 2,1 Mio ECU ()) corresponding to the part of the loan that had not been utilized. In its discharge resolution for the financial year 1991, the European Parliament sought ' the assurance of the Commission that any interest rate subsidies found not to have been applied in accordance with their purpose (would) be recovered` ().

8.19. At the request of the Italian authorities and after consulting the EIB, the Commission decided to allocate the unused part of the interest rate subsidy to another project involving the creation of basic infrastructure for sites for prefabricated housing.

8.20. This project had been realized as planned in 1982. The NCI contribution, which had been paid out in 1982, amounted to 195 000 Mio LIT, as compared with the estimated cost of 219 820 Mio LIT, the final cost having turned out to be slightly lower (by 219 480 Mio LIT) than estimated.

8.21. Nevertheless, the Commission decided to increase the Community's contribution more than 10 years after the conclusion of the project. The following arguments were put forward to justify this. Firstly it was felt that the two projects were of the same kind and were being managed by the same authorities. In addition, it was claimed that Article 6 of the framework Agreement between the Commission, the EIB and the Italian Republic allowed for the retrospective reallocation of funds to projects that had been completely finished. Indeed, the aforementioned Article states that, 'where any project is abandoned or only partly carried out, the Ministry of the Treasury, shall, in the light of information received to this effect, put forward applications in respect of other projects meeting the objectives of this Agreement with a view to utilizing the funds`. Finally, it was argued that the final cost of the infrastructure project was higher than estimated.

8.22. In the Court's opinion, however, none of the reasons given justified the reallocation operation in question. First of all, the projects concerned were not of the same nature. As stated above, one involved the repairing/rebuilding of schools and the other concerned basic infrastructure for sites for prefabricated housing.

8.23. Secondly, with regard to the application of Article 6, the Court considers that the case in question did not involve the submission of another project. In the Court's opinion, the wording of the aforementioned Article refers to new projects in the appraisal phase and not to a retrospective increase in Community aid for a project which has already received funds and which was completed as planned a long time before. Finally, it should be noted that the final cost was not higher than estimated, but actually slightly lower. In these circumstances, the Court feels that the reallocation operation in question was unjustified, both in terms of sound financial management and from a legal point of view.

THE EUROPEAN INVESTMENT FUND

8.24. On 14 June 1994, a new Community instrument was created called the European Investment Fund (EIF). The capital of the EIF was subscribed by the Community (represented by the Commission), the European Investment Bank and a consortium of financial institutions. The creation of this Fund was a concrete realization of the desire, expressed by the Edinburgh Council in December 1992, to offer additional financial capacity to support the development of the trans-European networks (TENs) and small and medium-sized undertakings (SMUs). The EIF's role was to provide security for financial backers and hold participations. This being so, the EIF has to take on risks that the banking and industrial sectors are not in a position to bear.

8.25. The Community backed the EIF by subscribing part of its capital. This contribution takes the form of a 30% share (600 Mio ECU) in the EIF's subscribed capital (2 000 Mio ECU). In all, 40% of the capital is held by the EIB and 30% is reserved for State-owned and private banks; 20% of the amount subscribed by the Community (120 Mio ECU) is to be paid in four annual payments of 30 Mio ECU each as of 1994 (the budget heading concerned is Article B5-730).

8.26. The EIF's capital has a twofold function. On the one hand, with its subscribed capital of 2 000 Mio ECU, the EIF will, for a given period, be able to supply financial guarantees ranging from 6 000 to 16 000 Mio ECU. This calculation is based on the fact that the EIF's Articles of Association state that it may grant guarantees of up to three times and, under certain conditions, up to eight times the amount of its subscribed capital. On the other hand, the paid-in capital serves to finance the running of the EIF, which continuously generates expenditure and revenue, the net balance of which, in proportion to the Community's contribution thereto, is of an eminently Community nature.

8.27. If it is to be successful in achieving its goals, the EIF must ensure that the projects that it backs or in which it acquires holdings are structured, managed and financed in such a way as to minimize the risk of loss. In addition, as specified in the Council Decision regarding Community participation in the EIF (), it must ensure the effectiveness and efficiency of the Fund and guarantee coordination between its operations and those of the Community's financial instruments.

8.28. For all these reasons, it is important for the European taxpayer to be given a correct and independent assessment of the management of such funds. This is the reason why the discharge authority exercises democratic control over the utilization of European public funds, using the Court's work as a basis.

8.29. It is the Court's belief that, in accordance with the spirit of Article 188c of the EC Treaty and the provisions of Article 87 of the Financial Regulation, it is required to examine all items of revenue and expenditure in the EIF's accounts, in the context of its audit of the implementation of the budget of the Union. Generally speaking, it is the Court that must guarantee ongoing supervision of the accounts and thereby obtain a reasonable assurance that the definitive accounts and the financial information are reliable and reflect the reality of the operations in accordance with the regulations. The Court's audit of sound financial management also obliges it to ascertain whether Community resources have been allocated and utilized in such a way as to ensure that the objectives of the various Community policies are achieved in an efficient, effective and consistent manner.

8.30. Discussions between the representatives of the EIF, the Commission, the EIB and the Court did not result in the Court being granted the auditing rights it considered to be indispensable for the discharge of its general mandate. As a result, the Court could not audit the operations of the Fund.

8.31. The role attributed to the EIF is of fundamental importance, but it is a role that must be fulfilled in complete transparency and in accordance with the Community's institutional framework. The same point of view has been expressed by the European Parliament, which 'expects and demands full powers of budgetary control` in this field and, 'consequently, it also requires that the Court of Auditors also have its full powers of access and audit` ().

THE GUARANTEE FUND

8.32. The Edinburgh European Council decided on the creation of the Guarantee Fund for external measures in December 1992 and this was set up on 31 October 1994 by Council Regulation (EC, Euratom) No 2728/94 (). The Fund's resources are intended to reimburse the Community's creditors in the event of the bankruptcy of the beneficiary of a loan to a non-member State that has been granted or guaranteed by the Community.

8.33. Payments into the Fund are equivalent to 14% of the principal of operations decided on and entered into as from 1 January 1993, until the Fund reaches its objective of 10% of the principal outstanding on all the Community's commitments arising from all loan and loan guarantee operations in favour of non-member States, plus any interest that is due and has not been paid.

8.34. As of 31 December 1994, outstanding debts, together with interest that was due but had not been paid, amounted to 6 017 Mio ECU, whereas the Fund contained 294,2 Mio ECU, or 4,9% of the amount of the outstanding debt plus interest. The interest on the bank deposits and the account of the Guarantee Fund amounted to 478 331,26 ECU in 1994.

8.35. The Court audited the Commission's administrative management of the Fund for the financial year ending on 31 December 1994, and has no particular comments to make on this subject.

THE ADMINISTRATIVE EXPENDITURE OF THE EUROPEAN INVESTMENT BANK

8.36. The question of the amount of administrative expenditure reinvoiced by the EIB to aid recipients in respect of its management of operations on the Commission's behalf under agency agreements was discussed in the Court's Annual Report concerning the financial year 1993 () and in several previous reports ().

8.37. More specifically, this concerned operations managed in the context of the NCI, Euratom, the EDF, the Mediterranean policy and the first and second protocols signed with Turkey.

8.38. For the management of these operations, the EIB has the right to charge a management commission, which should cover actual expenditure incurred in the management of the operation in question. This principle is stated explicitly in the agreements signed between the Bank and the Commission with regard to each instrument. Depending on the agency agreement, the Commission is paid by either the beneficiaries or the Member States.

8.39. In the aforementioned Annual Reports, the Court asked the Commission to 'provide it with detailed figures, so that it can assess the validity of the management costs charged to the Commission's account by the EIB`. Its aim, therefore, was to check that commissions collected corresponded to real expenditure. Despite the clear stance taken by the European Parliament (resolution of 18 April 1986 ()) and the Council of Ministers (7 March 1988) in support of the Court's request, the Commission at the time rejected the request. In fact, it said that the documentation requested was restricted to the Board of Directors of the EIB, to which the Commission nevertheless nominated a director and an alternate (). Any information made available to either of these was supposed to be private and confidential and the Court was categorically refused access to it.

8.40. In the course of the discussions relating to this Annual Report, it turned out that the Bank was, in future, willing to present its figures for costs and revenue for each of the five types of Community operation mentioned under 8.37 above as from the financial year 1994. The figures for the previous years are therefore grouped together in global amounts, inclusive of compound interest.

8.41. As they are presented, these figures appear to indicate that the Bank has received in three of the five groups of measures more in refunds than the amount of costs incurred (a recovery measure having been undertaken), whereas, in the two other groups, there still appears to be a deficit. Overall, the Bank appears to be in deficit in this connection

8.42. The fact that this information is made available constitutes a considerable step forward, in particular as regards future years. It does not, however, enable the Court independently to ascertain compliance with the rule requiring invoicing on the basis of real costs. The accuracy of the underlying data on which the figures are based is certified by the Bank itself, and the latter refuses to grant the Court access rights for verification purposes. The Bank bases its refusal on the argument that the data concerned are internal and that the Court does not have the right to audit its management.

8.43. As this old problem has only been partly solved and, in particular, the problem of independent verification has not been solved at all, the Court would like to draw attention to the wider problem of the auditing of bodies that are not covered by Article 188c of the EC Treaty, but which nevertheless manage a considerable proportion of Community funds. In actual fact, Article 188c(3) of the EC Treaty does not cover access to information held by bodies that manage funds on the Communities' behalf and which were set up by the Community. It is the Court's view that this is a legal loop-hole which should be closed.

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REPLIES OF THE COMMISSION

OBSERVATIONS CONCERNING THE BALANCE SHEETS AND REVENUE AND EXPENDITURE ACCOUNTS OF THE NCI, EURATOM AND BALANCE OF PAYMENTS INSTRUMENTS

8.2. The delay in presenting the accounts for the NCI, Euratom and balance of payments instruments was mainly the result of staff changes during 1994 and at the beginning of 1995 within the Directorate-General responsible. The work took longer than usual to complete, since matters had to be explained in detail to new staff and because a number of checks were duplicated.

In addition, the most experienced staff in the Directorate-General concerned were engaged in the preparations for installing improved banking software.

But it should be pointed out that the quality of the financial statements for these instruments apparently remained unaffected by the circumstances, since the Court has not so far asked for the accounts presented to it to be revised.

Now that the staffing situation has stabilized, there should be no such disruption at the end of 1995.

The introduction of the above-mentioned software should make it possible to standardize more of the accounting environment, rationalize the methods used, improve overall efficiency and produce the financial statements for these instruments under more favourable conditions from the end of the current financial year.

NCI LOANS AND INTEREST RATE SUBSIDIES IN ITALIAN REGIONS DEVASTATED BY EARTHQUAKE

Industrial estates project - creation of unutilized capacity

8.7 8.11. The objective of the project was to provide basic infrastructure for industrial zones. This was part of the effort to restore the means of production in the regions which bore the brunt of the earthquake and to permit a return to normal living conditions. The provision of infrastructure for industrial zones cannot of itself create employment; it facilitates investment and employment creation by entrepreneurs, which by definition is difficult to assess in advance. The EIB/NCI project was physically completed essentially in line with initial plans, thus achieving the project's fundamental objective.

The Court's remarks on employment creation in the sites visited are based on a comparison between initial expectations and the present outturn. Given that site occupation and employment creation are dependent on market forces, initial forecasts can only be indicative, based on past experience and on an analysis of future prospects in the particular locations concerned. The outturn is affected by a wide range of factors which normally influence business decisions, including technological developments.

The Court refers to the existence of demand for industrial sites which cannot be satisfied because of such factors as the legal difficulty of re-allocating sites following bankruptcy and certain inadequate access roads. At present the Ministry of Industry is in the process of establishing rules which should facilitate the reallocation of unused lots (Decreto Legge no 123 of 24.4.95). These are now under examination of the Consiglio de Stato and will become operational shortly.

8.12. The Commission notes that, to date, there has been no firm evidence of irregularities in the NCI files.

Schools project - failure to repay wrongly paid subsidies

8.21 8.23. The historical background to the earthquake reconstruction loans should be borne in mind. These loans, with associated subsidies, were granted with the aim of assisting the emergency earthquake reconstruction programme in general. Although it was decided, in the context of the crisis in the aftermath of the earthquake, to allocate loans to a list of projects agreed with the Italian authorities, it was realised that, due to difficulties at that stage in assessing the extent of the damage, some re-allocation of the loan amounts might subsequently be necessary. With this situation in mind, Article 6 (quoted in point 8.21) allowed the possibility of re-allocating loan funds to projects which were also aimed at achieving the objectives set out in the Convention. These objectives as outlined in Article 2 of the Convention were to finance investments for the reconstruction of economic and social infrastructure in the earthquake zones.

The Court argues in point 8.22 that the infrastructure project to which the re-allocation from the schools project was made was not of the 'same nature` as the schools project. However, this is not relevant since it is clear that in both cases the objectives were related to earthquake reconstruction, in line with the criteria of the above-mentioned Article 2.

The interpretation, set out in point 8.23, of Article 6 does not correspond either with the spirit of Article 6 or with the realities of the situation. There is no reference in Article 6 to 'new projects in course of appraisal`. Moreover, it would not be feasible to appraise an entirely new reconstruction project by the time that it became apparent that final expenditure on another reconstruction project was lower than had been forecast.

With regard to the final cost of the basic infrastructure project, the relevant point is that this final cost was greater than the loan amount initially accorded to the project. In line with the criteria set out in Article 6 of the Convention, there was therefore scope for re-allocating to the basic infrastructure project that part of the loan for the schools project, which was in excess of schools outturn cost.

In the Commission's opinion, this operation was fully justified.

THE EUROPEAN INVESTMENT FUND

8.24 8.31. The modalities of the Court's audit activities with regard to the EIF are currently under discussion by the institutions concerned. The Commission is fully aware of the Court's mission and expects a fruitful outcome to the future discussions.

THE ADMINISTRATIVE EXPENDITURE OF THE EUROPEAN INVESTMENT BANK

General

8.38. The EIB receives a management fee the level of which is based on the principle that the EIB expenses related to the management of the activities in question are recovered over the lifetime of the loans.

8.39 8.40. Following discussions between services of the Court, Bank and Commission the latter has supplied the Court with a statement regarding revenues and costs covering the period 1966-93 and figures for the year 1994. The figures for the period 1966-93 are aggregate figures expressed in real terms, and they reflect the trend in expenditure and income as discussed by the Commission and the Bank when the management commissions are periodically revised.

The Commission confirms that these figures which are extracted from the detailed audited accounts underlying the published financial statements of the EIB accurately reflect the costs incurred and the revenue received by the Bank with regard to the operations concerned.

The Commission will see to it that the level of cost and remuneration for the Bank will respect the stipulations of the respective mandates.

As pointed out in the reply to the Court's annual report last year, the Commission has made everything possible to reconcile the diverging positions of the EIB and the Court in this matter. The Commission notes that, as a result of its efforts, a solution which it considers satisfactory has been worked out.

8.41. It is to be underlined that costs and revenues should balance at the end of the mandate. In the one case mentioned by the Court the Bank has taken the initiative to reimburse the temporary surplus.

8.42 8.43. The figures supplied by the Commission are certified by the Bank and are subject to objective and independent controls being extracted from the detailed audited accounts underlying the published financial statements.

In addition to a well-developed and sophisticated system of corporate governance comprising a Board of Governors, a Board of Directors, an Audit Committee and an Internal Audit division - each with clearly defined responsibilities - the Bank's activities and accounts are subject to the independent control of a firm of external auditors as well as to close scrutiny every year by the major credit rating agencies.

The EIB was created by the Treaty of Rome and the Bank answers to the Member States which are the shareholders of the Bank and as such are the authority that gives discharge to the Bank's management. In any case, the auditing of the EIB is governed by the Statute of the European Investment Bank, which is annexed to the EC Treaty. The Member States have thus deliberately provided for an audit by institutions other than the Court of Auditors.

CHAPTER 9 (*) Research

9.0. TABLE OF CONTENTS Paragraph reference

Utilization of budgetary credits 9.1 - 9.3

The third framework programme (1990-94) - Human capital and mobility 9.4 - 9.41

Introduction 9.4 - 9.7

Planning and decision-making 9.8

Utilization of funds 9.9

Efficiency of Commission management 9.10 - 9.21

Selection procedures and contract negotiations 9.10 - 9.15

Monitoring of contracts 9.16 - 9.18

Cooperation between Commission departments 9.19 - 9.21

Effectiveness of the programme 9.22 - 9.36

Quantity and quality of human resources available 9.22 - 9.30

Industrial competitiveness 9.31 - 9.34

Cohesion 9.35 - 9.36

Conclusion 9.37 - 9.41

UTILIZATION OF BUDGETARY CREDITS

9.1. For the headings falling within the domain of research, the budgetary credits made available during 1994 for commitments and payments were 2 957 and 2 698 Mio ECU respectively (see Table 9.1).

9.2. There was a high level of utilization of the available appropriations during the year; 98,25% of the commitment appropriations for the year and 94,50% of the payment appropriations for the year were used. This is to be expected as 1994 was the last year of the third framework programme (1990-94) - underexecution is most common in the first years of a framework programme as a result of start-up problems and delays in implementation. Nevertheless, the Court notes that the appropriations on budget line B6-840 - Measures against fraud - were not used at all. Although the amount is small, 50 000 ECU, this money could have been used, for instance, to commission special audits in the research sector. In the human capital programme the utilization of payment appropriations was only 80%, due to the late start of the programme.

9.3. There was a lower utilization rate for appropriations carried over from the previous financial year. For commitment appropriations carried over, the apparent underutilization relates exclusively to additional appropriations arising as a result of work for third parties, both by the Joint Research Centre and the Commission, which may be maintained from year to year in accordance with Article 7 (4) and Article 96 (2) of the Financial Regulation. As these can be carried forward without authorization being required, there is not the same need to utilize these credits to avoid losing them. The Court therefore considers that the lower rate of utilization for such appropriations is reasonable as the main concern is the correct utilization of budgetary credits rather than the global utilization level of available appropriations. For payment appropriations carried over, the apparent underutilization is also mainly due to additional appropriations arising as a result of work for third parties. In addition, there was a particularly low utilization of appropriations carried over on the following budget lines:

(a) B6-8006 - Plan of action for information and communication technologies, 98% of appropriations were not used;

(b) B6-8107 - Completion of earlier measures, 36% were not used;

(c) B6-8371 - International scientific cooperation, 100% were not used;

(d) B6-9002 - Advanced European TV - Transmission of programmes in 16/9 format, 39% were not used.

THE THIRD FRAMEWORK PROGRAMME (1990-94) - HUMAN CAPITAL AND MOBILITY

Introduction

9.4. Community strategy in the field of science and technology is laid down in framework programmes and implemented through specific programmes. The third framework programme (1990-94) is still being implemented while the fourth framework programme (1994-98) has commenced, following the Council Decision of 26 April 1994. One of the major concerns of the third framework programme (the framework programme) was 'to introduce a European dimension into the training of scientific research and technological development staff` (). As a consequence, the 'management of intellectual resources` was selected as one of three strategic themes for which 587 Mio ECU were allocated (see Table 9.2) and the Council adopted a decision 'on a specific research and technological development programme in the field of human capital and mobility` ().

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9.5. The central objective of this human capital and mobility programme (the programme) was to help increase the quantity and quality of human resources concerned with scientific research and technological development. This involved the post-doctoral training of researchers outside their countries of origin. Other objectives were:

(a) the strengthening of the scientific and technological bases of European industry to make it more competitive;

(b) the strengthening of the economic and social cohesion of the Community.

9.6. The programme comprised of training action and accompanying measures. The latter were introduced to facilitate technical implementation, management and evaluation. The training action included:

(a) the development of a Community system of research fellowships. Candidates could apply directly to the Commission (individual system) or to research establishments declared suitable by the Commission (institutional system). In both cases applications for fellowships were vetted by the Commission and contracts were drawn up with research institutes;

(b) the creation and development of research networks for scientific and technical cooperation. In all 60% of the aid allocated was for extra researchers while 40% was for materials and administrative costs;

(c) the establishment of access for researchers to large-scale scientific and technical facilities. Of the funds allocated for this action 40% was to enable researchers to attend and use the facilities, while 60% was for administrative and material costs;

(d) the introduction of a Community system of European conferences to provide researchers with a forum for discussion and interaction. Participation expenses were paid by the Commission.

9.7. The establishment of these measures and their implementation by the Commission with the selected contractors were examined during the audit. The results achieved to date were also assessed. The legality and regularity aspects of a selection of contracts were checked by the Court in the services of the Commission. The Joint Research Centre at Ispra, Italy, universities in the United Kingdom and the conference in Rostock, Germany, were visited to obtain further information regarding the practical operation of the programme.

Planning and decision-making

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9.8. The programme was proposed by the Commission on 3 May 1990. However, following the opinion of the Economic and Social Committee and a revised proposal from the European Parliament the original proposal was considerably amended. It took almost two years from the date of the original proposal before the Council Decision was taken (16 March 1992). The timetable in the framework programme provided for the commitment of 227 Mio ECU by the end of 1992. In fact only 112,2 Mio ECU had been committed at that date, and the planned timetable had to be completely abandoned.

Utilization of funds

9.9. Table 9.3 shows the actual utilization of funds. The cumulative commitments and payments up to 31 December 1994 amounted respectively to 601,3 Mio ECU and to 265,6 Mio ECU. To get a true picture of the rate of utilization of the amount deemed necessary under the 1990-94 framework programme (587 Mio ECU), it is necessary to deduct the 1994 EFTA contribution of 17,4 Mio ECU and the 10,7 Mio ECU decommitments from the total commitments. The rate of utilization thus amounted to 98,6% including the contribution for the centralized measure for the dissemination and exploitation of results (Table 9.4). In total, the Commission signed 3 504 contracts with institutes, universities and laboratories (Table 9.5). As several hundred contracts will not expire until 1995 and 1996, considerable human resources are still required to manage the programme.

Efficiency of commission management

Selection procedures and contract negotiations

9.10. According to statistics produced in 1994, 11 885 aid applications were submitted to the Commission. In all, 3 545 applications were accepted (29,8%). Table 9.6 shows the numbers of applications received and selected, by individual activity and scientific field.

9.11. The Commission entrusted the Committee for the European Development of Science and Technology (Codest) with the task of evaluating the applications (). Codest appointed over 150 active scientists to evaluation panels for this purpose. Some of the scientists would have had to assess applications from their own institutes in the various panels. In order to avoid conflict of interests the Commission introduced systems of rotation and abstention. However, the rotation system was not rigidly implemented with the result that replacements were not provided for certain evaluation panels. For example, only one of the 18 members of the physics panel and one of the mathematics panel of 15 were replaced. It is significant that Codest itself, in the minutes of its 42nd meeting, concluded that the success rate of proposals submitted by panel-members seemed to be much higher than the success rate of proposals from other scientists. The minutes also stated that a reason for this might be that panel-members were more competent and were also better informed than others.

9.12. In accordance with the Council Decision () the opinion of a committee, composed of representatives from the Member States, had to be obtained in cases where the requested Community contribution for a single project exceeded 0,1 Mio ECU. Even though this committee did not check Codest's assessment work from a scientific point of view, obtaining the opinion could take over a month. While the functions of this committee were laid down precisely in the Decision, Codest, which carried out the main assessment, was not mentioned.

9.13. After this opinion was received, the Commission, using the written procedure, had to give a definitive decision on which proposals were to be granted assistance. While this decision was sometimes taken relatively quickly (within a month), delays of over three months also occurred.

9.14. The phase of contract negotiation which ensued was often a lengthy process, particularly for the research networks. As the Commission did not indicate any upper-limits or approximate amounts for possible Community subsidies, many applicants' expectations were excessively optimistic. Therefore, protracted negotiations were needed in order to whittle down to the approved size the originally planned research work and distribute cuts among the contracting partners. By the end of 1992, the Commission was unable to make the first payments for either the research networks, or indeed, for the large-scale facilities (see Table 9.3).

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9.15. The selection process for fellowships (institutional system) was particularly problematic. The institutes were required, first of all, to apply to the Commission and subsequently, scientists had to apply for fellowships with the successful applicant institutes. This two-stage procedure was very time-consuming and will not be used in future by the Commission.

Monitoring of contracts

9.16. The number of people charged with the monitoring of contracts was inadequate as, alongside other tasks, each contract manager of the Commission had to deal with several hundred contracts. As a result, the interim and final reports on the research activities undertaken were subject to cursory examination only. In the field of fellowship activity, the Commission was involved in only one on-the-spot checks when it accompanied the Court's auditors on an audit mission. No other on-the-spot checks were undertaken by the Commission to assess the quality of the training provided, or to ascertain the problems encountered by the fellowship-holders.

9.17. An examination of contracts, covering all measures, revealed a certain number of other weaknesses in the follow-up and other control procedures as illustrated below.

(a) Individual fellowships

Of the 30 contracts, which had expired by 31 December 1993, problems were found with nine:

(i) in five cases the obligation to send to the Commission a final report within three months following completion or termination of the projects was not respected. These reports were still unavailable up to 12 months after they were due, and the Commission had taken no corrective action;

(ii) there was no evidence at the Commission that fellowships awarded under two contracts with research institutes had commenced. Consequently, the Commission did not know whether or not the contracts/commitments should be cancelled;

(iii) in a further case the Commission had not recovered an overpayment discovered in 1993;

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(iv) despite advance notice one contract file was not produced by the Commission during the audit; it was made available some time later.

(b) Institutional fellowships

The Commission was given information to the effect that some institutes were retaining part of the fellowship funds specifically intended for researchers. Although extensive correspondence was exchanged with the universities on this subject, no on-the-spot checks were carried out. A subsequent audit by the Court at two universities in the United Kingdom, accompanied by the Commission for one university, confirmed that deductions of about one third of the fellowship amounts were being made, in breach of the contract stipulations.

(c) Research networks and large-scale facilities

As a consequence of the late start of these activities no contract was completed by 31 December 1993. However, initial delays in the submission of interim reports were found.

(d) Euroconferences

Of the 23 contracts which had expired by 31 December 1993, problems were found with 22:

(i) in 14 cases the beneficiaries did not respect the obligation to send a final report following the conferences. The Commission did not follow up;

(ii) for four other contracts the Commission had not carried out the necessary decommitments at their completion;

(iii) in another case the beneficiary requested the final payment. It took the Commission one year to reply that this could not be made as long as the final report was missing. No explanation was given for this delay;

(iv) despite advance notice, two contract files were not produced by the Commission during the audit; they were made available some time later;

(v) for another contract the Commission claimed reimbursement of an excess payment without a recovery order having been prepared.

9.18. A check by the Court was made on the accuracy of total amounts committed and paid in 1992 and 1993. It revealed that a systematic verification as to whether the commitments and payments had been correctly accounted for in the main (Sincom) and subsidiary (Ampere-C) systems had not been done, the reconciliation between the two systems being difficult and time-consuming. The Court's audit revealed a double commitment of 240 000 ECU for the same contract and overpayments of 595 000 ECU. This situation was described in the Court's 1993 Annual Report (). The amounts overpaid were recovered and the commitment regularized.

Cooperation between Commission departments

9.19. A sum of 24,7 Mio ECU was allocated for the implementation of the programme through the Joint Research Centre (JRC) (see Table 9.3). As host institution the JRC received, about 300 fellowship-holders. However, there was no exchange of experience between the JRC and DG XII/G concerning the results of the training measures carried out, in spite of the stated intention of the Commission () to carry out an integrated evaluation when a research field is covered by different types of Community action.

9.20. An amount of 5,9 Mio ECU was provided as the programme's contribution towards the centralized scheme for the dissemination and exploitation of research results (VALUE programme). The programme is managed by DG XII/G, whereas the VALUE programme is carried out by DG XIII/D. There was no exchange of information between these DGs which would lead to the implementation of this aspect of the programme.

9.21. 'The human capital activities should complement and be consistent with the training carried out under the specific programmes and other Community training activities such as Comett, Eurotecnet, etc.` (). The fulfilment of this instruction required coordination between DG XII/G and other DGs. However, there was no evidence of such coordination, for example, in relation to the Erasmus programme and The European Union Contest for Young Scientists set up under the Human capital and mobility programme as an accompanying measure.

Effectiveness of the programme

Quantity and quality of human resources available

9.22. The central objective of the programme was to help increase the quantity and quality of human resources available for research and technological development which will be needed by the Member States in the coming years. This implied the broadening of training for young researchers, by enabling them to carry out research in another Member State.

9.23. In the programme decision, there are no detailed objectives regarding the quantity of human resources. The Commission has established that the number of researchers and engineers in the Community is comparatively small (4 per 1 000 of the working population compared with 8 per 1 000 in the United States and 9 per 1 000 in Japan) ().

9.24. The programme's beneficiaries were intended to be researchers at post-doctoral level; researchers at doctoral level could also participate especially in those fields where there was a shortage of post-doctoral researchers. As the Commission could not identify where shortages existed this criterion could not be applied. The programme offered young researchers a temporary contract (usually limited to two years) and this acted as an anchor during their search for permanent employment. However, the Commission carried out no follow-up and therefore does not know if the quantity of researchers actively employed has increased or not, after the end of the training measures.

9.25. The improvement of the quality of the human resources depends on the quality and appropriateness of the training measures. In the programme, training is carried out via active participation in research projects, the themes and contents of which are put forward by the scientists themselves. The ascertainment of needs thus comes from below (the so-called 'bottom-up concept`), and appears to be logical as a complementary method to the 'top-down approach` (where themes are decided at a political level) in the other research programmes.

9.26. A conference was organized in Rostock, by the German authorities, on the subject of the human capital and mobility programme. It was attended by 120 fellowship-holders and 40 representatives of research institutes. During the course of interviews and workshops, the majority of the fellowship-holders expressed general satisfaction with the quality of the training that they had been given in their host institutes. However, the following complaints were made:

(a) some fellowship-holders had only been entrusted with student-type auxiliary tasks, and were not sufficiently involved in the research projects;

(b) the amounts they received varied considerably from one Member State to another and even within the same Member State. In France, for example, about 40% of the amount of the fellowship was absorbed by tax and social security deductions. In Germany, such deductions were only made if the host institute had signed a staff contract with the fellowship-holders;

(c) there was a lack of information concerning their rights and duties.

9.27. The requirement that fellowship-holders undertake research in countries other than their countries of origin was regarded as a key aspect of the programme. The Commission fixed a wide definition of mobility in its general conditions governing research training fellowships. Therefore many researchers could receive fellowships in the countries where they had already been resident for less than two years when they put in their applications. Of 161 cases examined in the field of individual training fellowships (about 30% of the candidates selected as of 31 December 1993), 50 fellowship-holders (31%) were already resident in the relevant host countries. Of these 50, 36 were already working in the institutes which were later to become the host institutes for their fellowships. Their institutes of origin were also their destination institutes. In these cases there was no increase in mobility and national financing is only being replaced by Community financing. Two universities from the Netherlands and the United Kingdom set up a scheme which allowed two researchers, who did not move from their previous countries of residence, to obtain fellowships. This scheme, which involved an exchange of contracts, was contrary to the provisions of the contracts with the Commission, and its whole purpose was to avoid the mobility requirements.

9.28. The aim to get the best researchers to participate in the programme was hampered by the procedural delays. As at 31 December 1993, there had been five assessment rounds in the field of institutional training fellowships, in which the 753 best candidates were selected. Of these, however, 156 (21%) turned down their fellowships because they had found an alternative activity in the meantime.

9.29. In the case of research networks and large-scale facilities, training is not the main objective. The central objective of the networks was to bring the best European teams together in order to produce results through coordination and cooperation. In the case of large-scale facilities, a significant proportion of the funds available (60%) was used for equipment and related costs. The activities carried out by the networks and large-scale facilities promise a high level of European 'added-value`. However, they are not fundamentally training actions.

9.30. The Euroconferences have certainly offered young scientists a forum for discussion and contact. However, a mid-term assessment () of the programme stated that most conferences had not enabled young scientists to play a really active role.

Industrial competitiveness

9.31. The international competitiveness of European industry depends on Europe's efforts with regard to its technological capacities and human resources. The programme was an important part of this effort.

9.32. The programme was aimed to introduce transnational mobility and transnational cooperation over and above existing national measures. However, no information was available at the Commission on the extent to which the European programme may have replaced national measures. It is essential to ensure that action to increase competitiveness complements rather than replaces national efforts.

9.33. The impact of the programme on the key area of competitiveness depends on the extent to which researchers can apply their knowledge when the training measures have finished. In so far as the European need for researchers is reflected in labour-market demand, there is at present a surplus of researchers in many disciplines.

9.34. Only in exceptional cases did industrial research laboratories take part in the programme. This may be due to the manner in which the Commission publicized the programme, as no specific efforts were made to target potential participants apart from universities. No information was published in national newspapers or scientific journals. As a result, the Commission signed contracts mainly with universities or State research establishments which carry out basic research not directly linked to commercial or industrial objectives. Given the objective of contributing to the improvement of European industrial competitiveness, the Court considers that the Commission should, in future activities of this kind, pursue the possibility of greater involvement of industrial research facilities and scientists working in them. This is not to detract from the value of basic research. However, it is essential to establish an effective balance between this type of research and research with closer links to industry.

Cohesion

9.35. The programme was also intended to benefit the peripheral and disadvantaged areas of the Community. Because of the programme's late start, neither of the two following cohesion measures provided for in the Regulation have been fully exploited:

(a) the measure whereby two-year fellowships could be extended for another year to enable researchers from disadvantaged regions to return to their own countries and follow up what they had learnt was only taken advantage of in 20 cases;

(b) little use was made of the measure whereby, in order to prevent a 'brain drain` from the disadvantaged regions of the Community, experienced researchers could also be granted financial support by the Community to enable them as visiting professors, to train a series of young scientists in these regions.

9.36. In the case of research networks, the programme also provided for two special cohesion measures:

(a) research laboratories from peripheral areas and disadvantaged regions were to be integrated into the research networks. At the time of the audit, the Commission was not able to state to what extent this had been done;

(b) a researcher trained in the context of the programme, who set up a new research team in a disadvantaged region, could get Community aid to equip that team. This provision has not been implemented.

Conclusion

9.37. The Human capital and mobility programme started with a delay of two years before the Council Decision (paragraph 9.8). Owing to lengthy selection procedures and contract negotiations another year passed before the first payments could be made in the field of networks and large-scale facilities (paragraphs 9.10-9.15). With regard to contract-monitoring and supervision, certain weaknesses were revealed (paragraphs 9.16-9.18) and the level of coordination between Commission departments needed to be improved (paragraphs 9.19-9.21).

9.38. The various actions of the programme have offered some thousands of young researchers the possibility of carrying out research in another Member State. Only subsequent investigations (role of the accompanying measures) will show to what extent young researchers are able to find suitable jobs after their training and thus remain in active research (paragraph 9.24).

9.39. Some universities did not pay the fellowship-holders their full contractual entitlements. Remuneration under the fellowship system did not take into account the fiscal and social security provisions in Member States with the result that there were significant differences in the net incomes of fellowship-holders (paragraph 9.26 (b)). In some cases the objective of mobility was not achieved (paragraph 9.27). Many young applicant researchers did not take the fellowships (paragraph 9.28). In the case of research networks and large-scale facilities, training was not the main concern (paragraph 9.29).

9.40. A contribution towards an increase in industrial competitiveness can only be expected in the medium term. It is as yet unclear to what extent the European fellowship system has complemented national systems (paragraph 9.32). The cohesion measures have been little used (paragraphs 9.35 and 9.36).

9.41. The Commission should address the problem areas identified in this report to ensure that improvements are introduced in the successor programme. The Commission should also take more measures (such as the Rostock conference) to ensure that timely and useful information on the development of training actions is obtained from programme participants.

REPLIES OF THE COMMISSION

EFFICIENCY OF COMMISSION MANAGEMENT

Selection procedures and contract negotiations

9.11. The rotation of evaluators ensures that they only operate during a limited period of time (up to 36 months maximum). The aim is to refresh regularly the competences of the evaluation panel. The large number of proposals received prevented the Commission from applying completely the rotation rules in the MAT (mathematics) and PHY (physics) panels (16 new evaluators joined but the old ones remained). In the Fourth Framework Programme, rotation will be assured.

The abstention principle, which prevents an evaluator from evaluating proposals originating from his own research institution, was applied without any difficulty and proved to be effective. The higher success rate of projects of panel members reflects the fact that panel members were among the best researchers in the top research centres.

In the new TMR programme, one third of the members of each evaluation panel will be renewed every year. The abstention principle will continue to be systematically applied.

9.12. The scientific assessment functions of Codest were described in the 'Work programme` adopted by the Commission, following a positive opinion of the programme committee.

At the end of 1994, Codest was abolished by a decision of the Commission. Coordination of the activities of the different TMR evaluation panels is now carried out directly under the supervision of the Commission.

9.14. For network contracts, the calls had been published in May 1992 and the selections made in September-October 1992. Substantial efforts by the Commission's staff nevertheless ensured the commitment of the entire budget before the end of the year.

Monitoring of contracts

9.16. An audit was performed in a university responsible for numerous HCM fellowships. To assess the quality of the training provided, and to ascertain the problems encountered by the fellowship holders, the Commission is following up HCM research fellowships by means of a study contract under the current training and mobility research programme.

9.17. In all the cases presented by the Court corrective action has been taken. It must be noted that such cases essentially covered the very early phase of the programme which, due to its late adoption, had a difficult take-off period.

(a) - Following Commission intervention, all the reports are now available and the corresponding payments have been made.

In one case, the laboratory failed to inform the fellow that he had been awarded a six-months fellowship. The Commission services twice requested evidence of an assumption of duties, without answer from the host institution. The renunciation of the fellow was received one year after the end of the contract duration.

In the second case, which was also a six-months fellowship, the 'Request for payment of main advance`, together with a statement that the research fellow that had started working on the project, reached the Commission three weeks after the end of the contract. No payment was made by the Commission before that date.

The fellow ended his activities five months before the planned end of the contract. The main advance payment (75% of the total amount) was more than required, so an 'ordre de recouvrement` was sent by the Commission in February 1995.

As a result of Commission intervention, one of the two institutions which were retaining funds rectified its behaviour. Audits carried out in March 1995 by the Commission and the Court at the second university confirmed the information known to the Commission; corrective actions have been initiated.

(d) Decentralization of contract management, together with the improvement in the staffing situation, have considerably facilitated the management of all Euroconference contracts.

Reminder letters have now been sent in all cases and the final reports are being received.

The necessary decommitment has been made after reception of the final reports and the final statement of expenditures.

A recovery order has since been sent.

9.18. No further problems of the type described by the Court of Auditors in its 1993 report have arisen. At present, systematic verification of the accuracy of commitments and payments in the main Sincom and subsidiary Ampere-C systems is carried out; reconciliation between the two systems renders possible the immediate detection and correction of differences.

Cooperation between Commission departments

9.19. For the selection of fellowships, the JRC procedure uses scientific evaluation criteria identical to those applied in DG XII. The general conditions used were the same as those of the HCM programme. The lists of JRC fellows were communicated to the HCM staff. The scientific activities of the JRC in the networks are described in periodical reports which are sent to the HCM programme staff.

In conclusion, the implementation procedures of the HCM programme in the JRC are much closer to, and more integrated with the programme managed by DG XII, than the Court of Auditors suggests.

9.21. Erasmus networks only cover activities related to the physical mobility of students and teachers and to the curricular activities set up between the partners in each 'network`. The training activities and the research networks of the 'Human capital and mobility` programme, on the other hand, are related to research and to training through research. While there is, in consequence, no specific need for coordination, regular exchanges of information have been established.

The new Socrates programme covers a broader variety of training actions than Erasmus. Specific steps are taken to ensure coordination between TMR and Socrates.

EFFECTIVENESS OF THE PROGRAMME

Quantity and quality of human resources available

9.24. The evaluation panels, when they analyzed each pre-doctoral proposal, assessed whether the training activity proposed could really contribute to filling a current gap in skills and know-how. This case by case approach, which turned out to be very precise and efficient, was the most practical for this programme which is based on a 'bottom-up approach` (as requested by the private and public sectors), and which covers, by definition, all disciplines and subject areas.

9.26. (b) The social security and tax systems are indeed different in each country. The Commission has presented the Member States with various options (exemption of charges, harmonization or compensation) which could, in total, or in part, contribute to the solution of the problem. This subject is being studied in depth with the Member States.

(c) One of the goals of a conference such as the Rostock one is precisely the communication of information on such matters.

9.27. The Court refers to 50 fellowships where applicants were able to choose a host country and host institutions where they previously lived and did research for less than 24 months. This possibility is provided for by Article 3 of the general conditions governing EC research training fellowships. It contributes fully to the mobility objective of the programme, because it enables applicants to acquire in advance a working knowledge of the language spoken in the host country, or to fulfill in the future host institution specific study requirements not directly related to the training project submitted to the Commission. In addition, the Community grants also enabled young scientists, in certain cases, to undertake post-graduate research work in a country where they had completed the first years of university but could not have continued in the absence of a fellowship providing support for training through research.

In one case of reciprocal exchanges between laboratories, the objective of mobility was not achieved. The Commission is investigating.

9.28. The fact that certain candidates had already found other employment is not essentially a consequence of slow procedures. It is normal, particularly when unemployment is high, for applicants not to hesitate to accept offers of stable and permanent positions, often in research or teaching.

9.29. In the case of research networks and large-scale facilities, training through research (the key to scientific training) is an important element. The 60% of funds set aside for the installations in the case of large-scale facilities was used for covering the costs of use or for improving access to users.

Industrial competitiveness

9.32. The Commission is making a major effort, on the basis of its Communication 'Coordination through cooperation` (COM(94)438 final of 19 October 1994), to develop the tools which will ensure that actions to increase competitiveness complement rather than replace national efforts.

9.33. The surplus of researchers results essentially from the economic situation and from the reduction of the public effort in R, D & T. However, this surplus is likely to be influenced in a positive way as individual researchers benefit from their new knowledge, allowing them to take advantage of new opportunities. The 'White Paper on growth competitiveness and employment` states in this respect that 'the measures to increase the total number of researchers and engineers in the Community... should in turn have a positive impact on employment` (§ 4.3., page 105).

9.34. Industrial research laboratories took part in only about 10% of research networks. However, for engineering sciences networks alone this participation rose to over 20%, reflecting the more applied nature of the research carried out in this area and indicating that the low participation of industries in the other disciplines does not primarily result from an insufficient effort to advertise the programme in industrial circles.

Cohesion

9.35. Some aspects of the programme are intrinsically cohesion friendly. For instance, in the large-scale facilities activity, priority is given to researchers from countries where such facilities do not exist: more than 40% of users came from countries in which less-favoured areas cover all or a major part of the territory.

(a) The 20 eligible return fellowships requested so far, after completion of the first two-year HCM training contracts, have been allocated.

In the Fourth Framework Programme, 26 MECUS are specifically allocated to return fellowships; HCM fellows ending their training in 1995 and 1996, and trainees from the new TMR programme will be entitled to benefit if they originate from a less-favoured region.

(b) Although no 'visiting fellowships` were allocated to university professors to train a series of young scientists in less-favoured regions, and to contribute in this manner to a reduction of the current 'brain drain`, four qualified scientists were awarded HCM training grants to go to less-favoured regions of the European Union.

In such cases the Commission only act on requests received.

9.36 (a) The contribution of research networks to cohesion has been analysed in the 1994 Annual Report on R, D & T. Table 9 of this report indicates that, as concerns the contracts awarded in 1994, Objective 1 regions participated in 203 HCM network contracts out of a total of 305, which involved 327 institutions out of a total of 2 113. Such figures are clearly much in excess of the average participation rates of less-favoured regions (5%), as calculated by the 'Archipielago Europe study`, in inter-firm cooperation (The European report on science and technology indicators 1994).

CONCLUSION

9.37. Payments to large-scale facilities and networks were not made in 1992 for the reason that the calls could only be published in May 1992, due to the date of approval of the programme. Substantial efforts by the Commission nevertheless permitted the commitment of all the budget before the end of the year (see 9.14).

The sample of contracts to which reference is made concerns the projects which were negotiated in 1992, that is to say at the period of time where the programme, because of its late adoption, encountered take-off difficulties.

Concerning monitoring and supervision, on site visits were carried out. An audit was also performed. Round tables were set up to bring together representatives of research facilities, users and representatives of the Commission. A follow-up of HCM research fellowships is being performed.

Contract monitoring is being improved in the new specific programmes and all monitoring activities have been decentralized to the level of the individual units of DG XII-G. Unit XII/G4 is dedicated to coordination of the training through research activities in the other programmes and a regular exchange of information is organized with the Leonardo, Socrates (ex-Erasmus) and Teleman programmes in areas not directly related to training through research.

9.38. The various actions of the programme have offered some thousands of young scientists the opportunity to receive training through research, and rendered possible scientific mobility and cooperation within 6 000 laboratories organized in 700 Community networks. In addition, numerous young researchers were able to attend high level Euroconferences and to make use of the most modern instruments offered by large scale installations.

Subsequent investigations concerning the role of the accompanying measures will show to what extent the training of young researchers has contributed to the programme's overall objectives as mentioned by the Court in point 9.5 above.

9.39. The social security and tax systems applicable to the fellowships fall within the competence of the Member States of the EU. This is why the problems resulting from national differences between those systems are being analysed with the Member States. As no agreement has yet been reached on a overall solution at the level of the Community, an interim scheme has been adopted for 1995.

In one case of reciprocal exchanges between laboratories, the objective of mobility was not achieved. The Commission is investigating the case.

The fact that many young researchers did not accept the fellowship offered to them may also be considered normal because applicants, particularly when unemployment is high, do not hesitate to attribute priority to offers, often in research or teaching, of stable and permanent positions.

Research and mobility, because they contribute directly to 'training through research`, are overall objectives of the HCM activities.

9.40. Recent statistics (cf. answer to 9.36) show that the participation of Objective 1 less-favoured regions was clearly above average in the HCM programme.

9.41. The Commission has addressed the problem areas mentioned by the Court in its proposals for the new training and mobility research programme, and several improvements have been introduced in the successor programme.

The Rostock conference in July 1994 was a pilot projet to obtain feedback on the operation of the programme from the research fellows themselves. The proceedings of the conference are in press, and it will serve as model for future conferences.

CHAPTER 10 (*) Measures in favour of the countries of Central and Eastern Europe, the newly independent States (former Soviet Union) and Mongolia

10.0. TABLE OF CONTENTS Paragraph reference

Introduction 10.1 - 10.4

Budgetary implementation 10.5 - 10.28

Budgetary implementation of the PHARE programme 10.9 - 10.17

Observations concerning the PHACSY system 10.11 - 10.13

Contract extensions 10.14 - 10.17

Budgetary implementation of the TACIS programme 10.18 - 10.26

The awarding of contracts 10.25

Renewal of contracts 10.26

Observations concerning the subdelegation of management 10.27 - 10.28

Advances to the EBRD 10.27

Advances under the Tempus programme 10.28

Observations concerning the implementation of the PHARE programme 10.29 - 10.39

The need for a link between preliminary studies and actual investment 10.29

The need to adapt programmes to economic realities and actual needs 10.30 - 10.35

Advances to SMUs 10.36

The need for genuine involvement of the Commission's on-the-spot Delegations 10.37 - 10.39

Observations concerning the implementation of the TACIS programme 10.40 - 10.53

Need for a rigorous selection of the beneficiaries 10.41 - 10.42

Need for concrete results 10.43 - 10.46

Need to pay more attention to the transfer of know-how 10.47

Need to ensure that programmes continue 10.48

Need for improved follow-up by the Commission 10.49 - 10.50

Need for small-scale and flexible technical assistance 10.51 - 10.52

Need for genuine involvement of the Commission's on-the-spot Delegations 10.53

Observations concerning humanitarian aid 10.54 - 10.55

Observations concerning the food aid operation of 204 Mio ECU 10.56 - 10.60

Lack of consultation and coordination 10.61

Follow-up to previous observations 10.62

Conclusion 10.63 - 10.71

INTRODUCTION

10.1. Cooperation between the European Union (EU) and the countries of Central and Eastern Europe (CCEE), the newly independent States of the former Sovier Union (NIS) and Mongolia intended to support the process of reform by promoting in particular economic restructuring and the development of the private sector takes a number of forms:

(a) in the CCEE since 1989, the PHARE programme which, mainly by supplying technical assistance and since 1993 also investment finance, aims to promote economic restructuring and the development of the private sector ();

(b) in the NIS since 1991, and in Mongolia since 1993, the TACIS () programme, which is also devoted to supplying technical assistance;

(c) programmes in support of democracy in the CCEE and NIS;

(d) the financing of humanitarian aid measures authorized by amendments to the Regulations for the PHARE and TACIS programmes in 1990 and 1993 respectively;

(e) food aid measures financed from the European Agricultural Guidance and Guarantee Fund (EAGGF) budget;

(f) counterpart funds generated by food aid and certain PHARE supply programmes;

(g) the granting of loans by the Commission, the European Investment Bank (EIB) and the European Bank for Reconstruction and Development (EBRD), which supplement the aid machinery set up by the EU through the PHARE and TACIS programmes;

(h) support activities for the coordination of the Group of 24 countries (G24) of the Organization for Economic Cooperation and Development (OECD).

10.2. Disregarding other measures such as the COST (European cooperation in the field of scientific and technical research) and THERMIE (programme for exploiting European technologies for energy management) programmes, which are financed under other budget headings, the sum total of Community appropriations committed since 1989 in favour of the countries of Central and Eastern Europe and the former Soviet Union amounted to 6 140,1 Mio ECU at the end of 1994. As of the same date, the EU had approved the grant of loans or loan guarantees to these countries to a total of 10 342,9 Mio ECU.

10.3. For the CCEE alone, the aid available under G24 decisions at the end of 1994 amounted to some 74 700 Mio ECU (all measures). Of this, 41% was provided by the EU and its Member States and 26% by international financial institutions.

10.4. The rest of the observations in this chapter result from examination of the files, supplemented by the Court's audit visits to Bulgaria, Estonia and Hungary for the CCEE and Belarus and Russia in the case of the NIS. In these countries the Court's audit mainly covered the sound financial management aspect, largely agriculture, SMUs, privatization and industrial conversion programmes in the military sector. The Court also inspected in Armenia, Azerbaijan and Georgia the food aid measures adopted by the Council in July 1994.

BUDGETARY IMPLEMENTATION

10.5. Tables 10.1 and 10.2. show, by country and intervention sector, the sum total at 31 December 1994 of aid granted under the EU budget (commitments and payments) under the PHARE and TACIS programmes since 1989 and 1991 respectively. Table 10.3 shows medium-term financial assistance, made up of loans and guarantees, granted by the EU to the various recipient countries.

10.6. Table 10.4 shows the utilization under the 1994 budget of the commitment and payment appropriations allocated to Title B7-6, 'Cooperation with the countries of Central and Eastern Europe and the independent States of the former Soviet Union`. Although the rate of utilization for this budget heading was 98,9% at 31 December 1994, it was only 63,2% ()on 30 November 1994. The appropriations were committed on the basis of agreements concluded with the beneficiary States, the contracts not being concluded, in most cases, until subsequent budget years.

10.7. The EU's contribution of 20 Mio ECU to the multilateral fund for nuclear safety, which is managed by the European Bank for Reconstruction and Development (EBRD), was entered in Supplementary and amending budget No 1, which was adopted on 2 December 1993 (Article B7-630). However, it was not possible to commit the appropriations in 1993. The appropriations in question were carried over and committed in May 1994, following the conclusion of an international agreement with the EBRD, after the Parliament had been consulted. The amount of 20 Mio ECU was paid to the EBRD in July 1994.

10.8. Table 10.5 shows the budgetary implementation of the appropriations allocated under the 1994 budget to emergency humanitarian aid for the people of the countries of Central and Eastern Europe and the independent States of the former Soviet Union. Table 10.6 shows the utilization of the commitment and payment appropriations allocated under the 1994 budget for the democracy programmes in Central and Eastern Europe and the independent States of the former Soviet Union (articles B7-520 and B7-521). The commitment appropriations were utilized in full. As of the year-end, there had been no payments under the PHARE democracy programme and only 12% of the similar programme for the TACIS countries had been utilized as of that date.

Budgetary implementation of the PHARE programme

10.9. The commitment appropriations available for the PHARE programme (budget heading B7-600) in 1994 showed a similar rate of utilization to the previous year's. The payment appropriations, which were 34,3% higher than last year, were utilized in full.

10.10. Although the Commission is required, under Article 10 of the basic regulation concerning the PHARE programme (), to draw up an annual report on the implementation of the programme and to forward it to the Parliament and the Council, it did not adopt the third and fourth reports, for 1992 and 1993 respectively, until February 1995 (). However, the fifth report, in the financial year 1994, was adopted by the Commission in July 1995.

Observations concerning the PHACSY system

10.11. PHACSY is the official financial reporting system used by the PMU management units in ministries in the beneficiary States to forward to the Commission on tape or diskette, every month, financial information concerning the programmes for which they are responsible. On the basis of the local budget allocation for each programme approved by the Commission, PHACSY details the settlement of individual payments by contract. At a practical level, the Commission uses it as the link, for accounting purposes, between the projects managed on the spot and the Commission's central accounts in Brussels.

10.12. In Bulgaria, in May 1994, only one third of the management units used this computer system which had been introduced in October 1992. Furthermore, there was a substantial delay before the delegation received the PHACSY diskettes from the units. Moreover, the delegation did not use the diskettes to monitor programmes, but simply forwarded them to the PHARE financial department in Brussels.

10.13. The Court found a large number of deficiencies in the PHACSY system, most of them attributable to the fact that the structure is not accounting-based, for example: the absence of subsidiary accounts setting out the nature of the expenditure associated with each programme; clearance of the accounts without the balances at banks being taken into account; negative or inaccurate budgetary attributions accepted by the system; the integrity of the PHACSY database is not secure given the absence of periodic closure of the accounts. These inadequacies explain why PHACSY is not much used for control or monitoring purposes, and the PMUs prefer to develop other accounting or management tools. The Commission ought to adapt or replace the PHACSY system so that it can function properly as a link between the on-the-spot management of contracts and the central accounts.

Contract extensions

10.14. In each country visited many of the contracts financed against PHARE appropriations were extended, using the same contractors, without a fresh call for tenders, even though the initial invitation to tender had made no provision for the possibility of renewal. In Estonia, for example, an initial contract concerning technical assistance for small and medium-sized undertakings (SMUs), for an amount of 0,8 Mio ECU, provided that there should be a permanent consultant on the spot for one year from the beginning of 1993. In order to avoid any break in the consultant's presence in Estonia, a new two-year contract, for an amount of 1,3 Mio ECU, was signed in 1994. The new contract was awarded by private treaty.

10.15. The justifications for the 'extension` were that the normal term for a project of this kind is three years, and there was a risk that a new call for tenders would cause a break in the programme; this argument was also backed up by a specific request from the Estonian authorities. Such a procedure is, however, a derogation from the general PHARE regulations concerning the award of contracts. Given the amount concerned, a new invitation to tender should have been organized, according to the present rules.

10.16. As regards the monitoring of food aid and counterpart funds in the Baltic States, 17 consecutive contracts were concluded between 1992 and 1994 by the Commission and the same two consultants for a total of 867 906 ECU. Only the 11th of these contracts, for an amount of 172 000 ECU, was the subject of a call for tenders.

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10.17. Once it becomes clear that it will not be possible to achieve the prescribed objectives by the end of the first contract, the Commission should make provision for the possibility of subsequently extending it as from the invitation to tender stage. Before a contract is renewed, a report should be prepared, with an analysis of the advantages of continuing the programme with the same contractor (experience acquired, the beneficiary State's wishes, continuity of the project).

Budgetary implementation of the TACIS programme

10.18. The commitment appropriations available for the TACIS programme under the 1994 budget (budget heading B7-620) were 7% lower than in 1993 and were almost 100% utilized in 1994. Contracts were awarded for a total value of 512 Mio ECU, which represents an increase of almost 50% compared with 1993. The payment appropriations were 64,8% higher than in 1993 and were used up completely.

10.19. When the 1994 budget was drawn up, the European Parliament decided to keep 225 Mio ECU of commitment appropriations and 120 Mio ECU of payment appropriations in reserve, in order to encourage TACIS to speed up the conclusion of contracts and the execution of payments. On that occasion, the Commission pointed out the difficulties associated with the start-up phase of the programme and said that the introduction of multiannual programming in 1993 ought to improve the execution of the TACIS programme.

10.20. The improvement in the utilization of the payment appropriations is not solely due, however, to the introduction of the new programming. In fact, the TACIS financial department decided in July 1993 that advances to contractors should be increased, from 20% to 35% of the total contractual amount. According to the Commission, this made it possible to increase the expenditure by 30 Mio ECU. The decision was made retroactive. The Commission, via the company responsible for providing logistical support for the preparation of the contracts, offered contractors who had not received more than one payment at most an additional payment of 15% of the value of their contracts.

10.21. As regards commitment appropriations, the Commission stated in the explanatory section of Request for transfer of appropriations no 13/94, which was submitted on 11 April 1994, that TACIS had already approved commitments for an amount of 104 Mio ECU and expected to approve 362 Mio ECU between then and July and 394 Mio ECU between then and October. However, reference to the commitments passed to the accounts in the Commission's central accounting system showed that only 94,6 Mio ECU had been booked against heading B7-6200 as of the end of September 1994. In spite of the more rapid programming procedures that have been introduced, 79% of commitment appropriations were booked in the last three months of 1994.

10.22. Furthermore, whereas the PHARE financial department effected some 4 500 payments without external assistance in 1994, the equivalent TACIS department, which made out 2 800 payment orders in the same year, continued to subcontract the preparation of payments to a private company in 1994 (see Annual report concerning the financial year 1993, paragraphs 12.43-12.44). Fundamentally different approaches were thus adopted to two similar tasks. In addition, the initial subcontracting contract was increased from 1,4 Mio ECU to 1,7 Mio ECU in 1994, but the term of the contract (from December 1993 to November 1994) was not extended. Moreover, in 1994 the same contract, which covered administrative expenditure, continued to be financed from operating appropriations.

10.23. The Advisory Committee on Procurements and Contracts (ACPC) said in September 1994 that it could not deliver an opinion on this new contract as the matter had been referred to it ex post facto: the initial contract had not been submitted for its opinion in accordance with Article 119 of the Financial Regulation. In fact, the initial contract had been awarded on the basis of Articles 112 - 118 of the same Regulation, in accordance with TACIS procedures, which were different from the committee's own rules. The ACPC also suggested that if the TACIS department wished to make use of such services again in the future, it should issue an invitation to tender in accordance with the rules set out in its own 'vademecum`, and drew attention to the fact that duties requiring the exercise of public powers are to be carried out exclusively by permanent officials.

10.24. The initial contract was renewed for 10 months, with the same consortium, for an amount of 2,1 Mio ECU. The first contract, which was concluded following a restricted invitation to tender for an amount of 1,4 Mio ECU, was thus increased in two stages to 3,8 Mio ECU without any further invitation to tender.

The awarding of contracts

10.25. The TACIS regulations that have been in force since 1991 allow contracts to be awarded by private treaty up to 300 000 ECU. In 1994, 320 contracts were concluded by private treaty, of which 23 were for between 290 000 ECU and 290 900 ECU. According to internal instructions dating back to November 1994, the Commission requires informal consultation of at least three firms for contracts between 150 000 ECU and 300 000 ECU. At least two bids must have been received before a contract can be drawn up and they may be submitted by fax, which is not permitted by the Financial Regulation, for obvious reasons of confidentiality. The Court calls upon the Commission to review this practice.

Renewal of contracts

10.26. In 1994, 75 contracts were renewed even though there was no provision for that possibility in the call for tenders which led to the conclusion of the contract. Thus, a contract for advisory services for an amount of 9 Mio ECU was placed with a firm of consultants in April 1992. After eight further amendments, the contract, which was funded from seven different programmes (three regional and four national: Belarus, Georgia, Kazakstan and Ukraine), was increased to 17,8 Mio ECU in 1994.

Observations concerning the subdelegation of management

Advances to the EBRD

10.27. Under the terms of the Bangkok Agreement of 15 October 1991, the Commission pays subsidies from PHARE and TACIS funds to the EBRD to finance measures preparatory to the Bank's investment projects. In its 1993 Annual Report, the Court raised the question of the interest generated by certain advances disbursed by the Commission (paragraphs 6.11-6.14). The interest received by the EBRD on advances paid to it by the Commission amounted to 142 000 ECU in 1992, 607 000 ECU in 1993 and 396 000 ECU in 1994. As of the end of 1994 the Commission had not issued recovery orders in respect of the interest generated in 1992 and 1993 and the unused balance of the advances.

Advances under the Tempus programme

10.28. Following the establishment of the European Training Foundation in Turin, which now manages the Tempus programme against PHARE and TACIS funds, the contract with the European Cooperation Fund expired at the end of 1994. The interest earned on the advances previously paid to the latter by the Commission for management of the Tempus programme amounted to 2,9 Mio ECU at the end of 1993 and 3,7 Mio ECU at the end of 1994. When the European Cooperation Fund's mandate expired at the end of 1994, the Commission had still not issued recovery orders for the amount of interest and for the unused advances (5,6 Mio ECU in May 1994) relating to 1993.

OBSERVATIONS CONCERNING THE IMPLEMENTATION OF THE PHARE PROGRAMME

The need for a link between preliminary studies and actual investment

10.29. In its 1992 report (paragraph 11.122), the Court has already stated that, having funded preliminary studies (usually expensive ones) for three years, the Commission, in close collaboration with the beneficiary State, should concentrate on putting the knowledge acquired into practice. For example, in Bulgaria, as of March 1994, three PHARE agricultural programmes had financed 26 assorted studies and reports, which are filed at the Bulgarian Ministry of Agriculture and with the Commission Delegation in Bulgaria. For the Bulgarian agricultural sector alone, these studies cost around 12,5 Mio ECU, but only one led to any investment. Moreover they were not always translated into Bulgarian and, consequently, have been used barely or not at all by the potential users. The Court once again recommends that the Commission should endeavour to achieve a better balance between the studies financed by PHARE and the actual needs of the sector concerned and should establish a closer link between the preliminary studies, with a view to subsequent accessions mentioned at the Essen summit in December 1994, and actual results.

The need to adapt programmes to economic realities and actual needs

10.30. The 1991 PHARE programme in Bulgaria made available to farmers a line of credit to the value of 7 Mio ECU. However, the programme did not take any account of progress achieved with the necessary reforms concerning privatization, finance and the banking sector, which were also being funded by PHARE. In 1993, according to a study financed by the Commission, less than 10% of the land had actually been returned to full ownership in the private sector. Furthermore, in 1994, the legal framework in the banking sector was still very incomplete and posed an obstacle to any effective achievement in the matter of loans. At the end of 1994, three years after it had been established, this line of credit, which was earmarked for a type of agricultural savings bank, remained unused.

10.31. Moreover, Bulgaria, a country which has traditionally been a major producer of dairy products, decided in 1991 to abolish its collective farms without any transitional period. In the years which followed, its agricultural production dropped by more than 50% and it is now even obliged to import agricultural produce, such as powdered milk. In Belarus, in contrast, where no systematic reforms and mass privatization have been introduced as yet (see paragraph 10.52), collective farms still provide a certain amount of production, though the share is falling, and continue to fulfil a sociological function (provision of schools, care for retired workers, etc) which no other welfare system is yet able to fulfil. In all cases, privatization, especially of the agricultural sector, should be accompanied by a clearly defined strategy of reform that takes proper account of the social, economic and political situation in each country. Privatization should not be a general slogan imposed for ideological reasons, with no regard for the social, economic and political realities peculiar to each country.

10.32. Estonia strictly enforced the principles of the free market and did not protect its farmers against imports of subsidized agricultural produce from third countries. As a result of this policy, the country is no longer self-sufficient in terms of food, for the first time for several decades. At the beginning of 1995 the Estonian authorities were obliged, finally, amongst other things, to introduce minimum prices for agricultural imports.

10.33. The Court observed a number of cases of negligence in the monitoring of contracts. Thus, as part of programmes in favour of Bulgarian agriculture, the Commission included provision in most long-term consultancy contracts for the purchase of a vehicle which would be the property of the Ministry of Agriculture at the end of the consultant's contract. In May 1994, the Ministry of Agriculture was already in possession of some 20 unused cars. The Commission had not established that this Ministry actually needed this number of vehicles.

10.34. Similarly, in 1993, surveying equipment to a value of 1,3 Mio ECU was supplied to the Bulgarian land registry under the PHARE programme. At the time of the Court's visit, one year later, the electronic measuring equipment had never been used. The beneficiary State undertaking which held it had not provided any explanation as to why the equipment was unused, in spite of repeated requests from the Ministry of Agriculture. It was even preparing to sell it or hire it out.

10.35. These examples, like the example of the 26 studies supplied on Bulgarian agriculture (paragraph 10.29), show how important it is that the Commission staff responsible in Brussels and in its on-the-spot Delegations, along with the on-the-spot experts, in close collaboration with the beneficiary State authorities, should develop a pragmatic and gradual approach with a view to implementing reforms, based on an in-depth analysis of actual needs and of economic reality in the beneficiary countries and taking account of any reforms these latter have already carried out. This is especially necessary for the introduction of the legal and financial structures and mechanisms that constitute the prerequisite for the creation of a market economy.

Advances to SMUs

10.36. The slowness of the rate of utilization of advances to PMUs and the volume of interest that they generate raises the question of their actual utility and significance. In fact, the interest produced amounted to 9,7 Mio ECU as at 20 October 1994. The Court therefore recommends that management of cash resources should be improved, in particular by better spreading out of payments and by bringing the amounts involved more closely into line with the beneficiaries' actual needs.

The need for genuine involvement of the Commission's on-the-spot Delegations

10.37. The new regulations to decentralize PHARE management were introduced at the beginning of 1994 and provide that the Commission delegation in the country concerned is to ensure that all PHARE programmes are carried out in accordance with sound financial and technical management practice. For that purpose, the Delegation must obtain, in addition to six-month work programmes, strategic plans for Community assistance from the management units for the programmes concerned and evaluate them in terms of a global strategy.

10.38. However, in May 1994, the Commission Delegation in Sofia merely endorsed the work programmes sent by the management units, with a formal cross-check of the figures presented in the evaluation reports, without any analysis or check of the actual implementation of the programmes. Such an absence of analysis is incompatible with the need to evaluate the strategic plans which will have to be carried out. Moreover, the Delegation did not take any part in the conception and, a fortiori monitoring and control, of PHARE programmes, or in the implementation of the association agreement and coordination with other donors. In countries such as the Baltic States, where there is no Commission Delegation, the influence of the EU is, of course, even more limited.

10.39. In its previous annual report (paragraph 12.30), the Court recommended strengthening the role of the on-the-spot Delegations. In this respect the Commission must, as a matter of priority, ensure that all posts in the Delegations are filled so that situations no longer recur where, for example, in one Delegation six of the nine occupants of permanent posts are moved to new posts within a single year and such moves are then followed by long periods during which vacancies are left unfilled, resulting in a loss of productive capacity of the order of 40 to 50%. For example, a Commission Delegate/Ambassador post was left vacant for nine months. It is also important that Delegation posts should be advertised with proper job descriptions, so as to ensure that all employees are fully aware of the duties they are required to carry out and the obligations devolving upon them.

OBSERVATIONS CONCERNING THE IMPLEMENTATION OF THE TACIS PROGRAMME

10.40. The overall objectives of the programmes are well targeted in general but they are sometimes too ambitious with regard to the resources which are made available to carry them out or compared with the reforms that the beneficiary States have already carried out. The implementation of the projects, has, however, sometimes been hindered by various difficulties, such as an inappropriate choice of beneficiary, the rapidly developing politico-economic context, an absence of political will at the official level, a lack of involvement at the intermediary level, a lack of concrete investment following the recommendations made by the experts and the fact that the Delegations lack independence and do not get involved, a fortiori where they do not exist.

Need for a rigorous selection of the beneficiaries

10.41. Often, the beneficiary who is selected when the programme is identified has disappeared or is no longer in a position to fulfil his obligations when the project is actually implemented. This was true of three out of the four projects in the food distribution sector in the Moscow region that were examined by the Court. The Commission should pay closer attention as a matter of urgency to the selection of its partner and the local beneficiary. If programmes were implemented more quickly and beneficiaries were involved more closely when the terms of reference are defined, a number of pitfalls could be avoided.

10.42. Furthermore, it is not good practice to ask the local partner for a contribution if he is not the direct beneficiary of the measure and is not convinced of the value of the project. For example, in the context of a military industry conversion programme in Russia, the Commission selected a consultant specialized in designing agricultural machinery as the beneficiary of technical assistance, even though it had no links with the military industry. As this consultant received no direct benefit from the operation it could not provide the counterpart it had undertaken to provide.

Need for concrete results

10.43. Except where the project carried out did not correspond to the beneficiary's expectations (for example, the study of the railway bottle-neck in Brest, Belarus), the beneficiaries claim to be fairly satisfied with the consultants' work. This is true, for example, of the programme of technical assistance for long-distance transport in Russia of perishable goods, which led in a very short time to concrete results.

10.44. However, even though the beneficiaries usually find experts' recommendations to be relevant, they regret the lack of financial resources needed to implement them. This was the case, for example, of the Energy Centres and military reconversion programmes financed by TACIS in Belarus and Russia. This was also the case for the projects to improve the food distribution system in Moscow.

10.45. The Commission must make it a priority, when the terms of reference for the programmes are being defined, to ensure that they lead to concrete results, such as actual investments. It is, however, true, as far as investments are concerned, that this is made difficult by the fact that the TACIS programme can only provide technical assistance, that the World Bank confines itself to the public sector and that the EBRD's criteria (minimum investment and percentage participation) are very narrow.

10.46. The Commission must also envisage approaches other than those which it traditionally adopts in connection with the TACIS programme. In this respect, the TACIS procedures for assisting the International Centre for Science and Technology, the aim of which is to keep in Russia scientists who had previously been involved in military research by paying them to carry out civilian research work, differ from the procedures usually implemented by TACIS but provide an adequate response to the important problem of retraining researchers.

Need to pay more attention to the transfer of know-how

10.47. Several beneficiaries to whom the Court spoke during its audit believe that, rather than studies carried out, there is a need for know-how to carry out similar studies, a fact of which the Commission does not take sufficient account. For example, with regard to the conversion of military industry to the production of farming equipment in the Moscow area, the carrying out of studies by consultants without providing the local experts with the appropriate know-how will not enable the beneficiaries to carry out this type of study themselves. Nevertheless, the beneficiaries believed that the acquisition of the methodology applied by the consultants was more important for them than the studies themselves. The Court also takes the view that a transfer of know-how is indispensable if the reforms are to be carried out by the beneficiary States themselves.

Need to ensure that programmes continue

10.48. The investments in studies and technical assistance, which are often very sizeable, as in the case of a 2 850 Mio ECU investment in a project to distribute fresh fruit and vegetables in Moscow, are likely to be mostly wasted if there is no follow-up after the consultants have left. This is also true of programmes in the fields of agriculture or the conversion of military industries. The continuity of the programmes is also threatened when the financial viability of the project depends almost exclusively on TACIS financing. This is true of the Energy Centres and the Business Communication Centres financed in most of the newly independent States.

Need for improved follow-up by the Commission

10.49. A minimum follow-up of the development of the programmes and, a fortiori, of the projects is not provided by the Commission's managers who, absorbed as they are with the task of preparing new projects, cannot react to the varied and numerous reports which are submitted to them by the consultants with a view to obtaining approval of or corrections to the strategy and/or the approaches adopted. This inadequate monitoring of the TACIS projects is illustrated, in particular, by the current situation in the Commission's Moscow Delegation. As this latter - faced with criticism - has noticed chronic deficiencies in the monitoring of projects which are completed, underway or scheduled (owing to quantitative or qualitative insufficiencies) it is employing all sorts of means to cope with its responsibilities. The fact is that, beyond the role played by Commission officials, projects in Russia are monitored by a subcontracted monitoring unit located in Moscow. It operates independently of the Delegation, which is responsible for the preparation of programmes and supporting current projects. Some of its staff are employed by a body which is subject to Belgian law and linked to the Commission (AEC), others are consultants. This lack of monitoring is particularly evident when one considers the terms of reference of the TACIS projects, which are either not amended to take account of the new conditions or are amended without the Commission being informed or are amended after too long and expensive a delay, as the Court noted on several occasions in Belarus and Russia. The completed projects are assessed neither by the Delegations nor by the Commission.

10.50. Furthermore, the monitoring by the experts and especially the lack of response to the problems they encounter, which they often consider deplorable, re-confirms the observation which the Court made in its previous Annual Report (see paragraph 12.34), and which the Commission contests. It is still too often the case that these consultants carry out their own policies on the spot, rather than the Commission's.

Need for small-scale and flexible technical assistance

10.51. The Belarussian and Russian officials complain of being inundated with studies, financed by various suppliers of capital, which are often too academic. TACIS measures are perceived in a better light by the beneficiary countries when, instead of assigning large teams of consultants to work on sectoral studies or in ministries, small teams of competent and motivated experts demonstrate concretely, by pilot projects, how to proceed practically with the reforms while providing small-scale technical assistance to the competent ministry. Furthermore, this type of assistance seems to make it possible to ensure that, at all levels, everybody works towards the same goal.

10.52. Small projects, which are more homogeneous than wide-ranging large programmes, have the advantage of being easier to control and check. They lead more quickly to concrete and visible results and make it possible to share experience more widely. The restructuring and privatization of the collective farms, which began in 1993 in Belarus, is an example of the success which small pilot projects may attain. The TACIS technical assistance was able to adapt to the prevailing conditions in this country. It succeeded, by means of concrete programmes, in demonstrating to the peasants the feasibility and the usefulness of privatizing certain units. This programme was extended as a result of a contract concluded by the Commission which makes it possible to convey at the ministerial level the experience which has been acquired and the expectations of the persons concerned by providing advice on the legislative and structural measures to be implemented. The request by several collective farms to benefit from a similar programme in 1995 is indicative of the success and the snowball effect of these small projects. The same is true of a pilot bakery set up with the aid of TACIS funds in Tomsk in 1992. This project, the total cost of which was 211 500 ECU, has since led to the creation in the region of more than 120 private bakeries.

Need for genuine involvement of the Commission's on-the-spot Delegations

10.53. The Delegations must be kept systematically informed of the steps taken by the Commission and by the other bodies of the EU, in particular the EBRD, concerning Community measures in the beneficiary States. However, in particular as regards the programmes in the transport sector, coordination between the Commission and the Moscow Delegation has been particularly inadequate. In order to reduce the time taken to implement measures, the Delegation should, however, be able to play a greater role in the management of the programmes, in particular in the case of the 'Democracy` programme.

OBSERVATIONS CONCERNING HUMANITARIAN AID

10.54. In March 1994, the Commission decided to supply hospitals in Minsk and Kiev with equipment for the detection of thyroid cancer, along with post-operative medicines, amounting to 1,3 Mio ECU.

10.55. The beneficiary hospital in Minsk was not suitable for the installation of the equipment that was supplied to it and the examinations that were supposed to be carried out with some of the equipment supplied could have been carried out with existing equipment supplied by a Member State and which had been stored in its original packing at the hospital, in precarious conditions, for more than a year. This situation serves to underline the importance of the coordination and identification of actual needs during the preparation of the programmes.

OBSERVATIONS CONCERNING THE FOOD AID OPERATION OF 204 MIO ECU

10.56. The 204 Mio ECU operation, 165 Mio ECU of which was financed from the EAGGF, 35 Mio ECU from the Humanitarian Aid Office of the European Community and 4 Mio ECU from TACIS, which was responsible for monitoring the aid, was approved by the Council in July 1994. The operation was supposed to enable the populations of Armenia, Azerbaijan, Georgia, Kyrgyzistan, Tajikistan and Moldavia to compensate for food shortages during the winter of 1994/1995.

10.57. At the end of March 1995, thanks to rigorous monitoring by consultants paid by the Commission, and in spite of the inadequate involvement of the Commission Delegation in Georgia, food aid intended for the three countries of the Caucasus had been delivered with relatively limited losses, in spite of the especially difficult conditions under which they had to be forwarded. This aid made it possible for these countries to escape supply problems during the winter and should help them to meet most of their needs in terms of flour until the next harvest.

10.58. However, the distribution of the aid has taken too little account of the several needs of the various beneficiary countries. The aid allocations were decided without adequate account being taken of the populations of the various States or of supplies to them programmed by other countries.

10.59. The Commission did not seize the opportunity offered by this operation in order to develop a coordinated approach for its various instruments. The TACIS programme could thus have usefully been used to intervene simultaneously in the food distribution sector and the food aid operation could have provided new impetus to all the distribution circuits, from the stage of unloading at the ports to the level of railways, flour mills and bakeries, right up to the food shops themselves. But the Commission did not take advantage of this possibility and the TACIS coordination units did not obtain the Commission's authority to cooperate in this aid measure or to develop a programme for the use of the counterpart funds provided for in the operation.

10.60. The aid supplied provided only a temporary solution to the supply problems these countries are experiencing: there was no definitive remedy. Additional aid in the form of agricultural inputs (seeds, fertilizers and pesticides), combined with TACIS technical assistance for the agricultural sector, would have helped these countries to relaunch their agriculture and to rely less in future on imports of cereals.

LACK OF CONSULTATION AND COORDINATION

10.61. Measures within the framework of the PHARE and TACIS programmes and humanitarian aid too are not adequately coordinated with those implemented by other Directorates-General or other donors in the beneficiary countries. This was the case in 1994 of the Energy Centres in Minsk and Moscow in respect of which there had been no coordination between TACIS (DG I at the Commission) and the Directorate-General for Energy (DG XVII) (see paragraph 10.48).

FOLLOW-UP TO PREVIOUS OBSERVATIONS

10.62. The Court, in its Annual Reports concerning the financial years 1992 (paragraph 11.131) and 1993 (paragraph 12.49), insisted on the need for the Commission to make systematic appraisals of the programmes, all the more so since, owing to the subcontracting of the various phases of the operations, it risked losing control of them. At the end of 1994, these tasks were still being inadequately carried out by the Commission. A systematic and autonomous evaluation of the programmes is still lacking.

CONCLUSION

10.63. At the Essen Summit of December 1994, the European Council decided that the PHARE programme should aim to prepare the CCEEs for membership of the European Union and reaffirmed the importance of PHARE in the framework of the process of reform in those countries. The Court considers that this decision means, by implication, that a substantial part of the PHARE programme should be orientated towards a larger-scale and more adequate preparation of the administrations of the candidate States concerned for the understanding, the adoption and the implementation of the main Community policies and the related regulations.

10.64. In addition, the Parliament, in its discharge resolution in respect of the financial year 1993, argued in favour of giving priority to projects intended to promote investment in the PHARE and TACIS programmes. At present, it is the case that PHARE to a large extent and TACIS almost exclusively finance technical assistance and studies carried out by private consultants. These studies should lead more often to concrete results and it is indispensable for these two programmes to facilitate more frequently the financing of specific investments, e.g. through the EBRD, the EIB and other international financial institutions.

10.65. Close cooperation between beneficiary States and external suppliers of aid (whether in the form of donations or loans) is indispensable so that a global and effective strategy involving the various programmes can be introduced. Care should also be taken to analyse actual needs, to prepare the programmes and to adapt them to economic reality, so that projects and studies that are financed by PHARE and TACIS produce concrete results more often. Similarly, coordination between the various Commission departments (in Brussels and during its on-the-spot audits), other external sources of aid and the beneficiary States is still inadequate and is even non-existent in some cases.

10.66. Six years after the creation of the PHARE programmes and four years after that of the TACIS programmes, the Commission has still not devised an autonomous system for evaluating these programmes. Such an instrument is all the more necessary in the light of the guidelines adopted at the Essen summit.

10.67. Moreover and as the Court has already pointed out, in its previous Annual Reports, the implementation of the programmes is still too slow. This problem can not be resolved by simply decentralizing the management at beneficiary State level, without any strengthening of the Delegations' administrative capacities. That is also indispensable in the interests of providing improved coordination, improved appraisal and improved monitoring of the programmes and improved control over consultants. Moreover, the Delegations should be closely involved in the process of evaluation of all the Community measures that are being implemented.

10.68. The Court wishes to stress that it considers that the preceding observations - some of which are severe - should not cause the reader to lose sight of the fact that efforts have been made by the Commission, with the sometimes limited resources available to it, to improve the management of the PHARE and TACIS technical assistance programmes. These mainly consist of the management of extremely varied and complex human resources, by reason of the nature of the projects in question: ranging from nuclear energy to small and medium-sized undertakings and including the privatization of economies.

10.69. In addition to the complexity of the programmes, there is also the fact that the administrations of the beneficiary States are faced with radical socio-economic change with which they cannot or will not cope with all the effectiveness and rapidity that is desirable. Some of them have a natural tendency to blame the Commission as a matter of course for the failure of any project, whilst the Commission, for its part, blames the administrations.

10.70. The Commission should discharge its responsibilities in collaboration with the beneficiary States, particularly concerning the preparation, implementation, follow-up, coordination and evaluation of the various programmes and measures. In this context the Commission should clearly state whether it believes it has adequate human resources to cope with its obligations without systematically entrusting to third parties or staff not subject to the Staff Regulations tasks that should be executed by a public service body. In this respect, the Court considers that only services that correspond to a non-permanent need for particular skills that cannot be found within the Commission should be put out to contract.

10.71. In conclusion, the Court believes that only if the Commission analyses and expounds the actual problems it is faced with, together with a transparent and realistic proposal concerning the resources it needs to discharge its responsibilities, will it be able to emerge from the present state of deadlock and uncertainty.

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REPLIES OF THE COMMISSION

BUDGETARY IMPLEMENTATION

10.6. By 30 November 1994, 94.9% of the total budget had been endorsed by the TACIS Committee and approved by the Commission. Budgetary commitment was delayed because of unresolved problems with some beneficiary States.

Since the beginning of the PHARE programme, the concentration of commitments in the last quarter of the corresponding years has reflected difficulties in preparing acceptable projects, jointly with a considerable number of institutions and ministries in each partner country, in the framework of a cumbersome annual programming exercise.

Following the adoption by the Essen Council of the pre-accession strategy for the associated CEEC, the financing of PHARE within a multiannual framework and the increase of the Copenhagen limit for co-financing investment and infrastructure projects to 25% will contribute, in general, to improving budgetary performance and, in particular, to committing the financial allocations more evenly throughout the year.

10.7. The carry-over of appropriations was due to a lack of approval of the basic agreement between the EBRD and the Commission by the European Parliament in 1993.

10.8. The ECU 10 million commitment appropriations for the PHARE and TACIS democracy programmes in 1994 were divided by the European Parliament into two tranches of ECU 5 million. The second tranche was put in the reserve and only became available in December 1994. The line, including overestimated payment appropriations, was created in 1994 at the initiative of the European Parliament. Due to the time necessary for planning, project preparation and contracting, only a small part of the payment credits could be used.

Budgetary implementation of the PHARE programme

10.10. The format, content and transmission of the 1994 PHARE annual report have been completely revised.

Observations concerning the Phacsy system

10.11 10.13. In Bulgaria, in May 1995, the PMUs which normally report through Phacsy represented 88% of the total funds advanced to the country. The seven non-reporting PMUs out of the 17 existing have started their activities recently.

The EC Delegation in Bulgaria does not take advantage of the Phacsy information because of staff constraints. This does not prevent the Delegation monitoring the programmes' implementation by other means on a transitional basis.

The Commission has at the end of 1994 issued an upgraded version of the Phacsy system to make it more operational, secure and user-friendly. The Commission is carrying out an inventory of the information, accounting and management structures of all PMUs. This will allow measures to be taken before the end of 1995 to improve local financial management and rationalize the number of PMUs.

Contract extensions

10.14 10.15. The interruption of the contract in Estonia of ECU 0.8 million would have adversely affected the quality of the assistance and a derogation from the general procedures was considered justified.

10.16. In order to counter the weaknesses of the local administrations, short-term provision of monitoring and inspection assistance had to be extended. The Commission avoided changing the consultants to ensure effective co-operation with the Baltic authorities.

10.17. Clear rules on duration and extensions of TA contracts will be incorporated into the new version of the PHARE manual of procedures currently under preparation. The report mentioned by the Court is already current practice in PHARE.

Budgetary implementation of the TACIS programme

10.20. Advance payments were raised from 20% to 35% in order to help with small and medium-sized contractors' cash flow problems, given the processing time for the first payment and the spacing of payments during contract execution. Once the increased advance payment had been decided, it was equitable to extend the benefit to those firms whose contracts had only just started. This offer was made by the Commission. A private firm was only used for mailing services and registration of replies. The one-time effect on payments was of ECU 30 million only, and accounts for a small proportion of additionally effected payments which increased from ECU 32 million in 1992 to ECU 180 million in 1993 and ECU 300 million in 1994.

10.21. TACIS programming had accelerated, and Commission Decisions had been taken for 95% of the budget by the end of October. The budgetary commitments were then delayed for procedural reasons.

10.22. The Commission maintained all key decision-making functions. The contract covers mainly advisory and secretarial assistance with tender and contract preparation, and, to a minor extent, payment preparation. The contract budget needed to be increased in 1994 due to the rising workload which required staff reinforcements. The paperwork for 1 300 TACIS contracts and 2 800 payments per year required this type of support service.

In 1993, this assistance was financed from Part B of the budget in the interest of the recipient countries, by analogy with the PHARE management system by programme implementation units, and pending TACIS decentralization. As possibilities for decentralization were deteriorating and continuous external support was required due to the steadily increasing TACIS workload, it was considered more appropriate to ensure funding from administrative budgets.

10.23. At the end of 1994, it was no longer considered possible to apply Articles 112 to 118 of the Financial Regulation (contracts financed by the Community for the benefit of the recipient of external assistance), but Article 119 (external assistance contracts in the interest of the Commission). Only at that stage did it become necessary to involve the ACPC.

10.24. The original tender had foreseen the possibility for an extension, and it was the most cost-effective solution to continue with the same assistance team at the same prices and conditions, thus avoiding a disruption of TACIS contracting. TACIS has since launched a new tender, this time in conformity with ACPC rules to ensure that this new contract can come into effect by 1 October 1995 following the request of the ACPC.

The awarding of contracts

10.25. The Commission believes it is not excessive if 23 contracts amounted to between ECU 290 000 and 300 000.

The practice of informal consultation for larger contracts introduced in 1994 should be considered as progress, combining flexibility and efficiency with increased competition. The Commission will review its rules on submission of offers according to the Court's request.

Renewal of contracts

10.26. TACIS has by now developed a formal procedure for extending contracts for successful projects in specific circumstances which ensures 'value for money`: a possible extension to a contract is normally announced in the original invitation to tender. The total value of all extensions may not exceed the original contract value. A formal bid must be requested and evaluated to judge technical quality, while unit costs must not exceed those in the original contract.

The contract explicitly mentioned was concluded to set up the European expertise service (EES) programme, which consists of numerous small projects in the area of policy and legal advice in the entire CIS. The initial contract of ECU 9 million for the first year included an explicit provision that additional funding was envisaged for a second year. Given the fast commitment of resources over the first year and soaring demand for EES activities, extra funds needed to be provided without interrupting this very successful programme. The contract was, however, re-tendered at the end of 1994.

Observations concerning subdelegation of management

Advances to the EBRD

10.27. The interest was the subject of a recovery order issued on 14 March 1995 and a reminder was sent on 6 July. As to the balance of unused advance payments, it will be recovered following definitive settlement.

Advances under the Tempus programme

10.28. The contract with the European Cooperation Fund (ECF) was extended up to 30 June 1995, the date on which the closure of the books takes place. Following this, the Commission will recover the definitive settlement of remaining cash balances including interest other than those subject of recovery orders issued by PHARE and TACIS on 29 June and 31 May 1995 respectively.

Transfers of the complete annual amounts of the Tempus programmes to the ECF until 1993 were at the origin of the important amount of interest generated. Since 1994 the funds are transferred in instalments which substantially reduces the interest generated.

OBSERVATIONS CONCERNING THE IMPLEMENTATION OF THE PHARE PROGRAMME

The need for a link between preliminary studies and actual investment

10.29. Only seven projects, worth ECU 2.7 million, actually concerned the preparation of studies and analysis likely to lead to concrete investments.

Continuous changes of governments since 1991 and shifting responsibilities of the main ministries concerned have substantially jeopardized the implementation of the recommendations and strategies formulated in the studies financed by PHARE. However, these studies are necessary for the definition of concrete strategy as well as for the adoption of investment decisions in Bulgaria or other partner countries.

The terms of reference of studies are increasingly linked to the preaccession strategy adopted at Essen, and drafted by local experts, thus ensuring a high adaptation to the actual local situation and specific needs.

The need to adapt programmes to economic realities and actual needs

10.30. Following the unblocking of the political situation by a decision of the Bulgarian Council of Ministers in December 1993, ad-hoc technical assistance was made available for the finalization of the mechanisms and financial provisions necessary to the operation of the credit line.

10.31. The introduction of a competition-based system within the framework of a market economy to replace a structure dominated by State monopolies and oligopolies is the cornerstone of the Bulgarian Government's strategy. In the short term the fact that certain commodities have been imported does not mean the reforms have failed. Quite the opposite, import-based competition is beginning to grow in certain sectors of the agricultural economy. In the longer term, once domestic production has become more efficient and has been restructured the Bulgarian Government will endeavour to secure the greatest possible - economic and social - balance between domestic production and imports.

10.32. The Estonian Government has recognized that going too far down the road of trade liberalization could lead to a further deepening of income disparities between the urban and rural sections of the population and is actively redressing the growing imbalance.

10.33. The cases pointed out by the Court reflect the difficulty the Bulgarian Ministry of Agriculture is having in financing the maintenance costs of the vehicles in question and the Bulgarian Government's inability to decide to whom they should be assigned. At the Commission's request a plan for the vehicles' use has been drawn up. Once it receives the Bulgarian Government's final approval, the vehicles will be put into service in new technical assistance projects or in priority departments in the Ministry of Agriculture.

10.34. The Commission pointed out these problems to its Bulgarian partners in the course of the monitoring exercise which followed on from the recent evaluation of agricultural assistance programmes.

10.35. In conclusion, PHARE interventions are based on a pragmatic approach which takes account of the actual local conditions and the needs expressed by the partner countries. However, the achievement of results is sometimes delayed or jeopardized by political changes and the institutional instability inherent to the transformation process towards market economy systems in these countries.

Advances to PMUs

10.36. The amount of the interest generated by the advance payments very much depends on the accuracy of the cash flow projections which PMUs regularly submit to the Commission. The latter carefully assesses this accuracy in order to avoid either excessive balances in PMU's bank accounts or shortfalls which would jeopardize programme implementation. Furthermore, the amount of interest accrued is deducted from subsequent advance payments.

The need for genuine involvement of the Commission's on-the-spot delegations

10.38. The shortcomings of the Delegation in Sofia are mainly the result of a serious lack of staff. However, since May 1994, date to which the observations of the Court refer, the Delegation's staff has been partially reinforced, and the new procedures for the decentralized implementation of the programme started. The opening of delegations in the Baltic States, which is being proposed to the Budgetary Authority, will complete the local presence of the Commission in the PHARE countries.

10.39. There is a clear policy for filling of vacant posts in delegations but this does not always produce results given the scarcity of acceptable candidatures. The PHARE manual of procedures describes the supervision and monitoring to be carried out by delegations; instructions will be issued to cover horizontal, coordination and political representation tasks. Heads of delegations' vacancies are always covered on an interim basis and their role is to be described in specific mission letters.

OBSERVATIONS CONCERNING THE IMPLEMENTATION OF THE TACIS PROGRAMME

Need for a rigorous selection of the beneficiaries

10.41. The Commission shares the Court's view that the selection of the beneficiary is crucial as is the adequate involvement of the beneficiary at the stage of defining the terms of reference.

The projects in the agriculture sector in Moscow were identified in 1992 when the situation in Russia was especially complicated and unpredictable.

TACIS now has more experience in selecting beneficiary institutions. The time-lag between project identification and implementation has been reduced and beneficiaries are closely involved in project preparation and selection of contractors.

10.42. The Commission shares, in principle, the opinion of the Court, and underlines that it is normal TACIS practice to request some counterpart inputs from the local partner which show his commitment to the project.

Difficulties in finding an appropriate beneficiary are illustrated in this project, where it was decided to designate a design institute as beneficiary, in order to establish contacts with the different potential final beneficiaries among the military enterprises. Even if some problems occurred as far as counterpart inputs are concerned, the objective of identifying a potential enterprise to carry out a pilot project was achieved.

Need for concrete results

10.43. The Commission welcomes the fact that the Court recognizes this positive judgment by the beneficiaries. It also agrees with the Court on the Brest railway bottleneck study that did not satisfy expectations. However, the contractor was asked to further examine some aspects of particular interest to the EBRD, so as to ensure needs were met in this respect.

10.44. The Commission acknowledges that some projects could benefit from enhanced follow-up. However, TACIS is a technical assistance programme, and cannot provide investment capital itself. The Commission coordinates its activities with other international financing institutions in order to facilitate TACIS beneficiaries' access to funds.

The activities of the energy centres will be extended beyond 1996, with emphasis on long-term sustainability. As far as the 'Food bases` project is concerned, TACIS is assisting in the identification of potential investors and continues on-the-job training.

10.45. The Commission agrees with the Court that for a certain part of TACIS projects the preparation of investments should be included in the scope of the technical assistance.

10.46. The Commission has always sought to use the most appropriate tools to achieve the objectives of TACIS projects. The ISTC is just one example. There is no restriction to a 'traditional` approach. Many other instruments (e.g. SSTA, Bistro, Democracy or Twinning programme, the productivity initiative, the work attachment programme, etc.) have been created to find the appropriate response to existing problems.

Need to pay more attention to the transfer of know-how

10.47. TACIS' main objective is the transfer of know-how. Nevertheless, in some cases feasibility or other technical studies need to be carried out before projects can materialize. It should be noted that TACIS follows the 'demand-driven approach`. Projects are carried out at the beneficiary's request and these are fully involved in project design.

In the specific case mentioned by the Court, the consultant's task was to carry out a market analysis for potential products of the recipient and not to teach the recipient how to carry out an analysis himself.

Need to ensure that programmes continue

10.48. Wherever appropriate, TACIS actively supports the search for follow-up investments to the technical assistance.

The business communication centres and the energy centres in the NIS cannot be self-financing from their foundation. TACIS continues to support them in their development towards financial autonomy. Measures have been adopted to ensure sustainability of the Moscow 'Food bases` project (see 10.47).

Need for improved follow-up by the Commission

10.49. The Commission shares the view that there is room for improvement as far as the supervision of project execution is concerned. However, given TACIS' present staff constraints, supervision cannot be as intense as one would ideally desire. With severe constraints on staffing both at headquarters and at the delegations, the creation of independent monitoring teams including a core team located in Moscow was the best solution. The teams consist of qualified EU experts and Russian counterparts, irrespective of whether they are contracted through a consultancy firm or through AEC. This system has produced good results which will now be summarized in a first set of synthetic sectoral evaluations. From September 1995 there will be three teams (one for Russia based in Moscow, one in Almaty and one in Kiev).

Measures will be taken to ensure that any modification to the terms of reference of projects under execution is, in due time, translated into an amendment to the contract.

Present budgetary constraints entail that there are be insufficient Commission delegations with insufficient staff resources in the CIS to ensure supervision on the ground, close liaison with beneficiaries and quick responses to changing conditions.

10.50. Since early 1995, detailed briefings are given to consultants before they leave for the partner countries. Increasingly efficient coordinating units and, where they exist, Commission delegations will also help to avoid this problem.

Need for simple and flexible technical assistance

10.51. At the beginning of the TACIS programme there was certainly a need for thorough sector studies. While their quality might not have completely satisfied the Commission and the recipient in all cases, there have been marked improvements. In the meantime TACIS often follows the approach, recommended by the Court, of setting up small pilot projects and concentrating on practical experience.

10.52. The Commission agrees that small projects tend to be especially successful for the reasons given by the Court.

The need for genuine involvement of the Commission's on-the-spot delegations

10.53. The Commission agrees with the Court that the delegations should be systematically informed on all EU activities ongoing in their country, but it cannot ensure that the EBRD regularly transmits all such information.

The delegations have been increasingly involved in programme preparation and implementation as their capacity has evolved. The transport sector will be no exception and full coordination will be ensured.

The Democracy programme has been set up as a joint PHARE and TACIS facility and close coordination can best be achieved if both facilities are managed from Brussels. However, the possibility of further decentralizing some Democracy programme activities to TACIS delegations is being explored.

OBSERVATIONS CONCERNING HUMANITARIAN AID

10.55. The beneficiary hospital is the only one carrying out thyroid surgery in the whole country. Other crucial support activities prior to and following surgery are carried out at two other hospitals in Minsk. It was suggested to locate the equipment needed for support activities in the hospital were they would be most useful, but the Belarussian authorities decided that all equipment should be delivered to the recipient hospital visited by the Court.

The equipment list was drawn up by highly competent internationally renowned thyroid experts. In all contacts with Belarussians, be it with officials of the Health Ministry or with hospital staff, the need for the equipment in question, namely a gamma camera, was confirmed.

Thus, the Commission had taken all measures to ensure that the needs were thoroughly identified. There is no sure way to protect the Commission against the sort of problem which occurred in this case.

OBSERVATIONS CONCERNING THE FOOD AID OPERATION OF ECU 204 MILLION

10.57. The EU's representative office in Georgia was set up in October 1994 one month after the start of the food aid operation in September of that year.

10.58. The purpose of the allocation was to cover 50% of the overall needs which could not be met by the beneficiary countries in the winter (or pre-harvest gap) and it was based on UN/WFP, FAO and OECD statistics. The population of each of these countries was taken into account in calculating needs.

The United States suddenly added itself at the beginning of the year to the list of donors which had been compiled during the operation's programming. Five coordination meetings have been held with the United States. A number of donors, Turkey in particular, have failed to provide the aid they had promised during the planning phase.

10.59 10.60. It was not the Council's intention to make this operation a development exercise. The objective of the food aid operation was to meet 50% of the beneficiary countries' food requirements in the winter of 1994-95, to put the goods on sale on the market and to use the counterpart funds for social programmes. Although it was not a humanitarian operation in the strict sense of the word, it needed to be implemented as quickly as possible if its objectives were to be met.

Although this Decision's objectives may have been rather limited, the fact that over 1 million tonnes were delivered to the beneficiary countries within the time allotted is an unprecedented achievement.

The Commission shares the Court's view that the operation should have been followed up by measures to relaunch agricultural production. Indeed it has taken this into account in planning the food aid operation for this year which includes structural measures in the agricultural sector.

LACK OF CONSULTATION AND COORDINATION

10.61. Coordination between different Directorates-General is, on the whole, working well. It is true that in some areas problems have occurred, but they have been detected and are being overcome, for example in the Minsk Energy Centre.

The Commission considers that it has made a maximum effort to enhance coordination with other donors, and probably more so than others.

FOLLOW-UP TO PREVIOUS OBSERVATIONS

10.62. Since early 1994, TACIS has had a monitoring programme in place which will be developed towards an evaluation programme. The information gathered on individual projects is now being aggregated and evaluated from a sectoral perspective, and the first results are expected by mid-1995. The next stage, which is about to commence, is a global programme evaluation which will draw conclusions from the sector information for the TACIS programme as a whole. For global evaluation of the programme, the above-mentioned steps are a necessary precondition. Efficient evaluation depends upon having a sufficient number of completed projects to ensure balanced conclusions.

With respect to PHARE, up to now some country and sector evaluations have been made. However, now that more and more programmes launched in 1990, 1991 and 1992 are reaching expiry, ex-post evaluations will already be rendered more systematic by the end of 1995.

Monitoring and evaluation for both programmes will be further strengthened under the new organization in effect since July 1995, which foresees a special unit for each programme to deal with these tasks.

CONCLUSION

10.63. The conclusions of the Essen Summit not only concern the adoption by the associated countries of the laws and policies of the Union, but also their implementation and enforcement. This requires appropriate measures related to institution building and development, as well as to public administration reform.

10.64. Most PHARE financed studies concern improving government and/or private sector institutions, improving policy formulation and implementation (e.g. support to SMEs), developing medium- and long-term sectoral strategies (e.g. agriculture, energy, and transport sector strategies), and tackling specific problems in the private sector (e.g. pre- and post-privatization support, restructuring of commercial banking).

There are, however, many examples of direct links between PHARE-financed preparatory, strategy and feasibility studies and the investment activities of the IFIs in the infrastructure area, as well as in private sector development.

The present Regulation limits TACIS to technical assistance, so it can only promote investments indirectly, for example by funding preparatory studies, supporting technical assistance, and by creating a favourable climate for investments. Coordination with other donors is close. Under the Bangkok Agreement, TACIS has financed ECU 20 million of investment preparation and support activities in 1994, which are expected to entail substantial loans from the EBRD. TACIS agrees to strengthen its investment promotion but without neglecting projects with no direct investment link which are essential for improving the legal, institutional and policy framework for reform and investments.

10.65. Coordination between different Directorates-General has considerably improved and is now, in general, working well. The Commission has already made great efforts to improve coordination with other donors, for example the EBRD, World Bank, EIB (in the case of PHARE) and bilateral assistance programmes, and the results have greatly improved. Nevertheless, the Commission will continue to intensify its emphasis on coordination, both through headquarters and in the field.

10.66. The Commission agrees with the Court on the necessity of an evaluation system for PHARE and TACIS. Such systems are being developed by both programmes and will be fully operational at the end of 1995.

Given the limitations summarized by the Court in paragraph 68, the PHARE programme has been forced in the past to concentrate its resources on programming, project preparation and monitoring. Now that programmes begun between three and five years ago have been completed or are nearing completion, stricter ongoing and ex-post evaluation methods are utilized, so as to improve the future programming. The conclusions of the Essen Council, which point the way for the future of PHARE operations in a preaccession context, imply systematic evaluation, review and, where necessary, adaptation of multiannual programmes.

10.67. The Commission fully shares the Court's views with regard to the PHARE programme. The role to be played by delegations in all steps of the programme cycle will be reinforced. The advantages of their presence on the spot, i.e. for the dialogue with partner governments, coordination or follow-up functions, will be further exploited and will not be limited to the implementation of the PHARE programme.

As far as TACIS is concerned, the Commission agrees that decentralization of management to the recipients is one important possibility to achieve accelerated implementation. This is, however, problematic in the present context of the TACIS countries. The Commission agrees that decentralization to the recipients should be matched by strengthened management capacity of Commission delegations which could improve the speed and quality of the programme.

Where they exist, the delegations are already increasingly involved in programme management, as their capacity evolves, but the present staff situation does not, in most cases, allow as much decentralization as might be desirable.

10.68. The Court's observations concerning the resource limitations in the past are very much to the point. It is opportune to mention that one of the consequences of the Essen Council, in so far as the PHARE programme is concerned, is that the variety and complexity of the interventions in a pre-accession context will exceed those prevailing during the initial years of the PHARE programme. In addition to necessitating a greater demand on the experience and capability of Member States' administrations and private sector operators, the future obligations of the PHARE programme will require a broader, as well as a more specialized, palette of skills and expertise. The present coordination, management, monitoring and evaluation capability, as well as the technical implementation capacity in a wide array of areas, requires strengthening, both at headquarters and within the delegations in the partner countries and, last but not least, where it concerns the externally recruited manpower providing advice and support to the recipient structures.

10.69. The natural resistance of the partner countries resulting from the radical economic and social changes which they have to face is an additional difficulty for the Commission. An appropriate combination of technical assistance and co-financing of investment support could gradually overcome such resistance.

10.70 10.71. The question of resources allocated to the PHARE and TACIS programmes needs to be seen in the light of the last five years. The two programmes now require significantly more human resources than they have at present, having moved on from their original objectives as the number of projects have grown from one programming exercise to another.

The need for extra resources will increase rather than diminish. In the immediate future non-programme operations - such as food aid operations for the Caucasian and Central Asian republics which have been running since 1994 - will stretch existing resources even further. Nor does the future bode well, especially in relation to Central and Eastern Europe. The pre-accession strategy defined by the Essen European Council and the budgetary implications laid down by the Cannes European Council for PHARE in particular will require an enormous effort on the part of PHARE to award contracts more quickly. It will also mean that there will have to be greater decentralization of programme management and, consequently, an improvement in delegations' management, monitoring and supervision capacity.

The Commission has carried out a thorough and exhaustive survey of human resource requirements and has looked at the scope for making greater use of external technical services, in particular for the main stages of the programme cycle (). It has identified three different types of work:

(i) work which is the exclusive responsibility of public authorities and can be carried out only by officials;

(ii) work which can be carried out by non-officials employed by the Commission and overseen by officials;

(iii) work which can be contracted out but also be supervised in the same way.

The Commission welcomes the Court's observations and recommendations. It will draw the operational conclusions which need to be drawn and will take particular account of the Court's comments on global allocation of human resources and the discharge of its responsibilities.

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CHAPTER 11 (*) Cooperation with developing and third countries (except Central and Eastern Europe)

11. 0. TABLE OF CONTENTS Paragraph reference

Introduction 11.1

Implementation of the budget 11.2 - 11.8

Commitment appropriations 11.2 - 11.6

Payment appropriations 11.7 - 11.8

Structural adjustment support programme 11.9 - 11.81

Introduction 11.9 - 11.17

Budgetary analysis 11.18

Observations concerning eligibility conditions 11.19 - 11.21

Observations concerning the import programme 11.22 - 11.28

Selection of instruments and objectives 11.23 - 11.24

Control procedures 11.25 - 11.28

Observations on the counterpart funds 11.29 - 11.51

Generation of counterpart funds 11.29 - 11.33

Budgetary support and control system 11.34 - 11.44

Implementation of counterpart funds 11.45 - 11.51

Technical assistance monitoring 11.52 - 11.60

Commission supervision 11.61 - 11.68

Support programme for Algeria 11.69 - 11.75

Conclusions 11.76 - 11.81

INTRODUCTION

11.1. This chapter deals with 'Cooperation with developing and third countries` financed from the general budget of the Community, mainly using appropriations relating to food aid, financial and technical cooperation with Asian and Latin American countries and some Mediterranean countries, joint financing of projects implemented by nongovernmental organizations (NGOs) and emergency aid. It also includes the operational costs of the common foreign and security policy as set out in Title V of the Treaty on European Union. More in particular, the chapter presents the results of the Court's 1994 enquiry into structural adjustment support programmes for the Mediterranean non-member countries.

IMPLEMENTATION OF THE BUDGET

Commitment appropriations

11.2. All the appropriations available and the way in which they are used are summarized in Table 11.1. The rate of utilization for commitment appropriations decreased from 99,9% in 1993 to 95,2% in 1994. This decline was because the Financial Controller, for the reasons set out in paragraphs 11.3-11.4, was not prepared to give his approval before the end of the financial year to commitment proposals in respect of 12 projects in Title B7-3 (Financial and technical cooperation with developing countries in Asia and Latin America) for a total amount of 123,7 Mio ECU, decided upon by the Commission at its last meeting on 14 December 1994. As a result, utilization of commitment appropriations for this title of the budget fell from 100,0% in 1993 to 80,8%.

11.3. Underlying this situation were two concerns on the part of the Financial Controller: firstly, that financial commitments in respect of projects were in some cases being entered into prematurely, with excessive periods - sometimes more than one year - elapsing between the raising of the financial commitment and the signing of the financing agreement with the beneficiary (). Also, in this area there is a relatively high level of commitments where no payments have been made since the commitment was entered in the accounts ().

11.4. Secondly, while previously the Financial Controller had approved commitment proposals on the basis of a Commission decision supported by a financing proposal, which was deemed to be a sufficiently supporting document within the terms of Article 37 of the Financial Regulation, for these projects he required the presentation of the draft financing agreement with the beneficiary, as this was the document that would create a financial obligation of the Commission.

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11.5. Consequently, the Commission decided to carry over to 1995 commitment appropriations totalling 123,7 Mio ECU under the terms of Article 7.2 (a) first indent of the Financial Regulation. The appropriations were all committed by 31 March 1995.

11.6. In its Annual Report concerning the financial year 1991 () the Court pointed to the excessive haste with which projects were prepared, the premature nature of financing decisions taken by the Commission, and the excessive concentration of commitment operations at the end of the financial year (). All of these elements are inconsistent with sound financial management. The Commission should, therefore, ensure that, before a financing decision is taken by the Commission and a financial commitment raised in the accounts, the project has reached a sufficiently advanced stage of preparation.

Payment appropriations

11.7. The overall rate of implementation of 1994 payment appropriations fell to 80,5% from 84,6% in 1993. In Chapter B7-51 (Humanitarian assistance) the level of utilization was 66,9%. Previous annual reports of the Court () have shown how budgetary transfers from the emergency reserve and through the 'Notenboom Procedure` in 1992 and 1993 provided payment appropriations for food aid and humanitarian assistance budget lines in excess of what could be spent during the year, with resulting substantial carry-overs of payment appropriations to the following year. In 1994, 212 Mio ECU was made available () in payment appropriations from the emergency reserve, of which only a small part could be spent in 1994. Subsequently 186,4 Mio ECU were carried over to 1995. This is, therefore, becoming a systematic, and major, exception to the rule relating to differentiated appropriations that unused payment appropriations lapse at the end of the budget year. It is, however, unnecessary and should be avoided as far as possible: experience shows that it is normal for the bulk of the payment appropriations in the reserve to be used in the year following that in which the commitment appropriations are needed. The differentiated nature of commitment and payment appropriations for humanitarian aid permit this to be taken into account in the normal way, without recourse to large and systematic carry-overs.

11.8. Further, the Commission carried over more payment appropriations from 1994 to 1995 than it should have done had it applied the normal provisions of Article 7.2(b) of the Financial Regulation governing the utilization in 1994 of carry-overs from 1993 and the appropriations authorized for 1994. This Article provides that 'the Commission shall, depending on management requirements, endeavour to use first the appropriations authorized for the current financial year and not use the appropriations carried over until the former are exhausted`. Examination of the utilization of appropriations in 1994 for the budget lines which were the subject of carry-overs to 1995 (B7-510, B7-511, B7-514 and B7-517) shows that on budget lines B7-511, B7-514 and B7-517 the Commission used appropriations carried-over from 1993 when payment appropriations of the 1994 budget year were available. As a result, the Commission had more payment appropriations of the year unused at 31 December 1994 than it otherwise would have had. Thus, for two of the budget lines concerned (B7-510 and B7-514) the Commission carried-over respectively 14,2 Mio ECU and 58,1 Mio ECU more than it was entitled to, had it applied strictly the provisions of Article 7.2(b). Neither in its report on the execution of the budget (), nor in its carry-over decision () did the Commission explain what were the management requirements which led it to use carry-overs from 1993 while appropriations for the 1994 year were still available. The Commission should, in future, in its explanatory notes to the carry-over decision, include an analysis showing whether carry-overs from the previous year were used when appropriations for the year were available, with an explanation for the reasons.

STRUCTURAL ADJUSTMENT SUPPORT PROGRAMME

Introduction

11.9. Since the mid-1980s, many of the south and east Mediterranean countries embarked on structural adjustment reforms in agreement with the International Monetary Fund (IMF) and the World Bank. The reforms are focused on the reduction of budgetary and external deficits and can be accompanied by severe social effects. In response to this situation, the European Community, when it adopted the redirected Mediterranean policy in 1990 (), introduced measures to support structural adjustment in the countries concerned. These measures were to help economic reform by:

(a) supplying foreign exchange to contribute to the maintenance of an import level necessary for general growth or for the implementation of sectoral reforms; and

(b) providing budgetary resources in the form of counterpart funds for social and job-creation measures to help offset the short-term impact of adjustment.

11.10. The structural adjustment support measures are governed by Article 4 of the Protocols on financial and technical cooperation concluded between the European Community and the Mediterranean non-member countries (), by Article 3 of Council Regulation (EEC) No 1762/92 of 29 June 1992 () - which sets out the objectives and the general provisions - and by the individual financing Agreements for structural adjustment support programmes (SASP) signed with Tunisia in 1992, Jordan in 1992 and 1994, and Algeria and Morocco in 1993.

11.11. The SASPs are financed by a special envelope of 300 Mio ECU. In addition, the possibility is given to call upon the normal grant resources for financial and technical cooperation provided for in Article 2.1 (b) of the Protocols. As at 31 December 1994, a total amount of 270 Mio ECU had been utilized, 220 Mio ECU from the special envelope and 50 Mio ECU from the Protocol grants.

11.12. In outline, the support to structural adjustment measures take the following form:

(a) funds are granted to the beneficiary country in the form of foreign exchange in order to finance imports in accordance with the terms and conditions of an import programme established by the financing agreement;

(b) counterpart funds representing the equivalent value in local currency of the imports are established by the Central Bank: these funds are transferred to the treasury and allocated to the government budget in accordance with the provisions of the financing agreement.

11.13. A particular feature of structural adjustment support measures is that they are supposed to provide a means of rapidly disbursing funds to help fill an identified foreign-exchange gap. They should also enable the beneficiary country to have additional funds quickly to support its budgetary expenditure strategy agreed as part of the reform process.

11.14. In 1994, the Court undertook an enquiry into the legality, regularity and sound financial management of SASP expenditure incurred by the Commission. The Court examined whether the preparation and definition of the support for structural adjustment measures were adequate, whether the arrangements for controlling implementation of the SASPs were appropriate and whether the objectives fixed for these programmes were achieved in a cost-effective manner. The enquiry included missions to Tunisia, Morocco and Jordan and involved meetings and checks on documentation at the responsible national authorities - the Central Bank, the National Authorizing Officer, the government departments in charge of the management of counterpart funds. The technical assistance bodies were visited and projects financed from counterpart funds were checked on the spot.

11.15. In 1993 and 1994 the National Audit Offices of the Netherlands, Sweden and the United Kingdom conducted audits of structural adjustment aid measures in sub-Saharan Africa, Asia and Central America, financed by their respective development agencies. These audits were independent of each other, but were carried out in coordination and involved discussions at the planning, fieldwork and completion stages. An agreed text on common findings was published by each office in their separate reports. Although the Court's audit took place after the work of these audit offices, contact was maintained and information exchanged with them. When the Court's general findings coincide with those of its fellow audit offices, it is noted in the following paragraphs.

11.16. In 1994 the Court published its findings concerning import programmes carried out between 1987 and 1992 under the sixth European Development Fund (EDF) ().

11.17. In presenting the audit findings, Morocco, Tunisia and Jordan are considered together. The SASP in Algeria is subject to particular circumstances and constraints, and so is dealt with in a separate section.

Budgetary analysis

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11.18. Table 11.2 and Graph 11.1 present the allocation and utilization of structural adjustment funds by beneficiary country; Table 11.3 sets out the use of

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counterpart funds by intervention sector. From both tables it can be seen that:

(a) a total of 270,3 Mio ECU (77,2% of appropriations) had been committed as at 31 December 1994; 79,9 Mio ECU from the special envelope earmarked for structural adjustment had not been allocated at that date by the Commission;

(b) 87,0% of commitments have been paid; the main outstanding payment concerns the second tranche of the Algerian programme, the implementation of which is much delayed for the reasons explained in paragraphs 11.69-11.75;

(c) Morocco and Jordan are the major beneficiaries, followed by Algeria () and Tunisia; Egypt, Lebanon and Syria have not been selected so far, although the protocols signed with these countries provide for structural adjustment support programmes, subject to specific eligibility conditions being met;

(d) sectors which have benefited most from the counterpart funds generated are social housing (25,9%), education (24,9%) and health (18,7%); this is in line with the social objectives of the programme.

Observations concerning eligibility conditions

11.19. Article 3.2 of the Council Regulation (EEC) No 1762/92 specifies that countries eligible for SASP must implement a reform programme approved by the Bretton Woods institutions (IMF or World Bank) or programmes recognized as similar in concert with those institutions. Accordingly, the financing agreements signed with the beneficiary countries include a clause by which the release of funds is conditional on a positive assessment by the Commission that the beneficiary has adhered to the terms of the structural adjustment agreement. The Commission should, therefore, monitor, analyse and evaluate the fulfilment of the eligibility conditions in each country.

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11.20. For this purpose, the Commission is in regular contact with the IMF and World Bank and receives from them their analyses and reports. The Commission monitors a number of macroeconomic and social aggregates on a regular basis and, on the basis of the documents it receives, prepares its own assessments of the countries' progress with economic reform. In general this work of the Commission is performed thoroughly.

11.21. In the case of Jordan, however, the Commission authorized, on 30 August 1993, the payment of the second tranche of the SASP funds, although it was not aware of the revised performance criteria and targets set out by the extended stand-by agreement approved on 9 July 1993 by the Executive Board of the IMF. It was not until October 1993 that the Commission obtained details of the extended stand-by agreement. This meant that the Commission was not able to monitor compliance with it, with a resulting delay in the release of counterpart funds from the Jordan Central Bank to the Treasury account (see paragraph 11.30).

Observations concerning the import programme

Selection of instruments and objectives

11.22. Article 3.3 of Council Regulation (EEC) No 1762/92 provides that structural adjustment support programmes may take the form of technical assistance at macroeconomic level in sectors particularly affected by structural adjustment, import programmes, or job-creation programmes. The Court is not aware of any evidence that the choice of import programmes was based on a comparative study of the different alternatives permitted under the regulation, identifying which would make the greatest contribution to supporting the reform process. In practice, the Commission has opted for the implementation of general import programmes, except in the case of Algeria, where a sectoral programme was introduced.

11.23. According to Council Regulation (EEC) No 1762/92 and to the financing agreements, the main objective of the import programmes is to provide the means to finance imports essential for the expansion of the production capacity of the recipient country. This objective is vague and ill-defined. It is not feasible to evaluate the extent to which the general import programmes financed by the Community contribute towards its achievement. First, the volume of imports under the programmes represents but a small percentage of total Community imports into these countries (see paragraph 11.26). Secondly, the negative list which all donors providing finance for the import programmes agree to apply is not very restrictive. A wide range of goods is eligible (), including ordinary consumption goods which would not normally be considered essential for expanding production capacity in the beneficiary countries.

11.24. It should also be noted that the import programmes have not affected import trends between the Community countries and the beneficiary. This is primarily because the retroactive clause included in the financing agreements with Jordan, Morocco and Tunisia means that all the import operations financed by the programmes had been already carried out and paid for.

Control procedures

11.25. The financing agreements provide for checks to be carried out on the import programmes which involve a considerable investment of resources and time. The central banks are obliged to select eligible operations and to gather the original commercial documents which should then be checked by the technical assistance. These checks, however, are of no real value and have not led to any useful results: operations identified by the technical assistance staff as non-eligible have been simply substituted by other eligible imports (). Further, the Commission accepted the non-respect of a specific provision in the financing agreement with Tunisia (the slight exceeding of the ceiling provided for in the first tranche on oil imports).

11.26. More significantly, an examination of the foreign trade statistics of these countries shows that the foreign exchange transferred by the programmes represents between 1 and 4% of their potential eligible imports. In such circumstances, no significant risks are involved in the import programme, and the checks provided for in the financing agreement are unnecessary. They amount to no more than bureaucratic procedures, which have, however, in some cases (e.g. Tunisia, see paragraph 11.30) had the undesirable effect of delaying the disbursement of funds.

11.27. This observation confirms the common finding of the National Audit Offices of the Netherlands, Sweden and the United Kingdom that checks on documentation concerning imports financed on a retroactive basis served little purpose.

11.28. The import programmes actually carried out in the cases of Jordan, Morocco and Tunisia are in effect general balance-of-payments support schemes on a limited scale. The Commission should, therefore, re-examine the import programme component of its structural adjustment support measures. It should base its approach on a macroeconomic analysis of the beneficiaries' foreign trade position. Where access to foreign exchange is relatively open and unregulated so that, in economic terms, it is allocated efficiently, and where the funds provided by the Commission represent a small proportion of total requirements for imports that are considered eligible for financing, an import programme as such is not necessary. It would be more appropriate, simple, and cost-effective to provide foreign exchange for straightforward balance of payments support.

Observations on the counterpart funds

Generation of counterpart funds

11.29. Counterpart funds are generated by the national paying agent (the Central Bank) through the reimbursement of the equivalent value in local currency of the foreign exchange transferred for the import programme. The Central Bank then transfers the counterpart funds to the national Treasury, where it is entered in the national budget. The management and accounting procedures for this are established in the financing agreements. A number of weaknesses have been identified in the constitution of counterpart funds and their transfer to the national treasury.

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11.30. First, counterpart funds were not always promptly released to the Treasury, so that one of the key objectives of the structural adjustment support measures, that of making available resources for the budget quickly, was not satisfactorily met. Table 11.4 shows that for the Tunisian and Jordan programmes, it took between 3 and 7 months to release the counterpart funds from the Central Bank to the Treasury account. This time-gap is difficult to justify, particularly since the import operations financed had already been carried out and paid for at the time of the transfer of the foreign exchange from the Commission. In the case of Tunisia, the delay was caused primarily by the cumbersome procedure for gathering supporting import documentation, and, in the case of Jordan, by a delay in obtaining the co-signature of the Head of the Delegation. As a result of these delays, the counterpart funds were only available either right at the end of the budget year for which they were intended, or in the following year.

11.31. Secondly, in Morocco, the counterpart funds were accounted for in the Government Treasury's books at 31 December 1993, before the co-signature of the Head of the Commission Delegation, as required by the financing agreement, was obtained on 21 January 1994.

11.32. Finally, in Tunisia and in Jordan the amounts of counterpart funds to be credited were not calculated using the exchange-rate provisions of the financing agreements. There is no significant technical reason why the provisions of the financing agreement could not be applied. In the case of Jordan, the technical assistance pointed out that the financing agreement had not been respected, but, without evaluating the impact, indicated that the method used was acceptable. The Commission did not react on this matter. In the case of Tunisia, the impact of the different exchange rates used was assessed by the Commission and considered negligible. Any decision to apply different rules for the conversion of ecu to local currency should have been followed by a formal amendment to the financing agreement.

11.33. In the case of the first SASP for Jordan, the use of conversion rules different from those provided for in the financing agreement was not financially neutral. The counterpart funds generated and transferred to the government budget were approximately 2,6 Mio ECU less than they should have been, which represents 5,2% of the total programme grant.

Budgetary support and control system

11.34. The structural adjustment support programmes introduced in principle a novel instrument within the framework of the Mediterranean protocols in the form of budgetary support. Counterpart funds generated by the import programmes are integrated directly into the government budget. This is a necessary, though not sufficient, condition to ensure that the creation of counterpart funds does not have adverse monetary and budgetary effects at variance with the objectives of the structural adjustment programme. It is the approach recommended by the international financial institutions - the World Bank and the IMF - and the Organization for Economic Cooperation and Development (OECD) and is applied by the Member States in their own aid programmes and by the Commission within Lomé IV. A key recommendation of the National Audit Offices of the Netherlands, Sweden and the United Kingdom is that counterpart funds should always be paid to the central government, accounted for in the budget process and shown transparently in the national accounts.

11.35. The logic of this approach is that the counterpart funds should help in the government's funding of expenditure already provided for in a budget which forms part of a coherent macroeconomic strategy. As the objective of the SASPs is to offset the adverse social consequences of the economic reform process, the budget should provide for priority spending in key social sectors.

11.36. The Commission has tried to ensure a certain level of expenditure in targeted budget sectors by specifying in the financing agreements that the counterpart funds should be used to finance selected budget programmes, budget lines, or individually identified projects. The control procedures set out in the financing agreements, including the requirements for financial and physical audits, are primarily focused on these specifically identified items.

11.37. These procedures are, however, of limited value for the Commission in assessing that the social objectives of the SASPs are met. This is because the counterpart funds are not themselves used directly to finance the earmarked projects, but rather they form part of the general resources of the government to finance its budgetary expenditure. It is necessary in these circumstances to take into account the 'fungible` nature of counterpart funds. This concept means that if the counterpart funds 'finance` an activity that the recipient would otherwise have undertaken using his own resources, then resources are released enabling the government to undertake some additional activity other than the one to which the aid is nominally directed.

11.38. An analysis of the evolution of budgetary appropriations between 1990 and 1994 on the budget lines targeted by the Commission for the application of counterpart funds in Morocco illustrates this. Graph 11.2 shows that, while expenditure on the targeted areas was higher in 1993 and 1994 than previously, the counterpart funds are in part substituting for local funds. In total, local funds allocated in the budget to the lines supported by counterpart funds declined by 36,5% in 1993, and in 1994 were still lower than in 1992. Taking the 1992 level as a base, the substitution effect is 37,7 Mio ECU. Although this was explicitly provided for in the financing agreement, no analysis was included to show that in the absence of counterpart funds the Moroccan authorities would not be able to maintain (or increase) the 1992 level of expenditure on the targeted lines. Nor was it shown that any local funds released would be directed to other areas of public spending compatible with the structural adjustment support programme.

11.39. The fungible nature of budget resources has led most donors - including the Netherlands, Sweden and the United Kingdom - not to earmark closely the use to which their counterpart funds should be put. Their attention is instead focused on ensuring that the recipient government's budgetary policy as a whole is directed in an appropriate manner, and that particular sectoral policies are being pursued.

11.40. In order to assess effectively the impact of Community aid, the Commission - in conjunction with the World Bank and any other donors providing aid for structural adjustment - needs to carry out regular budgetary reviews of the whole budget, and the key social sectors which it considers should have priority for government expenditure. Specific quantitative and qualitative targets at a sectoral level should be set together with the beneficiary. This does not exclude the Commission fixing, as at present, targets for the completion of specific projects or programmes which are considered to have particular priority. It is indispensable, however, that this is done within the context of evaluating the execution of the whole budget. It is not sufficient to review budgeted expenditure, it is essential to monitor actual expenditure at sector level and across the whole budget.

11.41. Evidence of budget review work carried out by the Commission is limited to Morocco, for which a partial review was carried out in 1994. Apart from not covering all areas of the budget, it was not related to quantitative and qualitative objectives set out by the Commission.

11.42. The Commission should, therefore, in addition to providing in the financing agreements for the monitoring of the countries' attachment to the conditions of the economic reform programmes agreed with the Bretton Woods institutions, set out in the financing agreements specific quantitative and qualitative targets for budgeted and actual expenditure in the key social sectors which it, in agreement with the government, considers to have priority. The financing agreements should contain thorough analysis of the governments' overall budget and sectoral expenditure policies agreed with the IMF and the World Bank and the other donors. There should be sufficient analysis to provide a basis for assessing the extent to which any targeted spending contributes to meeting the priorities of the government. The reasons why targets are fixed for particular areas of spending as against others should be made explicit. The tasks of technical assistance engaged to check implementation of the financing agreement should be directed to assisting the Commission, in association with the other donors, with reviews of budgeted and actual expenditure at the sectoral and total budget level, and to evaluating progress against the specific targets. These tasks should continue to include on-the-spot physical inspections.

11.43. These findings confirm those of the National Audit Offices of the Netherlands, Sweden and the United Kingdom. They observed that there was a need for sectoral objectives for the use of counterpart funds, not just macroeconomic targets, and that there should be close coordination between donors in making implementation of structural adjustment support measures more efficient and effective.

11.44. When preparing financing agreements, the Commission should include analysis of the social and economic environment of the sector targeted and encourage measures which conform with adjustments plans. In this respect, recommendations of the Bretton Woods institutions should be built into the SASP where they are of specific importance for the sector supported by the Commission. For example, in Jordan the Commission should stress the need to introduce water tariffs reflecting the actual cost in order to reduce the waste of this scarce resource and condition forthcoming grants to the sector to progress in this area.

>REFERENCE TO A FILM>

Implementation of counterpart funds

11.45. Even if there is little evidence that the Commission evaluated the alternative sectors for the earmarking of counterpart funds, those chosen correspond to the objectives of the structural adjustment support measures. The programmes have helped to offset the short-term negative social impacts of the economic reforms, especially in areas such as health, education, water and soil conservation, and urban employment, where the beneficiary countries have serious and urgent problems to overcome. There are, however, some shortcomings in the programmes themselves and their implementation by the local administrations which reduce their impact.

11.46. In Morocco, in some of the health centres examined, services were not fully operational because of a lack of basic equipment and shortfall of staff.

11.47. In Tunisia, lack of clarity in the data available on the financing structure of the water and soil conservation programme and of the forest programme made it difficult to assess whether the Community contribution in percentage terms was in accordance with the provisions of the financing agreement. Actual government budget appropriations for the period concerned were 15,88 Mio TD (13,81 Mio ECU) less than the national contribution foreseen by the financing agreement.

11.48. A particular problem in Tunisia concerns projects included in the urban integrated development programme (UIDP), for which the financing agreement earmarked 9,5 Mio ECU of counterpart funds to be allocated in the 1992 and 1993 government budget. The Tunisian Government, however, did not include in the 1992 and 1993 annual budgets the appropriations agreed for the projects. As a result, at the end of 1993 the execution rate was only 3,1% of the amount foreseen in the financing agreement.

11.49. This situation results from inadequate preliminary analysis in so far as feasibility studies for the UIDP projects had not been completed when the programme was chosen for counterpart funding. UIDP is a medium-/long-term scheme and as such is not suitable for SASP financing. Counterpart funds should be spent quickly if they are to support the economic reform process effectively. The Commission's monitoring procedure is deficient in that the difficulties in the implementation of the UIDP were not promptly identified and corrective measures were not proposed.

11.50. In Jordan, the counterpart funds allocated to the water sector have not been used according to the precise terms of the financing agreement. The Jordanian authorities report the Al-Fuheis water project as having been financed by counterpart funds to the extent of 3 Mio ECU although it is not included in the financing agreement. Similarly, the water conservation programme was reported as being financed by counterpart funds equivalent to 1,1 Mio ECU in 1992 although the financing agreement only provides for the allocation of funds to it in 1993.

11.51. Delays were also found in the execution of the projects implemented by the Jordanian authorities, all of which should have been completed by the end of 1993. Three health centres of a total of 17 had not been finished in January 1995; a fourth health centre constructed in Sabah (Amman) was completed in June 1994, but in January 1995 was not operational because it still had to be connected to the electric network; the bridge and the adjoining roads connecting Es-Salt and Wadi Shoub were in January 1995 at a preliminary stage and will not be ready to use before the end of 1995. Finally, some of the schools and water projects examined on the spot were found already to be showing need of maintenance. Future financing agreements should include provisions to ensure that the facilities in target sectors are adequately maintained.

Technical assistance monitoring

11.52. The financing agreements provide for technical assistance for monitoring and audit tasks of the SASP in the beneficiary countries. These tasks have been entrusted to national control bodies, 'Inspection générale des finances` (IGF) in Morocco and 'Contrôle général des finances` (CGF) in Tunisia, and to consultants in the case of Jordan. A number of weaknesses were encountered with these arrangements, as set out in the following paragraphs.

11.53. The Commission has not adequately evaluated the risks associated with the SASPs and has not identified correctly the control tasks of the technical assistance. Too much of the limited control resources provided for has been devoted to unnecessary documentary checks of imports (see paragraph 11.25). The checks on the use of counterpart funds have not included analyses of the whole budget and the sectors targeted (see paragraph 11.42).

11.54. The terms of reference for the technical assistance's checks were insufficiently specific and did not provide for thorough checks (). Further, in the case of Jordan, insufficient resources were provided for the checks on the use of the counterpart funds. Although the financing agreement refers to financial and physical 'audits`, the technical assistance contract provided only for a financial review with some physical checks. Only 10 man-days were estimated for the financial checks on the counterpart funds.

11.55. The Commission's supervision of the technical assistance monitoring has been insufficient. In the case of Jordan, the Commission's pre-mission preparation was inadequate, the consultants received little guidance before going to Jordan to carry out checks, and received no feedback from the Commission services on their progress reports. In Morocco and Tunisia coordination meetings were not held and information on the progress of the verification work was not exchanged prior to the scheduled reports.

11.56. In Morocco, the independence of the control function can be questioned, because the IGF is a service within the Ministry of Finance, which is also the National Authorizing Officer for the SASP. Further, the Commission did not conclude a contract with the IGF setting out in detail such matters as the tasks that it was to perform, the standards to be applied, the audit documents to be prepared and supplied, and the access that the Commission would have to the work carried out. This concern is valid, considering that the work of IGF was unsatisfactory and its report was insufficiently objective. Delays by IGF in submitting an acceptable report led to a delay in the transfer of the second grant to cover SASP requirements for 1994.

11.57. In Tunisia, the budgetary analysis carried out by CGF () was incomplete. Further, the transfer of funds by the Commission was delayed because CGF's reports were late. The main reasons for late reporting were the laborious reporting method applied by the CGF and an audit scope which went beyond the requirements of the SASP. This highlights the inadequate specification of the control task given to the CGF by the Commission.

11.58. In Jordan, the financial checks on the use of the counterpart funds were based solely on data prepared specifically for the consultants by the Ministry of Finance for the budget lines or projects identified in the financing agreement. The Court's examination found that there are significant differences between these data and the accounting data in the ministries/departments responsible for the implementation of the projects, primarily because the Ministry of Finance figures reported as 'actual expenditure` include in reality planned expenditure. In this way, for example, expenditure on the Wadi Shoub bridge could appear to show that the bridge was complete and all the counterpart funds spent, when in fact, as the auditors saw, construction of the bridge was at an early stage in January 1995.

11.59. Improvements to the technical assistance monitoring of the SASPs are, therefore, required:

(a) the terms of reference for technical assistance should provide more details on the control tasks, and should fix the timetable, the audit scope, the approach and reporting procedures. It is advisable that technical assistance bodies be involved in establishing those procedures;

(b) high priority should be given to more effective checks on the use of counterpart funds; budget reviews and analysis of the sectors concerned must be developed and combined with selected physical inspections on the spot;

(c) checks on the import programmes should be completely revised, doing away with the checks on documentation where these serve no useful purpose. Closer analysis of the import data of the beneficiary country would be of greater value to the Commission in its understanding of its economy;

(d) the Commission should follow up more closely the progress of the technical assistance work; coordination meetings need to be held, interim reports and other relevant information should be forwarded to the Commission; feedback should be provided by the Commission to the technical assistants.

11.60. Any agreement for technical assistance of this sort should include a clause by which the Commission and the Court of Auditors have access to detailed information on the work carried out, so that it is possible to ensure that the control procedures set up are efficient and independent.

Commission supervision

11.61. The supervision role of the Commission covers essentially three components:

(a) monitoring the progress of the structural adjustment economic reform programme of the countries concerned, and checking to see that the conditions laid down by the IMF and the World Bank are respected so that tranches of SASP finance can be released (see paragraphs 11.20 and 11.21);

(b) monitoring the implementation of the SASPs in each country, as provided for in the financing agreements;

(c) supervising the work of the technical assistance (see paragraphs 11.55-11.59).

11.62. The following paragraphs are concerned with the Commission's supervision, by the delegation and the headquarter's staff, of the implementation of the SASPs by the national authorities.

11.63. In order for the Commission to supervise the SASPs in the beneficiary countries, the financing agreements and the implementation protocols signed with the beneficiary countries provide for, in particular coordination meetings with the national authorities and the submission of reports on implementation progress and financial execution and accounting reports by the National Authorizing Officer and/or the functional departments.

11.64. In Morocco, although the delegation maintained that it was in regular contact with the authorities, the only evidence which could be found of coordination meetings between the Commission delegation and the Moroccan authorities were contacts for which neither an agenda nor minutes were prepared. At the date of the Court's visit in October 1994 no progress reports on the central and regional execution of targeted budget lines had been submitted, as was required by the Financing Agreement. These reports were necessary to evaluate the impact of the SASP on less-favoured and rural areas, one of its main aims. The delegation also had not requested bank statements on the special Bank Al-Maghrib accounts which managed the SASP.

11.65. In Tunisia, also, the Court was unable to find evidence, in the form of meeting agendas, minutes, or file notes, that coordination meetings had been held with the national authorities. The reports of the managing departments were submitted very late (more than one year for the Ministry of Agriculture) or not submitted at all, as was the case for the subprogramme PCRD () inserted in the UIDP. In order to reinforce its supervision, the Commission engaged consultants to carry out an analysis of the reports of the managing departments and the audit reports of CGF. The consultants' analysis, however, does not add a great deal: in particular, the quality of the budgetary analysis carried out is unsatisfactory. Budget data reported are incomplete and the rate of utilization is overstated because the consultants omitted from their calculations the appropriations carried over. It is not clear that the Commission should use consultants in this way: it introduces another layer of analysis - in this case of limited quality - before the staff finally responsible take decisions.

11.66. In Jordan, there was evidence of appropriately documented coordination meetings between the delegation and the Jordanian authorities. The Commission, however, relied almost entirely on the data obtained by the technical assistance company for its monitoring of the programmes. As is shown in paragraph 11.58 these data did not present a reliable picture of actual expenditure on the targeted programmes and projects. These problems might have been avoided if the quarterly reports on the utilization of the counterpart funds required by the financing agreement had been submitted by the Ministry of Finance, and if the functional managing departments had been involved, as was the case in Tunisia and in Morocco.

11.67. The above weaknesses in the supervision by the Commission are in part explained by excessive reliance on the technical assistance component. It is most important that the Commission does not fall into the assumption that because a technical assistance contract has been signed to perform a certain number of controls that its tasks of supervision have been largely taken care of. The Commission must play an active role in ensuring that data and reports are produced on time by the national authorities and the technical assistance, that the data and other information is analysed, appropriate feedback made, with follow-up action where necessary.

11.68. Insufficient supervision by the Commission is also a consequence of the inadequate allocation of staff resources both within the delegations and in the Brussels headquarters. It should also be noted that structural adjustment and related measures require different skills than traditional financial and technical cooperation, particularly where understanding macroeconomic evaluations and budget reviews are concerned. In the Brussels headquarters only one person is responsible for the programmes in Morocco, Tunisia, and Algeria. Responsibility for the Jordan programme has suffered from a lack of continuity in the personnel involved.

Support programme for Algeria

11.69. The SASP for Algeria requires separate treatment in this chapter, as the programme is different in a number of respects from the other beneficiary countries, and is severely affected in its implementation by the political situation. As a consequence of this, the Court has limited its audit to an examination of documents and interviews with Commission staff.

11.70. The Algerian programme is a sectoral adjustment support programme, based on a sectoral import programme of construction materials necessary for the implementation of a social housing programme, which is supported by the counterpart funds generated. Unlike the other import programmes, the eligible imports are defined in a positive list of six categories of building materials.

11.71. The much more strictly controlled option of a positive list was adopted by the Commission because the Algerian economy in general and the foreign-exchange market in particular are highly regulated, with a predominant State enterprise sector. Also, although Algeria has had a number of short-term monetary stabilization programmes with the IMF, there is no general structural adjustment programme. There is, however, a World Bank sectoral programme for 100 000 housing units, to which the Community social housing programme is linked.

11.72. The financing agreement was signed on 14 September 1993 for 70 Mio ECU, at a time when the security situation was already seriously deteriorating. The first tranche of 35 Mio ECU was released to the Central Bank of Algeria on 23 December 1993.

11.73. However, since then considerable problems have been encountered with the tendering procedures for European suppliers and Algerian importers, and at the beginning of 1995 they were still not completed. The reasons for these delays can be largely attributed to consequences of the deteriorating political situation in Algeria (frequent changes within the Government, the technical closure of the Commission delegation in August 1994, and the impossibility for European technical assistants to operate in Algeria). Also, the Commission had to insist on the relaunching of the tendering procedure for the Algerian importers because the first selection made by the tender board biased the result in favour of State companies.

11.74. In addition, the performance of the local technical assistance engaged to monitor the tender procedures was unsatisfactory. The technical standard of the work was inadequate, there was insufficient follow-up of the programme of work with the Algerian authorities, and the reporting requirements of the contract were not respected. Although the Commission identified these inadequacies, it did not act sufficiently quickly to terminate the contract.

11.75. As a result, the 35 Mio ECU transferred at the end of 1993 has remained in an account of the Central Bank of Algeria where it earns no interest. The opportunity loss of interest on the 35 Mio ECU is estimated at almost 2 Mio ECU per year.

Conclusions

11.76. Support for structural adjustment programmes in the south and east Mediterranean countries forms an important part of the Community's development assistance policy for the region. The Commission needs, however, to revise the design of the programmes both to reflect the particular economic and budgetary situations of the countries, and to improve the effectiveness of the programmes and the Commission's monitoring of them.

11.77. Where possible, the Commission should seek to avoid introducing unnecessary constraints and conditions on the use of the funds it supplies to support structural adjustment. Where foreign exchange is allocated reasonably efficiently to economic operators, and where the volume of foreign exchange to be supplied constitutes a small percentage of the country's imports that are acceptable for financing, there is no need for import programmes with heavy documentation checks: the foreign exchange can be supplied directly to the Central Bank, which simply converts it to local currency to constitute the counterpart funds. This solution necessitates an evaluation by the Commission of the import data of each country, and the procedures by which economic operators are able to obtain foreign exchange.

11.78. All counterpart funds should be used and accounted for in the national budgets. The Commission should, in conjunction with the other donors supporting structural adjustment, carry out a budget review for each country, and satisfy itself that the budget strategy is consistent with the economic reform programme. It should then develop quantitative and qualitative targets for priority sectors or subsectors, in addition to any macroeconomic targets contained in the structural adjustment programme. The sectoral targets, which may include objectives for specific projects or programmes, should be incorporated into the financing agreement, and form the prime focus of the monitoring exercise.

11.79. The Commission should strengthen its supervision procedures, and should seek to increase the staff resources allocated to the SASPs. The increased attention which needs to be paid to budget reviews requires additional staff with the necessary skills and experience to perform these tasks, in association with the other donors. Technical assistance control tasks need to be precisely defined and should be based on the evaluation of the actual risks involved in the programmes. The Commission should follow up more closely the work of the technical assistance.

11.80. The Commission needs to continue to apply a particularly strict approach to the SASP in Algeria. This is because, despite reforms designed to liberalize the economy, it is still highly regulated at the present time, and the budgetary framework is still insufficiently transparent. In addition the current situation requires the Commission to supervise this programme at a distance. The need to monitor the whole budget remains, nevertheless, and should form part of the financing agreement.

11.81. Donor coordination is essential to ensure efficient and effective implementation of structural adjustment support measures. Budget reviews cannot be effectively carried out by one donor on its own, all donors and agencies supporting structural adjustment must work together on this. Good coordination exists already between the Commission and the World Bank and the IMF, and this should continue to be developed. Where other donors are involved, such as the Japanese and German authorities in Tunisia, coordination should be maintained.

REPLIES OF THE COMMISSION

General remarks

Although the Court makes a number of criticisms of the structural adjustment support programmes implemented by the Commission in the Southern and Eastern Mediterranean countries (SEM), some general in scope and some relating to specific instances, it does not challenge their relevance or the overall conception.

The comments concerning implementation and organization of checks are very much in tune with the Commission's present thinking and serve more as a confirmation that the Commission is going in the right direction than as a criticism of what it has done under the present rules and procedures.

IMPLEMENTATION OF THE BUDGET

Commitment appropriations - Payment appropriations

11.6 11.7. In both 1993 and 1994 the Commission failed to receive all the appropriations until late in the year. This is why it had barely enough time for decision-making and the related commitment and contract-award procedures.

The payment appropriations for 1994 and 1995 were not enough to cover both current operations and those of the previous financial year, hence the need to carry over some of the unused appropriations of the respective financial years.

Furthermore, the Court's remark concerning the 'systematic` nature of the carryovers might be true but, because time is of the essence for this form of aid and the procedure for mobilizing reserves is so cumbersome, the Commission has no choice but to act this way.

The Commission would once again like to draw attention to the problem of mobilizing the emergency aid reserve and the need for improvements that will speed up the reaction to needs.

11.8. The Commission acknowledges the Court's remarks in point 11.7 concerning the exceptional nature of carryovers but believes that the carryovers were justified in this case by the equally exceptional nature of the emergency aid requirements.

The Commission will take account of the Court's remarks concerning decisions on carryovers in future.

STRUCTURAL ADJUSTMENT PROGRAMME (SAP)

Eligibility criteria

11.21. The IMF's decision of 9 July 1993, which revised and extended the stand-by arrangement, was based on the conclusions of a report dated 15 June 1993 (a copy of which was sent to the Commission) that Jordan had satisfied the conditions of the SAP regarding macroeconomic performance, even though there were some delays in structural reform.

In view of the IMF's assessment, the Commission believed that the conditions for the release of the second tranche were met.

The details of the amendments made to the stand-by arrangement, however important they may be for future monitoring of the SAP, did not affect this decision.

Import programmes

Choice of instrument and objectives

11.22. While it is true that the Commission has not systematically carried out comparative studies of the various instruments provided for in Council Regulation No 1762/92, this is because:

- it uses a variety of instruments, not just import programmes, in all the countries concerned, ranging from technical assistance (particularly in connection with social spending) to import programmes, and in some countries employment programmes as well (financed with counterpart funds);

- these instruments are, in the Commission's view, complementary rather than alternative, and need to be modulated in relation to the requirements of the country concerned: persistent external and internal deficits (signs of a need to adjust) call for quick-disbursing programmes (import programmes and budgetary channelling of counterpart funds).

Why are import programmes so widely used?

- One of the aims of SAPs is to provide foreign exchange (see 11.9a and 11.13) and this cannot be done with technical assistance or job creation programmes: job creation is better financed with counterpart funds anyway.

- There can be only one adjustment programme and donors should preferably use similar instruments (here import programmes), though this does not mean that they should not be reviewed when necessary. ()11.23 11.24. In using a standard negative list (included in the agreement) the Commission is merely observing international practice (its list being identical to the World Bank's) with the aim of not adding further administrative constraints.

The inclusion of a retroactive clause (for countries with liberalized foreign trade and a currency that is convertible on the current account) is also international practice.

Control procedures

11.25 11.26. Checks are tailored to the nature of the instrument in question; a revision of the instruments for countries with freely convertible/transferable currencies and liberalized foreign trade may include the abolition of checks.

In the case of Tunisia, the slight overshooting of the ceiling on oil products was offset in the second tranche.

11.28. The Court's recommendations merely echo the Commission's own views and support its argument that a more comprehensive and flexible approach is needed:

- direct balance-of-payments aid (direct budgetary aid) rather than import programmes (on condition that foreign trade is liberalized and the currency freely convertible and transferable);

- less restrictive use of counterpart funds (on condition that budgetary policy is effective, fair and transparent);

- broader and more detailed macroeconomic and budgetary policy formation and trading.

Note, however, that:

- this proposal applies to general import programmes subject to the above conditions;

- in other cases, GIPs have the distinct advantage of promoting the development of the local private sector if a significant proportion of the programme is earmarked for it.

Such changes call for careful thought and close coordination with the Member States and financial institutions, such as the IMF. This process is nearing completion: Council Resolution No 7566/95 of 1 June on structural adjustment makes provision for the possibility of direct budgetary aid and wider allocations of counterpart funds.

To implement this new approach, however, the Commission needs enough human resources and the 'critical mass` to carry out macroeconomic studies (balance of payments, budget, exchange-rate and monetary policy), something which is not likely in the immediate future (see 11.68).

Counterpart funds

Constitution of counterpart funds

11.30. The delays referred to by the Court are mainly attributable to the red tape involved in the current procedures. The Commission is making every effort to ensure that this problem does not recur but notes that the delays in implementing these programmes have not been too damaging.

11.31. In accordance with the procedure established by the Commission and the Moroccan government, the two signatures (of the Ministry of Finance and the Delegation on 14 and 21 January respectively) should have constituted the act of acquisition of the funds by the Treasury. Seemingly, the recipient did not observe the agreement.

11.32. In the case of Tunisia, the Commission has insisted that the provision apply to the second tranche.

For Jordan it has been agreed that conversion for future programmes should be carried out in one lump sum and the corresponding financing agreements will make provision for this.

11.33. The loss referred to by the Court was caused by developments (revaluation of the Jordanian dinar) that were outside the control of the Commission.

Budgetary support and control system

11.35. The Commission subscribes to this general approach to public spending. Following the Council's Resolution of 1 June on structural adjustment, which takes a similar attitude, the Commission is drawing up a structural adjustment operation for Tunisia, under which social spending in pursuit of macroeconomic and budgetary objectives will be financed with counterpart funds.

11.37 11.38. The issue here is to distinguish between the transfer of counterpart funds to the national budget and the agreement reached between the government and the Commission on the prioritization and levels of budgetary allocations in the framework of social and/or sectoral policies. ()The fact that counterpart funds may also generate additional budget savings is not necessarily incompatible with the adjustment process as long as the use of the surplus for operations on the current account is in conformity with the objectives set out in the Policy Framework Paper.

The targeting of counterpart funds can be a useful, indeed vital, step towards a more comprehensive macroeconomic and budgetary approach. Such targeting (coupled with regular analysis of public spending) is a key instrument for making budgets more transparent.

11.38. In the case of the areas targeted in 1993 for deployment of the counterpart funds generated by the EU's grant for Morocco's SAP II, note that budgetary appropriations for these areas increased markedly in the period 1991-93, particularly 1992-93. The Commission wants to encourage this trend.

Discussions with the Moroccan government on the budget established that social spending in 1994 would aim to:

- consolidate the efforts made in education and health between 1991 and 1993 and so preserve the achievements of SAP II;

- boost the appropriations for other areas of social spending in order to mitigate the effects of budgetary cutbacks;

- give greater priority to operations that generate productive jobs: to this end a DH 1 billion youth employment fund was set up under the 1994 Finance Act.

The Commission therefore believes that:

- the desired objectives have been achieved (especially in terms of targeted social spending);

- the injection of counterpart funds has released own (local) resources, the main benefit of which has been to top up the funds for other items of social expenditure.

11.40 11.41. The Commission does review expenditure to the extent that its resources permit (see replies to 11.35 and 11.78). It took part in joint spending reviews with the World Bank in Morocco and Tunisia (which may be partial or limited, depending on the specific context).

The quantitative and qualitative objectives (as an example of social spending, see the social component of Morocco's SAP II) are established jointly, although the Commission acknowledges the Bank's leadership.

Since the budget deficit and spending priorities of the Tunisian government have been identified and verified with the help of the IMF and the World Bank, discussions are confined to the overall figures and balances.

11.42. Macroeconomic and budgetary objectives (social spending) will feature prominently in more intensive spending reviews and closer dialogue with governments on public spending priorities and rationalization (see new operation in Tunisia and reply to 11.35).

11.44. The Commission tries to analyse sectoral aspects but is not always equipped to do so (whether in terms of own resources or of the technical assistance to carry out the preliminary studies necessary). Nor are the recipient countries keen to accept such an approach.

In the case of water tariffs in Jordan, the Commission cannot but agree with the Court. It has taken this into account in its most recent structural adjustment aid programme.

Implementation of counterpart funds

11.46. The projects in question come under the Moroccan budget and are subject to the relevant budgetary procedures.

11.47. The overall implementation rate for the conservation programme is 82%, which would seem quite satisfactory.

11.48 11.49. The Commission believes that the difficulties encountered in executing the UDIP have been identified and suitable measures taken to deal with them.

Since the programme comes under the national budget, any interference in the management of it would be contrary to the principles of responsibility and national sovereignty.

When the delays in implementing the programme became apparent, the Commission learnt that they were caused by the Tunisian authorities' desire to optimize the use of the EU's grant. In view of this, the Commission decided to reschedule the spending rather than penalize delays.

When aid for the SAP was appraised in 1992, the UDIP was presented as a high priority programme that could absorb the ECU 9.2 million remaining balance forecast for 1992 and 1993.

The UDIP was chosen because the job creation component would help soften the social cost of adjustment. The programme is expected to create some 5 000 permanent jobs (trades for young people) and generate 2.2 million working days (work carried out by the poorest sections of the population).

Since early 1994 the pace of implementation has picked up and all three pilot sites are fully on stream. Work at the 11 new sites started in early 1995. Going by past experience, most of the budget earmarked will be used before the end of the year.

11.50. The Commission acknowledges the points raised by the Court concerning Jordan but would like to emphasize that the sums in question are quite small in relation to the programme's total budget (ECU 50 million).

11.51. Complying with deadlines in the case of the Jordanian projects was complicated by the fact that the counterpart funds only partially financed the projects (see reference to the Wadi Staub Bridge in 11.58).

The length of the Jordanian procedures for awarding contracts also has to be taken into account.

And while some projects were subject to delays, most, it should not be overlooked, were completed on schedule.

Technical assistance monitoring

11.52 11.59. See also the reply concerning points 11.77 to 11.79. To carry out a comprehensive study of the budget plus detailed sectoral reports with other donors, followed by an in-depth economic and budgetary analysis in preparation for the financing agreements, and then to ensure that the use of counterpart funds is justified and that all this is properly monitored calls for resources and skills that are in desperately short supply at the Commission.

The Court suggests that the terms of reference for technical assistance be revised accordingly but this raises two problems:

- TA for implementation is meant to be helping the recipient country (rather than the Commission);

- what assistance (with what financing) would be available to the Commission for the preliminary macroeconomic and budgetary studies and reviews?

While the Court's recommendations concerning an overhaul of structural adjustment support instruments echo the Commission's own views, they also highlight the fact that such an overhaul must go beyond more instruments to include decisions on:

- the allocation of resources;

- the political investment in the adjustment process;

- the allocation of resources within the Commission itself.

These issues are being studied.

On the last point, however, the Court acknowledges that there should be an increase in the Commission's resources in order to cope with studies and monitoring. This will be crucial to any new approach to adjustment aid.

11.53. See reply to points 11.40 and 11.41. In view of the nature of aid instruments used up to now, TA has naturally been focused on physical controls and checks on conformity.

11.54 11.55. The Commission notes that monitoring of technical assistance for operations in Morocco, Tunisia and Jordan was carried out as well as possible within the limits of the resources available to it.

11.56 11.57. Morocco's Inspection générale des finances (IGF) and Tunisia's Côntrole général des finances (CGF) are regarded as 'independent auditors` by the World Bank and the ABD, for example. Here again, the Commission has followed the practice of the main donors involved in adjustment. As soon as it became aware of the delays in drawing up reports, it supplemented the existing TA with further monitoring/evaluation staff.

The Commission set out clear terms of reference for the IGF's and CGF's audit operations in the financing agreements.

11.58. Efforts were made to check the spending of ministries/departments in Jordan on the basis of the Ministry of Finance's accounts. Lack of time and staff meant that the checks were confined to the methods used and not the details of the accounts. The Court's criticisms will be taken into account for future programmes; employment of an Arab-speaking accountant is one proposed change.

Commission supervision

11.64 11.67. For the reasons referred to by the Court itself in point 11.68, the Commission would argue that it did coordinate and supervise technical assistance to the extent possible with the staff available.

Support programme for Algeria

11.74. The Commission was indeed aware of the shortcomings of the technical assistance personnel recruited locally on the basis of a call issued by the Delegation (there were very few candidates to choose from). It did try to exercise tighter supervision in Algiers than would normally be warranted, often reminding the TA consultants of the contractual requirements and turning down all requests for extension of the contract. However, the invitations to tender under way called for a minimum on-the-spot presence which could not be provided in any other way because of the security situation (de facto closure of the Delegation).

11.75. The protocol of agreement expressly provided that interest earned directly or indirectly from deposits made by the Commission at the Bank of Algeria should be transferred in full to the programme's account.

The Commission tried to insist on compliance with this provision on a number of occasions in writing. The new Governor of the Central Bank finally told the Commission that there was no statutory provision that would allow the generation of interest. The Commission then received a signed formal declaration to that effect.

It would have been too risky to deposit the funds with a commercial bank in Algeria (most of them have a negative net worth).

Conclusions

11.76. The Court's recommendations concerning the need to make adjustments to the instruments of structural adjustment support, particularly in the context of the Southern and Eastern Mediterranean countries, echo the Commission's own thinking on the subject and lend support to the steps it is proposing to take.

11.77. The Commission has proposed a less instrumental approach to adjustment which would be more oriented towards in-depth macroeconomic and budgetary dialogue with the countries concerned.

This approach found support in Council Resolution No 7566/95 of 1 June 1995 on structural adjustment, which authorized the Commission to consider direct budgetary aid for countries that had liberalized trade and made their currencies freely convertible and to move away from targeting to a wider use of counterpart funds where certain conditions are met (see reply to point 11.78.)

Direct budget aid does, however, call for close cooperation with other donors, especially the IMF and the World Bank, to lay down clear eligibility criteria for this new form of financing.

This transition should make it possible to do away with the restraints represented by import programmes and their concomitant controls (see replies to points 11.25 and 11.26). The eligibility criteria will incorporate the evaluations required by the Court.

11.78. The Commission has always attached great importance to the integration of counterpart funds into budgets and budgetary analysis of their targeting. To this end, it has taken part in, or followed, the budgetary reviews conducted by the IMF and World Bank. A stepping up of its involvement in the context of the appraisal of a new structural adjustment operation in Tunisia should lead to closer dialogue with the States concerned on priorities and public spending cuts. We must avoid, however, imposing a plethora of conditions that are disproportionate to the EU's financial contribution and liable to hold up the implementation of programmes as has happened in experiments carried out by the World Bank (stop and go).

11.79. The Commission can only support the Court's recommendation that its capacity to prepare, implement and monitor structural adjustment programmes be improved.

On this hangs its credibility in:

- implementing its programmes;

- conducting constructive macroeconomic and budgetary dialogues;

- playing a bigger role in economic reforms and adaption of economies to new regional realities (e.g. a free trade area with the EU).

The forecast revamping of instruments will inevitably lead to changes in the technical assistance for the economic and budgetary analysis needed as a basis for dialogue between the Commission and the countries concerned. The Commission is currently studying how technical assistance should be adjusted in parallel to any change in the instruments.

11.80. In Algeria, despite all the difficulties and the possibility of hold-ups in implementation, the Commission is doing all it can to ensure that aid for this country is subject to the necessary controls and the conditions met. It is not always easy, however, to pick a path between principles to be upheld and the constraints imposed by politics, and security or other considerations.

11.81. The Commission has always seen the need for (and practised ) close coordination with other donors involved in structural adjustment, especially the IMF and World Bank, who are the prime movers of the process in the region.

It has taken part in World Bank public spending reviews in Morocco and Tunisia and a joint evaluation mission to Tunisia is scheduled for September (1995).

The Commission notes the Court's recommendation for more coordination with bilateral donors, especially Member States involved in adjustment.

CHAPTER 12 (*) European Development Funds

12.0. TABLE OF CONTENTS Paragraph reference

Introductory observation 12.1

Implementation of the EDFs until 31 December 1994 12.2 - 12.4

Implementation of regional cooperation under the Third Lomé Convention (Sixth EDF) 12.5 - 12.74

Introduction 12.5 - 12.10

Regional cooperation objectives, planning and management of appropriations 12.11 - 12.33

Regional cooperation objectives and framework 12.11 - 12.16

Programming of the sixth EDF regional cooperation 12.17 - 12.20

Financial allocations and types of projects undertaken 12.21 - 12.27

Distribution of the appropriations between the various types of projects 12.28 - 12.31

Relation between the OLAS and PICS systems 12.32 - 12.33

Implementation of programmable Lomé III regional cooperation 12.34 - 12.65

Preparation of the regional programmes 12.34 - 12.37

Monitoring of regional programmes 12.38

Regional nature of the projects selected 12.39 - 12.42

Definition of the projects and quality of the preparatory studies 12.43 - 12.50

Achievement of the projects' aims 12.51 - 12.57

Monitoring of projects 12.58 - 12.60

Delays in implementation 12.61 - 12.65

Conclusion on regional cooperation 12.66 - 12.74

Cultural Foundation 12.75 - 12.102

Introduction 12.75 - 12.79

Functioning of the Foundation 12.80 - 12.89

Application of the legal provisions regarding administration 12.80 - 12.83

Typology and results of the Foundation's projects for the period 1992-1994 12.84 - 12.86

Shortcomings of some projects 12.87 - 12.89

Financial and accounting management 12.90 - 12.93

Supervision by the Commission 12.94 - 12.97

Conclusion on the Cultural Foundation 12.98 - 12.102

Introductory observation

12.1. Unlike in previous years, the observations of this chapter have not arisen from the annual financial audit of the EDFs, but bring together the findings of inquiries which have focused more on the sound financial management of regional cooperation operations under Lomé III, with particular attention being paid to the Cultural Foundation (Lomé III and Lomé IV). Now that the Treaty on European Union has come into force (Article 188c(1), second subparagraph of the EC Treaty), the Statement of Assurance concerning the reliability of the accounts, which is the result of the annual financial audit work, is dealt with, as regards the EDF, in a separate report.

Implementation of the EDFs until 31 December 1994

12.2. Table 12.1 shows the implementation of the appropriations of the sixth and seventh EDFs at 31 December 1994. For the two Lomé Conventions whose implementation continued in 1994, payments during the year amounted to 1 781,6 Mio ECU and new primary commitments () to 2 480,7 Mio ECU. The corresponding amounts for the three EDFs still being implemented in 1993 were 1 353,7 Mio ECU and 1 631,3 Mio ECU respectively. The sharp rise in the decisions and payments is mainly due to the implementation in 1994 of two years of application, 1992 and 1993, for Stabex, and to the aid granted in response to major humanitarian crises (in particular in Rwanda), which arose during the financial year. Nine years after coming into force, disbursements from the sixth EDF represented 76,8% of resources, whereas those of the Fifth EDF accounted for 76,6% at the same stage of implementation. For the seventh EDF, the rate of disbursement was 26,7% at the end of the fourth year of implementation. The rate for the sixth EDF was 29% at the same stage of implementation.

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12.3. When the fourth EDF was closed on 31 December 1990, 125,1 Mio ECU in appropriations were transferred to the sixth EDF. Four years later, only 41,7 Mio ECU of these appropriations had been paid out, i.e. 33% of the transfer. When the Fifth EDF was closed on 3 December 1993, 492,5 Mio ECU in appropriations were transferred to the seventh EDF. At 31 December 1994, only 61,7 Mio ECU, i.e. 12,5% of the transfer, had been used for payments.

12.4. This situation has arisen because of the way in which the appropriations were initially divided up between the ACP States when the indicative programmes were agreed. When new Lomé Conventions are signed, new indicative programmes are agreed and the ACP States which then have new resources at their disposal tend to overlook these old appropriations still outstanding. At the same time, the EDF may be required at short notice to implement studies or measures for which the resources are not immediately available. A paradoxical situation thus arises where the existing appropriations are blocked for lack of measures to be implemented in some countries, whilst at the same time other measures cannot be undertaken because appropriations are not available. The question of transferring the balances remaining upon closure of EDFs should be tackled with the ACP States, so that an agreement can be reached on a time-limit after which the appropriations will cease to be allocated to particular countries and the unexpended balances will be returned to a common fund which can be mobilized at the request of the chief authorizing officer.

IMPLEMENTATION OF REGIONAL COOPERATION UNDER THE THIRD LOMÉ CONVENTION (SIXTH EDF)

Introduction

12.5. The Court of Auditors examined the regional cooperation operations under the sixth EDF in order to evaluate the way in which they were being implemented, with regard to what the third Lomé Convention intended. For this purpose, apart from examining the planning process for each of the seven ACP regions (Table 12.3), it made a detailed audit of 35 projects representing a total of 463 Mio ECU. It made on-the-spot visits to about 20 of these projects.

12.6. In July 1988, the Court published a special report on regional cooperation under the fourth and fifth EDFs (). In this report it pointed out various management shortcomings that could explain some of the difficulties or failures encountered in the implementation. Lastly, it recommended that:

(a) a full evaluation of finished programmes be made;

(b) selection be made more rigorously in terms of the criterion of the projects' financial or economic viability;

(c) the tasks entrusted to the Commission delegates be reviewed to ensure that more attention is paid to regional cooperation aspects.

12.7. In its replies, the Commission pointed out that, with the new Lomé III Convention, previous experience was now being taken into account and the regional criterion was more clearly defined. It then emphasized that the importance attached to a project's chances of success should not lead to the rejection of operations which, although undoubtedly less easy to implement, would give a genuine regional character to a sectoral strategy. Lastly, with regard to the involvement of its delegates in regional cooperation, the Commission considered that, although in the past their involvement had not always been as intensive as it should have been, it had been improving over the last few years.

12.8. There are several reasons for the Court's decision to audit the sixth EDF's regional cooperation. First and foremost, there is the problematical management of appropriations mentioned in recent annual reports (), due in particular to the tasks entrusted to the European Investment Bank (EIB) by the financial Internal Agreement (). Secondly, the delays and shortcomings suffered by the regional programming process have marked this out as a particularly high-risk area with regard to the aims pursued and the viability of the projects. Thirdly, the audit visits carried out by the Court in several ACP countries between 1988 and 1992 have shown that the regional projects are still experiencing coordination and management difficulties at the level of the Commission delegations. Lastly, the recommendations of the evaluations made in three regions () and the limited modifications made to the programming procedure for Lomé IV regional cooperation as of 1992 argue in favour of fresh consideration of this type of cooperation.

12.9. At 31 December 1994, i.e. four years after the expiry of the third Lomé Convention (), the situation as regards the appropriations allocated to regional cooperation under the Sixth EDF was as follows:

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12.10. The financing decisions relating to the EIB's own resources amounted to 21,0 Mio ECU. At the end of 1994, the Commission departments did not know the true extent to which they had been implemented (payments).

Regional cooperation objectives, planning and management of appropriations

Regional cooperation objectives and framework

12.11. Regional cooperation is one of the original aspects of the (ACP-EC) cooperation, and a very strong one, as it lays down, on behalf of all the parties, political recognition of the fact that regions exist and that the countries making up a region are interdependent. Title VII of Part Two of the third Lomé Convention organizes the regional cooperation of the sixth EDF (), including inter-regional and intra-ACP cooperation. The aim of regional cooperation is defined there very broadly, as it is supposed to support the efforts 'to promote collective and self-reliant social, cultural and economic development and greater regional self-sufficiency` (). In this respect, the fourth Lomé Convention is clearer in that economic integration is the main aim of regional cooperation ().

12.12. In addition to the aims, the Convention specifies those areas of cooperation to which special attention is to be paid (Article 103), the criteria which are to be met for an operation to be considered as regional (Article 106) and the scope of regional cooperation (Article 113). It is allocated total funding of 1 000 Mio ECU (Article 112) (), i.e. 11,80% of all the funds available under the third Lomé Convention. This funding is taken from the total resources allocated to the sixth EDF under the provisions of Article 194 of the Convention and thus includes an unspecified portion of the 1 100 Mio ECU which the EIB was in principle able to devote to loans from its own resources (see paragraph 12.15).

12.13. The growing importance of regional cooperation is reflected in the allocations of funds: 399 Mio ECU for Lomé I, 632 Mio ECU for Lomé II and 1 000 Mio ECU for Lomé III.

12.14. The Internal Agreement on the financing and administration of Community aid () specifies for its part that the Programming Committee, consisting of representatives of the Member States and of the EIB and chaired by a representative of the Commission, shall consider the general guidelines contemplated for the implementation of regional cooperation (Article 17(5)). Under the provisions of Article 13 of the Agreement, the Commission appraises projects and programmes which could be financed by grants or special loans from the Fund's resources, and the EIB appraises those which could be financed by loans from its own resources or by risk capital.

12.15. These stipulations mean that the sixth EDF regional cooperation is characterized by joint management in which the respective shares of the Commission and the EIB are not fixed. Because financial viability is the dominant criterion applied when the Bank appraises the operations submitted to it, the EIB refuses to make any firm commitment for anything other than individual projects. This situation has a knock-on effect throughout the procedure for planning (sectoral priorities) and implementing (utilization of appropriations) regional cooperation. This being so, it would be advisable for the allocations implemented by the EIB and those mobilized by the Commission to be more clearly separated in future.

12.16. Despite the experience of the first 10 years of regional cooperation (Lomé I and Lomé II), the framework of Lomé III is still inadequate for settling several basic questions:

(a) the term 'region` is not defined (Article 102), even though the Internal Agreement and the Commission's administrative provisions are moving towards regional planning;

(b) the role of the international regional organizations is not specified in order to avoid infringing the sovereignty of the ACP States;

(c) the procedure for negotiating, adopting and implementing the regional indicative programmes is not satisfactory, as transposing the procedures used for the national indicative programmes gives rise to problems because of the large number of parties involved.

Programming of sixth EDF regional cooperation

12.17. The Commission departments began the process of regional programming under Lomé III as of April 1985. As for the previous Conventions, seven regions were chosen () (Table 12.3). The programming phase consisted of five main stages:

(a) consideration of regional themes both by the ACP States and by them and the Commission;

(b) identification of priority regional themes as an extension to the national indicative programmes;

(c) drawing-up of a joint analysis (by the delegations and central departments) of the regional cooperation for each region;

(d) exchange of views with the Programming Committee on the basis of a summary document presented by the Commission;

(e) preparation and adoption of a regional programming document.

12.18. The procedure encountered several difficulties:

(a) the joint analysis was achieved only for the Caribbean region;

(b) the 'guidelines for the exchange of views on regional cooperation` were drawn up late for all except the Central African region. For the Pacific region, which is an extreme case, the document was not available until after the programming document had been finished;

(c) for the Caribbean and Indian Ocean regions, the programming documents were agreed with considerable delays;

(d) for two regions (Western Africa and Eastern Africa), which together represented 55% of the programmable funding, it was not possible to agree on a programming document;

(e) in the programming documents, the sectors of concentration were allocated funding only for Southern Africa, the Indian Ocean and the Caribbean;

(f) the duty to make a joint (ACP-EC) annual examination of the implementation of the regional programme was stipulated only for three of the seven regions (Southern Africa, Western Africa and the Caribbean).

12.19. Although the instructions on regional programming attached importance to the participation of regional or multinational organizations, the latter played no noticeable role for Western Africa, Eastern Africa and Central Africa.

12.20. Some of the difficulties encountered in the programming are not simply administrative in origin. They stem from the politically-motivated reluctance shown by the ACP States when it is a question of pooling financial resources. The way in which the regions have been split up geographically is also an underlying cause of some of the difficulties experienced. Regional programming was less difficult in the small island regions and in Southern Africa, where there was already some regional integration within the SADC (). In regions such as Eastern Africa, which cover sharply contrasted cultural groups, or Western Africa, where the number of countries involved is particularly high (17 States) and the economic conditions very unequal (the Sahel region and the coastal region), the traditional way in which the regions are split up ought to be thoroughly reviewed. In order to achieve true regional cooperation, it is essential for there to be regional groups which are as coherent as possible and which have a genuine desire for and the possibility of integration. A mechanism for dividing up the regional appropriations which offered greater incentives and which was based on a principle of mobilization by tranches released according to the results attained could, moreover, help to stimulate efforts to achieve regional integration. It appears that this approach was not followed when the regional appropriations of the first Financial Protocol to Lomé IV (Table 12.4) were initially divided up.

Financial allocations and types of projects undertaken

Dividing up of appropriations

12.21. A diagram showing the distribution of the regional cooperation appropriations is set out in Table 12.5. It is particularly difficult to manage these appropriations because the main areas to which they are devoted overlap. The regional operations in fact relate at one and the same time to different geographical areas (), financial instruments (), ACP or ACP-EC organizations of the sectors of activity and administrators () (Tables 12.6 and 12.7). Since its report concerning the financial year 1991 (), the Court has found every year that the Commission's accounts fail to give a true picture of the appropriations of the Lomé III regional allocation. In 1993, the Commission decided to take care of the unutilized amount of the EIB's funding by means of a transfer of 21,7 Mio ECU from the interest-rate subsidies not used within the framework of Lomé III, a decision which allowed overspending of 2,7 Mio ECU on the total funding for regional cooperation to remain at 31 December 1993 ().

12.22. In the accounts of the sixth EDF, the allocations relating to the ACP countries' regional cooperation are shown as 965,4 Mio ECU. When the 21,0 Mio ECU already decided by the EIB from its own resources is added, the authorized total funding of 984,8 Mio ECU (Table 12.2) is exceeded by 1,6 Mio ECU.

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12.23. One of the main reasons for the difficulties that have been encountered is that the EIB cannot join in any forward planning of the appropriations entrusted to it (paragraph 12.15). The same situation applies to the regional appropriations of the first Financial Protocol to Lomé IV. It would therefore be advisable for the Commission to draw up, for the eighth EDF, an accounting system for dividing up regional appropriation quotas which is free from the present ambiguities.>

REFERENCE TO A FILM>

12.24. Furthermore, an examination of the commitments accounts has shown that, for the promotion of trade and industry, the financing decisions which have been entered in the accounts are 5,9 Mio ECU and 4,7 Mio ECU respectively in excess of those entered in the allocation accounts, whereas the logic of the accounting system should mean that these amounts are absolutely identical.

12.25. This inconsistency shows the weaknesses of the procedures used in the EDF accounting for recording entries, weaknesses which are mainly due to a poorly coordinated process for booking and entering the debit and credit movements for a single accounting entry.

12.26. From a strictly accounting point of view, the Commission manages the regional appropriations in one single bloc (), without taking any account of their geographical allocation, or by recipient body. Thus, no distinction is made between the various regions, despite the programming of their overall funding. In this system, the monitoring of appropriations between the regions (), the transfers of appropriations to other financial instruments () and the management of appropriations kept in reserve at the time of the initial programming were carried out outside the accounts, which does not enable there to be any reliable control of the availability of appropriations. This being so, the accounting framework of the management of regional appropriations needs to be thoroughly reformed.

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12.27. Because there is no control over the EIB's regional operations and no periodic reconciliation of the Commission's financial data with those of the EIB, it was not until the end of 1993 that it became apparent that 69,8 Mio ECU remained available for Lomé III regional cooperation. Such a reconciliation therefore needs to be made periodically, as these funds could then be put to use in other sectors which are in deficit, instead of lying dormant because the monitoring is not strict enough. Furthermore, and because of management outside the accounts, in several cases the residues of the Lomé II regional appropriations and the Lomé III appropriations seem to have been amalgamated, which has made monitoring them even more complicated (). In order to clarify the situation, it would be advisable in future to carry over the outstanding balances from Lomé III regional cooperation to the general appropriations and to use them in areas where they can be implemented speedily. In fact, 69% of the appropriations available belong to the category of special loans. This financial

instrument, which is already very difficult to mobilize under the national programmes, is even more so when regional operations are involved ().

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Distribution of the appropriations between the various types of projects

12.28. Implementation of the Lomé III regional appropriations has remained slow: as at 31 December 1994 the rates of implementation for primary commitments (decisions), secondary commitments (contracts) and payments were 94%, 82% and 68% respectively (Table 12.2). As regards programmable aid, the rate of implementation of the appropriations has been particularly low for the Pacific, the Indian Ocean, Western

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Africa and Central Africa. At the end of 1994, the level of implementation for regional cooperation was lower than that for the whole of the sixth EDF, which was 95% for primary commitments, 86% for secondary commitments and above all 81% for payments.

12.29. At the same date, the respective shares of the decisions concerning programmable aid and non-programmable aid were 768 Mio ECU and 157 Mio ECU. Furthermore, whereas, according to the Commission's initial estimates, 100 Mio ECU had been allocated to operations to be implemented by the EIB, at 31 December 1994 the latter had committed only 79,9 Mio ECU, i.e.:

(a) own resources21,0 Mio ECU;

(b) interest-rate subsidies2,7 Mio ECU;

(c) risk capital56,2 Mio ECU.

12.30. An analysis of the decisions by sector of concentration shows that, despite the efforts announced by the Commission to give higher priority to the regional measures corresponding to the major areas of action of the third Lomé Convention, such as food security or the fight against desertification and against damage to the environment, the transport sector's share is still predominant, accounting for more than 45% of the total (Table 12.8) (). The rural production sector ranks second with 15,5%, which is low, bearing in mind Lomé III's priorities. In Western Africa, operations relating to the three major areas of action have mobilized 9,8% of the funds in sectors close to that of food security but these funds have in fact largely been devoted to a CILSS project (), the results of which have not been very convincing.

12.31. The decisions concerning the non-programmable measures have involved 157 Mio ECU. They relate to budgetary support to several ACP or ACP-EC bodies () (76 Mio ECU) and inter-regional measures (60 Mio ECU) or general technical assistance (21 Mio ECU). In the recent past, the Court of Auditors has examined the use of grants paid to the ACP Secretariat () and to the Centre for Industrial Development (). Observations on the Cultural Foundation are made in paragraphs 12.74 to 12.101 of this report. The following comments relate solely to the implementation of programmable aid.

Relation between the OLAS and PICS systems

12.32. The measures decided by the Commission for the implementation of regional cooperation are not defined in the OLAS system () but in the PICS system (). This system makes a link between these regional measures and the decisions entered in the accounts (OLAS). It is therefore the PICS system that makes it possible to know, in regional terms, the regional cooperation measures and their state of implementation.

12.33. Having found discrepancies between the two systems, the Court considers that it is important to introduce strict procedures at the Commission for reconciliation and synchronization with the data entered in the accounts, which would also make the accounting information systems more transparent.

Implementation of programmable Lomé III regional cooperation

Preparation of the regional programmes

12.34. In both the cases where the programming exercise did not result in the agreement of a formal programme (Western Africa and Eastern Africa), implementation of the appropriations was based on an internal Commission document. Thus, for the seven regions there was nevertheless an instrument of reference intended to ensure a minimum degree of consistency in the implementation of the appropriations. The scope of these basic documents was affected by shortcomings in various respects.

12.35. Even though the framework of the regional programmes was supposed to consist of specific objectives for each region, these objectives were laid down only for Western Africa and Southern Africa.

12.36. As for the national indicative programmes, the regional programmes were supposed to be structured around the sectors of concentration so as to obtain a mass effect and to avoid the risks of dispersion and fragmentation. For the Pacific and the Indian Ocean, the way in which the sectors of concentration have been defined has remained vague. For Eastern Africa, the Pacific and Western Africa, the appropriations allocated to the sectors of concentration have not been specified. Lastly, for the Caribbean, Eastern Africa, Western Africa and Southern Africa, some sectors of concentration were neglected when the appropriations were implemented (Table 12.9). In Southern Africa, the transport sector was given assistance at the expense of the food security and agriculture sector (12% instead of 30% of the appropriations). In Eastern Africa, 103% of the initial appropriations were used in just one of the three sectors of concentration (the transport and communications sector).

12.37. The third Lomé Convention recognizes the importance of regional organizations in the implementation of regional cooperation. It was found that the regional organizations have often suffered from serious institutional weaknesses affecting their mandate, their structure, their financial resources or their conception or management abilities. Such phenomena were particularly marked in the case of the Pacific (South Pacific Bureau for Economic Cooperation), the Caribbean (Caribbean Community Secretariat), the Indian Ocean (Indian Ocean Commission), Western Africa (Inter-State Committee for Drought Control in the Sahel) and Central Africa (Customs and Economic Union of Central Africa). Their capabilities and their status in the context of the Lomé Convention need to be strengthened in order to avoid the delays and complications which have all too often been found. The provisions of Article 161 of the fourth Lomé Convention go further, as they recommend that the regional organizations play 'an important part in the design and implementation of regional programmes`.

Monitoring of regional programmes

12.38. Although the corollary of any programming is regular monitoring of implementation, it has become apparent that the procedures for examining regional indicative programmes (which are themselves reflected in various individual projects) in the course of their implementation and for their possible reorientation have been seriously neglected in the Caribbean, Eastern Africa, Western Africa and Central Africa regions. As only the proper functioning of these procedures can guarantee timely and speedy reorientation decisions, the overall effectiveness of the funds implemented is at stake. It is therefore essential, bearing in mind the disappointing experience of Lomé III in this respect, to pay greater attention, right from the seventh EDF, to the strict application of the provisions of Article 160(1)(b) of the fourth Lomé Convention. In this respect, stipulating that each region had to submit an annual report would impose a degree of internal discipline on the Commission departments that could not be circumvented (), even if this is not expressly foreseen in the Convention.

Regional nature of the projects selected

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12.39. Where the ACP States are only dimly aware that they belong to a region, there is a great danger that regional funds will be used for projects which are of little value in regional terms. Aware of this risk, the Commission adopted, in respect of Lomé III, a system whereby the regional appropriations were not supposed to be implemented by an ACP State unless that State itself was willing to devote a fairly significant portion of the funds from its national indicative programme (NIP) to the project in question. Despite this mechanism, various cases were found where regional appropriations were in the end used to finance either operations for which it was not possible to ascertain the validity of the way in which the financing was divided up, or operations which were basically national in nature.

12.40. The way in which the financing was divided up between the national and the regional indicative programmes was in theory supposed to reflect the degree of regional importance of the projects (). However, in the absence of adequate information at the Commission, it proved impossible to ascertain how the amount of the contribution from regional appropriations had been calculated. Thus, in several cases, the share of the regional appropriations does not emerge clearly in relation to the value of the operation for regional development.

12.41. This was true for:

(a) the construction of an airfield runway and of an airport at Bequia (St Vincent and the Grenadines) for 18,9 Mio ECU, 2 Mio ECU of which was borne by the St Vincent NIP;

(b) the construction of the Bukombe-Isaka road in Tanzania for 35,9 Mio ECU, 5 Mio ECU of which was borne by the Tanzanian NIP;

(c) the construction of the Kobero-Nyakasansa road in Tanzania for 26,5 Mio ECU, 3,5 Mio ECU of which was borne by the Tanzanian NIP;

(d) the repair of the Ibanda-Uyole road in Tanzania for 9,8 Mio ECU, 3,5 Mio ECU of which was borne by the Tanzanian NIP;

(e) the implementation of the programme to open up the road network in Burundi for 33 Mio ECU, 11 Mio ECU of which was borne by the Burundi NIP;

(f) the development of the 'central corridor` in Tanzania for 13 Mio ECU, 2 Mio ECU of which was borne by the Tanzanian NIP.

12.42. In several cases, it is the project's regional nature iteself that is not established. This was so for:

(a) the tertiary-level training project in the Caribbean (7,2 Mio ECU), as students who do not come from the islands where the campuses are situated are put off by the high cost of attending the courses;

(b) the solar energy programme in the Sahel countries (34 Mio ECU), which was treated in the end as a juxtaposition of national projects, without the economies of scale originally planned being fully made;

(c) the wood development project in the Kompienga valley (6,5 Mio ECU), which was ultimately only of real benefit to Burkina Faso;

(d) the project to conserve and make rational use of the forest ecosystems of Central Africa (20 Mio ECU), the main regional element of which, namely the setting-up of a databank on the conservation of natural resources, had still not been set up after four years of implementation.

Definition of the projects and quality of the preparatory studies

12.43. According to the Commission's internal instructions, a memo written upon completion of the appraisal was supposed to summarize the way in which the projects have been drawn up and to explain their main characteristics. Despite the fact that this memo represents a fundamental administrative reference instrument for the proper implementation of the projects, it was drawn up in only one of the 35 cases examined.

12.44. As for all projects, the quality of the preparatory studies may have serious consequences not only for the scheduling of the projects, but also for their cost and impact. In the case of the regional projects, the difficulties encountered have been exacerbated by the number of parties involved and the fact that responsibilities have been watered down. The audit revealed various cases where the quality of the preparatory studies was unsatisfactory.

12.45. For the block trains project in Tanzania (30 Mio ECU), no check was made to ascertain whether the data on transit rail traffic were reliable. These unverified data were used in calculating the project's viability, thus resulting in a considerable overestimation. In practice, the project was of benefit to Tanzanian rail traffic as a whole, since it was not feasible to restrict it to transit traffic, as provided for by the financing agreement.

12.46. For the Caribbean Agricultural Trading Company (CATCO) (a 3 Mio ECU project), which was intended to give support to small farmers, the legal and administrative constraints hampering intra-regional trade were largely ignored, CATCO's management capabilities were overestimated, despite the fact that a Lomé II project was being implemented, and the body's true financial situation was not taken into consideration.

12.47. For the Bukombe-Isaka road in Tanzania (35,9 Mio ECU), the hypotheses on which the viability calculations were based were over-optimistic, as some of the investments needed were not incorporated into the calculation, thus resulting in the prospects for the project's viability being overrated.

12.48. National highways No 1 and No 6 in Burundi (33 Mio ECU) were repaired on the basis of old studies which were updated in confused circumstances. In the end, the final costs of highway No 1 were 62% higher than those provided for in the contract which was initially made and 20% higher than the amount (including provisions) specified in the financing agreement.

12.49. Work to repair the Godomey-Bohicon road in Benin (10,5 Mio ECU) started six months late because the technical studies available were out of date.

12.50. For the Ibanda-Uyole road in Tanzania (9,8 Mio ECU), the surface recommended in the technical study proved to be unsuitable, thus delaying the work and leading to extra costs of about 4,5 Mio ECU.

Achievement of the projects' aims

12.51. It was found on several occasions that the financing agreements' aims had not been achieved or had been only partly attained.

12.52. Within the framework of the block trains project in Tanzania, goods traffic in transit to Zaire, Rwanda, Burundi and Uganda in 1993 was considerably less than provided for in the financing agreement. The support given in the context of this project to the Tanzania Railways Corporation nevertheless helped to bring about some improvement in the traffic conditions within Tanzania.

12.53. Whilst the repair work financed by regional cooperation amounted to 56 Mio ECU, the failure to find a solution to the question of the dredging of the channels of the port of Beira in Mozambique has considerably reduced the possibilities of using the port since 1991.

12.54. The Isaka rail terminal (central corridor project - 10 Mio ECU) intended for the transhipment of goods transported by rail was not built, as Tanzania did not sign the long-term leasing contract for the land situated on its border with Rwanda in time. Subsequently, the Tanzania Railways Corporation built a transhipment facility with a much smaller capacity than that provided for by the financing agreement.

12.55. For the central corridor project in Tanzania, the works carried out on the railway track (main component of the project) had only a minimal effect because insufficient amounts of ballast were made available.

12.56. In the Caribbean, the Caribbean Agricultural Research and Development Institute (CARDI) project had only a limited impact because of the disappointing results of its various components and the lack of support shown by the Member States of the Caribbean Community (Caricom) (arrears on contributions, failure to appoint counterparts and qualified advisory staff).

12.57. The Zairian component (3,2 Mio ECU) of the project to conserve and make rational use of the forest ecosystems of Central Africa (20 Mio ECU) will not be carried out because of the present situation in that country. In October 1994, the funds which had been frozen since early 1992 had still not been released for new projects.

Monitoring of projects

12.58. Individual monitoring of each regional project should be carried out jointly by a regional authorizing officer designated specifically for this purpose and the Commission departments. This monitoring is essential in order to ensure that at regional level the set objectives are not lost sight of and that regional cooperation does indeed remain an effective instrument of integration.

12.59. With regard to the decentralized departments of the Commission, the monitoring of regional cooperation is split up between the delegations of the region. There is no formal procedure for appointing a 'lead` delegation which has the resources and the overall responsibility for the monitoring. Furthermore, the dividing-up and coordinating of the specific tasks which are the responsibility of the delegations are not sufficiently organized. In the central technical departments responsible for monitoring the projects' implementation, the workload is such that it adversely affects the attention that can be paid to regional projects. In the general central departments, there is no unit responsible for managing the joint aspects of the regional projects, the overall monitoring of the implementation and the follow-up given to the recommendations made in the evaluation reports.

12.60. The projects listed below are examples of projects where the monitoring and coordination mechanisms have proved to be faulty at both central and local level:

(a) the solar energy programme in the Sahel, for which no procedure for coordinating the nine delegations concerned has really functioned properly;

(b) the Caricom Regional Trade Development Programme, where the central departments took eight months to respond to a proposal put forward by the delegation to make an interim evaluation;

(c) the Caribbean Tourism Development Programme, where the Commission departments waited six months before cancelling an invitation to tender procedure for which the results were not satisfactory;

(d) the Limpopo line rehabilitation project in Mozambique, where the central Commission departments were unaware in July 1994 of the state of progress of the delivery of supplies for which the contracts had been agreed in 1992 and 1993;

(e) two inter-regional projects relating to the Air Transport Safety Agency in Africa and Madagascar (37 Mio ECU), financed by risk capital, for which the central Commission departments have not been able to produce any file on the monitoring of the project not only at the time of the audit performed by the Court, but also, and contrary to what the Commission says in its reply, at the time of the most recent discussions on this matter in July 1995. In its Annual Report concerning the financial year 1991 (), the Court noted a serious shortcoming in the Commission's documentation relating to operations financed by risk capital;

(f) with regard to the monitoring of the Caribbean Agricultural Trading Company project, for which two delegations had been instructed to come to an agreement, no specific responsibilities were, in practice, clearly allocated, which led to the financial situation becoming worse without being taken in hand again by the central Commission departments.

In several cases, the shortcomings in the monitoring of the projects by the delegations and the central departments may be attributed to the fact that some posts have remained unfilled for a long time.

Delays in implementation

12.61. The slow implementation of regional cooperation is due not only to the difficulties in identifying eligible projects, but also to the delays suffered by the projects once the financing decision has been taken by the Commission.

12.62. The financing agreement for the regional programme of meteorological cooperation for tropical cyclones in the Indian Ocean (5 Mio ECU), signed at the end of 1990, had given rise to contracts for only 6% of its amount at 30 June 1994, despite the fact that the equipment was supposed to be operational within two years of the signing of the agreement. The Commission's coordination and monitoring procedures are the cause of these delays.

12.63. The setting-up of a computerized system for processing customs data in the Caribbean was supposed to have been completed in 1991. By the end of 1992, the system had been set up in only three of the nine countries concerned. The delays were due to the failure to take sufficient account of the constraints (non-application of a common customs tariff) and to poor coordination between the project's managers.

12.64. For the Caribbean Examination Council Data Processing System, the technical installation had still not been set up four years after the financing agreement had been signed because, from the outset, the organization of the project had been shrouded in uncertainty, following an unsatisfactory preliminary study and the lack of availability of the requisite staff.

12.65. For the project to construct air safety colleges in Douala (Cameroon) and Niamey (Niger)(7 Mio ECU), the regional fire-safety college in Douala, the repair of which was supposed to have been completed by March 1991, had still not resumed its courses by September 1994, whilst at the same date the equipment in the Niamey college had still not been installed.

Conclusion on regional cooperation

12.66. Since the Lomé III objectives for regional cooperation have been worded in very general terms, it is not possible to make a valid comparison between what was intended and what was in fact carried out (paragraphs 12.34 and 12.35). Similarly, in the case of the regional programmes, it was not so much aims to be achieved as sectors of concentration that were laid down (paragraph 12.36). Thus, without any precise, quantified points of reference, the managers can only assess the results intuitively, which is not satisfactory when the implementation of public funds is involved.

12.67. Whilst acknowledging that various improvements have already been made to the process for regional cooperation programming relating to Lomé III, the Court considers that further improvements still need to be made, such as fixing a timetable and drawing up a more systematic programming document (paragraphs 12.17 to 12.20).

12.68. With regard to the regional organizations, the Commission should try to convince the ACP States to give them a broader mandate and to appoint them more systematically as regional authorizing officer, as this would help to improve the effectiveness of the regional programmes in terms of both their rate of implementation and their quality (paragraph 12.37). It is necessary, however, to make sure beforehand that these organizations actually have the means and the capabilities to play such a role. It should be noted, with this in mind, that considerable financial resources have been earmarked for strengthening some of the regional organizations within the framework of the fourth Lomé Convention ().

12.69. The financial and accounting management of regional cooperation still leaves much to be desired. It is essential to clarify the mechanism for dividing up appropriations between the Commission and the EIB, and then to set up an accounting monitoring system both by type of financial instrument as well as by regional area or other units of countries or beneficiaries (paragraphs 12.21 - 12.31).

12.70. Procedures for monitoring the implementation of regional programmes exist within the Commission, and in some cases only in conjunction with the ACP States. It has been found that these monitoring procedures have been neglected in several regions and more specific information needs to be given about their objectives, the departments responsible and their frequency (paragraph 12.38). Furthermore, in several regions the overall funding for the sectors of concentration selected in the programming documents had not been abided by, as no transparent procedure for revising the regional programmes had been followed.

12.71. All too often, it has not been clear that the projects were regional in nature (paragraphs 12.39 and 12.42). If the measures undertaken are to fulfil the general objective of regional integration effectively, each project needs to be carefully and critically examined from the outset and any measure that only partially meets the eligibility criteria laid down for regional cooperation must be rejected. Moreover, a genuine incentive mechanism needs to be set up in order to give support as a matter of priority to regions which show in practice a true desire for economic integration (paragraph 12.20).

12.72. With regard to the implementation of projects, efforts still need to be made in order for:

(a) the projects to be more carefully prepared, particularly in terms of identifying constraints, the quality and timetable of the technical studies and the validity of the analyses of the financial and economic viability (paragraphs 12.43 - 12.50);

(b) the monitoring of the operations to be made more regular and more effective, on the part of both the Commission departments and those of the regional authorizing officer (paragraphs 12.58 - 12.60);

(c) the operational objectives and the frequency of the involvement of the Commission departments (delegations and central departments) to be clarified so that it is easier to identify the responsibilities and to implement them (paragraphs 12.61 - 12.65).

12.73. It should also be noted that the shortcomings found by the Court with regard to programming and implementation of the projects, the role of the regional organizations and the monitoring of the projects have been mentioned on several occasions in various external evaluations (), which, at 31 December 1994, had not yet been systematically followed up.

12.74. The Court notes the fact that the Commission considers that the provisions and practices for implementing the fourth Lomé Convention have made it possible to overcome the bulk of the difficulties encountered in mobilizing the Lomé III regional appropriations. The Court would point out, however, that, in the replies to Special Report No 4/88 on regional cooperation financed under the first two Lomé Conventions, the Commission at that time stated that the provisions of the new Convention (Lomé III) had solved the problems encountered in implementing the preceding Conventions. The Court therefore insists that a report on the overall implementation of the regional cooperation and on the state of progress of and adjustments to the regional indicative programmes needs to be submitted to the discharge authority every year (paragraph 12.38).

CULTURAL FOUNDATION

Introduction

12.75. The Cultural Foundation was set up in the wake of the Third Lomé Convention () in June 1986 in the form of an international association under Belgian law (). Following financing difficulties, it was wound up during the financial year 1994 (see paragraph 12.96). From the outset, it received the support of the Commission because a former Commission Member was its first President. The association's management structure, as laid down in its Statutes, was rather cumbersome as, in addition to the General Assembly of the members, there was a 21-strong administrative board supported by an advisory board of 15 people and represented by a bureau of at least five people (). There was no particular mechanism guaranteeing the financial resources needed for the association to function. With this structure and with its extremely ambitious aims, this association was in a very precarious financial situation.

12.76. An agreement protocol concluded between the Commission and the Foundation on 16 December 1988 laid down, for the benefit of the latter, the principle of support from sixth EDF funds for the drawing-up and implementation of cultural projects satisfying the objectives of the Convention (). This protocol did not lay down any overall funding.

12.77. On 23 October 1987, the Commission made a global financing decision of 10 Mio ECU, in favour of cultural cooperation measures, from the sixth EDF's regional cooperation appropriations. Within the framework of this global decision, between 1987 and 1991, the Foundation received about 3 Mio ECU from the sixth EDF's appropriations, either to remunerate the permanent (virtually salaried) 'technical assistants` or to finance projects of a predominantly cultural nature. The Foundation's operating costs were covered by a 10% commission on the amounts reserved for the projects.

12.78. The fourth Lomé Convention (Article 141) recognizes the existence of the Foundation and confirms that its task is to contribute to the implementation of the objectives of cultural cooperation, but does not, however, make it an ACP-EC organization. The declaration in Annex XXII to the Convention states that 'the Community will make a financial contribution available to the Foundation ... to enable it to discharge its function. This financial support shall be granted on a multiannual basis to be determined under an agreement protocol to be concluded with the Commission, renewable in the light of the Foundation's achievements and taking account inter alia of the results achieved in the mobilization of external resources other than those provided under the Convention`.

12.79. As the agreement protocol relating to the seventh EDF was never signed because the parties failed to reach an agreement, the Commission made direct payments to the Foundation, between April 1992 and August 1993, of advances amounting to 2,25 Mio ECU () and in 1994 committed a sum of 738 606 ECU on behalf of the latter to settle the operations in progress.

Functioning of the Foundation

Application of the legal provisions regarding administration

12.80. The Foundation is governed by the Belgian law of 25 October 1919 on international associations, which stipulates that a list of the association's directors be published and that the statutes settle matters such as the adoption of the budgets and the approval of the accounts by the general assembly.

12.81. The statutes which were approved by royal decree on 19 February 1987 were amended on 7 November 1990, with the purpose of the Foundation being very much broadened in order to cover all the provisions of Title XI (cultural and social cooperation) of Part Two of the fourth Lomé Convention. Similarly, the provisions relating to the administration of the Foundation were extended so that as high a number as possible of representatives of ACP and ACP-EC bodies and Community institutions could sit on the administrative board. An advisory board was finally set up, consisting as far as possible of representatives of ACP or ACP-EC bodies to assist the administrative board, in particular in seeking financing complementary to that of the EDF (). In so doing, the Foundation granted itself a quasi-institutional status, one of its aims clearly being to prolong its financing.

12.82. Since being set up, the Foundation has not been managed in accordance with the provisions of its Statutes:

(a) the general assembly did not meet in 1992 and the minutes of its meetings prior to July 1990 could not be found;

(b) the administrative board did not meet in 1991; the minutes of its meetings prior to April 1992 could not be found;

(c) the registers provided for in Articles 9 and 13 of the statutes for recording the General Assembly's resolutions and the Administrative Board's decisions were not kept;

(d) the general assembly never adopted an annual budget and never had this question referred to it by the administrative board;

(e) the general assembly never approved the accounts of the previous financial year;

(f) the general assembly failed to renew the mandates of the administrative board's directors in mid-1988 and mid-1990, contrary to Article 10 of the former Statutes. The legal obligation to publish the names and capacities of the directors was therefore not fulfilled;

(g) the administrative board never drew up the annual programme of the Foundation's activities (Article 14 of the Statutes);

(h) it was not until the end of January 1994, seven years after the Foundation was set up, that the scale of members' contributions was laid down. The conditions under which this was done were not very clear, as there was no mention of this in the Statutes;

(i) the two external auditors required by Article 18 of the new statutes were not appointed until 1994. Those appointed are not persons who can be rendered professionally liable ();

(j) the rules of procedure provided for in Article 7 were not adopted until early 1994, i.e. seven years late.

12.83. With regard to the functioning of the bodies provided for in the statutes, scrutiny of the documents available showed that:

(a) the general assembly played only an unobtrusive role, which fell very much short of that provided for by the statutes;

(b) the administrative board neither monitored nor checked the Foundation's management, in particular the activities of its Secretary-General;

(c) the role of the treasurers did not go as far as that provided for in Article 15 of the statutes, which associated them with important decisions that committed the Foundation financially;

(d) the Secretary-General had an inordinate amount of power and managed the Foundation as he pleased, without giving an account of his management.

Typology and results of the Foundation's projects for the period 1992 - 1994

12.84. The Foundation did not implement a strategic plan for its operations. Similarly, it never had clearly defined objectives, pursued by means of annual work programmes. As the operations were carried out one at a time, it is not possible to make an objective assessment of their overall effectiveness. The 'strategic plan` drawn up by the Commission for Lomé IV was never ratified by the Foundation's administrative bodies and could not be applied.

12.85. Between 1 January 1992 and 30 June 1994, the Foundation wholly or partly financed 69 projects (Table 12.10). For more than 80% of these projects, the

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individual commitments did not exceed 50 000 ECU, with the average commitment being around 24 000 ECU. The three largest amounts of financing related to:

(a) a contribution of 150 000 ECU covering about a quarter of the cost of a musical show ('Waramba, the Mande opera`) performed at the Limoges French-speaking festival in October 1992, during a tour in Western Africa in 1993 and for three weeks in Paris () in the autumn of 1992;

(b) between January 1992 and October 1994, a series of radio programmes on the RTBF () concerning ACP culture (318 hours of broadcasts financed at a cost of 129 000 ECU);

(c) a series of very diverse shows presented at the World Fair in Seville in July 1992 (100 300 ECU).

12.86. In general, no independent assessments of the projects have been made. For their part, the Commission departments do not keep any press book which could give an idea of the impact of the projects financed out of EDF funds. The Foundation made an internal evaluation of its 21 largest projects in the period 1992-1994, but since this was basically an act of self-congratulation, the exercise was of little value, as the Court found when it audited some of the financing of courses or seminars.

Shortcomings of some projects

12.87. Several cases where the expenditure was questionable in terms of its timeliness or usefulness, relating to two sixth EDF projects financed in 1989, may serve as examples and must be noted.

Seminar on the culture and development of the island ACP countries

12.88. For this seminar, which was held in Mauritius from 31 July to 4 August 1989 at a cost to the EDF of 103 167 ECU, the following findings were made by the Court, without giving rise to any observations by the Commission:

(a) the Foundation never submitted the report provided for in the contract, despite the fact that 500 000 FB (12 821 ECU) was paid by the Commission.

(b) although the seminar lasted only five days, a car was hired, without any convincing reason being given, for a period beginning 14 days prior to the start of the seminar and ending four days after the end of the seminar;

(c) subsistence allowances of 78 000 FB (2 000 ECU) were paid to one person, without there being any proof that the person in question was actually present on the spot;

(d) the project financed the cost of a cocktail party for 200 people although only 50 people attended the seminar.

Training course on culture and development

12.89. This course, which took place in Cotonou (Benin) from 21 August to 1 September 1989, cost the EDF 145 229 ECU and gives rise to the following observations:

(a) the final report, for which the Foundation received a lump sum of 300 000 FB (7 800 ECU), was never received by the Commission. The draft outline paper giving a brief account of the involvement of some of the participants cannot be considered, by virtue of both its structure and its content, as the equivalent of a final report containing detailed conclusions ();

(b) the costs of staying at the Sheraton hotel in Cotonou (34 016 ECU) were borne by the project without the identity of the beneficiaries or the length of their stay being known; the documents available at the Commission were inadequate for the purpose of making a detailed check;

(c) three of the 14 Brussels-Cotonou air fares paid by the Commission were first-class tickets;

(d) two persons each received fees of 165 000 FB (4 300 ECU) in addition to their subsistence allowances, without there being any convincing reasons given for these fees;

(e) in this case too, the Commission departments reimbursed the sums thus invoiced without asking for any explanation.

Financial and accounting management

12.90. Despite the provisions of Annex XXII to the fourth Lomé Convention, the EDF remained the Foundation's main supplier of funds, as it covered 98% of the operations in 1992 and 1993 (1,16 and 1,18 Mio ECU respectively). The Foundation's members for their part continued to make only token contributions.

12.91. For 1993, the Foundation's last financial year of full activity, administrative expenses accounted for 47,3% of the total expenditure (). These costs were chiefly composed of:

(a) staff expenditure (19 862 000 FB, i.e. 509 283 ECU) for three full-time staff and, as of 1 July 1993, the Secretary-General ();

(b) the rent of the building housing the Foundation's headquarters (2 145 000 FB, i.e. 55 000 ECU).

12.92. The remuneration paid to the staff included allowances which the Foundation had not made subject to the social and fiscal regulations in force in Belgium. Moreover, the rent paid for the Foundation's headquarters was out of all proportion to its work and its financial means.

12.93. During the financial years 1992 and 1993, the Foundation left large sums on non-interest-bearing bank accounts (), which resulted in considerable losses of earnings.

Supervision by the Commission

12.94. Until the end of 1993, the Commission confined itself to paying the Foundation the sums which had been laid down under the financing agreements for the projects, without exercising any budgetary control over the way in which the Foundation functioned or any financial management control over the projects.

12.95. Following the controversy which began in January 1992 concerning the Foundation's management, the departments of the Commission's Financial Controller made an on-the-spot audit of the operations carried out by the Foundation and financed by the EDF. The findings of this audit visit, made in October 1992, are particularly limited, as there was no examination of matters relating to the validity of the expenditure incurred. The report which was submitted in November 1992 tried to be reassuring (), but nevertheless recommended the departments of DG VIII to make regular on-the-spot checks at the Foundation, which had hitherto never been done.

12.96. It was only at the insistence of the EDF Committee that the Commission decided to tackle the question of the Foundation's management in depth, which resulted in the Foundation's staff being dismissed as of February 1994 and its operations being suspended. The last commitment of 738 606 ECU of appropriations in April 1994 was intended to complete the projects under way and to take the measures for winding up the Foundation. Following this winding-up and in view of the seven-month arrears on rents, on 28 November 1994 the justice of the peace of the fourth canton of Brussels ordered the Foundation and its Secretary-General jointly to pay the rent arrears, costs and interest on late payments totalling 1 260 900 FB (32 050 ECU) plus the costs of the legal proceedings. Following an amicable agreement between the lessor and the Secretary-General of the Commission (), in August 1995 the Commission paid 1 071 660 FB (28 005 ECU) in compensation for cancellation of the lease, whilst the rent arrears were covered by invoking the tenant's bank guarantee of 660 000 FB (17 247 ECU).

12.97. In June 1994 the Financial Controller approved this last commitment of 738 606 ECU, but added the following negative opinion: 'the Financial Controller maintains his critical attitude to the proposal in question, which ultimately endorses the consequences of poor financial management`. Such a practice by the Financial Controller may be criticized inasmuch as his involvement is supposed to make clear the cases of management which do not comply with the rules, even though they may be motivated by external considerations (). Granting an approval accompanied by a negative opinion does not help to provide the desired transparency. In this instance, it would have been appropriate for the Financial Controller to have refused to grant approval.

Conclusion on the Cultural Foundation

12.98. The difficulties encountered by the Foundation have largely been due to the poor functioning of its administrative bodies, which were unable to exercise the desirable degree of control over the Secretary-General's mandate (paragraphs 12.80 - 12.83). This being so, the Commission departments ought to have drawn the budgetary authority's attention to the divergences noted as of before the second half of 1993. In this respect, the memo of 10 March 1993 referred to by the Commission in its reply fails to mention that the Foundation's administrative bodies do not operate in compliance with the Foundation's Statutes.

12.99. Since the Foundation is not permitted to have the constitution of an ACP-EC body, it is not desirable for it to be allowed to present itself in this light. Here too, the Community bears considerable responsibility for having agreed to assume the Foundation's operating costs as of 1992 without having set up an adequate mechanism for verifying whether the decisions taken and the projects carried out were justified (paragraphs 12.94 - 12.97).

12.100. Since there are no clearly laid down objectives and no defined work programme whose implementation could genuinely be monitored, it is impossible to assess the Foundation's overall results. This being so, it is not desirable to finance anything but individual projects, making sure that they are justified, that they are actually implemented and that they have good results. Any move towards institutionalizing the Foundation serves only to generate wasteful operating expenses (paragraphs 12.84 and 12.86).

12.101. In respect of the last commitment relating to the winding-up of the Foundation in June 1994 (738 606 ECU), the Financial Controller, who considered that the planned operation was the result of poor management, ought to have refused his approval. The Commission could then either have overruled this refusal, stating its reasons for this decision, or have made the Foundation's directors liable for their actions (paragraphs 12.96 and 12.97).

12.102. The Commission, having had to shoulder the financial consequences of decisions taken under conditions contrary to the statutes by the President and the Secretary-General of the Foundation, should explore the possibilities of taking legal action against these directors in the law courts in order to recover the amounts which the EDF was obliged to bear, namely the cost of winding up the Foundation: severance payments, compensation payments for breach of lease, excessive administrative expenditure from 1993 onwards, and the other costs incurred and studies undertaken in this context, forming part of the 738 606 ECU.

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REPLIES OF THE COMMISSION

IMPLEMENTATION OF REGIONAL COOPERATION UNDER THE THIRD LOME CONVENTION (SIXTH EDF)

Introductory observation

The Commission is fully aware of the difficulties that have arisen in the implementation of regional cooperation - they are inherent to this type of cooperation. It should nevertheless be pointed out that the European Community is the only donor engaged in a sizable regional cooperation programme. At the July 1990 Maastricht conference on development in Africa, African countries and donors together asked the Commission to draw up a programme to promote regional cooperation and integration. Work on this has been carried out in the context of the Global Coalition for Africa. Furthermore, as part of the Special Programme of Assistance for Africa, the Commission has launched a debate on the regional dimension of adjustment, paving the way for current efforts to set up the Crossborder Initiative in East and Southern Africa and the Indian Ocean, which is a pragmatic approach to furthering regional economic integration.

Introduction

12.8. See 12.15 for the reply to the Court's remarks.

12.10. The situation of EIB own-resource payments at the end of 1994 was established during the first half of this year in the course of a reconciliation of accounts by the Commission and the EIB.

Regional cooperation objectives, planning and management of appropriations

Regional cooperation objectives and framework

12.12. In order to give a clearer picture of regional cooperation's overall financial situation, the allocation under the second Lomé IV Financial Protocol will be made up entirely of grants managed by the Commission and constitute a minimum amount. Regional programming will no longer take account of operations administered by the EIB, which are considered to be non-programmable by their very nature.

12.15. The Internal Financial Agreement calls for the general guidelines for the implementation of regional cooperation to be discussed in the Programming Committee, where the EIB is represented.

The Commission made ex post allocations for regional projects appraised and approved by the EIB, as and when the financing decisions, were adopted from funds earmarked for the purpose. Throughout Lomé III the EIB provided the Commission with regular updates. See also the reply to 12.12.

12.16. (a) It would not be useful to introduce a strictly fixed notion of a region. Regional cooperation can cover a variety of situations as set out in Article 102. Nevertheless, for practical purposes the bulk of regional cooperation has been programmed and implemented for seven geographic regions. Other regional operations have usually benefited countries belonging to more than one such geographic region.

(b) The role of regional organizations in relation to the programming and implementation of regional cooperation has been progressively refined. Lomé IV explicitly recognizes the important role of duly mandated regional organizations. The possibility to effectively involve these organizations depends very much on the specific context. It is also necessary to make an important distinction between organizations with a broad economic integration mandate and others that are specialized on certain sectors or themes. On the whole, regional cooperation has been easier with the more specialized organizations. A complication is that the situation evolved significantly over time, new organizations are created and the mandate of existing organizations changes. Another frequent complication is the overlap in mandate or even conflict among various organizations. The above factors explain why in practice the role of regional organizations has been different across regions.

(c) It is clear that regional programmes are generally more complex to set up and implement than national programmes. The approach of the Commission has been to use established procedures used for the national indicative programmes to the extent that they were considered appropriate. Under Lomé IV there have been regular meetings between the national authorizing officers, regional organizations and the Commission for the different geographic regions. In the cases where there is a duly mandated regional organization, the latter has been prominently involved in the procedures.

Programming of sixth EDF regional cooperation

12.18. Around the period when Lome III was programmed, the geographical units did not have a regional desk officer. The follow-up of regional programmes was shared by several desk officers responsible for one or a few specific countries. This situation explains why the regional programming process is on the whole less well documented than the national process. The situation has improved as from Lomé IV with the nomination of regional desk officers.

12.19. The profile and capacity of regional organizations differ very much across regions. In some regions there is a lack of clarity in the mandate of different organizations. Both factors explain why the role of the regional organizations has been limited in the regions that are mentioned. Among the priorities of Lomé IV is to support regional integration by enhancing the capacity of regional organizations.

12.20. The Commission feels that there is no ideal way of splitting up the regions. Though membership of a regional organization might initially seem to offer a rational way of doing it, in practice this foundered on the problem of overlapping organizations. The divisions used by the Commission constitute a pragmatic solution.

The Commission feels that there are easier ways of encouraging regional integration than that of a complicated mobilization by tranches, examples being a mix of national and regional resources and additional balance-of-payments assistance for countries embarking on regional integration programmes. See also the reply to 12.71.

Financial allocations and types of projects undertaken

Dividing appropriations

12.22. This overrun has since been offset this year by routine decommitments concerning regional projects.

12.23. As the Commission pointed out in its reply to the 1993 report of the Court of Auditors (15.20), OLAS will be adjusted in the course of the year to allow for entries of any EIB contributions from own resources. See also the reply to 12.12.

12.24 12.25. Checks carried out on the accounts for the trade promotion and industry allocations this year have re-established conformity with the commitment entries.

12.26. Although non-accounts-based (non-OLAS) controls have been carried out since Lomé II, the Court is right is saying that the management of appropriations would be facilitated by entering them in the OLAS system; they will be computerized as soon as possible.

As soon as the necessary adjustments have been made to OLAS the Commission will enter the appropriations for the subregions and for the 'all ACP` heading, thus doing away with 'non-book` management.

12.27. A system to reconcile the EIB and Commission accounts on a regular basis was introduced early this year. The data held by the two institutions are updated each time the EIB gives notification that use has been made of risk capital or interest-rate subsidies/own resources. Efforts have also been made to correct some past inconsistencies. Following the Cannes Summit (June 1995), it is planned to transform fifth and sixth EDF special loans into grants.

Distribution of the appropriations between the various types of projects

12.30. Regional cooperation has been directed towards activities that would be very difficult or impossible to finance by the ACP States themselves. In addition, transport improvements (infrastructure as well as the regulatory framework) are necessary conditions for improved food security, because of the effects on the cost of bringing food from surplus to deficit areas and because of the effect on competition. Moreover the structure of expenditure does not necessarily reflect the importance attached to specific priorities. Some types of food security operations do not require a large amount of funding in contrast to infrastructure improvements. In some specific cases planned food security operations have been hampered by civil strife in the participating countries (this applied to activities for the Intergovernmental Agency on Drought and Development (IGADD) covering the Horn of Africa).

Relation between the OLAS and PICS systems

12.32 12.33. As soon as the allocations for subregions and 'all ACP` instruments are entered in OLAS the data will be reconciled automatically. This correction is under way.

Implementation of programmable Lomé III regional cooperation

Preparation of the regional programmes

12.36. The concept of sectoral concentration is more difficult to apply at the regional level than at the national level. There have been efforts to progressively refine the sectoral approach at the regional level. There has been significant progress in this respect for Lomé IV. Nevertheless, there will remain a need for flexibility at the regional level.

12.37. The Commission generally tries to find partners for its regional projects and programmes among the regional organizations but the States concerned have to have the political will to make these organizations function.

The Commission is well aware of the weaknesses of many regional organizations (see also the reply to 12.16 (b). Under Lomé IV activities to increase their capacity has become a priority. In addition, the Commission has supported efforts towards the rationalization of integration institutions in the context of the Global Coalition for Africa.

Monitoring of regional programmes

12.38. As the Court has noted, the complexity of regional cooperation can make it necessary to revamp programmes to take account of new developments.

In accordance with Article 160(1)(b) of Lomé IV, and in the light of the lessons of Lomé III, there is regular monitoring of regional programmes based on coordination and exchanges of view about implementation between the Commission, national authorizing officers, regional organizations and those running regional projects.

For certain regional programmes, in the Caribbean and Pacific especially, an annual report is drawn up. The Commission thinks that regular reports on other regional projects and programmes would be a good idea and is looking into the possibility of doing this.

Regional nature of the projects selected

12.40 12.41. The Commission understands that the 'regionality` of the specific projects mentioned is not being questioned. As indicated in the reply to point 12.37, the use of national funds to complement the regional funds is a sign of government commitment to the regional operation. The share of the national funds that are topping up the regional ones is essentially determined in view of the availability of such national funds and the government's commitments to the regional operation.

12.42. (a) There are three components to the project:

- technical assistance for the secretariat of the Organization of Eastern Caribbean States (OECS);

- training of secondary school teachers;

- infrastructure.

The movement of students between countries is one of the worthwhile objectives of the OECS Education Reform Strategy: in each country specialized centres are set up that cover a certain discipline for the whole subregion. But the strategy is still at an early stage and it is now clear to everyone that study awards are needed to ensure that the operation is truly regional in scope. The movement of students will thus be dealt with at a later stage.

(b) The project has a regional dimension thanks to the economies of scale achieved by grouped purchases of equipment.

(c) Even though Burkina Faso was the main beneficiary, some of the timber marketing operations carried out under the project were of regional scope, though smaller than initially forecast.

(d) The Ecofac project (conservation and rational use of the forest ecosystems of Central Africa) did not become operational until March 1992. It was designed as a series of pilot schemes in the various countries involved.

The 'regional` dimension lay not only in the sharing of information by the national authorities concerned but also in a common approach to the problems of a shared ecosystem. In this context, the data base referred to in the Court's report is only one of a number of management/information tools. Work on setting it up has already started and will proceed apace with the gradual introduction of new data generated by work in the field.

Definition of the projects and quality of the preparatory studies

12.43. Neither the convention or the internal agreement provides for such a memo, which is an administrative procedure that has long been abandoned.

12.45. Tanzania Railways Corporation (TRC) Block Trains: An evaluation of the above project completed in June 1994 confirmed that there was an overestimation of the growth in transit traffic. Transit traffic forecasting is inevitably subject to considerable risks given the unpredictable political and economic disruptions occurring in the region. Two particular factors leading to lower traffic than expected were:

- the dramatic fall in copper and zinc exports from East Zaire due to declining production at Gecamines,

- the delay and the subsequent scaling down of the Isaka Terminal project, with the resulting diversion of increasing proportions of Rwanda traffic via the Northern Corridor route (recently, due to improved operations at Isaka, this trend has been reversed).

It is fair to say that as transit traffic demand was below forecast, the programme has effectively enabled TRC to improve the efficiency of its domestic services. The project had included arrangements to ensure the block trains were used for transit traffic, and established a steering committee of representatives from the user countries to manage these arrangements. However, the envisaged system proved unworkable due to numerous conflicts, and the block trains have effectively reverted to management by TRC.

12.46. The Commission is aware of the problem and will try to avoid its recurrence by undertaking detailed preparatory studies.

12.47. Bukombe-Isaka road: the external evaluation report (Transport Sector Evaluation, Technecon, June 1994) found that the Commission's estimates were realistic and even overly-modest since the prospects for economic viability are currently better than forecast.

However, it is true to say that the increase in traffic has also been facilitated by other investments, notably the TRC and Isaka terminals, which have been carried out during/after construction of the Bukombe-Isaka road. As a general principle, economic appraisal of all future projects in the transport sector will be based on an overall network approach, including all transport modes. This is particularly important in the context of regional projects in Tanzania.

Moreover, the unexpectedly high level of traffic carrying emergency aid to the refugees in Western Tanzania since mid-1994 has certainly increased average daily traffic levels beyond those originally foreseen.

12.48. On the question of preparatory studies, a number of studies were indeed needed for the rehabilitation of RN No 1, which is the country's main highway for both national and international traffic.

The final cost overrun in respect of the contract amount was 62%, 30% of which was attributable to price revisions.

12.50. Ibanda-Uyole road: the design for the road rehabilitation was completed in 1990. The surface dressing was in conformity with the usual road standards of Tanzania, i.e. 'Wearing Course 50 mm`.

During the works, three years later, considering the new conditions of traffic and road damages, it was decided to modify the composition of the pavement construction. The total overrun for the surface dressing modifications has been about ECU 1 million and the rest of the supplementary funding (ECU 3.5 million) was due to the base-course (built-up solution) and some complementary works.

Achievement of the projects' aims

12.52. Since the start of the Rwanda crisis in April 1994, there has been a substantial increase in emergency supplies transported to the refugee camps (now running at approximately 400 000 tons per year), which has been greatly facilitated by this project.

12.53. A study of the dredging requirements was carried out before completion of the EDF-financed works in the port, and was followed by an open invitation to tender. The tenders received in September 1993 were, on average, double both the cost estimate of the consultants (DHV, Netherlands) and the sum earmarked for this project (ECU 20 million). The Mozambican authorities proposed to cancel the invitation to tender and to find another, more economically and technically viable, solution.

The Commission agreed to cancel the tender procedure and to adopt a new approach, namely:

(i) assistance to build up the capacity of the Mozambican dredging firm;

(ii) purchase of a dredger, the terms of reference for which are presently under discussion.

12.54 12.55. Isaka Terminal/Central Corridor: it is correct that the original conception of the Isaka terminal as a regional transit terminal for all the land-locked countries neighbouring Tanzania was not realized, as a result of delays in the Tanzanian Government's ratification of the Isaka lease agreement. However, subsequently, Tanzania did sign the lease agreement, albeit too late to 'save` the original project. The smaller terminal constructed later by TRC has enabled a significant growth of traffic recently, notably emergency aid consignments to the refugee camps near the Rwanda border.

Under the ongoing TRC restructuring programme (ECU 33 million, of which ECU 14 million under the national programme) the production of ballast is to be contracted out to a private contractor. Ballast application and permanent way maintenance is being improved by additional equipment and TA for track maintenance.

12.56. The Commission admits that the Caribbean Agricultural Research and Development Institute (CARDI) suffered from organizational failings, largely because of a failure to support the organization by the Member States of the Caribbean Community (Caricom).

This is why it is planned under Lomé IV to set up a management unit run by external consultants for the regional agriculture programme. The unit would coordinate and promote the programme, and report to a governing board made up of the agriculture ministers of the Cariforum member States. This structure would give the Cariforum members greater responsibility for the day-to-day management of the programme.

12.57. The reallocation of the budget allocation for the Zairean component of the project to conserve and make rational use of the forest ecosystems of Central Africa was approved by the Principal Authorizing Officer in June 1995 acting on a request of the Regional Authorizing Officer.

Monitoring of projects

12.59. See reply to 12.73.

12.60. (a) Procedure for coordination of Delegations: the importance of coordinating project implementation has been recognized by the Commission and has found tangible expression in the creation of the post of adviser in charge of regional projects in the Burkina Faso Delegation.

The main means of programme coordination is the steering committee, which meets yearly and is made up of the representatives of the national and regional contracting authorities, regional coordinators and the Commission. For budgetary reasons it is difficult to have all the Delegations concerned participate regularly.

(b and (c) The complexity of the problems to be dealt with combined with a heavy workload mean that it sometimes takes much longer than is desirable to evaluate proposals.

(d) In the specific case of the Limpopo Line rehabilitation project in Mozambique, the lack of information in the central departments in 1994 concerning supply contracts placed in 1992 and 1993 was the result of the Delegation's heavy workload (absence of the Delegate and elections in Mozambique). The information was available at the Delegation, however, and the only problem lay in the flow of information.

(e) The EIB sent documents concerning the two projects referred to by the Court to the Commission in December 1994 and they were then archived in accordance with the classification system the Commission set up in 1992 to enable the Court to consult EIB documentation. It was not possible to deal with the Court's communication of 20 July notifying the Commission of the relevant numbers, without which the projects could not be identified, until the end of August. The Court was informed in September that the documents in question were available and at no time did the Commission have any intention of obstructing the Court's work.

(f) The Commission is aware of this problem and under the Lomé Convention started appointing some one to be responsible for each project; responsibility for the Caribbean Agricultural Trading Company (CATCO) project lay with the Barbados Delegation.

The Commission acknowledges the Court's remarks. The lessons learnt from this project will be useful in planning the implementation of regional programmes.

Delays in implementation

12.62. Delays were mainly attributable to:

(i) the political situation in Madagascar;

(ii) implementation problems that made it necessary to appoint a project director and set up a management unit.

It also proved necessary to evaluate the impact of changes that had taken place since the project's approval. Implementation has been relatively satisfactory since the revision of the financing agreement in May 1993.

12.63. The delays were mainly attributable to:

(i) acceptance of the proposed systems;

(ii) slow introduction of laws and regulations;

(iii) inadequate training of customs officers in the countries concerned;

(iv) computerization requirements and the compatibility of the systems to be used in the programme: a major shortcoming was the overall management of trade data from different sources.

The Commission evaluated the programme in 1994 and the information and conclusions drawn from it will be useful for continuing with similar initiatives in a region where trade promotion is of prime importance. As noted in point 12.60(f), there is now someone with specific responsibility for each project.

12.64. The Commission is considering how to follow up the project.

12.65. The ERSI college in Douala opened unofficially in November 1994 and was officially handed over to the authorities concerned on 18 February this year. Despite the delay, Commission believes that the ERSI project has achieved its objectives.

The EAMAC college in Niamey - supplies for Asecna: all supplies have been delivered to Niamey. The radar for teaching (Lot 8) was accepted on 16 November 1994 and the HF antenna (Lot 6) was set up in July this year.

Conclusion on regional cooperation

12.66. The monitoring of regional cooperation as compared to that of countries or even individual instruments poses a number of problems and it is not easy to lay down quantifiable reference points. Nevertheless, the Commission would like to improve the overall monitoring of regional cooperation. The lessons learnt from the implementation of Lomé III provided the basis for new guidelines for Lomé IV. The failings that had become evident in terms of implementation and establishment of objectives led to the establishment of a central objective for regional cooperation to be identified as such in all the regional indicative programmes, namely economic integration on the basis of a liberalization of intra-regional trade, the strengthening of clearing and trade-financing machinery, and coordination of sectoral policies.

12.67. Under Lomé IV the programming process has become more coordinated and more clearly defined. Each Head of Government was asked to identify cooperation priorities for the region or, in some cases, for other groupings. On the basis of these priorities, which were set out in an annex to the national indicative programmes, an initial set of guidelines was put together for discussion with all the ACP States of a given region, leading in each case to the drafting of a preprogramming paper by the Commission. Furthermore, in four regions a regional organization was mandated to coordinate this exercise (and regional cooperation/integration organizations were much involved in implementation in the three other regions). Once the EDF Committee had given a favourable opinion on the preprogramming paper, the regional indicative programme, was drawn up as a standardized, coherent document, in accordance with the Committee's recommendations, and usually signed the following month.

12.68. The Commission is aiming to make the appointment of regional organizations as regional authorizing officers standard practice but rationalization is needed. With this in mind, efforts under Lomé IV to build up the capacity of certain regional organizations (financial and technical aid) should help them to play better their role as partners, since their competence is sometimes a problem.

12.69. The entry of subregional and 'all ACP` allocations in OLAS (June/July 1995) will make monitoring easier. Operations financed with EIB own resources will also be entered in the system (non-accounts entries). See points 12.15, 12.23, 12.26, 12.27 and 12.33.

12.70. As explained earlier, regional cooperation is by nature complex, both to programme and to implement. If it proves necessary to revise regional programmes and the corresponding financial allocations, the changes are discussed with the partners directly concerned. However, in response to the Court's call for greater transparency, the Commission intends to take steps to clarify the present procedure.

12.71. Regional economic integration has been designated the central objective of regional cooperation and this, combined with systematic programming, has led to an improvement in project eligibility criteria under Lomé IV. Furthermore, a true incentive to encourage regions to make real progress towards economic integrations already exists under Lomé IV, especially in the case of East and Southern African and Indian Ocean countries which are involved in the regional initiative to improve crossborder trade, investment and payments. Support takes three forms:

- financial aid to governments linked with structural adjustment aid for the purpose of financing the transitional costs of intra-regional economic liberalization;

- aid for restructuring the private sector;

- technical assistance for institution building.

12.72. The appointment of regional desk officers combined with regular meetings with national authorizing officers and regional organizations has improved the preparation and monitoring of regional operations. The Commission is also aware that delegations should play a greater role in a number of priority areas (political cooperation, democratization, conflict prevention, the rule of law, and so on) and wishes to enhance their role.

12.73. While programming has improved markedly under Lomé IV, some of the Court's remarks and recommendations are still valid. The Commission will take account of them in:

- enhancing the role of duly mandated regional organizations;

- giving delegations a larger role in programming and monitoring; and

- ensuring that regional projects and operations are consistent.

12.74. The Commission reiterates the fact that regional cooperation is complex and difficult by its very nature, and this is true at all stages, from programming to implementation. However, the approach improves from one convention to the next and many of the problems pointed out by the Court have already been overcome.

As explained in point 12.38, reports are drawn up for certain regional programmes, those of the Caribbean and the Pacific in particular. The Commission would like to have systematic reports for other regional programmes and projects, and is looking into this.

CULTURAL FOUNDATION

Functioning of the Foundation

Application of the legal provisions regarding administration

12.81. The Court rightly notes that it was the Foundation which granted itself quasi-institutional status with the aim of prolonging its funding.

The Commission, in agreement with the Council, always considered the Foundation to be a private institution. It therefore quite rightly rejected its request that it become a joint institution and it declined numerous invitations to sit as a full member on the Administrative Board. It also refused any financial aid for running costs.

This is why the Commission did not want to get involved in the internal management of the Foundation. The aid it accorded was always either for specific operations or technical assistance, a flat-rate percentage of which went to cover general administrative costs (see reply to fourth subparagraph of 12.99).

12.82. The fact that the Foundation has not been administered in accordance with its own statutes, as shown in the many examples given by the Court, is purely an internal matter.

It is up to the Commission, as a provider of funds, to ensure that its grants for specific projects are subject to the rules of proper financial management and used for the purpose for which they were accorded.

Typology and results of the Foundation's projects for the period 1992-94

12.84. The operations financed under Lomé III were part of a multiannual work programme drawn up by the Foundation and approved by the ACP Council of Ministers in 1987.

For Lomé IV the Foundation drew up a new multiannual programme (1991-95), which was the basis for the financing proposal submitted to the EDF Committee. The proposal did set out a 'strategic plan`, which, drawn up with technical assistance funded by the Commission, was designed in accordance with the integrated approach.

Shortcomings of some projects

12.87. The Commission has closely monitored all the operations implemented by the Foundation and checked expenditure wherever possible.

Training course on culture and development for island ACP States

12.88. On the subject of the Mauritius seminar:

(a) The proceedings of the seminar, which contained the main communications, were published jointly by the Foundation and Unesco. The Foundation believed that a final report was unnecessary because it would merely have duplicated the same material.

(b) The car was hired for the period before and after the seminar for travel entailed by preparatory work and the finalization of some administrative paperwork.

(c) The person in question was a secretary of Mauritian nationality who normally resides in Brussels and was in the country on holiday at the time the seminar was held. The return ticket was paid by the person's employer in Brussels.

This secretary, whose trip was not paid by the Foundation, acted as secretary for the seminar and was paid a per diem in return for services rendered.

(d) At this type of event it is quite normal for the number of people invited to a cocktail party to be higher than the number of participants.

The invitation list for the end-of-seminar reception was drawn up by the Ministry of Education in consultation with the protocol section of the Ministry of Foreign Affairs, taking into account the demands of protocol and local custom (present, for example, were the Governor-General, ministers and leading figures from State and parastatal institutions).

Training course on culture and development

12.89. Cotonou seminar:

(a) The final report took the form of a summary report drawn up by the seminar's organizers, which also set out the conclusions. This summary was given to the Court's representative.

The Commission was also informed that an internal evaluation of the course was carried out by those taking part.

(b) The hotel bill was settled by the travel agency of the Free University of Brussels (ULB), which acted as the Foundation's conference organizer for the seminar. The conformity of payments made on the sport was checked by the Foundation's treasurer, a member of the ULB staff, who travelled to Cotonou for this purpose. The invoice was checked by the Commission.

(c) Two of these first-class tickets were for Benin's Ambassador to Belgium and the Foundation's Secretary-General, who at the time was the Mauritian Ambassador to Belgium. The third ticket was taken because of the difficulty of finding enough seats in economy class for the dates in question.

(d) Two leading experts did indeed receive fees for their work in preparing the seminar and providing training during it. They also received per diems for the period of their stay in Cotonou. The Commission was aware of their active participation in the preparation and running of the seminar and found this expenditure to be justified and appropriate for the work carried out.

Financial and accounting management

12.91. The admittedly bloated administrative expenditure, which stood at 47.3% of the total in 1993, was not always this high; it usually stood at about 25%, even in the first half of 1993. After July of that year, its share of the whole rocketed because the Foundation continued to operate in expectation of an imminent payment of the EDF grant, to which it believed it had a legitimate and unalienable right by virtue of Article 141 of the fourth Lomé Convention and Annex XXII thereto.

12.92. The premises rented by the Foundation would have been suitable had its activities developed normally: they were not luxurious and corresponded to the Foundation's own vision of its future.

Supervision by the Commission

12.94 12.95. Each fresh transfer of funds was made only after a control of the accounts concerning the previous payments.

In October 1992 Financial Control, at the request of DG VIII, carried out an audit of the Foundation's accounts which revealed some shortcomings that were mostly attributable to the fact that the accounts were kept by a secretariat with little training in book-keeping. Although no actual irregularities were revealed, it was thought best to have DG VIII carry out on-the-spot checks. DG VIII had not carried out such checks because of a chronic shortage of resources.

At the Commission's request, in 1990 the Foundation made provision in its statutes for supplementary controls, such as the appointment of a statutory auditor.

12.96. The Foundation's financial situation was always precarious and it became desperate after the EDF Committee's final refusal to accept its programme in October 1993. The Commission then proposed to the Foundation's President that a last tranche of aid could be given on condition that the staff were laid off and operations suspended. The approach was made at the Commission's initiative. As a result, a financing decision was taken by the Commission on 1 June 1994.

The fact that legal proceedings were started for non-payment of rent was the fault of the Foundation, which did not take the necessary steps to quit the premises at the end of the six months period of notice that was covered in the financing decision of 6 June 1994. It was only thanks to pressure from the Commission that agreement was finally reached on 27 March 1995 between the landlord and the Foundation on the issue of the cancellation of the lease and rent arrears. Under the terms of this agreement the landlord accepted the cancellation of the lease, something which he had previously contested, demanding that the Foundation find a new tenant to take over the lease. In accepting the agreement, the landlord implicitly gave up his claim to rent arrears not covered by the bank deposit lodged by the Foundation. The deposit took the form not of a blocked account but a bank guarantee payable on demand, payment of which was one of the conditions of the agreement of 27 March 1995. The Commission made sure it had been paid by the bank before itself paying the reparation for cancellation.

12.97. See reply to point 12.101

Conclusion on the Cultural Foundation

12.98. The Foundation's problems fall into two categories: financial and institutional.

Its financial problems became acute in the second half of 1993 when the financing proposal was turned down. Before this time the Commission had not noticed any serious deficiencies in the management of the grants accorded to the Foundation, apart from some shortcomings that could be overcome.

The Foundation's internal problems, notably those arising after the General Assembly of 14 June 1993, were public knowledge. Some members of the Board challenged the legitimacy of the decisions taken and considered taking legal action, though they desisted in the end. Nevertheless, while there was still a possibility of legal proceedings in the Belgian courts, the Commission did not want the internal workings of the Foundation to be the subject of a legal ruling. It explained this position on a number of occasions, both orally and in writing (Note of 10 March 1993) to the permanent representatives of the Member States. It was also the subject of an oral declaration by Mr Marín to the Joint Assembly, which met in Brussels from 4 to 8 October 1993.

12.99. Under the fourth Lomé Convention (Article 141 and Annex XXII) and the resolutions of the ACP Council of Ministers, the Commission could not avoid providing financial aid for the implementation of the Foundation's projects.

As it has explained in point 12.81 the Commission, in agreement with the Council, has always considered that it should not interfere in the internal affairs of a body governed by private law but confine itself to checks of financial management.

The Foundation never received aid from the Community that was directly destined to cover general running costs. All the aid granted since 1987 has been for technical assistance or the financing of projects. Certainly the Foundation was authorized to use a proportion of these sums for its operations but this is normal practice in the case of aid to non-commercial associations or entities which are pursuing objectives supported by the Community.

The Commission did not want to sit on the Foundation's decision-making bodies because to do so would have placed it in an extremely delicate position owing to a possible conflict of interest. Moreover, as it has said, it exercised external control to the extent that was possible on the projects put forward and the justification of expenditure.

12.100. As early as 1987 the Foundation drew up a multiannual programme of work that was approved by the ACP Council of Ministers. In its resolution on cultural and social cooperation of 13 May 1987 the ACP Council designated the Foundation as the body responsible for implementing the programme. The projects undertaken in following years all stemmed from this programme.

12.101. In 1993 the Financial Controller delivered a negative opinion on the project concerning a work programme for the Foundation for ACP-EEC Cultural Cooperation, for which a grant of ECU 7 750 000 was requested. The Controller maintained this negative stance in 1994, being opposed to the high level of allowances in particular. Finally, after an external audit and negotiations with those in charge of the Foundation, a financing proposal for a much smaller sum, ECU 738 606, was drawn up with a view to settling the Foundation's finances and enabling the Commission to withdraw completely from involvement in the Foundation. The proposal went before the EDF Committee on 21 April 1994 and was approved. Financial Control, which had not seen the proposal beforehand, told the Commission that it remained critical of this proposal, insisting that all the financial obligations be studied and evaluated with the greatest care on account of the inter-connection of Belgian law and Community rules in this matter so that an undisputed final clearance could be made. After evaluating all aspects of the matter, the Commission decided in favour of the proposal on 1 June 1994 (Minutes 941204 of 2 June 1994) and Financial Control approved the corresponding commitment proposal.

12.102. As explained in point 12.82, the many examples cited by the Court where the Foundation failed to abide by its own articles of association were an internal matter. It was not up to the Commission as the Foundation's main provider of funds to interferes in internal management questions as it did not sit on the decision-making bodies.

The EDF had no legal obligation to bear the cost of the suspension of the Foundation's activities; the decision to award the Foundation a grant to settle its debts and cover the expenses incurred by the suspension of its activities was clearly political and not the result of legal constraints. The decision adopted by the Commission on 1 June 1994,following the favourable opinion of the representatives of the Member States on the EDF Committee, to accord the Foundation financing totalling ECU 738 606 was therefore unquestionably a political decision. Under these circumstances, the Commission does not see the need to pursue the Foundation's administrators in order to recover the (political) cost of suspending the activity of the Foundation.

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PART II Observations on the administrative appropriations of the institutions and bodies of the European Communities

Chapter 13 - The Commission

- Staff and administrative expenditure of the European Commission Delegations

- Financial and administrative management of assets (excluding research)

Chapter 14 - The Court of Auditors

CHAPTER 13 (*) The Commission

13.0. TABLE OF CONTENTS Paragraph reference

Staff and administrative expenditure of the European Commission Delegations

Introduction 13.1 - 13.2

Budget appropriations and staff 13.3 - 13.4

Local staff 13.5 - 13.16

Regulations relating to the conditions of employment of local staff 13.5 - 13.8

Special system for administrative and technical staff in certain Delegations 13.9 - 13.13

Awarding of steps during grading immediately after recruitment and when adjusting grades throughout careers 13.14 - 13.16

Permanent inventories of movable property 13.17 - 13.18

Kilometre allowance, official cars and overtime 13.19 - 13.20

Administration of annual leave 13.21 - 13.27

Accommodation 13.28 - 13.33

Irregularities 13.31 - 13.33

Conclusion 13.34 - 13.37

Financial and administrative management of assets (excluding research)

Introduction 13.38 - 13.39

Observations relating to the value of the assets 13.40 - 13.55

Buildings 13.40 - 13.42

Brussels 13.40 - 13.41

Outside the Community 13.42

Movable assets in Brussels and Luxembourg 13.43 - 13.52

Impossibility of declaring the values communicated to be reliable 13.43 - 13.52

Inventories outside the Community 13.53 - 13.54

Publications Office 13.55

Explanatory factors 13.56 - 13.84

Role of the accounting officer 13.57

Legislative framework 13.58 - 13.68

Accounting principles 13.58 - 13.60

Keeping of inventories 13.61 - 13.68

The budget and its implementation 13.69 - 13.71

Human resources employed 13.72

Management systems 13.73 - 13.84

Official system for keeping the inventory (Sysbien) 13.73 - 13.74

Monitoring of computer equipment 13.75 - 13.76

Sincom accounting system 13.77 - 13.79

Global and coordinated approach to management needs 13.80 - 13.84

Financial consequences 13.85 - 13.88

Conclusion 13.89

Staff and administrative expenditure of the European Commission Delegations

INTRODUCTION

13.1. During the course of the past two years, the Court of Auditors has audited five Delegations, accounting for some 19% of the total budget for Delegations, as allocated at the beginning of the financial year.

13.2. The findings made during these on-the-spot visits led to a further examination of certain aspects at the Commission's headquarters in Brussels, which revealed weaknesses and shortcomings in the decentralized administration.

BUDGET APPROPRIATIONS AND STAFF

13.3. Initial appropriations totalling 186,5 Mio ECU were entered in 1994 under budget heading A-6 of the Commission's budget, 1,9 Mio ECU of which was transferred during the course of the financial year to another heading. The remaining 184,6 Mio ECU of appropriations were used to cover the staff and administrative expenditure of the European Commission Delegations.

13.4. Moreover, as of 31 December 1994, out of a total of 609 posts allocated to the Delegations, 559 were occupied by members of staff employed by the Commission's external service under the terms of the Staff Regulations. There were also 1 814 local staff. It should be pointed out that the Commission's management activity in non-Member States also involves the use of staff recruited and managed by the European Association for Cooperation (EAC), staff from the Humanitarian Office of the European Union (ECHO) and experts from less developed countries. Different salary conditions apply to these staff.

LOCAL STAFF

Regulations relating to the conditions of employment of local staff

13.5. At the beginning of 1992, following the integration of ex-EAC staff into the Commission services, the Directorate responsible at that time for managing the external service commissioned a task force to draw up specific employment conditions for the local staff in the service of each Delegation, using a framework regulation which came into force on 1 January 1990 in implementation of Article 79 of the Regulation applicable to other servants.

13.6. By the end of 1992, some 30 local regulations had been through the various phases provided for by the framework regulation and were ready for the integration into the new system of the local staff concerned, whilst some 80 draft regulations had been drawn up and were the subject of the consultation procedures provided for (see the Court's Annual Report concerning the financial year 1992, paragraphs 17.41 and 17.42, p. 379).

13.7. Three years later, at the beginning of 1995, in the case of the 116 Delegations concerned, 63 local 'new system` regulations were in use, 23 were still being discussed by the Central Staff Committee, 14 were still being negotiated at local level and 16 were still being drawn up.

13.8. In view of the problems resulting from the legal void in which the Delegations, for whom there is no legislation, find themselves, it appears that internal procedures must be initiated as a matter of urgency in order to bring all these Delegations under the common system defined in the framework regulation as quickly as possible.

Special system for administrative and technical staff in certain Delegations

13.9. In some Delegations, some of the local staff of Community origin are paid according to different pay scales from local staff originating from the country where the Delegation is situated and, where appropriate, from other staff of European origin.

13.10. This results in either the co-existence of two different salaries or in a special allowance being granted to the European staff in the form of a proportion of their existing salary. This has created salary variances of between 1 to 3 and 1 to 10. The administrative and technical staff concerned work in a dozen or so Central and East European and Asian Delegations and this situation is justified on the grounds of security and confidentiality.

13.11. As far as the remuneration of the members of staff in question is concerned, it appears to be too expensive to make them subject to the Staff Regulations, and in particular to the section governing temporary staff in the Regulations applicable to other servants, with all the very costly financial advantages that follow from Annex X of the Staff regulations.

13.12. As the staff concerned (some 60 posts are involved) have nonetheless to be integrated into an appropriate legal framework which excludes any possible controversy, appropriate amended legal texts covering the situation of locally recruited staff for positions with specific responsibilities need to be drafted as a matter of urgency.

13.13. More specifically, it would be advisable to amend Article 79 of the Staff Regulations applicable to other servants and the Framework Regulation governing the conditions of employment of local staff employed in non-member States, and to create a specific salary scale with, where necessary, coefficients that could be used to adjust it to local situations.

Awarding of steps during grading immediately after recruitment and when adjusting grades throughout careers

13.14. Of the five Delegations inspected, only two had made their local staff, of whom there were 53, subject to a regulation fixing the specific conditions of employment in application of the framework regulation quoted in 13.6. above.

13.15. In the case of these two Delegations, however, each sixth file checked revealed a step which had been fixed incorrectly, either on recruitment or following promotion or a subsequent regrading.

13.16. This high level of irregularities (17%) is unacceptable. It should induce the authority empowered to draw up contracts of employment (AECE) and the local administrations, as well as the control authorities in Brussels and, in particular, the Financial Controller, to ensure that the initial calculations and the subsequent verifications are carried out with maximum accuracy.

PERMANENT INVENTORIES OF MOVABLE PROPERTY

13.17. In the case of the Delegations, the permanent inventories of movable property constituting the Commission's assets are kept on the spot. They have to be made available regularly to Brussels in accordance with the methods laid down in administrative note No 42 of 11 February 1992 concerning the decentralized keeping of inventories at Delegations outside the Communities, and in Offices and Delegations within the Communities. By January 1995, 93 local inventories had been updated to 31 December 1994 and sent to Brussels, 25 others sent previously had not yet been updated to the above date and three had never been sent (these figures include five Delegation local offices).

13.18. The decentralized keeping of the Delegation inventories nonetheless calls for some specific comments:

(a) a restructuring of the inventories is needed, both locally and in Brussels, in order to make it possible, on the one hand, accurately to establish the value of the assets to be included in the balance sheet and, on the other hand, to ensure that these assets are adequately covered by collective insurance policies. This restructuring should, in particular, help to produce inventories which will make it possible to keep a check on the Delegations' items of property, whether located in the offices or in the accommodation made available to officials;

(b) items should be removed from the inventories in all the cases provided for in the relevant legislation and in particular when no longer used by the Delegation;

(c) in a fair number of cases, the location of the property listed needs to be reviewed: when property which is listed in the inventories is moved from one place to another, it is often the case that the inventories are not corrected accordingly; such items are then located in different rooms or on different floors from those listed.

KILOMETRE ALLOWANCE, OFFICIAL CARS AND OVERTIME

13.19. Article 19 of Annex X of the Staff Regulations stipulates that, where travel for official purposes within their area of activity is not by an official car, made available to them, officials shall receive an allowance per kilometre, the amount of which shall be fixed by the Appointing Authority, for the use of their own vehicles.

13.20. In spite of work undertaken since 1988 to draw up rules for applying the abovementioned provisions, no concrete progress has been made. However, establishing an allowance per kilometre or, where appropriate, laying down restrictions concerning the use of official cars would make it possible to:

(a) examine the possibilities for reducing the Commission's fleet of cars - at present some 500 vehicles - which has remained virtually unchanged since Annex X of the Staff Regulations came into force. Whilst it is aware of the special circumstances obtaining in ACP countries, the Court nevertheless observes that in some Delegations the number of cars definitely seems too high in proportion to the number of staff carrying out administrative functions, and taking into account local means of transport;

(b) write down the cost of transporting vehicles belonging to staff who transfer to another Delegation to the new place of employment, which is charged to the Community budget, and

(c) reduce the amount of overtime worked by chauffeurs.

ADMINISTRATION OF ANNUAL LEAVE

13.21. The special arrangements concerning leave for Delegation staff, as they are set out in Annex X of the Staff Regulations, provide for 60 calendar days of annual leave, 20 of which may be carried over to the following year automatically. Carrying over a higher number of days is only permitted if the requirements of the service make it impossible to use up the leave during the year in question.

13.22. Although the administration of leave was decentralized in 1992, each person's holiday entitlement is still determined in Brussels. The Delegations are required to send a statement of the leave situation to Brussels once a year. Approximately one third of the Delegations neglected to send their leave statements in 1994. It must also be said that Brussels' monitoring of the local administration is not very developed in this respect. It is carried out manually, as and when the Delegations send in the information.

13.23. The 'Administration of the external service` Directorate should, in order to ensure effective management, equip itself as quickly as possible with suitable software, in particular to enable it to monitor the planning and taking of leave in the Delegations.

13.24. As far as carry-overs of leave from 1993 to 1994 are concerned, 255 members of staff carried over more than 20 days, a total of 11 029 days being carried over, i.e. 6 000 days in excess of the automatic carry-over. Applications for leave to be carried over to 1995 are as follows: 271 members of staff applied to carry over more than 20 days, a total of 12 650 days, i.e. 7 200 days in excess of the automatic carry-over.

13.25. A note dated 29 November 1994 on the administration of leave, aimed at establishing the methods for implementing administrative note No 26a of 6 November 1991 concerning the decentralization of the administration of the 'leave` file, lays down guidelines for reducing the number of days of leave carried over.

13.26. From the very beginning there have been significant delays. In fact, although Delegations had been asked to submit their leave charts for the following year before 31 December 1994, 45 delegations had not fulfilled this obligation by the beginning of February 1995, and it was not until the middle of March that the charts requested were all available.

13.27. A reduction in the number of days of leave carried over can, however, only be achieved if there is efficient planning from the beginning of the year, thus permitting the authorization of the carrying-over of a number of days of leave in excess of the automatic carry-over.

ACCOMMODATION

13.28. The Commission provides officials working in its external service with furnished accommodation which they are obliged to use and for which the Commission pays the rent and furnishing costs. An administrative circular (No 7) from 1988 provides for the obligatory conclusion of an agreement between the Commission (represented by the Head of the Delegation or his/her deputy) and the official for whom the accommodation is provided setting out the rules for the occupation of the accommodation.

13.29. By February 1995, in spite of perfectly clear notification from Brussels, of the 112 Delegations managing accommodation on behalf of the Commission, only 21 had sent the Directorate responsible for the administration of the external service all the agreements for the accommodation they managed, 30 had done so for a greater or lesser part of the accommodation and 61 had not sent in anything at all.

13.30. It is therefore imperative that a reminder about respecting the provisions in force be issued immediately, to ensure that the Heads of Delegations and their deputies fulfil the obligations incumbent upon them.

Irregularities

13.31. Some irregularities were found relating to accommodation in the case of a Delegation in South East Asia, in which the personal demands of some staff had led those responsible locally to go beyond the limits of acceptable needs.

13.32. For example, a file authorizing the renting of a house for a newly recruited official, which had been submitted to the authorizing officer for prior approval, was withdrawn when it was still being considered in Brussels on the strength of a note from the Head of the Delegation claiming that the property was no longer available, although no evidence was provided to support this claim. A new file proposing the renting of another house was submitted scarcely two months later, this time with the signature of the Deputy Head of the Delegation. The proposal was backed up with hand-drawn plans, even though the original plans were available, as the house in question was a brand new building, on the market for the first time. Both the plans and the file prepared for the authorizing officer indicated a usable surface area which in fact represented only some 40% of the actual usable area found when the house was visited. The actual usable area was confirmed by a subsequent check carried out by the Commission to be 460m2.

13.33. The Commission should take the appropriate steps in response to this by examining the responsibilities at all levels.

CONCLUSION

13.34. Since the decentralization which resulted from the amendment to the Financial Regulation in 1990 (Articles 121 to 123) and to the Commission regulation concerning the methods for implementing some of the provisions of the 1993 version of the Financial Regulation, large areas of responsibility, particularly in the field of administration of inventories, buildings and local staff, have been handed over from the central administration in Brussels to the Delegations themselves.

13.35. Even greater efforts need to be made in respect of training and information in order to make both the Heads of Delegations and their deputies, as well as the administrative assistants, fully aware of the new responsibilities incumbent upon them.

13.36. Furthermore, the control methods used, in particular those used on the spot by the services and Directorates General concerned, seem no longer to be adapted, in every case, to the new situations arising from decentralization (see in particular the keeping of lists and the grading of local staff).

13.37. Finally, the 'Administration of the external service` Directorate should accord priority to adopting the outstanding regulations required to complete the staff regulations, especially concerning employment conditions for local staff and the use of official cars.

Financial and administrative management of assets (excluding research)

INTRODUCTION

13.38. A check of the value of the Commission's movable and fixed assets was carried out on the basis of the information available on 31 December 1994. The survey covered assets worth some 445 Mio ECU which are held in Brussels and Luxembourg, as well as in the Community offices and in the Delegations outside the Community.

13.39. These assets include property (146,1 Mio ECU), vehicles (11,2 Mio ECU), computer equipment (151,5 Mio ECU) and other movable assets (136,4 Mio ECU). There are some 450 000 movable assets in all.

OBSERVATIONS RELATING TO THE VALUE OF THE ASSETS

Buildings

Brussels

13.40. Although the Commission has modified the presentation of the balance sheet by introducing a heading for 'current fixed assets`, the exact value of the assets concerned is 18,8 Mio ECU (not 12,1 Mio ECU). Information provided by the ECSC, which was anyway not relevant, was misinterpreted. The Commission should have examined its own accounts to find the information required so as to ensure an accurate entry in the accounts.

13.41. In its financial statements, the Commission was required to note the awarding of long-lease contracts for terms of at least 27 years which give a right in rem on buildings in Brussels.

Outside the Community

13.42. The value of the fixed assets located outside the Community is particularly difficult to establish. In some countries there are significant fluctuations in the market. The lack of relevant documentary evidence (property deeds, accounting documents, etc.), the failure to take into account refurbishment work which has increased the value of the property and obtuse accounting methods mean that it is not easy to establish this value.

Movable assets in Brussels and Luxembourg

Impossibility of declaring the values communicated to be reliable

13.43. A major part of the audit related to the value of the movable assets included in the inventory. It was difficult even to check the amount notified by the Commission because the data in Sysbien, the programme used to establish it, change constantly. This system was not devised in a way which makes it possible to use it properly to produce financial statements. The method used to establish the value of the movable assets was not designed to eliminate those assets whose value falls below the four inclusion thresholds provided for in the financial regulations.

13.44. The financial regulations stipulate that the exact location of every asset acquired must be specified. Four elements have been selected within Sysbien to this end: the town, the building, the floor and the office. At least one of these items of information is missing in the case of some 65 700 assets valued at 91,6 Mio ECU. The implications of this vary, depending on the type of information omitted.

13.45. In some 700 cases representing 5,4 Mio ECU and concerning principally scientific equipment belonging to the Euratom Safeguards Service, none of these four items had been included. It is very unlikely that this equipment is located in the Commission's usual places of work. Checking their existence poses special problems.

13.46. In the case of some 11 200 assets representing 6,5 Mio ECU, the name of the town/city is shown but the second, more important, identifying feature, the name of the building, is missing.

13.47. In the 53 800 remaining cases, the information is incomplete because the details relating to the floor or location on the floor (office or common area) are missing. Any imprecision here makes checking the inventory more complicated. If the information making it possible to locate the asset is not available, it may be impossible to effect a comparison between the data on the lists and the actual equipment.

13.48. According to the data entered in Sysbien, on 1 December 1994 some 27 800 assets representing a value of 15,6 Mio ECU were located in the Berlaymont building in Brussels, even though this building had been completely evacuated in 1991. This was also true of a further 5 000 assets, representing 4,3 Mio ECU, which were still listed in three recently evacuated buildings, and in the case of 20 000 assets, representing 5 Mio ECU, supposedly located in a warehouse at Zaventem.

13.49. An analysis of the coding used to specify the location of the assets showed that, in total, there was a serious shortage of information concerning some 83 000 assets, representing around 41,6 Mio ECU, which made it impossible actually to find them.

13.50. The regular and reliable updating of the inventory is an absolute must for all assets. Only computer equipment (151,1 Mio ECU) has been checked regularly over the past few years and it was possible that the Commission might have more reliable, and above all controllable, data for this equipment during the course of 1995.

13.51. In the case of the other assets, the Commission has not kept the inventories up to date since the end of the 1970s. The evacuation of the Berlaymont building and the ceaseless moves between the 60 or so buildings occupied by the Commission in Brussels has resulted in a loss of control over the situation. No opinion can be expressed concerning this part of the assets, the notified value for which is 136,4 Mio ECU.

13.52. The Commission's car fleet in Brussels is a special case. The inventory has not been kept in accordance with the usual rules (requiring the value of the assets to be included) and monitoring is inadequate.

Inventories outside the Community

13.53. In the case of the inventories of assets kept in the Delegations outside the Communities, the same problems, about which the Court has been complaining in its Annual Reports since 1979, still exist (), irrespective of the administrative structure (EAC, then Administration of Delegations and Offices, or DAD, and today DG I AE) and in spite of a computer system which has greatly simplified monitoring.

13.54. The necessary checks have not been carried out at any point in the process of transmission from the Delegations to the Commission's accounting officer. In the case of Nigeria, there is a discrepancy of approximately 0,8 Mio ECU between the amount shown on the statement sent to the accounting officer by DG IA and its justification on the inventory. On the inventory of the Ivory Coast delegation one item of furniture is valued at 532 074 ECU. In Nigeria, the same items are listed three times in number and twice in value and the value of one vehicle is 10 times higher than others of a similar sort. In a large number of Delegations, the valuation was not made in ECU and the assets are shown as having zero value.

Publications Office

13.55. The stock in trade held by the Publications Office is entered in a separate balance sheet. In accordance with the financial regulations and generally accepted accounting principles, fixed assets acquired using appropriations specific to the Publications Office should be shown in the Office's own balance sheet.

EXPLANATORY FACTORS

13.56. The following factors explain why the Commission is unable to communicate a reliable value for its assets.

Role of the accounting officer

13.57. The accounting officer does not have any control over the information received: he can neither check whether or not it is genuine nor even know exactly how the figures have been established. He must continue with his efforts to collect the documentation necessary to understand the methods used to establish the figures and check that the procedures followed are in accordance with the legislative framework. Only in this way can the tasks entrusted to him be effectively fulfilled.

Legislative framework

Accounting principles

13.58. The lack of reliability of the financial statements is due also to the inadequacy of the legislative framework. The accounting principles used are based on a mere draft drawn up in 1986, the text of which is not included in the accounting and budgetary instructions normally available to the Commission.

13.59. More specific, updated rules are needed in order to meet not only the Commission's administrative requirements but also those of the other institutions, and so that a consolidated balance sheet can be drawn up under satisfactory conditions.

13.60. A distinction ought to be made between the valuation of the assets for the purpose of preparing the financial statements and the conservation or rational administration of the assets which are needed for day-to-day operations.

Keeping of inventories

13.61. As of 1 January 1994, the Commission has had to keep an inventory showing numbers and values when the value of movable assets exceeds a certain threshold (350 ECU). Not all the useful consequences of adopting a threshold henceforth fixed at 350 ECU have been taken into account regarding the rules on keeping inventories. The 1969 regulation on which these rules are based is completely outdated and must be revised. More specifically, it does not take into account the computerized form of administration introduced in 1985.

13.62. This threshold of 350 ECU means that numerous assets have to be excluded from the balance sheet, but it results in only a marginal reduction of the value shown in the accounts. In 1994, those assets which had to be included in the inventory fell from 99,7% of the total to 91,7%, in value terms, and from 91,8% to 39,6% in terms of numbers. For reasons of administrative necessity, the Commission continued to include assets of a value lower than the threshold.

13.63. The Financial Regulation currently in force was not designed to require the Commission to take out insurance cover and obtain realistic estimates of the value of its assets in order to ensure appropriate cover.

13.64. There is no provision making it clear precisely who takes responsibility for the safeguarding of the assets. Provision is only made in respect of the responsibility of the authorizing officers, Financial Controllers and accounting officers for the safeguarding of cash and securities. Once assets have been purchased, the authorizing officers do not have any clear instructions regarding their responsibility or regarding internal transfer methods.

13.65. This legislative framework has not been adapted to meet current requirements. Numerous movable assets are no longer purchased but leased. The information given in the notes to the balance sheet is only fragmentary and does not give a complete picture of the expenditure incurred. In some cases, the leasing of an asset may entail an option to buy which may result in the Commission becoming owner of the asset. The Commission ought to improve its means of monitoring leased assets in order to facilitate the proper keeping of the accounts.

13.66. It is also necessary to monitor software stocks used in order to take into account changes in conditions for distributing them and paying the publishers. Furthermore, the revaluation of such assets would also allow the Commission to comply with the Fourth Council Directive of 25 July 1978, stipulating that licences must be entered in the accounts as tangible fixed assets if acquired in return for a consideration. This directive also includes provisions concerning the depreciation of assets. This is another question which should be looked into because the raising of the inclusion threshold results in some assets continuing to be listed although they are without commercial value, whilst others of considerable value are not shown in the lists.

13.67. The provisions relating to the revaluation of stocks should be completely reviewed.

13.68. In the light of the above, the Court considers that the Commission should revise its financial regulations so as to meet current requirements and accounting standards.

The budget and its implementation

13.69. The budgetary nomenclature used, and the subsequent budgetary implementation, show shortcomings which inhibit the satisfactory monitoring of the Commission's assets. In principle, only payments made against a limited number of budget headings should result in the purchase of assets. It would be desirable to use one single budget support for the purchase of one particular type of asset, but this is not the case in practice. On account of the very structure of the budget, as provided for in the financial regulations, different types of charges for different purposes are mixed together.

13.70. The purchasing of data-processing equipment provides a good illustration of this situation. In order to monitor the amounts committed, an initialling procedure for commitments relating to computer measures has been introduced. This procedure does not guarantee absolute thoroughness.

13.71. In a structure where the responsibility for implementing the budget is devolved on several different persons, the budgetary nomenclature itself makes it difficult to set up procedures guaranteeing the thorough and exact inclusion of all assets in the inventory, not to mention the rather untransparent budget management.

Human resources employed

13.72. The Commission set up a group of four officials, one B grade, two C grade and one D grade, in order to administer the whole inventory in Brussels. The group is assisted by a computer expert for one third of his time.

Management systems

Official system for keeping the inventory (Sysbien)

13.73. The input of data into Sysbien must be made more reliable by making the consistency controls provided for in the system effective. This would ensure, for example, that 68 armchairs are not included at 19,6 Mio ECU. The use of certain modern techniques for identifying items (for example bar codes) would be one way of eliminating de facto some of these inputting errors. The possibility of creating registers guaranteeing the consistency and homogeneity of the entries has not been adequately researched. As a result of the failure to adapt the legislation in force, the system includes a large amount of information which is either out of date or has become useless.

13.74. Some errors in the information raise questions about the functioning of Sysbien itself. Hence a recommendation that a systems audit covering all aspects of the functioning of Sysbien be carried out in order to guarantee its reliability.

Monitoring of computer equipment

13.75. Special monitoring of computer equipment is carried out. The data available cannot, however, be used, at least directly, for the preparation of the financial statements: the purchase price is not included. The Informatics Directorate does not need this information at all. Responsibility for keeping the inventory remains the task of one central unit (DG IX), which is responsible for notifying the value to be included in the balance sheet.

13.76. Despite some shortcomings, the central computer equipment database seems to be an interesting way of putting some order back into the Commission's inventories. The procedure followed, based on a mixture of decentralization and coordination, with specialization for a specific type of asset and an annual check of existing stock, should serve as a model.

Sincom accounting system

13.77. The Sincom accounting system is not suitable for ensuring the inclusion of an asset in the inventory because of the conditions for granting authorization electronically. It does not require any check that the financial rule ensuring inclusion in the inventory before payment is effected has been properly applied.

13.78. One attempt was made to compare the accounting data in Sincom and the values given in the inventories. This did not yield any convincing results due to the opaque and excessively global nature of the accounting entries and the numerous different budget headings used for these purchases.

13.79. It is not possible to follow a systematic audit trail. It is impossible, today and in practice, to attempt a reconciliation of the budgetary expenditure of a given financial year and the gross increases in the value of the Commission's assets during the same financial year.

Global and coordinated approach to management needs

13.80. The administrative tools are not part of a more global perspective aimed at meeting the Commission's needs as a whole. Most usually, they are devised to meet only the requirements of the direct users of them, and often include overlapping information. The present waste of resources, which could be avoided, should be eliminated by better information management. Data which should be shown simultaneously in Sysbien and in the central base for computer equipment are still entered manually and separately. Each year, some 10 000 assets are double-entered in this way.

13.81. The situation of the inventories resulting from the way in which Sysbien has been managed, the fact that various tools, in some cases deficient ones, co-exist, the purchase of a new accounting programme (Sincom 2), the various more or less advanced projects for the management of assets and, finally, the difficulties of intra-system communications, all call for a swift reaction. Guidelines are needed to adopt a basic strategy and a decision should be made as to how to monitor the assets, selecting from the numerous options possible.

13.82. As far as the tools to be used are concerned, the Commission should either equip itself with a large integrated system that is capable of meeting all requirements, by merging all currently existing systems, or use autonomous systems synchronizing a regular data flow. In both cases, an in-depth study of the information requirements and a precise definition of the operations necessary is indispensable. Finally, systems are needed which are sufficiently rigorous for accounting use.

13.83. The decentralized monitoring of computer equipment could be generalized to cover all assets. The future organization would be based on a principle of allocating responsibility to the Directorates General, in which a unit charged with coordination would find points of support or links.

13.84. Such a change of approach presupposes a reliable inventory statement. The Directorates General would then be taking over an improved situation and it would be in their own interests to keep the inventory in a satisfactory state. The Financial Controller also has a role to play here.

FINANCIAL CONSEQUENCES

13.85. The loss of control over information relating to the inventory, in particular in respect of the location of assets, has financial consequences. Restoring order to the inventory will inevitably result in a special charge to the budget.

13.86. Other points to be mentioned here include the waste of resources caused by the double entry of data, the existence of independent and partially redundant systems and the loss of relevant bases for the administration of movable assets.

13.87. Improved monitoring of the car fleet would eliminate any doubt as to the superfluous payment of insurance premiums and any risk of lack of cover.

13.88. In the light of the statistics established, the Commission's Security Office concludes that theft has not had a significant impact on the institution's assets. This conclusion could only be shared if

(a) physical checks of the inventory were carried out regularly, and went even further than mere checks that the provisions of the financial regulations have been complied with,

(b) the systematic declaration of disappearances could be guaranteed,

(c) the Security office was always in a position to investigate disappearances of assets without delay,

and

(d) the financial loss suffered could be effectively quantified.

CONCLUSION

13.89. The Commission entered a total of around 450 Mio ECU in the balance sheet to show the situation as at 31 December 1994 concerning the fixed assets which were examined by the Court. After studying the various elements of which this amount is made up, the conclusion must be drawn that it was possible to establish reliable figures only for the fixed assets in Brussels (approximately 120 Mio ECU). For the rest, the amounts shown in the balance sheet do not give a true picture of the situation of the Commission's assets on that date.

REPLIES OF THE COMMISSION

LOCAL STAFF

Regulations relating to the conditions of employment of local staff

13.8. The Commission expects the local regulations to have been through the various stages necessary for their adoption by the end of 1995.

Special system for administrative and technical staff in certain Delegations

13.12 13.13. The Commission can confirm that it is examining the introduction of specific provisions for local administrative and technical staff of Community origin along the lines laid down by the Court of Auditors.

Awarding of steps during grading immediately after recruitment and when adjusting grades throughout careers

13.16. The Commission agrees that the percentage of errors made in grading local staff is too high. At the request of the Financial Controller it has therefore taken the following measures to avoid excessive administrative centralization:

- When an employee is recruited, the personal data affecting grading must be put in writing and certified by the person responsible for administration in the Delegation. It must then be sent on a standardized form to the Commission's headquarters in Brussels.

- The draft standard employment contract, including the provisional grading, is to be sent to Brussels by fax, certifying that the candidate's academic qualifications and documentation relating to previous employment have been verified.

- If Brussels does not comment within five working days, the contract can be drawn up and signed locally. However, these contracts are subject to checking by the financial control authorities.

PERMANENT INVENTORIES OF MOVABLE PROPERTY

13.17. In June 1995, 118 delegations sent their inventories to Commission headquarters in Brussels. These are currently undergoing thorough checks, Directorate IA.E having assigned an official from unit IA.E.3 to monitor them (see paragraph 13.55).

13.18. (a) For monitoring as well as insurance purposes, the Commission wishes to continue including in the inventories of the Delegations outside the Communities, all movable and immovable property, whatever its value, even if it is below the regulation threshold of ECU 350. In order to adjust the totals so that the values of assets to be included in the balance sheet can be established correctly, as required by the Financial Regulation, the software used will have to be adapted. The departments responsible are discussing what adjustments will need to be made to the existing program. The program is due to be modernized in the second half of 1995.

(b) The procedures for removing items from the inventories are currently being evaluated with regard to all the movable property of the Commission, including the Delegations outside the Communities. In response to the other observations of the Court on this point, all the 'chargés de mission` of Directorate IA.E have been instructed that with every mission to a Delegation, there should be an on-site examination both of the state of the inventories and of how procedures for removal from the inventories are monitored. Financial Control also checks the inventories systematically when conducting on-site checks.

(c) In order to avoid permanent and constant updating of the inventories, the Commission recommends that the inventories sent to Brussels should be drawn up on a building-by-building basis. Movement of inventoried property within a building would not alter the total inventory of the building, nor the total value of the Commission's assets.

KILOMETRE ALLOWANCE, OFFICIAL CARS AND OVERTIME

13.20. The Commission has set itself the objective of drawing up implementing rules in this area by the end of 1995. However, it would also draw attention to the fact that, as in numerous diplomatic missions, the size of the car fleet is determined by the type of activity of each Delegation and by the duties of both officials and certain local staff.

(a) In developed countries, the number of official cars in the Commission delegations is low.

It is only in most ACP countries that the Commission currently sees a need for a fleet of vehicles exceeding the number of officials. This is because an off-road car is needed as a result of transport difficulties, the large number of missions and the frequent location of missions in areas not served by major roads. In addition, the problem of repairs, including the shipping of spare parts, must also be taken into account.

(c) The Delegations will be instructed to review the amount of overtime worked by chauffeurs in order to establish how much of it is really necessary.

ADMINISTRATION OF ANNUAL LEAVE

13.23. The software program for determining leave entitlements is now operational. The program for monitoring the planning and authorization of leave is expected at the end of the year.

13.26. At the beginning of May 1995, 93% of leave charts had been approved by Brussels. In contrast to previous years, these charts indicate that staff will use up their annual leave during the year. The aim of this is to reduce the amount of leave carried over, as recommended by the Court.

Furthermore, with regard to the rotation of staff between Delegations in the financial year 1995, particular attention will be paid to annual leave entitlements so that staff do not begin a new posting with a significant carry-over of leave from their last posting. Finally, applications for leave to be carried over to 1996 will be looked at closely in the light of the note of 29 November 1994 on the administration of leave.

ACCOMMODATION

13.28 13.30. The reminder suggested by the Court about respecting the provisions in force was issued on 4 July 1994. Agreements between the official occupying the accommodation and the Commission are now being sent much more systematically. By mid-June 1995, 70% of files had been put in order. The work that has been done in this area will be continued.

Furthermore, any rental agreement will now be made subject to an occupation agreement between the official and the Commission.

Irregularities

13.31 13.33. A file has been opened by Directorate IA.E following an on-site mission and has been sent to the relevant services to be studied so that administrative steps can be taken. These are now under way.

In March 1994, Directorate IA.E. also issued general guidelines on the accommodation of officials working in the Delegations outside the Communities. The procedures for examining plans to rent new accommodation have been revised and simplified, with a view above all to accelerating the decision-making process (decision amending the ACPC procedures adopted by the Commission on 11 November 1994).

CONCLUSION

13.35. The Commission is continuing its efforts in the fields of training and information for Heads of Delegations and their deputies. For 1995, the following are planned: a meeting of Heads of Delegations, a training course for officials in Brussels who are preparing for a posting to a Delegation, and continuing training for Delegation officials.

13.36. The Commission recognizes that decentralization will involve a new approach to control methods, which in future will tend towards ex post inspection on the basis of clear and regularly updated administrative rules.

13.37. The Commission aims to complete the implementation of the local regulations for local staff at the end of 1995. Meanwhile, a practical 'administrative guide` was issued in March 1995, aiming to explain the regulations in detail.

Regarding the use of official cars, a reworked set of instructions is expected for the end of 1995. Financial and administrative management of assets (excluding research).

OBSERVATIONS RELATING TO THE VALUE OF THE ASSETS

Buildings

Brussels

13.40. The mistakes mentioned by the Court result from the fact that the current procedures used to evaluate the Commission's assets do not use any accounts-based data. Any repetition of such errors, which are due not to incorrect interpretation but to data transmission problems, should be ruled out by the introduction of the new system Sincom 2.

13.41. In the light of generally accepted accounting principles and international accounting standards, the Commission will examine the extent to which long-term leases should be noted in its financial statements.

Outside the Community

13.42. The Commission agrees with the Court that in some countries there are significant fluctuations in the market. The explanatory notes to the consolidated balance sheet (p. 693) mention that 'land and buildings purchased before 1992 at delegation sites have been revalued in the light of market prices. Revaluation was carried out by independent experts and the resulting figures incorporated in the balance sheet as at 31 December 1994`, and that 'land and buildings acquired by the Commission after 1992... are entered in the balance sheet at their purchase value.`

Movable assets in Brussels and Luxembourg

Impossibility of declaring the values communicated to be reliable

13.43. Even if the initial purpose of Sysbien was not to produce financial statements, using it does make this possible. The assets whose value falls below the four inclusion thresholds provided for in the Financial Regulation have been eliminated from the final balance sheet for 1994, as requested by the Court.

13.44 13.51. The Commission admits that there are problems locating some of the property constituting its assets. However, the difficulties have in large part been caused by the hasty evacuation of the Berlaymont, for safety reasons, and the increase in departmental removals between the many buildings occupied. Among the criteria applied for Sysbien, the specification of the building and floor would seem to be the most important; the other two (town and office) are useful, but not absolutely essential: the nomenclature of the buildings makes any mention of the town superfluous and not all movable assets are necessarily located in an office (e.g. photocopiers and fax machines which are shared by several departments). Also, the Financial Regulation does not lay down specific criteria for locating items.

The Commission is aware that the problem exists, and has therefore embarked on a general physical inventory of all its 450 000 movable assets between September 1995 and February 1996, as well as modernizing its property management techniques with the systematic introduction of bar code labels read by an optical reader. It is therefore taking the necessary measures to have the situation completely in hand in the course of 1996.

A contracting partner has already been chosen to do the work, following the publication of an invitation to tender.

13.52. The Commission's car fleet in Brussels is monitored according to specific rules (itemizing in an internal software system, attribution of an inventory number linked to the use of magnetic cards for fuel).

The Commission will do its best to integrate the management and monitoring of the car fleet into the general Sysbien system.

Inventories outside the Community

13.54. As was noted in the reply to paragraph 13.17., Directorate IA.E. has designated an official in Unit IA.E.3 to monitor the inventories sent by the Delegations, so that more precise figures and data can be established. In response to the Court's observations, the anomalies mentioned have been cleared up.

Publications Office

13.55. The Commission will ensure that these assets are entered in the Office's balance sheet.

EXPLANATORY FACTORS

Role of the accounting officer

13.57. It is true, as the Court points out, that the Accounting Officer does not have any formal power to check the information he collects, nor any enforcement measures, even though it falls to his services to draw up the balance sheet.

Work is currently under way to determine the respective responsibilities of the authorizing officers and the Accounting Officer. Meanwhile, the Accounting Officer is persevering with his efforts to obtain full information, certified by the authorizing officers.

Legislative framework

Accounting principles

13.58 13.60. It is true that the instructions on keeping and managing inventories go back to 1986. An interdepartmental group is currently working on the establishment of the body of internal rules necessary for coherent and methodical administration, distinguishing between the preparation of financial statements and the conservation of assets.

Keeping of inventories

13.61 13.62. The consequences of introducing a new threshold for inventory entries into the Financial Regulation were discussed by the Heads of Administration at a meeting on 18 May 1994, when they agreed on how the new threshold should be applied.

Apart from that, there is no reason why the institutions should not organize themselves on an individual basis for purposes of internal management, except where provisions relating to the financial inventory apply. For the balance sheet at 31 December, the thresholds were applied in accordance with the provisions in force at the time of acquisition of the assets.

13.63. The Commission insures its buildings and their contents to cover the cost of replacement. This value is calculated on the basis of the acquisition price.

13.64. See reply to paragraph 13.59.

13.65. The Commission believes that its tools for managing leased software stocks are reasonably effective. It will look into ways of improving the situation for other leased goods.

13.66. and 13.68. The new inventory regulation will stipulate provisions for intangible assets as well as rules for the depreciation of assets.

13.67. The internal instructions from 1986 regarding the revaluation of stocks will be amended to bring them into line with the regulations and the accounting principles of the fourth Directive.

The budget and its implementation

13.69. and 13.71. The fact that purchases are charged to a large number of budget items, even for assets of the same type, is not in itself a problem as long as the acquisition expenditure is correctly charged by type. The Commission will nonetheless ensure that purchases of assets are not, as a result of being charged by purpose, entered under budget headings which should not be used for asset acquisition.

The cases where it would be possible to acquire assets outside Title A2 and Title A5 (for software assets) are rare, known to and authorized by the budgetary authority: for the most part these consist of acquisitions made within the framework of authorized mini-budgets (research and Structural Funds) or within Title A6 (all external service expenditure).

The problem of the absence of a link between the budgetary nomenclature and the inventory nomenclature should be resolved in the near future when Sincom 2 (computerized accounting system, version II), which includes a fixed asset management module, is introduced.

Human resources employed

13.72. The 'Inventory` section has already received some reinforcements by redeployment of staff within the relevant unit of the Directorate-General for Personnel and Administration. The forthcoming adoption of rules for management decentralization should also result in each Directorate-General appointing an official to be responsible for inventory management.

Management system

Official system for keeping the inventory (Sysbien)

13.73 13.74. The Court's criticisms concern:

- the functioning of Sysbien itself;

- the lack of certain financial procedures;

- the quality of the data;

- the lack of interfaces with other asset management systems.

The Court proposes making the mechanism for consistency control more effective, and recommends carrying out a technical audit. On the basis of the Court's preparatory work, the Commission has already started doing a technical audit on Sysbien. The report, which will be published in July 1995, will be made available to the Court, and contains a plan of action for improving the system, with particular stress laid on the development of consistency control mechanisms, in order to improve the quality of the data. Certain technical measures have also already been put in place (for example, user identification, saving the balance sheet file).

As a result of the elaboration of a general architecture for the systems operating in asset management (see replies to paragraphs 13.82 to 13.86), data which ensure links with the financial systems will also be input into Sysbien, although its principal purpose will of course remain inventory and asset management.

Sincom accounting system

13.77 13.79. The Commission recognizes that it is currently impossible to match the data from the central accounting system with that from Sysbien.

As part of the definition of the role and interaction of the different systems concerned, as proposed by the Commission in paragraph 13.83, and more specifically in the context of the Sincom 2 project, the departments involved will define procedures to guarantee a leakproof information flow, from the acquisition of an asset and its entry in the inventory to the transmission to the accounting officer of the data needed to produce the financial information shown on the balance sheet.

Global and coordinated approach to management needs

13.80. At the beginning of 1994 the Commission set up a coordinating body to develop a coherent, global approach to all the institutional administrative systems for asset, finance, personnel and procedural management. The objective of this project is administrative efficiency and optimal use of resources. This objective should be achieved within five years, with priority given to financial and accounting management and asset management.

In terms of Sysbien and the central base of software stocks, one of the first results of this coordination is that data transfer between the two systems is now automatic.

13.81. The analysis carried out in 1994 has already shown that the planned or implemented systems correspond to different management needs and that therefore there is no pointless duplication of systems. Work is currently under way to specify overall systems structures for each area (assets, budget, personnel, procedures). This will detail the respective role of each system and the necessary interactions between them. The objective is to improve the systems making them as straightforward and homogeneous as possible.

13.82. This architecture must enable the Accounting Officer, the Financial Controller and asset managers to perform their duties and produce the necessary inventory statements. In this context, the competences of each one will be defined, not just from the technical angle in terms of the exchange of information, but also in terms of the distribution of information between the different systems. A balanced distribution will reduce the amount of redundant information.

These functional needs will be taken into account by the computer experts when they are working out solutions. There can be no question of creating a single system, as it would be incompatible with the organization of the Commission and impracticable because of the number of functions to be covered. Between systems, the means of accessing information, the level of automaticity of the exchanges, and the acquisition of different modules all need to be studied in more depth before anything is implemented.

13.83. The extension of the decentralization of asset monitoring is currently being studied. It will be one item in the inventory regulation which is being prepared.

13.84. The rationalization of the inventory base that the Court is seeking will be one product of the physical inventory check which is to begin in September 1995.

FINANCIAL CONSEQUENCES

13.88. As regards software stock, which is particularly susceptible to theft, the Commission is carrying out regular physical stock checks and has reminded those responsible for this stock of the procedure for declaring losses to the Security Office.

CONCLUSION

13.89. With all due respect for the Court's observations, the Commission would point out that in October 1994 a programme of reform of the rules and techniques of administrative and financial asset management was drawn up. Its main action points can be summarized as follows:

- increase in charge of monitoring assets;

- drafting of a regulation on asset management, covering inventory entries, decentralized asset management and removal of items from inventories. The first part (inventory entries) is ready; the entire draft will be submitted to the Commission before the end of the year after the interdepartmental consultations have been completed;

- clearance of the inventory base by carrying out a general physical stocktaking of the 450 000 items listed between September 1995 and February 1996. For software stocks, it will in fact be the third physical stock check in three years;

- modernization of the techniques for monitoring assets: during the physical stock check, bar code labels are to be affixed to all items, enabling later periodic checks to be carried out by optical reader;

- reinforcement of the coordination of the different computer systems involved in asset conservation.

CHAPTER 14 (*) Court of Auditors

The external auditor's certificate as to the regularity and fairness of the revenue and expenditure account and the financial balance sheet as at 31 December 1994

and

his report on the internal control system and the soundness of the financial management of the Court of Auditors

were published in OJ C 298 on 11.11.95.

() Special Report No 4/94 on the urban environment. OJ C 383, 31.12.94

Special Report No 1/95 on the cohesion financial instrument. OJ C 59, 8.3.95

Special Report No 2/95 concerning the Stabex fund in the context of the first financial Protocol of the fourth Lomé Convention. OJ C 167, 3.7.95

Special Report No 3/95 on the implementation of intervention measures provided for by the organization of market in the sheepmeat and goatmeat sector. OJ C 285, 28.10.95.

Special Report No 4/95 concerning the management of EAGGF-Guidance section expenditure in Portugal from 1988 to 1993 (due to be published in the OJ).

(*) The Commission's replies are on page 45

() OJ L 185, 15.7.1988, p. 24.

() Council Regulation (EEC, Euratom) No 1552/89 of 29 May 1989 implementing Decision 88/376/EEC, Euratom on the system of the Communities' own resources, fifth recital, OJ L 155, 7.6.1989, p. 1.

() OJ L 302, 19.10.1992, p. 1.

() OJ L 144, 2.6.1981, p. 1.

() OJ L 90, 2.4.1987, p. 3.

() Annual report concerning the financial year 1993, paragraphs 1.27, 1.28 and 14.82, OJ C 327, 24.11.1994.

() The fight against fraud. Annual report 1994, COM(95) 98 final, 29.3.1995.

() Council Regulation (EEC, Euratom) No 1552.89, Article 6(3).

() IRENE (database for irregularities, searches, utilization) also contains cases of fraud against the expenditure aspect of the budget: CAP (Council Regulation (EEC) No 595/91 of 4 March 1991, Articles 3, 4 and 5), Structural Funds (Commission Regulation (EC) No 1681/94 of 11 July 1994, Article 3), Cohesion Fund (Commission Regulation (EC) No 1831/94 of 26 July 1994, Article 3).

() Council Regulation (EEC) No 1468/81 of 19 May 1981 on mutual assistance between the administrative authorities of the Member States and cooperation between the latter and the Commission to ensure the correct application of the law on customs or agricultural matters, OJ L 144, 2.6.1981, p. 1, Article 15b of R.945/87.

() Commission Regulation (EEC) No 2454/93 of 2 July 1993 laying down provisions for the implementation of Council Regulation (EEC) No 2913/92 establishing the Community Customs Code, Article 95(5), OJ L 253, 11.10.1993, p. 1.

() Decision No 2/94 of the ACP-EC Customs Cooperation Committee of 25 November 1994 amending Decision No 4/93 derogating from the definition of the concept of 'originating products` to take account of the special situation of the Republic of the Seychelles with regard to its production of canned tuna. OJ L 371, 31.12.1994.

() Commission Regulation (EEC) No 2454/93.

() As of 7 January 1995, this list, which formerly appeared in Annex 53 to the provisions implementing the Code, was abolished by Regulation (EEC) No 3254/94 of 19 December 1994 and replaced by a procedure for communications between the Commission and the Member States.

() Commission Regulation (EEC) No 2454/93, Article 82(1).

() Communication from the Commission - Fraud in the transit procedure, solutions foreseen and perspectives for the future, COM(95) 108 final, 29.3.1995.

() The results of the previous study were published in the 1987 Annual Report, paragraphs 3.3 to 3.35, OJ C 316, 12.12.1988, p. 45.

() Council Regulation (EEC) No 2913/92, Article 37.

() Ibid, Article 43.

() Ibid, Articles 48 and 49.

() Ibid, Article 50.

() Ibid, Article 51.

() Ibid, Article 53.

() Annual Report concerning the financial year 1987, paragraphs 3.17-3.19, OJ C 316, 12.12.1988.

() The office of departure is the customs office where the Community transit operation begins, Commission Regulation (EEC) No 2454/93, Article 309(b).

() The office of destination is the customs office where goods placed under the Community transit procedure must be produced to complete the Community transit operation, Commission Regulation (EEC) No 2454/93, Article 309(d).

() The principal is the person who, in person or through an authorized representative, lodges a declaration that has been the subject of the requisite customs formalities, and thus applies to effect a Community transit operation and is answerable to the competent authorities if the operation is not carried out properly (Council Regulation (EEC) No 2913/92 of 12 October 1992, Article 96(1) and Article 4(21).

() Commission Regulation (EEC) No 2454/93, Article 378.

() Ibid, Article 379.

() Ibid, Articles 359-374.

() Ibid, Articles 444 and 448.

() The Commission's anti-fraud strategy - Work programme for 1994, Section (d) Own resources, COM/94/92 Final, 23.3.1994, p. 9. Answer given by Mrs Scrivener on behalf of the Commission (30 September 1994) to written question 1950/94 by Florus Wijsenbeek (ELDR) to the Commission (6 September 1994) (95/C/24/84), OJ C 24, 30.1.1995, p. 38.

() TIR: international road transport. Commission Regulation (EEC) No 2454/93, Articles 451-457.

() 329 396 227 DM converted into ECU at the accounting rate for 31 December 1994, includes 73 Mio DM converted into ECU at the same rate (1 ECU: 1,90533 DM).

() 2 800 000 DM converted into ECU at the accounting rate for 31.12.1994 (1 ECU: 1,90533 DM).

() Commission Regulation (EEC) No 2454/93, Article 378.

() COM(95) 108 final.

() Annual Report of the Court of Auditors concerning the financial year 1991, paragraphs 1.119-1.121, OJ C 330, 15.12.1992. Annual Report of the Court of Auditors concerning the financial year 1992, paragraphs 1.80-1.81, OJ C 309, 16.11.1993. Annual Report of the Court of Auditors concerning the financial year 1993, paragraphs 1.68-1.71, OJ C 327, 24.11.1994.

() OJ L 49, 21.2.1988, p. 26.

() OJ L 155, 7.6.1989, p. 1.

() Annual Report concerning the financial year 1993, paragraphs 1.77-1.82, OJ C 327, 24.11.1994.

() Ibid, paragraph 1.92.

() Declaration by the Council and the Commission entered in the Council minutes on adoption of Council Directive 89/130/EEC, Euratom of 13 February 1989.

() OJ L 77, 19.3.1994, p. 51.

() The four reports are:

1.Descriptions of calculations and adjustments ensuring exhaustiveness of present GNP estimates;

2.Validation of employment underlying present GNP estimates;

3.Use of information from fiscal audits to improve the exhaustiveness of GNP estimates;

4.Description of regulations and statistical adjustments pertaining to income in kind and tips or gratuities.

Two of the above were examined by the GNP Committee (Nos 2 and 4). Commission Decision 94/168/EC, Euratom of 22 February 1994, OJ L 77, 19.3.1994, p. 51.

() The 18th meeting of the GNP Committee on 21 and 22 December 1994 approved an amended proposal for a decision put forward by the Commission concerning the principles followed in evaluating accommodation services in the national accounts.

(*) The Commission's replies are on page 83

() Council Regulation No 23 of 4 April 1962 abolished by Council Regulation (EEC) No 1035/72 of 18 May 1972 (OJ L 118, 20.5.1972).

() Council Regulation (EEC) No 516/77 of 14 March 1977 (OJ L 73, 21.3.1977), replaced by Council Regulation (EEC) No 426/86 of 24 February 1986 (OJ L 49, 27.2.86).

() OJ C 258, 6.10.1980.

() OJ C 128, 24.5.1989.

() COM(94) 360, 27.7.1994.

() Council Regulation (EEC) No 1035/72 of 18 May 1972, Article 13 (OJ L 118, 20.5.1972).

() Commission Regulation (EEC) No 1596/79 of 26 July 1979 (OJ L 189, 26.7.1979).

() Commission Regulation (EEC) No 3587/86 of 20 November 1986 fixing the coefficients to be applied to the buying-in price (OJ L 334, 27.11.1986).

() Commission Regulation (EEC) No 1201/93 of 17 May 1993 (OJ L 122, 18.5.1993).

() Estimate based on 28% of the expenditure declared of 108,5 Mio ECU in 1993 and 107,7 Mio ECU in 1994 for peaches and nectarines.

() OJ L 350, 14.12.1990.

() In Italy nine citrus processors which received 33,2% of the total processing aid for lemons and 21,8% of the total financial compensation for oranges in Italy for EAGGF year 1992/93 were audited. In Spain five citrus processors were audited which received 24% of the total of financial compensation in 1992/93. In Greece one processor was audited which had received 8,8% of the total financial compensation for Greece for EAGGF year 1992/93.

() Commission Regulation (EEC) No 920/89 of 10 April 1989, Annex II (OJ L 97, 11.4.1989).

() Commission Regulation (EEC) No 920/89 of 10 April 1989, Annex II (OJ L 97, 11.4.1989).

() The number of claimants visited in each Member State and the amounts claimed by them were: tomatoes: three in Greece (10,8 Mio ECU, 21,1%), two in Spain (18 Mio ECU, 40%), six in Italy (10,3 Mio ECU, 5,6%); peaches: one in Greece (3,3 Mio ECU, 9,7%), four in Spain (1,4 Mio ECU, 13%), one in Italy (0,11 Mio ECU, 1,1%).

() Commission Regulation (EEC) No 1558/91 of 7 June 1991 (OJ L 144, 8.6.1991).

() Commission Regulation (EEC) No 1558/91 of 7 June 1991 (OJ L 144, 8.6.1991).

() Council Regulation (EEC) No 789/89 of 20 March 1989 (OJ L 85, 30.3.1989) amending basic Regulation (EEC) No 1035/72 of 18 May 1972.

() Commission Regulation (EEC) No 2159/89 of 18 July 1989 (OJ L 207, 19.7.1989).

() Commission letter reference 34755 dated 21 October 1993 signed by the Director-General.

() The Court examined a statistical sample of expenditure drawn from the nomós of Heraklion which represents 46,7% of the total expenditure of 93,2 Mio ECU in Greece for dried grapes. The transaction concerned 408 beneficiaries who received 0,54 Mio ECU.

() Commission Regulation (EEC) No 2911/90 of 9 October 1990 (OJ L 278, 10.10.1990).

() The 'Agricultural Situation in the Community - 1993 Report`. Farm sizes: 7 ha for a farm with fruit and other permanent crops, 4 ha for a farm with vegetables and 22 ha on average for other farms.

() Commission Financial Report 1993 (expenditure) and the 'Agricultural Situation in the Community - 1993 Report` (area).

() Commission annual reports 1984-91: 'The Agricultural Situation in the Community`.

() European Commission, Directorate-General for Agriculture, 'Rapport fruits et légumes` dated 17 May 1994.

() COM(94) 360, 27.7.1994.

() Commission Financial Report 1989-93 and DG VI/E.1 statistics on withdrawals and processing of fruit and vegetables.

() Council Regulation (EEC) No 668/93 of 17 March 1993 (OJ L 72, 25.3.1993).

() Council Regulation No 23 of 4 April 1962 abolished by Council Regulation (EEC) No 1035/72 of 18 May 1972 (OJ L 118, 20.5.1972).

() Council Regulation (EEC) No 1319/85 of 23 May 1985 (OJ L 137, 27.5.1985).

() COM(94) 271, 6.7.1994.

() COM(94) 360, 27.7.1994.

() Commission Regulation (EC) No 2475/94 of 13 October 1994 (OJ L 264, 14.10.1994) which amends Commission Regulation (EEC) No 2911/90 of 9 October 1990 (OJ L 278, 10.10.1990).

() OJ C 128, 24.5.1989.

() Council Regulation (EEC) No 595/91 of 4 March 1991 (OJ L 67, 14.3.1991).

() See the Court's Special Report No 7/93, paragraphs 4.13-4.25 (OJ C 53, 19.2.1994).

(*) The Commission's replies are on page 98

() OJ L 388, 31.12.1992.

() 15th recital of Council Regulation (EEC) No 3468/88 of 7 November 1988 amending Regulation (EEC) No 3796/81 establishing a common organization of the markets in the fishery products sector and Regulation No 2658/87 on the tariff and statistical nomenclature and on the Common Customs Tariff. (OJ L 305, 10.11.1988).

() OJ L 350, 31.12.1994. The amendments essentially concern the simplification of the administrative management of the measure and the elimination or modification of certain conditions and ceilings.

() Sources of the data, respectively: the Spanish authorities, the Syndicat national des armateurs de thoniers congélateurs and the regional authorities of Madeira and the Azores.

() I.e. 750 Mio FF according to information provided by the Syndicat national des armateurs de thoniers congélateurs.

() The result of a calculation based on data obtained from the Spanish authorities on quantities sold and average prices.

() DOC. COM(94) 266 final, 28.6.1994.

() Commission Decision 92/448/EEC of 30 July 1992, OJ L 248, 28.8.1992.

() Council Regulation (EC) No 1503/94 of 27 June 1994, OJ L 162, 30.6.1994.

() Articles 4 and 18 of the basic Regulation and Article 1 of Council Regulation (EEC) No 105/76 of 19 January 1976 on the recognition of producers' organizations in the fishing industry (OJ L 20, 28.1.1976).

() Article 2(1)(d) of Council Regulation (EEC) No 105/76 of 19 January 1976.

() Article 5 of Commission Regulation (EEC) No 2381/89 of 2 August 1989, laying down detailed rules for granting cooperation for tuna for the canning industry (OJ L 225, 3.8.1989).

() OJ L 20, 27.1.1979.

() Article 6 of Regulation (EEC) No 2381/89.

() OJ L 144, 2.6.1981.

(*) The Commission's replies are on page 120

() Table of financial perspectives, OJ C 331, 7.12.1993, p. 6.

() Decision adapting the financial perspectives, OJ C 395, 31.12.1994, p. 1.

() Council Regulation (EEC) No 2052/88 of 24 June 1988 concerning the Structural Funds and their effectiveness and the coordination of the various interventions of the Funds with those of the European Investment Bank and other existing financial instruments, as amended by Council Regulation (EEC) No 2081/93 of 20 July 1993 (OJ L 193, 31.7.1993, p. 5).

() Council Regulations (EEC) Nos 2080/93, 2081/93, 2082/93, 2083/93, 2084/93 and 2085/93 of 20 July 1993.

OJ L 193, 31.7.1993, pages 1 to 47.

() Regulation (EC) No 1164/94 of 16 May 1994.

OJ L 130, 25.5.1994.

() Article 14(2) of Council Regulation (EEC) No 4253/88 of 19 December 1988 (OJ L 374, 31.12.1988, p. 1), as amended by Council Regulation (EEC) No 2082/93 of 20 July 1993 (OJ L 193, 13.7.1993, p. 20).

() The Court's Annual Report concerning the financial year 1992 (6.43) and Special Report No 1/95 on the Cohesion Funds (4.18).

() Council Directives 93/36/EEC, 93/37/EEC, 93/38/EEC, 92/50/EEC, 92/13/EEC, 89/665/EEC.

() The Commission's Annual Report on the application of Community law.

() Communication C(88) 2510 from the Commission to the Member States concerning checks that the rules relating to public works contracts are being respected in the projects and programmes financed by the SF and the financial instruments.

OJ C 22, 28.1.1989, p. 3.

() OJ C 59, 8.3.1995.

() The Commission's Annual Report on the application of Community law.

() OJ C 245, 23.9.1992.

() OJ L 175, 5.7.1985, p. 40.

() OPI Island of Gomera ERDF No 881109002 page 53 annexed to Decision C(90) 1493/1 of 30.7.1990.

() OJ L 135, 30.5.1991, p. 40.

() Article 11 of Regulation (EEC) No 4253/88, as amended by Regulation (EEC) No 2082/93.

() Communication C(90) 1562/3 - OJ C 215, 30.8.1990 - Annex 1.

() Article 25 of Regulation (EEC) No 4253/88 as amended by Regulation (EEC) No 2082/93.

() Paragraph 7.60 and the following of the Court's annual report concerning the financial year 1993.

() Other projects have been checked by sampling in the context of the Statement of Assurance (SOA). The results of these checks will be incorporated into the Special Report planned for this purpose.

(*) The Commission's replies are on page 147

() The Sincom data were taken from the CUC Cumul commitments file - position on 5.1.1995 - and the Eurada data concerning the 1990-93 ESF were derived by comparing the payment codes overview tables for the years 1990-93 on 28.1.1994 and 26.1.1995. The data for the 1994-99 ESF were taken from the table on 26.1.1995.

() The calculation is as follows: out of 10 Mio ECU checked, an error of 150 000 ECU was detected. On 31.12.1994, the total amount of payments made to Greece was 1 285 Mio ECU, making the exchange rate error 128,5 × 150 000= 19,27 Mio ECU.

() The Court's 1993 annual report, OJ C 327, 24.11.1994.

() Article 44 of Commission Regulation (Euratom, ECSC, EC) No 3418/93 of 9 December 1993 on the methods for implementing certain provisions of the Financial Regulation of 21 December 1977.

() Paragraph 8.35 of the 1993 Annual Report.

() Lisrestel, GTI, Lisnico, Rebocalis and Gaslimpo

T-50-93 of December 1994.

() Article 24 of Council Regulation No 4253/88 of 19 December 1988, as amended by Council Regulation (EEC) No 2082/93 of 20 June 1993.

() Italy 54,2 Mio ECU; Portugal 8 Mio ECU; Greece 11,9 Mio ECU; France 7,5 Mio ECU.

() For pratical reasons it is easier to use the term 'Enti Pubblici` to describe all of these entities.

() The total cost of the measure was 2 690 139 000 LIT, 968 450 040 LIT of which was contributed by the ESF.

() OP 94 0026 I1, OP 94 0029 I3 and OP 94 0032 I4 for an EMBUT total of 960,025 Mio ECU.

() Banca Commerciale Italiana, Credito Italiano and Nuovo Pignone.

() EP 210.850/end of 20.12.1994 and second Annual Report on the European Observatory for SMEs, p. 17.

() Source: Eurostat.

() Regulation (EEC) Nos 4254/88 (Article 4.2) and 4255/88 OJ L 374 of 31.12.1988 (Article 2b).

() COM(93) 700 final of 5.12.1993.

() OJ C 224 of 31.8.1992, p. 78.

() OJ C 294 of 22.10.1994, p. 6.

() 1994 Draft communication by the Commission concerning the definition of SMEs, p. 12.

() SEC(92) 351 of 29.4.1992, p. 1.

() Regulation (EEC) No 2084/93, OJ L 193 of 31.7.1993, p. 41.

() Study of the assessment of the use of the Structural Funds by SMEs in Portugal. The Community-level report was drawn up by Ernst & Young in 1993.

() Council Decision No 89/490/EEC of 28.7.1989 for the period 1990-93 and No 93/379/EEC of 14.6.1993 for the period 1993-96.

() Survey in October 1993 - EOS Gallup poll of public knowledge of the DG XXIII networks.

() SEC(92) 1867 of 27.10.1992.

() The Commission's fourth project report (1995) on the progress of the pilot project for start-up capital.

() See previous endnote.

() Council Decision of 14 June 1993, replacing Council Decision 91/319/EEC of 18 June 1991, revising Decision 89/490/EEC.

() SEC(92) 704 and written procedure E/701/94.

() Council Decision (89/490/EEC) of 28.7.1989, Article 5.

() Annex E of DG XXIII's report on the future cooperation of the information and cooperation networks.

() SEC(94) 488 of 22.3.1994, p. 2.

() Letter dated 31.1.1995 from the IAPMEI in reply to a Court questionnaire (page 6, last paragraph).

() SEC(92) 1992 final of 11.11.1992.

() COM(93) 600 final.

() The 1990 payments were estimated.

() OJ C 13 of 17.1.1994, p. 7.

() Resolutions 88/C 197/04, 90/246/CEE and 92.C 331/02.

() On the basis of the action programme for SMEs, the principles of which were approved by the Council, COM(86)445 final and Resolution 86/C287/01.

() The European Seed Capital Fund Scheme: Review of the first three years, Warwick Business School, 29.05.92.

() 'Seed capital` - Fourth progress report on the Community pilot scheme, DG XXIII/B3, February 1995.

() Third annual report, 1995: ISBN 90-371-0538-6.

() ISBN 92-826-7692-7.

() The invitation to tender for carrying out this evaluation was published in OJ C 106/11 of 17.04.95.

() 'The Commission's information and communication policy: priorities and coordination proposals`, SEC(86)1841 final of 4.11.86 and page 1 of COM(87)152 of 7.4.87.

() SEC(94)448 of 22.03.1994.

() SEC(89)931 final of 5.06.1989, pages 5 and 6.

() COM(88)161 (page 7).

() Review of UK European Information Centres, Ernst & Young, August 1994.

() 'Les PME, les instruments communautaires au service des enterprises et la Semaine Européenne de l'Entreprise`, Gallup Europe /EOS Managers, October 1993.

() Annex 'Community measures in connection with the Integrated Programme in favour of enterprises`, page 27.

(*) The Commission's replies are on page 170

() Council Directive 85/337/EEC of 27 June 1985 on the assessment of the effects of certain public and private projects on the environment.

() -Declaration of the Council of the European Communities and of the Representatives of the Governments of the Member States meeting in the Council of 22 November 1973 on the programme of action of the European Communities on the environment, OJ C 112, 20.12.1973, p. 1.

-Resolution of the Council of the European Communities and of the Representatives of the Governments of the Member States meeting within the Council of 17 May 1977 on the continuation and implementation of a European Community policy and action programme on the environment, OJ C 139, 13.6.1977, p. 1.

-Resolution of the Council of the European Communities and of the Representatives of the Governments of the Member States, meeting within the Council, of 7 February 1983 on the continuation and implementation of a European Community policy and action programme on the environment (1982-1986), OJ C 46, 17.2.1983, p. 1.

-Resolution of the Council of the European Communities and of the Representatives of the Governments of the Member States, meeting within the Council of 19 October 1987 on the continuation and implementation of a European Community policy and action programme on the environment (1987-92), OJ C 328, 17.12.1987, p. 1.

() Special report No 3/92 of the Court of Auditors on the environment (OJ C 245, 23.9.1992, p. 1).

() Resolution of the Council - A European Community programme of policy and action in relation to the environment and sustainable development, OJ C 138, 17.5.1993, p. 1.

() Council Regulation (EEC) No 1973/92 of 21 May 1992 establishing a financial instrument for the environment (LIFE), OJ L 206, 22.7.1992, p. 1.

() -ACE: Council Regulation (EEC) No 1872/84 of 28 June 1984 on action by the Community relating to the environment, OJ L 176, 3.7.1984, p. 1.

-Medspa: Council Regulation (EEC) No 563/91 of 4 March 1991 on action by the Community for the protection of the environment in the Mediterranean region (Medspa), OJ L 63, 9.3.1991 p. 1.

-Norspa: Council Regulation (EEC) No 3908/91 of 19 December 1991 on Community action to protect the environment in the coastal areas and coastal waters of the Irish Sea, North Sea, English Channel, Baltic Sea and North-East Atlantic Ocean (Norspa), OJ L 370, 31.12.1991, p. 28.

-ACNAT: Council Regulation (EEC) No 3907/91 of 19 December 1991 on action by the Community relating to nature conservation (ACNAT), OJ L 70, 31.12.1991, p. 17.

() The principle of subsidiarity was introduced into Community law by Article 130(r), paragraph 4, of the Single Act.

() Council Directive 92/43/EEC of 21 May 1992 on the conservation of natural habitats and of wild fauna and flora, OJ L 206, 22.7.1992, p. 7.

(*) There has been no reply from the Commission concerning this Chapter.

(*) The Commission's replies are on page 184

() 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, 15.3.1982);

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) No 397/75 of 17 February 1975 (OJ L 46, 20.2.1975).

() ECSC report concerning the 1994 financial year.

() Council Decision 81/19 of 20 January 1981 (OJ L 37, 10.2.1981).

() Annual Report of the Court of Auditors concerning the financial year 1991 (OJ C 330, 15.12.1992, paragraphs 12.12 - 12.48).

() Annual Report of the Court of Auditors concerning the financial year 1991, the Commission's reply to paragraph 12.26.

() See the Court's Annual Report concerning the financial year 1993 (OJ C 327, 24.11.1994, paragraphs 10.3 - 10.19.

() Report of the Italian Parliamentary Committee on the utilization of public funds for reconstruction work in the affected areas, 27 January 1991.

() Eurispes - Institute of Political, Economic and Social Studies: Phoney undertakings and phoney entrepreneurs, from ghost industries to the development of the areas affected by the earthquake in southern Italy, S. Castillo, V. Moretti, Koiné, Rome, 1993.

() The industrial estates visited were: Baragiano, Tito, Vitalba, Oliveto Citra, Porrara, Buccino, Melfi and Calabritto.

() The loan of 70 000 Mio LIT was paid out in Japanese yen and corresponded to 13 190 Mio yen. Interest rate subsidies amounted to 3 503 Mio YEN. The share of unduly paid interest rate subsidies amounted to 260 Mio YEN, which, at the exchange rate for the end of the financial year 1994 (122,659 YEN/ECU), was the equivalent of 2,1 Mio ECU (the Lira/yen exchange rate went from 5,3 at the time of the payment in 1982 to 16,3 at the end of the financial year 1994).

() Decision of the European Parliament 93/366/Euratom/ECSC, EEC of 21 April 1993 on the implementation of the general budget of the European Communities for the financial year 1991 (OJ L 155, 26.6.1993, paragraph 62).

() Council Decision 94/375/EC of 6 June 1994 (OJ L 173, 7.7.1994).

() Working document of the European Parliament's Committee on Budgetary Control on loans and borrowings, document EP 211.586 of 7 March 1995, p 4.

() Council Regulation (EC, Euratom) No 2728/94 of 31 October 1994 (OJ L 293, 12.11.1994).

() See the Annual Report of the Court of Auditors concerning the financial year 1993, paragraphs 10.26 - 10.30.

() See the Court's Annual Reports concerning the financial years 1994 (paragraphs 14.20 - 14.23), 1985 (paragraphs 12.12 - 12.14), 1986 (paragraphs 14.10 - 14.24) and 1987 (paragraph 11.32).

() Resolution of the European Parliament of 18 April 1986 (OJ L 150, 4 July 1986).

() The Court's Annual Report on the financial year 1987, the Commission's reply to paragraph 11.32.

(*) The Commission's replies are on page 197

() Council Decision No 90/221/EEC, Euratom, of 23 April 1990 concerning the framework programme of Community activities in the field of research and technological development (1990 to 1994), OJ L 117, 8.5.1990, p. 32.

() OJ L 107, 24.4.1992, p. 1.

() Codest was founded by a Commission decision in 1982, OJ L 350, 10.12.1982, p. 45.

() OJ L 107, 24.4.1992, p. 1.

() Annual report concerning the financial year 1993, OJ C 327, 24.11.1994, paragraph 14.91, p. 255.

() OJ C 14, 20.1.1987, p. 5.

() OJ L 107, 24.4.1992, p. 5.

() Growth, competitiveness and employment. The challenges and ways forward into the 21st century (White Paper), European Commission, COM(93) 700 final, paragraph 4.2(a).

() Mid-term evaluation of the Human capital and mobility programme, Final report, April 1994.

(*) The Commission's replies are on page 218

() Council Regulation (EEC) No 3906/89 of 18 December 1989 (OJ L 375, 23.12.1989, p. 11), on economic aid in favour of the countries of Central and Eastern Europe (Albania, Bulgaria, the Czech Republic, Estonia, Latvia, Lithuania, Rumania, Slovakia and Slovenia), as amended by Council Regulation (EEC) No 2698/90 of 17 September 1990 (OJ L 257, 21.9.1990, p. 1), Council Regulation (EEC) No 3800/91 of 23 December 1991 (OJ L 357, 28.12.1991, p. 10) and Council Regulation (EEC) No 2334/92 of 7 August 1992 (OJ L 227, 11.8.1992, p. 1).

() Council Regulation (EEC, Euratom) No 2157/91 of 15 July 1991, concerning the supplying of technical assistance to the Union of Soviet Socialist Republics in its efforts towards the improvement and recovery of the economy (OJ L 201, 24.7.1991, p. 2), as amended by Council Regulation (Euratom, EEC) No 2053/93 of 19 July 1993 (OJ 187, 29.7.1993, p. 1).

() See also paragraphs 11.2 - 11.6 of this report, concerning the budgetary implementation of cooperation programmes with developing and non-Member States (excepting the CCEE and CIS), in which the concentration of commitments at the end of the financial year is set out.

() Council Regulation (EEC) No 3906/89 of 18 December 1989 on economic aid to the Republic of Hungary and the Polish People's Republic (OJ L 375, 23.12.1989, p. 11).

() Doc COM(95) 13 final, 20.2.1995.

() Preparation, implementation, monitoring, coordination and evaluation.

(*) The Commission's replies are on page 245

() The Commission's management information system does not yet provide comprehensive information for all B7-3 budget lines on this. In respect of items B7-3010 and B7-3011 (Latin America), of 97 projects being executed or for which decisions have been taken by the Commission at 31 December 1994, 30 experienced delays of at least six months between the Commission decision and signature of the financing agreement.

() At 31 December 1994, the accounts of title B7-3 contained 69 commitments raised in the three years 1991 to 1993 for a value of 361,3 Mio ECU on which no payment had been made.

() OJ C 330, 15.12.1992, Chapter 15, see in particular paragraphs 15.3 and 15.21-15.23.

() See paragraph 10.6 of this report where the problem of excessive concentration of operations at the end of the year is referred to in the context of PHARE and TACIS programmes.

() See paragraph 12.2 of the Annual Report of the Court of Auditors concerning the financial year 1992, OJ C 309, 16.11.1993, and paragraph 13.2 of the Annual Report of the Court of Auditors concerning the financial year 1993, OJ C 327, 24.11.1994.

() Transfer 32/94 of 20.9.1994, SEC(94) 1489 final.

() SEC(95) 83 (provisional version).

() SEC(95) 400 final of 13.3.1995 - carry-over decision from 1994 to 1995.

() See Council Decision of December 1990 taken in Session 1464 of 18-19.12.1990, see also 'Redirecting the Community's Mediterranean policy`, SEC(89) 1961 final of 23.11.1989, and SEC(90) 812 final of June 1990.

() OJ L 18, 25.1.1992 for Tunisia; OJ L 94, 8.4.1992, for Algeria and Jordan; OJ L 352, 2.12.1992 for Morocco.

() OJ L 181, 1.7.1992.

() Special Report No 2/94 on the import programmes carried out under the sixth EDF, OJ C 97, 6.4.1994.

() The Community also provided in 1991 a medium-term loan of 400 Mio ECU to Algeria to support the balance of payments. A second loan of 200 Mio ECU for the same purpose was decided on 22.12.1994 by the Council.

() The non-eligible goods specified in the negative list are such items as alcohol, tobacco, radioactive and nuclear materials, luxury goods and military equipment.

() In this regard, see also the comments of the Court in paragraph 7.12 of its special report No 2/95 concerning Stabex in the framework of the first financial protocol of the fourth Lomé Convention (OJ C 167, 3.7.1995).

() Similar situations have been identified by the Court in the context of the implementation of import programmes of the sixth EDF, in paragraph 5.7 of its special report No 2/94 (OJ C 97, 6.4.1994).

() As in Morocco, the CGF is a service within the Ministry of Finance. As, however, the Ministry of Finance is not the National Authorizing Officer in Tunisia, the problem of independence of the technical assistance body is less acute than in Morocco.

() Programme des chantiers régionaux de développement.

() Countries that are well advanced on the road to reform (liberalized trade, a freely convertible and transferable currency and budgetary policies that are effective, fair and transparent) may well in future receive direct targeted budgetary aid (see Council Resolution No 7566/95 of 1 June 1995 on structural adjustment).

() Since the agreement was a prerequisite for the transfer, it was a condition and not merely a question of allocation.

(*) The Commission's replies are on page 274

() In the EDF accounts, the primary commitments correspond to the financing decisions, whereas the secondary commitments relate to the contracts concluded with third parties.

() Special Report No 4/88 of 19 May 1988, OJ C 188, 18.7.1988.

() Annual Report concerning the financial year 1991, OJ C 330, 15.12.1992, para. 17.21;

Annual Report concerning the financial year 1992, OJ C 309, 16.11.1993, para. 14.6;

Annual Report concerning the financial year 1993, OJ C 327, 24.11.1994, para. 15.20.

() Internal Agreement on the financing and administration of Community aid, OJ L 86, 31.3.1986.

() Eastern Africa (March 1991), Indian Ocean (March 1991), Central Africa (July 1991).

() Article 291 lays down the date of expiry of the Convention as 28 February 1990. However, the Seventh EDF did not come into force until 1 September 1991, because some Member States were slow in ratifying it.

() Articles 101 to 113.

() The Georgetown Agreement constituting the ACP group in 1975 and the Suva Declaration of the ACP Council of Ministers in 1977 had already emphasized collective self-sufficiency, the reduction of the ACP countries' dependency on imports and the creation of sufficiently large markets.

() Article 156(3).

() Several articles in the Convention allocate limited amounts from this total funding to specific operations: development of trade and services (Article 100 for 60 Mio ECU), the Centre for the Development of Industry (Article 73(4) for 40 Mio ECU), the ACP-EC Joint Assembly (Annex XXXI for 1 Mio ECU).

() Signed in Brussels on 19 February 1985 by the Member States, OJ L 86, 31.3.1986.

() The composition of some regions was affected by the accession of new States: Mozambique, Cape Verde, Guinea-Bissau, and then Angola.

() Southern African Development Conference.

() Seven regions and inter-regional interest groups.

() Grants, special loans, loans from EIB own resources, risk capital, interest-rate subsidies.

() The European Investment Bank and the Commission.

() Annual Report concerning the financial year 1991, para. 17.22, OJ C 330, 15.12.1992.

() Minutes of the Lomé III regional cooperation meeting; VIII/C/2/D(94)JOB.

() Country code 'RPR`.

() Overspending was found at the end of 1993 for the Indian Ocean (0,04 Mio ECU) and Western Africa (4,1 Mio ECU).

() On 7 July 1988 the Council decided to increase the 1987 Stabex (System of stabilization of export earnings) resources by 15 Mio ECU by drawing on the Sixth EDF's regional cooperation resources. No reduction corresponding to this withdrawal was ever made to the regional appropriations in the EDF accounts. An internal Commission memo dated 21 November 1994 referred to a transfer of 15,2 Mio ECU.

() At 31 December 1994, the Sixth EDF accounts included, for the Caribbean, 18 regional measures for a total of 12 Mio ECU which are regarded as transfers from Lomé II.

() Annual Report concerning the financial year 1993, paragraph 15.22, OJ C 327, 24.11.1994.

() In its reply to paragraph 4.3 of the Court of Auditors' Special Report No 4/88, the Commission considered that road projects were 'a typical case where the regional character has often been weak`.

() Inter-State Committee for Drought Control in the Sahel.

() The Centre for Industrial Development, the Technical Centre for Agricultural and Rural Cooperation, the Cultural Foundation, the ACP Secretariat, the ACP-EC Joint Assembly, the Courier.

() Annual Report concerning the financial year 1990, paragraphs 14.17 - 14.40.

() Annual Report concerning the financial year 1993, paragraphs 15.99 - 15.111.

() On Line Accounting System.

() Project Information Control System.

() The system whereby the annual reports of each delegation include a chapter on the regional cooperation in which the country participates does not make it possible to obtain an overall view of the cooperation within a region and, all the more so, at the overall regional level.

() The stronger the regional nature of a project is, the greater the relationship between the regional funds and the national funds mobilized (see Article 107 of the third Lomé Convention).

() Annual Report concerning the financial year 1991, OJ C 330 of 15.12.1992, paragraph 17.52.

() Carisec, the Indian Ocean Commission, the Pacific Secretariat Forum.

() Eastern Africa: March 1991; Indian Ocean: March 1991; Central Africa: July 1991; CILSS countries: May 1993.

() Unlike the Centre for Industrial Development (CID) or the Technical Centre for Agricultural and Rural Cooperation (TCA), the Cultural Foundation is not an ACP-EC organization.

() These associations are for a philanthropic, religious, scientific, artistic or educational purpose (Law of 25 October 1919).

() The costs of the two general assemblies and the meetings of the administrative board were 928 889 FB in 1993 (23 225 ECU).

() Title VIII of Part Two of the third Lomé Convention.

() The Foundation thus received in all about 5,2 Mio ECU in Commission subsidies between 1987 and 1993.

() See the provisions of Annex XXII to the Fourth Lomé Convention.

() See the Annual Report concerning the financial year 1993, paragraph 15.111, OJ C 327, 24.11.1994.

() Théâtre des Champs Élysées.

() Belgian French-speaking Radio.

() The statement which was adopted at the closing session and which the Commission referred to in its reply as the outcome of the seminar is not included in it.

() I.e. 26,2 Mio FB (671 795 ECU) for total expenditure of 55,4 Mio FB (1,42 Mio ECU).

() Before being retired from the Mauritian civil service, the Secretary-General carried out his duties on a voluntary basis.

() For example: 11,4 Mio FB (292 308 ECU) at the beginning of 1992; 11,5 Mio FB (294 872 ECU) at the end of 1992 and 6,2 Mio FB (158 975 ECU) at the end of 1993.

() The report concluded: 'we would see no reason for any interruption of the current funding arrangements`.

() Under its statutes, the Secretary-General of the Foundation was not authorized to take a decision of this kind on his own (Articles 14 and 15 of the Statutes).

() See the Annual Report concerning the financial year 1993, paragraph 14.62, OJ C 327, 24.11.1994.

(*) The Commission's replies are on page 307

() Annual Report on the financial year 1979, Part II, paragraph 4.9., third indent, and reply by the Commission.

Annual Report on the financial year 1985, paragraph 10.5.

Annual Report on the financial year 1989, paragraph 1.105, and reply by the Commission.

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.

>TABLE>

ANNEX II

Annex concerning the abbreviations and symbols used in the report and background information on the general budget

1. Sources of financial data

The financial data in the diagrams included in this report have been drawn from the revenue and expenditure accounts and the balance sheets of assets and liabilities of the European Communities () and of the European Development Funds and from other financial records provided by the Commission. The geographical distribution is in accordance with the indices of the country codes in the Sincom system.

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. In 1991 the nomenclature for expenditure was considerably changed with the regrouping of Commission appropriations into subsections in order to align the budgetary nomenclature of the headings used to encompass the 'multiannual financial prospects`. This should be taken into account when comparing the various financial years.

4. Abbreviations and symbols

EC European Community(ies)

ECSC European Coal and Steel Community

EEC European Economic Community

EAEC or

Euratom European Atomic Energy Community

EFTA European Free Trade Association

GNP Gross national product

VAT Value-added tax

BFR Belgian franc

DKR Danish crown

DM German mark

DR Greek drachma

ESC Portuguese escudo

FF French franc

HFL Dutch guilder

IRL Irish pound

LFR Luxembourg franc

LIT Italian lira

PTA Spanish peseta

UKL Pound sterling

u.a. Unit of account (until 1977)

EUA European unit of account (from 1978 to 1980)

ECU European currency unit (as from 1 January 1981)

Mio ECU Million European currency units

DA Differentiated appropriations

NDA Non-differentiated appropriations

CA Commitment appropriations

PA Payment appropriations

AFC Appropriations for commitment

AFP Appropriations for payment

B Belgium

DK Denmark

D Germany

GR Greece

E Spain

F France

IRL Ireland

I Italy

L Luxembourg

NL Netherlands

P Portugal

UK United Kingdom

EUR 10/12 Total of the 10 or 12 Member States of the European Communities

ex-GDR The former German Democratic Republic

EDF European Development Fund

ACP African, Caribbean and Pacific States signatories to the Lomé Convention

OCTs Overseas countries and territories

FOD French overseas departments

RRP Rehabilitation and revival plan

Stabex Stabilization of export earnings

Sysmin System of stabilization of export earnings from mining products

FR Financial Regulation of 21 December 1977 (see also the foreword on page 2)

OJ Official Journal of the European Communities

S Budgetary section

Ss Budgetary subsection

T Budgetary title

Ch Budgetary chapter

0,0 Data between zero and 0,05

- Lack of data

% Percentage

D Diagram referred to within other diagrams (e.g. D IX)

5. Background information on the general budget

5.1. Origin of the general budget

The general budget was created by the Merger Treaty () (Article 20). It replaced, on 1 January 1968, the three separate EC budgets which existed before that date: the ECSC administrative budget, the EEC budget and the Euratom operating budget. The Euratom research and investment budget was incorporated into the general budget as from 1971 by the Treaty of Luxembourg () (Article 10).

5.2. Legal basis

The general budget is governed by the financial provisions of the Treaties of Paris () (Article 78 ECSC) and Rome () () (Articles 199 to 209 EEC and Articles 171 to 183 Euratom) and by the Financial Regulations ().

5.3. Main budgetary principles laid down in the Treaties and the Financial Regulation

All items of Community revenue and expenditure are to be included in a single budget (unity). Revenue is to be used without distinction to finance all expenditure and, like the expenditure, is to be entered in full in the budget and subsequently in the accounts without any adjustment of one item against another (universality). The appropriations are specialized according to their nature or intended use (speciality). The budget is authorized for one financial year only (annuality). Budgetary revenue and expenditure must balance (equilibrium). There are some exceptions to these general principles.

5.4. Content and structure of the general budget

The budget consists of a 'General statement of revenue` and a 'Statement of revenue and expenditure`, which itself is subdivided into five sections: (I) Parliament; (II) Council (annexed: Economic and Social Committee); (III) Commission (7); (IV) Court of Justice; (V) Court of Auditors; (VI) Economic and Social Committee and Committee of the Regions.

Within each section (), items of revenue and expenditure are classified under budget headings (titles, chapters, articles and, where applicable, items) according to their type or the use to which they are to be applied.

5.5. 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, the basket of currencies is made up as follows: 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 1994 between the ECU and the national currencies were as follows: 1 ECU = 39,1614 BFR = 7,48233 DKR = 1,90533 DM = 295,480 DR = 195,884 ESC = 6,57579 FF = 2,13424 HFL = 0,795061 IRL = 39,1614 LFR = 1 997,45 LIT = 162,070 PTA = 0,787074 UKL.

5.6. 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 ().

Besides own resources, there are other, marginal items of revenue (see Diagram XII).

5.7. 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) make it possible to enter into legal obligations during the financial year for activities whose implementation extends over several financial years;

- payment appropriations (PA) make it possible to cover expenditure arising from commitments entered into during the financial year and/or preceding financial years.

(b) non-differentiated appropriations (NDA) make it possible to ensure, during the financial year, the commitment and payment of expenditure relating to annual activities.

It is thus important to establish the following two totals for the same financial year:

(a) the total of appropriations for commitment (AFC) () = non-differentiated appropriations (NDA) + commitment appropriations (CA) (1)

(b) the total of appropriations for payment (AFP) (1) = non-differentiated appropriations (NDA) + payment appropriations (PA) (1).

Revenue raised in the budget is intended to cover the total appropriations for payment. Commitment appropriations do not need to be covered by revenue.

The following simplified presentation (with illustrative amounts) shows the impact of these types of appropriations in each budget year.

>REFERENCE TO A FILM>

5.8. Implementation of the general budget

5.8.1. 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 (). 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 (). In certain specific areas (EAGGF-Guarantee, mainly the Structural Funds) the management of Community funds is shared with the Member States.

5.8.2. 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 of establishing the entitlements and recovering the revenue due to the Communities (own resources and other revenue); it is governed by certain special provisions ().

The actual revenue of a financial year is defined as the total of sums collected against entitlements established during the current financial year and sums collected against entitlements still to be recovered from previous financial years.

5.8.3. Implementation of expenditure

The estimated expenditure is entered in the budget. 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 () + transfers (1) + commitment appropriations carried over from the preceding financial year () + non-automatic carry-overs () from the preceding financial year (uncommitted NDA) + released commitment appropriations from preceding financial years which have been made available again () + repayments of advances giving rise to re-utilization ();

- 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);

- carry-overs of appropriations from one financial year to the next financial year: non-differentiated appropriations belonging to the financial year which have not been committed may be carried over non-automatically to the next financial year after approval by the budgetary authority(6). Non-utilized commitment appropriations of the financial year may be carried over by the Commission to the following financial year(5). In the case of expenditure on behalf of third parties, carry-overs may be repeated;

- cancellation of appropriations: the balance is cancelled.

(b) appropriations for payment:

- evolution of appropriations: appropriations for payment may also undergo modifications before leading to the final appropriations for payment: final appropriations for payment = initial budget (NDA and PA) + amending and supplementary budgets + supplementary receipts(4) + transfers(1) + appropriations carried over from the previous financial year in the form of automatic carry-overs () or non-automatic carry-overs () + repayments of advances giving rise to re-utilization (8);

- utilization of appropriations: the appropriations for payments are available in the financial year for use as payments (utilized appropriations for payment = amount of payments made from the appropriations of the financial year);

- carry-overs of appropriations from one financial year to the next financial year: non-utilized appropriations of the financial year may be carried over to the next financial year in the form of automatic () or non-automatic () carry-overs. In the case of expenditure on behalf of third parties, carry-overs may be repeated;

- cancellation of appropriations: the balance is cancelled.

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 paragraph 5.8.4) = payments against appropriations for payment of the financial year plus appropriations for payment of the financial year carried over to the following financial year.

5.8.4. 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 () (see Diagram VII).

5.9. Presenting the accounts

The accounts for a given financial year are forwarded not later than 1 May of the following financial year to Parliament, the Council and the Court of Auditors; these accounts comprise a revenue and expenditure account and a balance sheet, together with an analysis of the financial management ().

5.10. 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 (). The Court of Auditors examines the accounts of all revenue and expenditure of the general budget. It shall provide the European Parliament and the Council with a statement of assurance as to the reliability of the accounts and the legality and regularity of the underlying transactions. It also considers 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 and 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 its observations on specific questions and deliver opinions at the request of one of the institutions of the Communities.

5.11. Discharge and follow-up

As from 1977 the following provisions are applicable (): 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 ().

() In the case of the 1994 financial year: revenue and expenditure account and financial balance sheet concerning the budgetary transactions pertaining to the financial year 1994 [Doc SEC(95) 252-255].

() Merger Treaty (8 April 1965): Treaty establishing a Single Council and Single Commission of the European Communities.

() Treaty of Luxembourg (22 April 1970): Treaty amending certain budgetary provisions of the Treaties establishing the European Communities and of the Merger Treaty.

() Treaty of Paris (18 April 1951): Treaty establishing the European Coal and Steel Community (ECSC).

() Treaty of Rome (25 March 1957): Treaty establishing the European Economic Community (EEC).

() Treaty of Rome (25 March 1957): Treaty establishing the European Atomic Energy Community (Euratom).

() Mainly the Financial Regulation of 21 December 1977 (OJ L 356, 31.12.1977). See in this respect the foreword on page 2.

() Section III (Commission) is subdivided into Part A 'Staff and administrative appropriations` and Part B 'Operating appropriations` which is further subdivided into main sectors of activity. Section VI (Economic and Social Committee and Regional Committee) constitutes an intermediary subdivision of Part A 'Economic and Social Committee` Part B 'Regional Committee` and Part C 'Common organizational structure`.

() 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) No 1552/89 of 29 May 1989 (OJ L 155, 7.6.1989); Council Regulation (EEC, Euratom) No 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).

() 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.

() Articles 78d ECSC, 205 EC, 179 Euratom and 22(2) of the Financial Regulation.

() Articles 21 to 55 and 73 to 77 of the Financial Regulation.

() 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).

() Article 96(2) of the Financial Regulation.

() Article 7(2)(a) of the Financial Regulation.

() Article 7(1)(b) of the Financial Regulation.

() Articles 7(1)(a) and 7(3) of the Financial Regulation.

() ) Articles 7(1)(a) and 7(2)(b) of the Financial Regulation.

() Article 7(6) of the Financial Regulation.

() Article 7(7) of the Financial Regulation.

() Article 7(6) of the Financial Regulation.

() Article 7(7) of the Financial Regulation.

() Articles 32 of the Financial Regulation and Articles 15 and 16 of Council Regulation (EEC, Euratom) No 1552/89 (OJ L 155, 7.6.1989).

() Articles 78 to 82 of the Financial Regulation.

() Articles 45a, 45b and 45c ECSC, 188a, 188b and 188c EC, 160a, 160b and 160c Euratom and Articles 83 to 90 of the Financial Regulation.

() Articles 78g ECSC, 206bEC, 180b Euratom.

() Article 89 of the Financial Regulation.