20.5.2005   

EN

Official Journal of the European Union

C 121/1

1-6

7-14

7-13

14

15-34

15-25

15-18

19-25

26-34

26-29

30-32

33-34

35-48

35-40

41-44

45-48

45-47

48

49-61

49-53

49

50-53

54-61

54-57

58-61

62-65

62

63

64-65

I-II

1.

The purpose of the proposed regulation is to establish with effect from 1 January 2007 a legal framework for financing the two ‘pillars’ (market expenditure and income support; rural development) of the common agricultural policy (CAP). The proposal builds upon existing CAP provisions (2). It does not introduce changes to the substance of the CAP or fix the amounts to be spent on the CAP.

2.

The Court has considered whether the proposal is likely to improve the financial management of the CAP taking into account its opinion of April 2004 on the single audit model (Opinion No 2/2004) (3).

3.

Under this model, the Commission would be responsible for promoting improvements in internal control systems and for providing assurance that they are working effectively. The internal controls systems would be based on a logical framework using common principles and standards. The Court emphasised that the cost of the controls should be in proportion to their benefit. However, some elements identified in the Court's single audit opinion as necessary for an effective and efficient chain of accountability and financial control require further clarification (see paragraphs 20, 21, 23 and 24).

4.

Paragraphs (7 to 61) below discuss four principal themes of the draft regulation:

—

Consolidation of agricultural expenditure and separation of the two pillars (Articles 2 to 5 of the draft regulation),

—

Management and control (Articles 6 to 8,10,11,12 to 17, 22 to 31, 36, 37 of the draft regulation),

—

Budgetary discipline (Articles 12 to 21 of the draft regulation),

—

The treatment of irregularities (Articles 9, 32 to 35 of the draft regulation).

5.

At a number of points (Articles 7, 8, 9, 13, 15, 16, 18, 19, 26, 30, 39, 42, 45 and 48) the draft regulation leaves important issues, to be settled through committee procedure in secondary legislation, on which the Court is clearly unable to comment at the moment. The Court notes that the effectiveness of a number of aspects of the proposed system will depend on the quality and content of such secondary legislation. In particular, the draft regulation leaves unclear the precise financial responsibilities of the Commission and the Member States.

6.

Some of the proposed changes of the draft regulation are not consistent with some of the provisions in the Financial Regulation (4). The Commission will need to consider whether amendments to the Financial Regulation are necessary.

7.

For many years the common agricultural policy has been implemented through one ‘Fund’: the European Agricultural Guidance and Guarantee Fund. This Fund has two sections, Guidance and Guarantee, which are governed by different rules. (They are currently set out in Council Regulation (EC) No 1257/1999 and Council Regulation (EC) No 1258/1999 (5)).

8.

The Guarantee section

—

finances all expenditure in support of agricultural markets and income support, and

—

co-finances (with Member States) certain rural development measures.

9.

The rural development measures co-financed by the Guarantee section are

(a)

early retirement payments,

(b)

subsidies to farmers in less-favoured areas and areas with environmental restrictions,

(c)

support towards meeting standards (in the field of environment, public health etc.),

(d)

agri-environmental and animal welfare payments,

(e)

support for food quality,

(f)

afforestation (6) and,

(g)

support for all ‘other rural development measures’ in areas not covered by Structural Funds Objective 1:

10.

The Guidance section co-finances all ‘other rural development measures’ listed under (g) in the preceding paragraph in areas covered by Objective 1. It also co-finances the Community Initiative ‘Leader+’ (8).

11.

These arrangements are shown graphically in figure 1.

12.

Thus, at present, whether a rural development measure is financed by the Guarantee or Guidance section of the EAGGF depends on both the type of measure and its geographical location. For example: modernisation of an abattoir in an Objective 1 region will be co-financed by the Guidance section, while an identical project situated outside Objective 1 will be co-financed by the Guarantee section; afforestation of agricultural land will be co-financed by the Guarantee section throughout the Community, whereas investment in maintenance and improvement of forest resources will be co-financed by the Guidance section in Objective 1 areas.

13.

The Commission proposes that two funds, a European Agricultural Guarantee Fund (EAGF) and a European Agricultural Fund for Rural Development (EAFRD) should replace the Guarantee and Guidance sections of the current EAGGF. The EAGF would include expenditure in support of agricultural markets and income support to farmers as laid down in paragraph 8, first indent above (9). All rural development expenditure, regardless of type or geographical location, would be co-financed by EAFRD.

14.

The proposed consolidation of all rural development expenditure within a single budgetary framework would mean that it would be possible to identify total spending on particular rural development measures and overall spending on rural development (10). This represents a welcome increase in transparency (11).

15.

The proposal introduces no significant changes to the management and control of market expenditure. As at present nearly all expenditure would be effected by the paying agencies of the Member States.

16.

For most expenditure the process would continue to be as follows:

(a)

farmers present claims to paying agencies in the year before payment is due, based on areas cultivated, number of eligible animals owned during a specified retention period, etc.;

(b)

the paying agencies subject these claims to administrative checks and, on a sample basis, to on-the-spot-checks, mainly through the Integrated Administration and Control System (IACS);

(c)

each paying agency pays claimants, and reports expenditure made on a monthly basis to the Commission which reimburses the paying agency (‘monthly payments’);

(d)

the accounts and payments of the paying agency are examined by an independent auditor (certifying body) who reports to the Commission in February of the year following the budget year;

(e)

by 30 April of that year, the Commission must take a decision (financial or accounting clearance) on whether to accept these accounts and audit reports or to ask for more work to be performed or information provided;

(f)

the Commission may then examine payments made by the paying agencies and, if they were irregular, or if financial controls were weak, may decide that some expenditure should be borne by the Member States concerned and not be charged to the EU budget (the Commission ‘disallows’ such expenditure in ‘conformity decisions’). When it disallows expenditure the Commission reduces its payments to paying agencies accordingly.

17.

Expenditure under EAGF, as under the present Guarantee section, would be financed by non-differentiated appropriations i.e. there would be no distinction between commitment and payment appropriations.

18.

The draft regulation introduces, however, some new elements and/or changes:

—

in Member States where there is more than one paying agency a coordinating body is already required to centralise information to be made available to the Commission, to ensure that it is provided on a consistent basis, and to promote a harmonised application of Community rules. Article 6 (3) of the draft regulation would introduce the need for coordinating bodies to be subject to specific accreditation by the Member States,

—

Article 8 (1)(c) of the draft regulation would introduce the need for the person in charge of each paying agency to sign and send to the Commission every year a ‘statement of assurance’,

—

Article 31(4)(a) of the draft regulation would allow the Commission, under the clearance of accounts procedure summarised in paragraph 16(f) above, to disallow EAGF expenditure that is incurred up to 36 months before the Commission notifies the Member State in writing of its inspection findings (a ‘36 months rule’). This period is 24 months at present.

19.

The current payment process for EAGGF Guarantee is tried and tested. In the past the Commission has usually not proposed changes to areas that worked reasonably well.

20.

The introduction of a specific accreditation requirement (separate from the accreditation of paying agencies) for ‘coordinating bodies’ could strengthen the chain of accountability for CAP spending (see Opinion No 2/2004 on single audit, paragraphs I, II and IV). This would however depend on the quality and content of the rules for specific accreditation provided by the Commission to the Member States and on how Member States applied them.

21.

The introduction of a ‘statement of assurance’ signed by the person in charge of a paying agency could improve the existing control system in the direction of the single audit model. However, the proposal makes no suggestion as to the objective, the content and scope of the statement. Its content should be closely modelled on the equivalent statement generally required under corporate governance requirements of, for example, listed companies. This would imply that the head of the agency should explain his/her responsibility for the accounts, conduct an annual review of the effectiveness of the system of internal control and report that he/she has done so. Such a review should cover all controls, including financial, operational and compliance controls and risk management. Such a statement cannot replace the work of certifying bodies. Neither DG AGRI nor the certifying body should place reliance on such a statement without additional corroborative evidence. On a point of detail, the terminology suggested would promote confusion with the statement of assurance required of the European Court of Auditors and with the assurance statement required of the Directors-General of the Commission. An alternative name should be chosen.

22.

The Court supported a ‘36 months rule’ in its Opinion No 9/2002 (12). This modification would reduce the risk that weaknesses detected in Member States’ systems may not be penalised simply because the Commission has not been able to cover all areas of expenditure within a two-year cycle. The Commission should consider 36 months strictly as a limit, and should endeavour so far as possible to avoid delays in clearing accounts and charging expenditure definitely to the budget.

23.

The existing EAGGF Guarantee arrangements are capable of improvement in an important respect which the Commission has not proposed. Certifying bodies, which audit the paying agencies accounts and the operation of the paying agencies' internal control procedures, limit their work to confirming the existence of controls designed to ensure conformity of the payments, and do not always carry out sufficient tests of compliance to confirm that such controls function effectively. Nor do certifying bodies carry out sufficient work at the level of the beneficiary of CAP payments to confirm that payments are legal and regular.

24.

The Court maintains the view (set out in its Opinion No 10/98 (13)) that certification of paying agencies by certifying bodies should be based on internationally accepted auditing standards. A reference to internationally accepted auditing standards (14) should be introduced in Article 7 of the draft regulation. The certification should cover legality and regularity of expenditure at the level of the beneficiary and key controls of the paying agency should be tested. When defining the intensity of these checks, the related costs and the related benefits must be taken into account. Such coverage would represent a stronger and clearer chain of accountability for CAP spending. It would provide increased assurance to the Commission and would be consistent with the concept of the single audit model (see Opinion No 2/2004, paragraph 42). Changes to extend the scope of the work of the certifying bodies could be usefully set out in either Article 7 or Article 8(1)(c)(iii) of the draft regulation.

25.

The Court notes that responsibility for the accreditation of paying agencies under CAP would remain with the Member States. In its Special Report No 2/2004 (15) on Sapard (the financing mechanisms of this programme are in many aspects similar to that of the CAP) the Court welcomed the Commission's role in giving accreditation: prior approval of the systems based on both Sapard countries' and the Commission's audits, has ensured that well-defined systems with key controls existed, at least on paper, before any money could be spent. The Court considered this as good practice.

26.

The proposed management and control framework for the EAFRD is based in part on that of the structural funds and in part on that of the EAGGF Guarantee, and would provide a single set of financial rules and a common control system for all rural development expenditure.

27.

As explained in paragraphs 8 to 13 above and in figure 1, the new EAFRD would bring together all rural development expenditure:

—

Guarantee expenditure: payment appropriations of 4,8 billion euro in 2004 paid through non-differentiated appropriations (see paragraph 17 above),

—

Guidance expenditure: payment appropriations of 2,9 billion euro in 2004 paid through differentiated appropriations (16).

28.

The Commission proposes that all this expenditure should be financed under one expenditure stream with differentiated appropriations in future. The implications of these changes are that:

—

rural development expenditure would no longer be implemented under different programming, implementation and control systems,

—

the ‘accompanying measures’ (Part A in figure 1), which account for the greater part of rural development expenditure and other rural development expenditure, currently financed by the EAGGF Guarantee section (Part B in figure 1), would no longer be dealt with in the way summarised in paragraph 16 above.

29.

The proposed process for most of the expenditure would be as follows:

—

when a Member State's rural development programme is adopted, the Commission pays 7 % of the EAFRD contribution to the programme concerned to the paying agency(ies) involved,

—

this 7 % represents a pre-payment (reimbursable to the Commission if there is no payment application for the rural development programme within 24 months),

—

expenditure is reported each quarter to the Commission,

—

for each rural development programme the Commission makes intermediate payments to the accredited paying agency, on the basis of intermediate payment applications, ‘wherever possible three times a year’,

—

after receiving the final implementing report the Commission pays the outstanding balance,

—

the total prefinancing amount is cleared when the rural development programme is closed (a process which may take several years).

30.

There is a strong case to be made for the use of differentiated appropriations to finance expenditure from the Community Budget where two conditions are met:

—

the expenditure concerned is genuinely multiannual (in the sense that a project must be planned and executed over a number of years),

—

the budgetary framework is genuinely multiannual, involving commitment appropriations which cover the total cost of the legal commitment entered into during the current financial year.

31.

Rural development expenditure includes a range of measures with different characteristics. Some of these support multiannual investment expenditure. The greater part involves multiannual contractual obligations with annual payments and control systems which frequently are similar to payments and control systems under the ‘first pillar’ of the CAP.

32.

As for the budgetary framework, although the Commission proposes the use of differentiated appropriations for EAFRD, it does not propose a genuinely multiannual budgetary framework. A genuinely multiannual approach would be to record a commitment covering the total cost of legal commitments entered into during the current financial year. Instead the Commission proposes (Article 23 of the draft regulation) to raise a commitment for the entire amount expected to be disbursed in a particular Member State in a given year, i.e. to have annual tranches of commitments. As the Court argued in its Opinion No 2/2001 (17), such a procedure is contrary to theory and good practice in the use of differentiated appropriations (18).

33.

The Financial Regulation provides for two types of budget appropriation:

—

differentiated appropriations (comprising commitment and payment appropriations) used to finance multiannual expenditure, and

—

non-differentiated appropriations which ensure the commitment and payment of annual expenditure.

34.

Depending on the nature of the expenditure, the appropriate type of appropriation should be chosen for expenditure for EAFRD. Given the diverse nature of EAFRD expenditure it is important that the Commission applies the principles mentioned in paragraph 30 correctly and consistently and that the relevant management and control systems are transparent and effective. The Commission's proposal for annual tranches of budget commitments, which negate the essential purpose of differentiated appropriations and of a commitment budget, is however not appropriate.

35.

Budgetary discipline rules aim to ensure the respect of the financial perspectives.

36.

The current legal requirements with regard to budgetary discipline are set out in Council Regulation (EC) No 2040/2000 (19). For each budgetary year the ‘agricultural guideline’ constitutes the ceiling for agricultural expenditure which the Commission has to set when it submits the preliminary draft budget. The agricultural guideline covers sub-heading 1.a (CAP expenditure) and 1.b (rural development and accompanying measures) of the financial perspective, as well as a part of heading 7 i.e. pre-accession aid for agriculture.

37.

The current financial perspectives cover the period 2000 to 2006. They are set out in the Interinstitutional Agreement of 6 May 1999 between the European Parliament, the Council and the Commission. They are consistent with the conclusions of the Berlin European Council of 24 and 25 March 1999 (20).

38.

The Court notes that there is some complexity in the planned arrangements for the control of CAP expenditure after 2006. On the one hand the Commission has proposed dividing Community expenditure into five new headings in the next financial perspective instead of the eight headings at present. Heading 2 of the financial perspective 2007 to 2013 is called ‘Conservation and management of natural resources’. It would cover the two pillars of the CAP, as well as expenditure on fisheries policy and environment. The sub-heading ‘Agriculture — Market-related expenditure and direct payments’ of heading 2 would include the content of the current sub-heading 1.a.

39.

On the other hand, ceilings (until 2013) for the first pillar of the CAP were defined by the Brussels European Council of 24 and 25 October 2002. Following the agreement in Brussels, the amount of market-related expenditure and direct payments is to be stabilised until 2013 on the basis of the ceiling for sub-heading 1.a foreseen for the EU-15 in 2006, with the addition of the amount of the corresponding expenditure for the 10 new Member States. Thus the overall expenditure of market related expenditure and direct payments in nominal terms for each year in the period 2007 to 2013 will be kept within this 2006 figure, increased by 1 % per year.

40.

Council Regulation (EC) No 1782/2003, which sets out the results of the CAP reform agreed in June 2003, also contains budget discipline provisions. Article 11 provides that starting with the 2007 budget, an adjustment of direct payments will be decided by the Council on a Commission proposal, when forecasts indicate that current sub-heading 1.a of the financial perspective will be exceeded in a given budget year. The adjustments are to be made by 30 June at the latest of the calendar year in respect of which it applies.

41.

The arrangements for budget discipline set out in the draft regulation reproduce and, in some respects, complement some of the provisions of the existing budgetary discipline Regulation (EC) No 2040/2000 and of Regulation (EC) No 1782/2003. However, the intention appears to be not to maintain the agricultural guideline.

42.

Articles 18(1), 19 and 20 of the draft regulation essentially reproduce the provisions of Regulation (EC) No 2040/2000 which relate to

—

legislative instruments with an impact on CAP spending (Article 5(1) of Regulation (EC) No 2040/2000),

—

actions which the Commission must take at different stages of the budget procedure if there is a risk that CAP spending will overshoot (Article 6 of Regulation (EC) No 2040/2000),

—

the ‘early warning’ system for CAP spending.

43.

Article 18(4) of the draft regulation provides for the Commission to adjust direct payments (paragraph 40 above) if the Council has not done so by 30 June of the year in question.

44.

Article 17(2) of the draft regulation would enable the Commission to reduce or suspend monthly payments to Member States where there is a risk that a financial ceiling set by Community legislation has been exceeded. Under Article 19(4) of the draft regulation the Commission would be authorised to distribute the available budgetary balance between Member States if the reimbursement requests from Member States at the end of the budgetary year exceed or are likely to exceed the net balance available for EAGF expenditure.

45.

The draft regulation in Articles 17, 18(4) and 19(4), would permit a somewhat stricter application of budgetary discipline. The Court welcomes these proposals.

46.

The disappearance of the agricultural guideline appears to reduce one element of budgetary discipline: there would be no overall ceiling on agricultural expenditure. The Court invites the Council and Parliament to consider carefully the arguments for and against retention of the agricultural guideline (21).

47.

In point 12 of the Interinstitutional Agreement on budgetary discipline and improvement of the budgetary procedure (22), it is provided that ‘for the purposes of sound financial management, the institutions will ensure as far as possible during the budgetary procedure and at the time of the budget's adoption that sufficient margins are left available beneath the ceilings for the various headings’. A similar provision in the draft regulation would be appropriate in the Court's view.

48.

In the Commission's draft multiannual financial framework 2007 to 2013 expenditure on rural development is no longer shown under a distinctive subheading. The ceiling for the resources available for commitments from EAFRD is set by Article 70(1) of the Council Regulation on support for rural development, that is currently under discussion (23). This Article mentions a total amount of 88,75 billion euro at 2004 prices that are to be distributed by almost equivalent tranches each year for the period 2007 to 2013. The amounts set by the Commission as result of modulation have to be added to these commitment tranches.

49.

Member States are obliged to notify the Commission when they detect irregular payments over 4 000 euro made under the CAP and to attempt to recover such payments. Where recovery is not possible the sums concerned are written off and the losses are borne by the Community unless non-recovery is due to the negligence of the Member State concerned. In its Special Report No 3/2004 (24) (‘Recovery of irregular payments under the common agricultural policy’) the Court showed that in practice there is an unsatisfactorily low rate of recovery of irregular payments. In addition, the write off of reported irregular payments has been very limited.

50.

The Commission proposes that the rules for EAGF should be carried over from EAGGF Guarantee but with some important changes.

51.

The draft regulation proposes that if recovery has not taken place within four years of the primary administrative or judicial finding, (or within six years where recovery action is taken in the national courts,) 50 % of the financial consequences of non-recovery would be borne by the Member State concerned and 50 % by the Community budget (see Article 32(5) of the draft regulation). In cases of negligence on the part of the Member State it would be possible for the Commission, as now, to charge the full sum to the Member State concerned (see Article 32(4) of the draft regulation).

52.

While the Court underlines the primary importance of an efficient and effective recovery mechanism as an element of an overall internal control system (25), it welcomes this redistribution of the financial burden of non-recovery, which may encourage swifter resolution of procedures in Member States. The Court also welcomes the fact that the draft regulation:

—

clarifies the Commission's powers to charge the sums to be recovered to the Member State in cases of negligence (26), and

—

includes a new time limit: Member States must initiate appropriate administrative or judicial procedures to recover sums wrongly paid within one year of the primary administrative or judicial finding relating to the payment.

53.

Under the Commission's proposal the Member States would continue to be able to retain 20 % of the amounts recovered as flat rate recovery costs, unless the irregularity or negligence is the fault of the Member State (see Article 32(2) of the draft regulation.) However, in the Court's view Member States should not be permitted to deduct the 20 % recovery costs before the cost sharing procedure described in paragraph 51 above because in such cases recovery has not yet taken place. Thus the reference to ‘the deduction provided for in paragraph 2’ should be removed from the last sentence of the first sub-paragraph of Article 32(5) of the draft regulation.

54.

For rural development expenditure the current position is mixed, reflecting the fact that currently rural development expenditure falls partly under the EAGGF Guarantee section and partly under the EAGGF Guidance section.

55.

For all rural development expenditure financed under the Guarantee section the current situation is as discussed in paragraph 49 above.

56.

For the part of rural development financed by the Guidance section structural fund rules apply:

—

Member States have to report on a quarterly basis to the Commission any irregularities (over 4 000 euro) which have been subject of initial administrative and judicial investigations as well as the follow up of irregularities previously notified,

—

in the first instance, it is the responsibility of the Member State to investigate and to recover any amounts lost as a result of an irregularity detected,

—

Community funds released via recovery and/or correction may be re-used by the Member State for the assistance concerned and before closure of that programme,

—

where a Member State considers that an amount cannot be (totally) recovered it must report it to the Commission,

—

the Commission decides in consultation with the respective authorities of the Member State concerned who shall bear the financial consequences.

57.

In practice, similar problems as discussed for the Guarantee section exist e.g. a low rate of recovery, inadequate criteria for deciding who should bear the costs, etc.

58.

The Commission proposes that structural fund rules on irregularities, including the reuse of funds recovered, be applied to all rural development expenditure (as laid down in paragraph 56 above).

59.

As explained in paragraph 31 above, rural development expenditure frequently involves payment and control arrangements which are similar to those for direct payments under EAGF. It would be more logical to treat cancelled and recovered amounts in such cases in the same way as under EAGF.

60.

A similar provision to that described in paragraph 51 above is proposed in respect of this Fund. However the distribution of the financial burden of unrecovered amounts will only be effected four years after the closure of a rural development programme, which, for expenditure in the period 2007 to 2013, could be as late as 2019. This will almost certainly be longer than the period allowed under EAGF. The Court believes that it would be more appropriate to fix an earlier deadline.

61.

As for EAGF, Article 33(5) of the draft regulation would clarify the cases of negligence on the part of the Member State for which the Commission may charge the full sum to the Member State concerned (27). However, draft Article 33(5) should, in the view of the Court, also introduce the same one year time limit to initiate the appropriate administrative or judicial procedures as is provided for EAGF.

62.

Article 26(6) of the proposed regulation states that EAFRD intermediate payment applications in respect of expenditure incurred from 16 October onwards are to be booked to the following year's budget. This is a new rule for expenditure currently financed from the EAGGF Guidance section. It would align the EAFRD financial year with that for EAGF, whereas for EAGGF Guarantee at present, payments made by paying agencies after that date would be reimbursed by the Commission in January of the following year. The Court notes and regrets that the Commission has not proposed harmonisation with the rest of the General Budget where the financial year is the calendar year.

63.

Article 39(1)(a) of the proposed regulation states that, in respect of rural development programmes for the period 2000 to 2006 financed by EAGGF Guarantee, payments to beneficiaries shall cease no later than 15 October 2006. By way of an exception (Article 39(1)(c)), expenditure in respect of rural development measures incurred over the period 16 October to 31 December 2006 shall be charged to the EAFRD budget in the years 2007 to 2013. This appears to mean that payments due to beneficiaries after 2006 under five-year commitments entered into from 2003 onwards, which are likely to be significant, will not be charged to the EAFRD budget and thus not be co-financed at all. This would cause financial and legal problems in the Member States: Article 48 appears to provide a procedure for dealing with such problems.

64.

In (draft) Article 8(2), first subparagraph ‘and the Court of Auditors’ should be added to the last sentence, so that the Court can carry out its responsibilities.

65.

The last sentence of Article 33(3)(c) of the English version of the draft regulation should read: ‘and provided the funds are NOT reallocated to operations which have been the subject of a financial correction’. In addition, Article 33(5)(b) refers to paragraphs 2(a) and 2(c) of the same article. This should be changed to paragraphs (3)(a) and (c).

I.

The Court:

—

welcomes the increase in transparency that would result from grouping all rural development expenditure under one budget heading,

—

considers that the Commission's proposal in respect of the management of the EAGF include some potentially helpful changes but need further improvement in the light of the Court's opinion on the single audit,

—

notes that the Commission's proposals in respect of budget discipline and the treatment of irregularities also include some welcome changes but are in some respects capable of improvement,

—

regards as inappropriate the Commission's proposal for annual tranches of budget commitments under EAFRD.

II.

The Court's principal observations on the detailed provisions of the draft regulation are as follows:

(i)

Management and control of EAGF

(ii)

Management and control of EAFRD

(iii)

Budgetary discipline

(iv)

Irregularities

20.5.2005   

EN

Official Journal of the European Union

C 121/14

1-29

30

1.

The proposal for a Regulation essentially retains the framework that was established in the previous programming periods. Besides this, it focuses on achieving greater simplification with regard to, in particular, financial instruments and the choice of themes and, more generally, implementation, management and control systems. The Court paid particular attention to the consequences of the measures proposed for financial management and control.

2.

The legal framework for the implementation of the Community budget is set by Article 274 of the EC Treaty, according to which the Commission implements the budget on its own responsibility and in cooperation with the Member States, having regard to the principle of sound financial management.

3.

In the context of the various methods for implementing the Community budget, structural measures are included among ‘shared management’ areas, namely, areas in which ‘implementation tasks shall be delegated to Member States’ (9). The management and control of structural measures involve not only several Commission departments but also hundreds of national, regional and local offices and departments in the Member States. In future, these measures could account for nearly half of the appropriations in the Community budget.

4.

The rules currently governing structural measures (Regulation No 1260/1999) already provide as follows:

5.

The proposal for a Regulation refers, in Article 12, to shared management within the meaning of Article 53(3) of the Financial Regulation. However, the wording of the proposal contains no reference to the Commission's final responsibility. For instance, it is specified in the last sentence of Article 12(1) that ‘the Member States and the Commission shall ensure compliance with the principle of sound financial management’, Article 12(2) essentially limits the Commission's responsibility for implementing the budget to checking ‘the existence and proper functioning of management and control systems in the Member States (…)’, and Article 69(1) makes the Member States alone responsible: ‘Member States shall be responsible for ensuring sound financial management of operational programmes and the legality and regularity of underlying transactions’. What is more, it is the Member States that are assigned a general obligation to guarantee that assistance measures comply with Community law (Articles 39(f), 59(a), 60(b)(ii) and 66(2)(g)). Yet the fact that implementation tasks are entrusted to the Member States cannot limit the Commission’s final responsibility. In a context where the Member States are both beneficiaries of the Community funds and responsible for the implementation of measures, only the Commission is able to ensure that the Community objectives are applied in a logical and consistent manner. It is therefore crucial that the notion of the Commission's final responsibility, as envisaged in Article 274 of the Treaty, be reaffirmed unequivocally in the articles that deal with the responsibility of Member States.

6.

It is worth noting that if the Commission no longer had final responsibility for implementing the budget, the Community's financial process, and in particular the discharge procedure, would lose a good deal of its significance. The budgetary authorities' recommendations (Article 276(3) of the EC Treaty) would be deprived of all practical effect.

7.

In order that the Commission can assume its ultimate responsibility for the implementation of the budget, the proposal for a Regulation should take into account the following key aspects, which underpin opinion No 2/2004 of the Court on the ‘single audit’ model:

8.

There is no indication in the current legislation of the intensity of the checks at final beneficiary level, which should rely on a comparison of the costs to be borne by the Member States and the Commission in connection with the controls and the related benefits. The proposal only indirectly addresses the need to set acceptable confidence and materiality thresholds (Article 61(1)(e)(ii) and 61(1)(g)). It would be desirable to explicitly provide for appropriate criteria in the implementing rules specified in Article 58(6). The terms ‘reasonable assurance’ and ‘validity of the application’ should also be defined.

9.

The reference to ‘international audit standards’ (Article 61(1)(a)) is not sufficiently explicit to allow the control procedures to be based on common norms and principles. There should be provision in the implementing rules mentioned above for a preliminary acceptance procedure covering both the system’s audit and the audit of the operations themselves.

10.

Article 54 of the Financial Regulation specifies that the implementing tasks delegated must be clearly defined and fully supervised as to the use made of them. Article 35(1) of the implementing rules states that, where management is shared, the Commission will first carry out documentary and on-the-spot checks into the existence, relevance and proper operation of the procedures and systems within the entities to which it entrusts implementation. The proposal for a Regulation departs from these provisions in that, prior to the Commission's adoption of an operational programme, only the Member States are required to ensure that management and control systems have been set up (Article 70). In this context, it would be desirable to make arrangements, if not for an approval procedure, then at least for the Commission to oversee the procedures by which management and control bodies are appointed at national level. Moreover, it would also be advisable to set up an intermediary body at national level to ensure liaison with the Community authorities.

11.

A substantial strengthening of Community controls is the indispensable corollary to a system in which project management rests with the national or regional authorities (10). Given that the rules on the eligibility of expenditure will, from now on, be largely fixed at national level, the conditions outlined above will be of even greater importance.

12.

Article 60(1) of the Financial Regulation makes the authorising officer responsible for ensuring the legality and regularity of expenditure. In Article 53(6), the Regulation also states that, where management is shared, the Member States are to conduct regular checks to ensure that the actions to be financed from the Community budget have been implemented correctly. They are also to take appropriate measures to prevent irregularities and fraud and if necessary bring prosecutions to recover funds wrongly paid.

13.

In the light of these provisions, the proposal for a Regulation (Article 69(1)) confers upon the Member States responsibility for the legality and regularity of the underlying transactions (see paragraph 5). The ensuing transfer of competence to the Member States also comes as a corollary to the stipulation in Article 70 that they are to approve the management and control systems.

14.

It is true that, where there are doubts as to the operation of these systems, or where irregularities are suspected or confirmed, the Commission could interrupt payment for a period of six to twelve months (Article 89). It is also envisaged that the Member States and the Commission could adopt financial corrections (Articles 99 and 100). However, such measures could provide no more than a limited, auxiliary contribution to the necessary rigour of everyday management. Their effectiveness is essentially dependent on the number of checks performed. Furthermore, since financial corrections would intervene only after the fact, they could not be enough on their own to make good all the consequences of any transactions that might be implemented even though they did not meet the necessary regulatory requirements.

15.

Article 60(1) of the Financial Regulation indicates that the authorising officer is to implement expenditure in accordance with the principles of sound financial management. Article 27 of the Regulation sets out the conditions for the use of Community appropriations in accordance with the principles of economy, efficiency and effectiveness. The same Article states that specific, measurable, achievable, relevant and timed objectives are to be set for all budget activities. The Commission is to undertake ex ante and ex post evaluations which it then forwards to the spending, legislative and budgetary authorities.

16.

The proposal for a Regulation makes the Member States responsible for sound financial management (Article 69). However, this provision does no more than refer to the existence of ‘adequate guidance’ on setting up management and control systems that will ensure that community financing is used ‘efficiently and correctly’. On the matter of effectiveness (11), the proposal refers almost exclusively to the management and control systems, and by implication to those governing only legality and regularity. Article 59 of the proposal is limited to making the managing authority responsible for managing and implementing programmes ‘efficiently, effectively and correctly’ and finally refers, in indent (e), to the quality standards agreed between the Commission and the Member States in respect of ex ante evaluations.

17.

Concerning the narrower question of evaluations, the proposal for a Regulation specifies that the evaluation methods and standards to be applied (Article 45(5)) are to be agreed between the Commission and the Member States (Article 59(e)). The quality of these standards will be of particular importance for the ex ante evaluations entrusted to the Member States (Articles 46(2) and 46(3)), which must inter alia identify the added value that operational programmes bring to the Community.

18.

lt is therefore particularly important that the implementing rules that the Commission is to adopt pursuant to Article 58(6) of the proposal for a Regulation provide all the necessary clarification of these aspects.

19.

Article 88 of the proposal for a Regulation says that supporting documents concerning expenditure are to be kept available for the Commission and the Court of Auditors for a period of at least three years following closure. In the case of co-financed assistance, where the eligibility of the expenditure is largely dependent on national legislation, it would be desirable to state explicitly that the three-year term is without prejudice to national rules specifying longer periods.

20.

These remarks apply also to the partial closure of operational programmes (Article 97). In this specific case by derogation from the general rule (Article 88), the period for conserving supporting documents would start on the date of partial closure (Article 98(2)). This would have the effect of seriously limiting checks on an operational programme as a whole at the end of the programming period, since the supporting documents for operations closed earlier might no longer be available. In the Court's view, such an eventuality could encroach upon its audit prerogatives as specified in Article 248 of the EC Treaty.

21.

The proposal stipulates that each Member State is to draw up a ‘national strategic reference framework’ that is consistent with the ‘Community guidelines on economic, social and territorial cohesion’ to be adopted by the Council (Article 23). However, there is no reference under the ‘national strategic reference framework’ to the ‘European territorial cooperation’ objective.

22.

The content of the ‘national strategic reference framework’ (Article 25) is not sufficiently precise (in terms of measures, the allocation of resources and expected results) to provide detailed information on the national and regional development strategy. Neither are the ‘thematic and territorial priorities’, which are supposed to define the measures to be financed, explained adequately. This framework is also likely to be limited exclusively to areas where assistance is co-financed. Thus the Commission, which is required to adopt the frameworks, would not be in a position to emphasise some or other aspect in the operational programmes.

23.

The operational programmes are also characterised by a lack of precision, no information being requested in respect of the various measures to achieve the priority objectives. This prevents any arbitration between measures. Specific objectives would be quantified by means of a limited number of implementation, results and impact indicators. Compared with the current legislation, a description of the arrangements for managing each operational programme is no longer required (Article 36). Thus, neither the ‘national strategic reference framework’, nor the operational programmes would be true management and monitoring instruments for the Commission. It is consequently unclear how the Commission will be able to ensure that coordination with the operational programmes has been established at national level.

24.

The extended impact assessment fails to address the reasons for maintaining separate Funds (as opposed to grouping the Funds as postulated in Article 161 of the EC Treaty). However, this should have been the subject of a thorough analysis from the point of view of the advantages and disadvantages of all the available options, given that the extended impact assessment gives arguments in favour of setting up a single Fund. As regards the present Objective 2, in fact, it says that the relative thematic diversity of funded projects and the fragmentation caused by zoning have blocked the implementation of suitable policies. Moreover, it has not been possible to exploit sufficiently the ERDF/ESF synergies under Objective 3. It is therefore concluded that there is a need for:

25.

Establishing the principle of ‘one Fund/one operational programme’, in the interest of simplification is not likely to promote the search for the necessary synergies.

26.

It is especially difficult to justify the separation between the ERDF and the Cohesion Fund in the context of the ‘Convergence’ objective. These two Funds are generally to be found in the same operational programmes and are concerned with the same themes (transport infrastructure and environmental projects/actions). The corresponding actions/projects are often complementary (for example, where the Cohesion Fund and the ERDF are both used to finance different parts of a motorway). What distinguishes them are regional/State eligibility (per capita GDP of less than 75 % of the Community average in the case of the Structural Funds, and per capita GNI of less than 90 % of the Community average), the contribution ceiling, Article 51 gives 85 % for the Cohesion Fund and 75 % for the ERDF, although the ERDF ceiling may be increased to 85 % in certain cases (Articles 51(4) and 52(1)), and the matter of pre-financing (Article 81), which amounts to 7 % for the Structural Funds and 10,5 % for the Cohesion Fund. ERDF actions and Cohesion Fund projects are often managed by the same public entities. The concepts of major projects and revenue-generating projects are equally valid for both Funds. For reasons of consistency it would be appropriate to operate a single Fund, at least in the case of the ERDF and the Cohesion Fund, since the differences given above do not constitute major obstacles.

27.

Looking at Article 3(2) of the proposal, it is difficult to draw a clear line between actions concerned by indent (a) and those concerned by indent (b). The real difference appears to be ‘territorial’ (eligible areas) as compared with ‘financial’ (contribution levels).

28.

From a practical point of view, the provision of Article 33 (financing from a single Fund, with no more than 5 % from any other Fund) is a further complication arising from the existence of multiple Funds.

29.

In the past, the Court has noted (12) several delays during the different stages of programming or during the performance of checks for which the responsibility must lie with Commission departments. It is therefore vital that administrative structures and adequate procedures be established. Moreover, precise deadlines should be laid down in several of the provisions proposed (Articles 31(5), 32(2), 40(3), 85(2) and 96(1)). It would also be useful to have the departments responsible for the different Funds reach a common accord on the audit strategy, the allocation of resources and the required level of assurance.

30.

The Court sets out specific observations in the table below. In this section the imprecision of certain time limits and certain expressions used is noted on several occasions. This runs the risk of giving rise to differing interpretations and undermining the legal scope of the provisions concerned.