FINANCIAL REGULATION
(21749)
12598/00
COM(00) 461
|
Draft Council Regulation on the Financial Regulation applicable to the general budget of the European Communities.
|
| Legal base:
| Article 279 EC; consultation; unanimity
|
| |
| Document originated:
| 17 October 2000 |
| Forwarded to the Council:
| 19 October 2000 |
| Deposited in Parliament:
| 8 November 2000 |
| Department: |
HM Treasury |
| Basis of consideration:
| EM of 18 November 2000
|
| Previous Committee Report:
| None; but see paragraph 11.1 below
|
| To be discussed in Council:
| No date known |
| Committee's assessment:
| Politically important |
| Committee's decision:
| Not cleared |
Background
11.1 The Financial Regulation is the main instrument
which lays down rules for all aspects of the budget of the European
Communities, pursuant to the principles set out in Articles 268
to 279 EC. It covers the establishment of the budget; the implementation
of revenue and expenditure; the definition of the role and responsibility
of those involved in implementation; and the monitoring and control
of implementation. The current Regulation was adopted in 1977.
It has been amended on numerous occasions to take account of institutional
and budgetary policy changes and the developing needs of sound
and efficient financial management. These amendments have been
made piecemeal with little regard for the overhaul consistency
of the text. In April 1998, we reported on an Opinion of the Court
of Auditors which called for a complete overhaul of the Regulation[26].
Later that year, the Commission produced a Working Document on
recasting the Regulation. We reported on that document in October
1998[27].
11.2 On 12 April 2000, we reported on the Commission's
White Paper on reform of the Commission[28].
The White Paper made the improvement of financial management by
the Commission a top priority. It also made proposals for introducing
activity-based budgeting. This would be reflected in the presentation
of the Annual Budget, which would no longer be split between administrative
and operational expenditure and would, instead, show how expenditure
relates to specific activities and programmes. The White Paper
recognised that these and other changes would depend on a recasting
of the existing Financial Regulation. On 12 July, we reported
on a proposal to amend the Financial Regulation to allow the establishment
of an Internal Audit Service within the Commission, independent
of the Commission's Financial Controller[29].
This proposal was introduced ahead of the main recasting of the
Financial Regulation in order to allow the setting up of the Internal
Audit Service as soon as possible and to bring to an end the system
under which the Controller was, in effect, responsible for both
expenditure decisions and their subsequent audit.
The document
11.3 The document sets out the text of the proposed
Financial Regulation and also includes an Explanatory Memorandum
in which the Commission explains the approach it has taken. As
regards the form of the draft Regulation, the Commission has aimed
for simplification, improving presentation and clarity, and better
co-ordination between the Regulation and other related financial
provisions.
11.4 As regards simplification, the Commission
says that the Financial Regulation should focus on essential principles
and matters that must be dealt with in a Council Regulation rather
than in implementing rules which could be adopted by the Commission
under delegated powers. It notes that the exact demarcation between
what belongs to the Regulation and what belongs to the implementing
rules is not always easy to determine. When in doubt, it has left
provisions in the Regulation. The Commission notes that in order
to comply with the Treaty, certain matters (for example, structure
of the budget) have to be in the Regulation itself. It has also
treated exceptions to the basic budgetary principles (unity
and annuality) as essential matters to be covered in the Regulation,
along with the rules concerning the Community's institutions,
in particular inter- institutional relations. As a result of this
approach, the Commission's proposal would substantially slim down
the detail in the current Financial Regulation dealing with implementation
of the budget (distribution and exercise of the duties of the
financial actors). On the other hand, the Commission has transferred
very little from the present Regulation to implementing rules
in areas concerning budget principles and the procedures for establishing
the budget and for presenting and auditing the accounts.
11.5 As regards co-ordination between
the Financial Regulation and other financial provisions, the Commission
proposes to retain the present approach under which the Financial
Regulation does not incorporate the "own resources"
or the inter-institutional agreements (except for the recent agreement
on legal bases and the 1975 Declaration on the Conciliation Procedure);
or the sectoral rules — for example, the Regulations dealing
with the Structural Funds and agricultural expenditure[30].
On matters of substance, the Commission says that changes to the
current Regulation are proposed in six areas:
— statement of
the principles of budget law (the Treaty distinguishes seven principles
of budget law which govern the establishment of the budget and
its execution — unity, annuality, equilibrium, unit of account,
universality, specification, and sound financial management);
— implementation of the budget, covering
the role of the actors, externalisation and share or decentralised
management, commitments, payment times and recovery orders;
— procurement, grants;
— keeping and presentation of the accounts;
— external action (for example, aid to
third countries); and
— other matters: EAGGF Guarantee Structural
Funds, research, creation of the Anti-Fraud Office (OLAF), administrative
appropriations and transitional provisions.
11.6 The Commission notes that many exceptions
to the financial principles, as set out in the Treaty, have been
made as a result of a long series of amendments to the Financial
Regulation. These were criticised by the Court of Auditors in
its Opinion 4/97 as running counter to a disciplined financial
approach and hugely complicating the accounting and financial
management. The Commission says that it has re-examined the merits
each exception and questioned them when appropriate. It sets out
its views on the main exceptions by reference to the relevant
Treaty principles.
11.7 The Commission proposes that the new Regulation
should apply to expenditure on the Common Foreign and Security
Policy (CFSP) and the Justice and Home Affairs Pillar (JHA) when
it is charged to the Community budget (as required by Article
268 EC).
11.8 It proposes also to bring the establishment
plans of the Community agencies within the control of the Budgetary
Authority. Although these agencies are de-centralised, with their
own legal personality and budgetary autonomy, the Commission argues
that these plans should be submitted to the budgetary authority
so that it is aware of any increase in the number of Community
officials and of their budgetary impact[31].
11.9 The Commission proposes an exception to
the principle of specification (Article 271 EC, third paragraph:
"appropriations shall be classified under different chapters
.... and sub-divided, as far as may be necessary") so that
it can have what it considers to be the necessary flexibility
in the management of operational appropriations. It links this
to the proposal in the White Paper for an integrated presentation
of the allocation of financial and administrative resource by
purpose (activity-based budgeting) in the Community budget.
11.10 The Commission proposes to include in the
Regulation a new principle of transparency, not included in the
Treaty. In that connection, it proposes that the "negative
expenditure" which still exists in agriculture should
be converted into earmarked revenue. This covers matters
such as amounts recovered in fraud or irregularity cases and "profits"
on sales from public storage. The Commission says that this proposal
should not pose any problems for financing agriculture. Similarly,
the negative revenue (amounts representing the collection cost
deducted by Member States from traditional own resources) will
be dropped[32].
As a result the budget would show only net revenue.
11.11 As regards implementation of the budget,
and the role of the Commission, the document sets out the Commission's
plans for separating internal audit from the authorisation of
expenditure within Directorates. As we have already noted, a separate
legislative proposal to that end is already being fast-tracked.
The document notes the relationship between the Financial Regulation
and the Staff Regulations in respect of disciplinary matters relating
to financial mismanagement or irregularity. In broad terms, the
Financial Regulation can create liabilities: for example, for
misconduct of Accounting Officers, the conditions and procedures
for applying this liability are laid down in the Staff Regulations.
11.12 The Commission notes that the present definition
of "commitment" is a constant source of difficulty
for budget implementation and accounts. The proposal contains
a clearer definition of the concept of budget commitment
(reservation of appropriations) on the one hand and legal commitment
(obligations to third parties) on the other. The document retains
the instrument of budget commitment but with stricter time limits
for concluding individual legal commitments before the budgetary
commitment, in effect, expires. For most purposes, individual
legal commitments will have to be concluded before the end of
the budget year plus one. A longer period — budget year
plus three — would apply generally in the area of external
actions (for example, external aid programmes).
11.13 The proposal defines two main methods
of implementation of the budget:
— centralised
management by the Commission either directly or indirectly
through other agencies with the limits clearly defined (so-called
externalisation); and
— shared management with the Member
States, in particular on agriculture and the Structural Funds,
or by third countries receiving external aid.
11.14 The Commission notes that although shared
management has long been practised, it is regulated solely in
different sectoral Regulations and not in the basic Financial
Regulation. It recalls that the Court of Auditors has insisted
that Member States should be involved more closely in improving
shared management. The Commission proposes that the provisions
on budgetary discharge in the Financial Regulation should
be used to increase Member States' involvement. This is in keeping
with the Treaty changes made at Amsterdam which required Member
States to combat fraud and to co-operate with the Commission with
a view to sound financial management. The specific proposals are
that:
— Member States
should in future have to reply to comments on shared management
in the Court of Auditors Annual Report;
— they should co-operate with the Commission
throughout the discharge procedure; and
— they should inform the Commission of
the measures they have taken in response to the comments accompanying
the discharge decision so that it can take them into account in
its follow-up report.
11.15 In the context of procurement by
the Community's institutions, the Commission proposes that the
Community Directives relating to public contracts should be made
directly applicable to the Community institutions, via the Financial
Regulation and implementing rules.
11.16 The Commission notes that grants
have gradually become an important instrument for Community action,
both within and outside the Union. The present Financial Regulation
contains no provision on the award of grants, and procedures have
evolved without any proper regulatory framework. This would be
remedied in the new Regulation which would contain a clear definition
of the concept of grant and a statement of the principles to be
involved in their administration. Their application in practice
would be spelt out in the implementing rules.
11.17 In respect of external actions,
the proposal would authorise the total or partial de-centralisation
of management of external aid to the beneficiary states, provided
that they can demonstrate to the Commission that certain minimum
standards of sound management are met (existence of transparent
procurement procedures, efficient internal control system and
presentation of separate accounts, external audits, all under
the responsibility of the State). Contracts concluded either directly
by the beneficiary States or by an organisation empowered by them
or by the Commission on their behalf would have to comply with
the general principles and procedures laid down for Community
contracts, subject to any detailed variations in the implementing
rule.
11.18 The Commission notes that the sectoral
regulations concerning the Structural Funds and the Cohesion Fund
contain financial provisions differing from the general rules
laid down by the existing Financial Regulation. In order to improve
the link between the sectoral regulations and the Financial Regulation,
it proposes a specific section on the Structural Funds.
11.19 Finally, the Commission notes that a new
Title is needed within the budgetary structure to accommodate
the new European Anti-Fraud Office (OLAF), including delegation
of implementing powers to the Director-General of OLAF to ensure
its operational autonomy.
The Government's view
11.20 In her Explanatory Memorandum of 18 November
2000, the Economic Secretary to the Treasury (Miss Melanie Johnson)
says that:
"The Government recognises
that the current Financial Regulation, more than 20 years old,
is long overdue for a radical overall. Ambiguous and incoherent
rules must be replaced with a simpler but robust regulation which
acknowledges modern financial and accounting practices.
"The Financial Regulation has a major impact
on many of the key objectives of financial management reform of
the Commission. Most of the proposed reforms cannot be implemented
without substantial changes to the Financial Regulation and the
Government therefore strongly supports the proposal for a new
Regulation.
"Regarding the detail of the proposal, the Government
will consider this carefully and contribute to the discussion.
However, the Government is pleased to see that many of the changes
the UK would like to see have already been included: for example,
the incorporation of principles of sound financial management
and modern accounting, clear definitions of roles and transparency
in accounting procedures. The final Regulation should be clear,
readable and unambiguous. The relationship between the Financial
Regulation and sectoral Regulations and the implementing rules
should be clearly set out, and the rationale for inclusion of
financial rules in a particular place should be clear. The Financial
Regulation should deal with principles and leave detail to the
implementing rules which can be updated on a timely basis.
"It is important that sufficient time is allowed
for proper consideration of this important proposal, but the Government
will press to keep up the impetus and ensure that an acceptable
timetable is followed".
11.21 The Minister concludes that, although the
proposal has no direct financial implications, it may lead to
cost-savings by improving financial management and cutting down
on errors and waste through enhanced responsibility.
Conclusion
11.22 We welcome the long-awaited arrival
of this proposal. A new Financial Regulation is a necessary, though
not sufficient, step in improving the Community's budgetary process
and management of its resources. Many reports by the Court of
Auditors have highlighted the contribution made to financial mismanagement
of the Community resources by over-complex and unclear or ambiguous
rules. These have contributed to waste and errors within Member
States as well as within the Commission itself and the agencies
through which it has worked.
11.23 In attempting this major reform, the
Commission has rightly taken the approach that detailed implementing
rules should, as a general principle, be dealt with separately
through subordinate legislation. In practice, this can mean Commission
regulations not subject to the same legislative processes and
checks as a Council Regulation. The Commission says that it is
not always easy to determine what should be in the Council Regulation
and what in the implementing rules but that, when in doubt, it
has opted to keep provisions in the Financial Regulation. We ask
the Minister whether she is satisfied that the Commission has
got the balance right, or whether there are areas in the Commission's
proposal which need to be clawed back into the Financial Regulation
itself.
11.24 We are glad to see that the proposal
would enable the Commission to present its annual Budget for the
Community so as to make it clearer how the resources relate to
policy programmes and objectives. However, we note that the Commission
is seeking increased powers for itself to vire appropriations
within the adopted Budget. We ask the Minister whether she is
satisfied that the Commission has made an adequate case for this
increase in its powers.
11.25 We note that the proposal would impose
new responsibilities on Member States in respect of shared
management, at least in terms of the discharge procedures
for the Budget. The Court of Auditors has argued that Member States
must take their responsibilities for the management of Community
resources as seriously as they do that of their own national resources.
We ask the Minister whether she is satisfied that the new requirements
on Member States in respect of discharge are appropriate and whether
the proposal goes far enough, bearing in mind that Member States
are responsible for management of over 80% of the Budget.
11.26 We note that the proposal would bring
within the budgetary process the need for the budgetary authority
to approve the establishment plans of Community agencies, for
example, the European Medicines Evaluation Agency based in London.
We ask the Minister whether she considers this extension of the
role of the budgetary authority to be appropriate.
11.27 We are glad to see the proposal to extend
the Regulation to cover grants and to provide a clear principle-based
framework for their administration. Similarly we welcome the proposals
on decentralisation of management of external aid to the beneficiary
states, provided that the tests proposed are applied with appropriate
rigour.
11.28 Finally, we note that the proposal makes
provision for the budgetary structure to accommodate the appropriations
for OLAF and related matters. We ask the Minister whether she
is satisfied that these arrangements will give the Director-General
of OLAF and its Supervisory Committee the freedom to manage its
resources in the way it wishes in order to make the most effective
use of them. We know from the 1999-2000 Progress Report of the
OLAF Supervisory Committee for the year ending July 2000 that
it is concerned that the Commission's administrative arrangements
do not give OLAF the autonomy it needs.
11.29 We recognise that, as the Minister says,
this proposal is likely to be under consideration for some time.
The Court of Auditors will deliver its Opinion in April next year.
With that in mind, and also the intrinsic importance of this proposal
in improving the propriety and effectiveness of the management
of the Community's resources, we propose to use our powers formally
to request an opinion on a European Union document from another
select committee. To that end, we intend to ask the Committee
of Public Accounts for its opinion on this document.
11.30 In the meantime, we do not clear it,
and invite the Minister to respond to the questions we have raised.
26 (18747) 10218/97; see HC 155-xxiii (1997-98), paragraph
9 (1 April 1998). Back
27 (19321)
10764/98; see HC 155-xxxvii (1997-98), paragraph 14 (21 October
1998). Back
28 (21070)
6302/00; see HC 23-xiv (1999-2000), paragraph 8 (12 April 2000). Back
29 (21348)
9242/00; see HC 23-xxiv (1999-2000), paragraph 14. Back
30 "Own
resources" are the resources Member States contribute to
the Community revenue, and are defined in the Own Resource Decision. Back
31 The
budgetary authority is the Council and the European Parliament. Back
32 Traditional
own resources are customs duties and agricultural and sugar levies. Back
| 
