1 Financial management
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COM(10) 185
(b)
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COM(10) 261
(c)
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COM(10) 260
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Commission Report on the functioning of the Inter-Institutional Agreement on budgetary discipline and sound financial management
Commission Communication: More or less controls? Striking the right balance between the administrative costs of control and the risk of error
Draft Regulation on the Financial Regulation applicable to the general budget of the European Union (recast)
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| Legal base | (a)and (b) —
(c) Article 322(1) TFEU; co-decision; QMV
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| Documents originated | (a) 27 April 2010
(b) 26 May 2010
(c) 28 May 2010
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| Deposited in Parliament | (a) 25 May 2010
(b) and (c) 4 June 2010
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| Department | HM Treasury |
| Basis of consideration | Three EMs of 18 August 2010
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| Previous Committee Report | None
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| To be discussed in Council | Not known
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| Committee's assessment | Politically important
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| Committee's decision | For debate in European Committee B after receipt of further information
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Background
1.1 The Inter-Institutional Agreement on budgetary discipline
and sound financial management provides for many aspects of the
planning, preparation, execution and control of the EU Budget.
The agreement is between the Council, the European Parliament
and the Commission — it has no legal base but is politically
binding. It is an important tool of budgetary discipline and includes
a multiannual Financial Framework. The Financial Framework is
intended to ensure that, in the medium term, EU expenditure develops
in an orderly manner and within the limits of own resources. It
contributes to budgetary discipline by setting ceilings on the
amount of funds available to the EU Budget in broad policy areas
for each year it covers.
1.2 The current Inter-Institutional Agreement
was agreed in June 2006 and its Financial Framework spans spending
over 2007-2013.[1] This
Financial Framework is structured around six broad policy areas
or 'headings' — sustainable growth, preservation and management
of natural resources, citizenship, freedom, security and justice,
the EU as a global player, administration and compensations.
1.3 The current agreement is being replaced presently
as part of the implementation of the Lisbon Treaty.[2]
1.4 Errors inevitably arise when EU money is
spent. These are typically involuntary, not fraudulent, errors
in spending — for example, misinterpretation of eligibility
criteria when using EU funds. But preventing and detecting errors
requires controls, which cost money. The concept of a tolerable
risk of error captures the idea that reducing the error rate beyond
a certain point requires an increase in the cost of controls which
outweighs the benefit from the resulting financial corrections
(spending returned to the budget).
1.5 The European Court of Auditors currently
uses a 2% materiality threshold as the general acceptable level
of error for all expenditure areas. This measure is also used
by the Court in drawing its conclusions on the legality and regularity
of underlying transactions in its annual reports on implementation
of the EU Budget. The concept of tolerable risk for EU funds was
first introduced by the Court,[3]
which made it clear that "transactions can rarely be absolutely
free of error, and a degree of tolerance in their accuracy is
therefore acceptable".[4]
The Court has further indicated that, because of the inherent
risk of some funds, 2% is not necessarily the right benchmark
for balancing the costs and benefits of control in some areas
of the budget. And so it has called on the Commission to propose
rates of tolerable risk of error and for these to be decided upon
at political level.
1.6 In December 2008 the Commission suggested
in a Communication an approach to tolerable risk and illustrated
the efficient control costs for two EU funds. The annexed Staff
Working Document outlined in more detail the model and the specificities
of the work carried out. Together these documents provided guidance
on how the concept of tolerable risk could be analysed and examples
to illustrate how varying levels of tolerable risk could provide
cost efficient controls for the EU. (However the illustrations
were based on relatively dated data from the 2000-2006 Financial
Framework budgetary cycle.) The Commission hoped the Communication
would stimulate further debate and provide a basis for institutional
agreement on the way forward in analysing the tolerable risk of
error.
1.7 When the previous Committee first considered
the Communication, in February 2009, it heard that the Government
welcomed it as a basis for further discussion on the issue of
tolerable risk of error. However, it also heard some cautionary
remarks from the Government. It commented that, for all these
caveats, this Communication was, as the Government acknowledged,
a basis for further discussion of the issue of tolerable risk
of error. When the Committee considered the matter again, in October
2009 it noted that the Commission had pointed out that its Communication
was not a proposal, but was intended to stimulate discussion,
and that with this in mind, the Commission was likely to come
forward with a further Communication towards the end of 2010 or
early in 2011, by which point the benefits of simplification of
funding procedures, then being implemented might be beginning
to be seen and it would be sufficiently far into the cycle of
the current Financial Framework for the use of 2007-2013 data
to be feasible.[5]
1.8 Formation, implementation and audit of the
EU General Budget are governed by the Financial Regulation, Council
Regulation (EC, Euratom) No 1605/2002, and rules in the Implementing
Regulation, Commission Regulation No 2342/2002. The Financial
Regulation is subject to a triennial (or, if necessary, earlier)
revision.
The documents
1.9 The Commission Report, document (a), on the
functioning of the Inter-Institutional Agreement focuses on three
areas — implementation procedures related to the Financial
Framework, inter-institutional collaboration and sound financial
management of EU funds.
IMPLEMENTATION PROCEDURES RELATED TO THE FINANCIAL
FRAMEWORK
1.10 An analysis of implementation procedures
forms the bulk of the Report, covering: procedures for adjusting
the Financial Framework, flexibility in the framework and revisions
of it.
Procedures for adjusting the Financial Framework
1.11 The Commission notes that a number of adjustments
to the Financial Framework are provided for in the Inter-Institutional
Agreement:
- technical adjustments to all
spending ceilings may be made annually to reflect inflation;
- spending allocations to Member States under the
cohesion policy may be altered to take account of higher or lower
than expected growth;
- the Commission has the right to propose adjustments
to the ceiling for total payments to the EU budget across the
Financial Framework in order to accommodate changes to spending
profiles during policy implementation; and
- money for the Structural Funds, the Cohesion
Fund, rural development and the European Fund for Fisheries intended
to be spent in 2007 but not in fact disbursed in that year may
be reallocated. This applied only to the first year of the current
financial perspective, allowing for time taken to set up programmes
under Regulations agreed in 2006. It does not allow funds not
spent (or under spent) to be reallocated as a matter of course.
The Commission concludes that these procedures seem
to be functioning well. It has not needed to adjust the ceiling
on total payments. And adjustments for implementation of structural
and other funds went smoothly, involving amounts far lower than
in 2001 — €2.03 billion (£1.77 billion) in 2007
compared to €6.15 billion (£5.35 billion) in 2001.
Flexibility in the Financial Framework
1.12 There are three sources of flexibility in
the current Inter-Institutional Agreement:
- the difference between the
Financial Framework ceiling for funds committed to a policy heading
in the EU budget for a given year and the value of commitments
actually entered in the EU budget for that area in that year is
'margin'. Margins under policy headings may be reallocated to
other policy headings, if the Budgetary Authority (the Council
and the European Parliament) agrees, in order to fund previously
unanticipated projects;
- the agreement provides for the use of special
flexibility instruments that sit above the Financial Framework
ceilings, which vary in size and may be mobilised under different
conditions for different purposes. There are currently four such
instruments — the Emergency Aid Reserve, the European Solidarity
Fund, the European Globalisation Adjustment Fund and the Flexibility
Instrument; and
- the Commission has flexibility to appropriate
more funds for a multiannual project or policy programme than
the amount stated as required in the legislative act establishing
that project or policy programme — the 'financial envelope'.
Any change in excess of 5% of a programme's financial envelope
is permitted only if new, objective and long-term circumstances
arise for new spending and is subject to careful assessment. All
changes must remain within the existing ceilings for the policy
area concerned.
The Commission concludes that:
- margins are becoming tight;
- large margins under the heading for preservation
and management of natural resources, which covers spending on
the Common Agricultural Policy, have afforded scope for redeployments;
- this margin, however, is expected to shrink,
reducing overall flexibility; and
- the Flexibility Instrument has been used to respond
to a wide range of EU priorities, particularly for recurring international
crises and emergencies, owing to insufficient margins.
Revisions of the Financial Framework
1.13 The current Inter-Institutional Agreement
allows for the Financial Framework to be revised and the agreement
itself may also be amended. The agreement provides for spending
ceilings to be revised by up to 0.03% of EU gross national income
(GNI) by qualified majority voting the Council, to which the European
Parliament must assent, and revisions in excess of 0.03% of EU
GNI require unanimity in the Council, and again the European Parliament
must assent. The Commission reports that:
- the Financial Framework was
revised in 2007, by €1.59 billion (£1.39 billion), for
implementation of the European Global Navigation Satellite System
programmes EGNOS and Galileo and financing for the European Institute
of Technology;
- a second revision was made in 2009, by €5.00
billion (£4.35 billion), to finance the European Economic
Recovery Plan;
- in both cases these revisions did not change
the overall ceilings — the total amounts, expressed in current
prices, of funds committed and payment appropriated to the EU
budget over all headings and for all years — of the current
Financial Framework;
- the Financial Framework was also revised to increase,
exceptionally, the size of the Emergency Aid Reserve for 2008,
in order to respond to soaring food prices in developing countries
using a €1.00 billion (0.87 billion) Food Facility; and
- the institutions agreed on the procedures to
adjust the Financial Framework, though their use led to protracted
negotiations.
INTER-INSTITUTIONAL COLLABORATION
1.14 The Inter-Institutional Agreement sets out
provisions relating to the improvement of inter-institutional
collaboration during the budgetary procedure. The Lisbon Treaty
has altered the annual budgetary procedure, requiring most of
these provisions to be altered. Nevertheless, the Commission notes
that two aspects of the existing guidelines should receive particular
attention:
- it encourages the Council and
the European Parliament to pay greater attention to its comments
on the European Parliament's amendments to a draft annual budget
in order to improve implementation; and
- it notes progress made during 2009 on the procedure
on information regarding pilot projects and preparatory actions,
which may be built on in the future.
1.15 The agreement includes provisions on fisheries
agreements, requiring the Commission to keep the European Parliament
properly informed of policy implementation on a quarterly basis,
and on the Common Foreign and Security Policy, requiring the Council
to meet the European Parliament at least five times each year.
The Commission finds that these provisions have worked well and
need not be modified.
SOUND FINANCIAL MANAGEMENT OF EU FUNDS
1.16 The Inter-Institutional Agreement prioritises
sound financial management aiming at a positive Statement of Assurance
(commonly referred to as the DAS, from the French acronym), from
the European Court of Auditors, for all EU funds. Audit authorities
in Member States are required to produce an assessment of the
compliance of management and control systems with EU Regulations
in an annual summary. The Commission reports that:
- it is committed to continuing
to work with Member States to maximise the added value of annual
summaries, including proposals to reinforce these requirements
to be put forward during the triennial revision of the Financial
Regulation, that is document (c);
- it undertakes financial programming in order
to indicate the orientation of future spending, submitting a document
to the budgetary authority twice a year. The format of the financial
programming document was revised in 2009 to highlight better any
changes since the last financial programming and the new format
appears to be a valuable tool for supporting political decisions;
- reports by the Commission to the Budgetary Authority
on the activities financed by the European Investment Bank, the
European Investment Fund and the European Bank for Regional Development
to support investment in research and development, Trans-European
Networks and small and medium enterprises have been running smoothly;
and
- a positive overall assessment can be made of
provisions in the agreement regarding the sound financial management
of EU funds.
1.17 The Commission's conclusions are:
- the Inter-Institutional Agreement
has proved invaluable in facilitating budgetary discipline and
ensuring smooth budgetary procedure. Overall, its track record,
in particular of the Financial Framework, can be regarded as quite
positive;
- given adjustments already made to the Financial
Framework and the potential for new spending pressures during
the remaining period that it spans, further redeployments of funds,
revisions to the Financial Framework or use of special flexibility
instruments may be necessary;
- other financing possibilities outside the scope
of the current agreement, such as European Investment Bank loans
or intergovernmental financing, could be examined; and
- limited margins suggest that more flexibility
will be needed in the future.
1.18 The Commission Communication, document (b),
and two accompanying Staff Working Documents develop its ideas
on the concept of tolerable risk of error. The document is in
five parts — background and objective of the present Communication,
why decide a tolerable risk of error, how tolerable risk of error
levels could be decided, Commission proposals and a conclusion.
BACKGROUND AND OBJECTIVE OF THE PRESENT COMMUNICATION
1.19 The Commission, recalling that the European
Court of Auditors currently uses a 2% materiality level when assessing
whether spending meets the rules and regulations surrounding each
EU policy objective (the "legality and regularity of transactions"),
says:
- the Court gives a policy group
a "green light" if it concludes that the overall error
rate is below 2%;
- it only gives an overall positive DAS if all
policy groups receive a green light;
- the 2% materiality threshold was decided before
reliable information on the cost of controls became available;
- despite, in recent years, the Court's annual
audit report showing declining error rates, the level of error
in some areas is still significantly above the 2% threshold;
- the Court therefore remains unable to give a
positive DAS;
- two approaches might help achieve a positive
DAS;
- first, simplify rules and regulations to reduce
errors that arise from misinterpretation — recent steps
in this direction have helped, but too much simplification risks
diluting policy objectives;
- second, greater controls to detect ineligible
spending and drive the error rate below 2% — but controls
cost money; and
- with new data, the Communication is to explore
a cost-benefit approach to setting new tolerable error rates —
weighing control costs with the benefit from resulting corrections.
WHY DECIDE A TOLERABLE RISK OF ERROR?
1.20 The Commission says that:
- a tolerable risk of error approach
recognises that complex rules, extended control chains, and high
control costs do not allow a 2% error rate to be achieved in a
cost-effective manner in all areas;
- instead, it sets the tolerable error rate to
balance the financial impact of errors, the costs of control and
related recoveries, and the sound management of EU funds; and
- a decision on tolerable risk of error would not
result in errors being overlooked — any errors detected,
even beneath the tolerable risk of error ceiling, would be corrected.
The Commission comments further that there are also
considerations beyond a simple financial cost-benefit trade-off:
- beneficiaries often consider
controls overly burdensome — any increase in controls might
discourage appropriate beneficiaries from participating, increasing
the risk of failing to achieve policy objectives; and
- political priorities and reputational risk —
as comes with high profile public spending — might also
motivate alternative tolerable risk of error rates.
HOW TOLERABLE RISK OF ERROR LEVELS COULD BE DECIDED
1.21 The Commission notes that it has included
the concept in the triennial revision of the Financial Regulation
proposal, document (c). It says that:
- this would establish a legal
framework for tolerable risk of error rates; and
- actual tolerable risk of error rates would be
adopted by the co-legislator (the Council and the European Parliament)
following inter-institutional discussion and consultation with
the European Court of Auditors.
COMMISSION PROPOSALS
1.22 The Commission says that it will progressively
propose tolerable risk of error levels for each policy area, or
significant part of an area. In this Communication it proposes
levels for two areas — research, energy and transport and
the European Agricultural Fund for Rural Development. The two
Staff Working Documents accompanying the Communication give details
of the proposals.
Research, energy and transport
1.23 The Commission notes that:
- payments in this policy area
were €7.20 billion (£5.90 billion) in 2008;
- 76% of this was on research projects in multi-annual
framework programmes;
- control activities in this area cost €267
million (£218 million); and
- the error rate is estimated at 3%.
The Commission discusses several models and narrowing
in on two of these illustrates their main findings:
- with Model 1 an additional
€90 million (£74 million) of control activities gives
a reasonable probability of pushing the average error rate below
2%;
- assuming errors were fully recovered, this 1%
reduction in error rate recovers €72 million (£59 million);
- from a purely financial viewpoint, there is a
loss of €18 million (£15 million);
- with Model 2 reducing the number and cost of
on the spot controls and accepting a higher error rate of 3.5%
saves €6.50 million (£5.30 million) as control costs
are lowered by €8 million (£6.50 million), while recovered
amounts only decrease by €1.50 million (£1.20 million);
and
- on balance, the Commission proposes a tolerable
risk of error level in the range 2-5%.
European Agricultural Fund for Rural Development
1.24 The Commission notes that:
- rural development is the second
pillar of the Common Agricultural Policy;
- payments in this policy area in 2008 were €8.50
billion (£6.90 billion), 16% of total agriculture expenditure;
- the error rate for the European Agricultural
Fund for Rural Development is estimated at 2.8%;
- complex rules and eligibility conditions make
spending on policy objectives hard to verify in this area; and
- the cost of control is high — for example,
the analysis shows that the relative cost of control for the fund
is nearly three times higher than for the European Agricultural
Guarantee Fund, which received a green light from the European
Court of Auditors in 2008.
The Commission says that:
- analysis shows that the cost
of increasing controls to achieve a 2% cent error rate would be
five times higher than the predicted recovery;
- reducing the error rate below 2% though simplification
of the eligibility rules alone, however, would risk jeopardising
policy objectives;
- it concludes, therefore; that a tolerable risk
of error above 2% is necessary for the European Agricultural Fund
for Rural Development;
- it proposes a tolerable risk of error level in
the range 2-5%; and
- the target for the first pillar of the Common
Agricultural Policy (direct payments to farmers and market support)
would remain at 2%.
CONCLUSION
1.25 In its conclusion to the Communication the
Commission:
- reiterates its view that for
both "Research, energy and transport" and "Rural
development" the tolerable risk of error lies in the range
2-5% and asserts that a DAS error rate in the middle of this range
can be justified;
- says it will make tolerable
risk of error proposals for "Administrative Expenditure"
and "External Aid, Development and Enlargement" before
the end of 2010 and for remaining areas in 2011 and, to further
reduce the error rate after 2013, will propose simplification
of the legislation; and
- recalls its proposal of enshrining the concept
of tolerable risk of error in the revised Financial Regulation.
1.26 In document (c) the Commission presents
its proposal for the triennial revision of the Financial Regulation.
It is accompanied by a Staff Working Document showing what the
Commission intends as consequential amendment of its Implementing
Regulation. In assessing potential changes to the Financial Regulation
the Commission has highlighted four benchmarks:
- reducing administrative burdens;
- facilitating the leveraging of budget appropriations,
wherever possible;
- improving delivery instruments and simplifying
the rules and procedures; and
- ensuring sound financial management and protecting
the financial interests of the EU.
The Commission suggests that reform is necessary
with a view to adapting the financial rules to the new requirements
of budget implementation and where basic principles create disproportionate
burdens or may unduly impede efficiency. It bases its proposals
on five objectives:
- to introduce more flexibility
in the application of the budgetary principles, to better suit
operational needs and alleviate unnecessary administration burdens;
- to streamline relations with implementing partners
to which the Commission entrusts the management of programmes,
in particular taking account the nature of such partners and the
financial risks associated;
- to shift the regime of grants from real cost-based
management towards a performance-based scheme, in order to better
target policy objectives;
- to ensure sound financial management, while leaving
Authorising Officers significant room for manoeuvre; and
- to modernise the system of risk management and
control measures so as to make them more proportional to the probability
of errors and the costs involved.
1.27 The Commission proposes exceptions to the
basic budgetary principles of unity, universality, specification,
annuality and sound financial management by:
- simplifying the rules governing
interest generated by pre-financing (Article 5 and 5a), as they
generate excessive administration burdens and represent a small
proportion of the EU budget;
- suppressing the obligation to recover pre-financing
interest so that national agencies will be allowed to re-use interest
generated for the programmes they manage — interest generated
by EU bodies will continue to be recovered annually. The Commission
estimate that the loss to the EU will be +/- €15 million
(£12.3 million) each year;
- providing for a dual regime for assigned revenue
(Article 18) to distinguish between internal assigned revenue
(re-use of funds initially assigned by the Budget Authority) and
external assigned revenue (revenue collected and assigned by various
donors to a specific programme);
- clarifying the rules on transfers of appropriations
and allowing for more flexibility in the adoption procedure of
some transfers decided by the Commission (Articles, 21, 23 and
26); and
- introducing, in financial management, the concept
of tolerable risk of error (Article 28b), as discussed in document
(b). This would allow the Council and the European Parliament
to set a cost-effective level of control for each policy area,
providing the Discharge Authority (after audit the European Parliament
"discharges", on the basis of recommendations from the
Council, the annual budget) with a more appropriate basis to judge
the quality of the Commission's management of risk.
1.28 On implementation of the budget the Commission
proposes numerous possible amendments, including:
- on the grounds that current
provisions concerning methods of implementing the budget are overly
complicated, streamlining methods of implementation from five
to two modes (Article 53), making a clear distinction between
when the budget is implemented directly by the Commission and
when the budget is implemented indirectly by the Commission through
shared management with Member States or other entities;
- amending Articles 53a to 53c to strengthen the
responsibility of Member States and entrusted entities to meet
common requirements for all types of indirect management;
- new provisions to harmonise control and audit
obligations and management declarations of assurance across Member
States;
- introducing more proportionality in ex-ante
controls (Article 53c) so as to take into account the nature of
the task entrusted, the experience and the operational and financial
capacity of the entities concerned;
- on the rules relating to pre-financing, amending
Article 81 to allow for a single pre-financing payment —
this should provide recipients of EU grants with more security
on the amounts they receive, as the Commission would approve the
eligibility of cost on a regular basis through interim payments;
- to change the current situation, in which the
Financial Regulation only covers bank accounts opened for cash
management under the responsibility of the Accountant, adding
Article 61(4) to enable the Authorising Officer to open a fiduciary
account on behalf of the Commission for the implementation of
a programme under indirect management by a financial institution;
- strengthening rules on recovery through the addition
of Article 73b, to ensure that recoveries are not treated less
favourably by Member States than they treat claims on their own
territory;
- reviewing provisions on procurement in order
to simplify the rules, take into account the specific status of
the European Investment Bank and define the scope of some provisions
more precisely;
- including in Article 93 a new provision to allow
derogation from the obligation of exclusion for overriding requirements
of general interest, in particular to preserve the service continuity
of the institution;
- extending, in Article 95(3), access to the central
database of exclusions to include the European Central Bank and
the European Investment Bank;
- as the last revision of the Financial Regulation
made limited modifications to the rules on grants which have been
insufficient to alleviate administrative burdens imposed on operational
services and beneficiaries (because of excessive similarity between
procurement and grant rules and procedures, although objectives
often differ, and of controls that focus on real cost, as opposed
to expected results of projects), shifting the grants regime (Articles
108-120)
towards a performance-based system — this would be based
on agreed indicators and objectives, and include a simplification
of lump sums, standard scale of unit costs and flat rates that
are disconnected from any verification of actual costs of implementation;
- maintaining, however, the real cost-based regime
as the default regime;
- reviewing the real-cost regime to provide clarification
on various types of costs and the recovery of possible profit
from any actions;
- reviewing, rather than abandoning, the stipulation
in Article 113, on the principle of degressive award, that operating
grants that are renewed for a period exceeding four years, shall
be decreased after the fourth year, unless specified in the basic
act or in the financing decision for grants awarded under Article
49(6) point (d);
- on the procedures for the award of grants, amending
Article 114, and the appropriate rules in the Implementing Regulation,
to remove excessive administrative requirements in line with the
principle of proportionality;
- allowing Authorising Officers to refrain from
requiring certification of eligibility when certification has
already been approved in another award of a grant and when there
is a material impossibility to provide such certification;
- increasing, in the Implementing Regulation, the
threshold for very low grants from €25,000 (£20,438)
to €50,000 (£40,875);
- amending Article 120(2) on the rules governing
subcontracting and grant redistribution to allow a beneficiary
to redistribute its grant by way of subsidies to third parties,
achieving this by removing and relaxing some of the current restrictions
where the redistribution of funds is the primary aim of the action,
if appropriate guarantees are provided by the first ranking beneficiary
— it is asserted that this should improve implementation
of programmes targeting large groups of similar single identities,
such as universities bidding for funding under the Erasmus programme;
- laying down in Article 120a, on separate provisions
for the award of prizes, that prizes would be subject to the same
principles of transparency and equal treatment as grants, but
recognising that prizes constitute different EU contributions;
- proposing that award conditions and criteria
for prizes exceeding €500 (£409) should be approved
by the Commission;
- introducing Articles 120b and 120c to provide
provisions for financial contributions that are combined with
financial instruments managed by International Financial Institutions,
such as loans, guarantees, equity or quasi-equity investments
or participations, as such specific provisions are necessary to
reflect the specificities of their implementation, while respecting
the principles of responsibility and sound financial management;
- amending Articles 143 and 144, concerning annual
and special reports of the European Court of Auditors, in order
to better reflect current practices and to streamline the timetable
- establishing in Article 144a new provisions to
formalise the practice of the Court of producing statements of
preliminary findings resulting from its audits;
- introducing new provisions to enable the Commission
to create and manage EU trust funds for external actions, following
an agreement with other donors (Article 164) — these trust
funds would be used to intervene in emergency, post-emergency
or thematic actions, and would pool EU budget contributions with
funds from other donors;
- adding Article 179(3)b to provide institutions
the option of exploring the possibility of raising loans, in order
to purchase real estate assets, as institutions would benefit
from the simplification of the current system and could profit
from lower interest rates due to the EU AAA rating in financial
markets;
- amending Article 184 in order to remove the need
to review the Financial Regulation every three years, with a to
future revisions being made whenever it proved necessary, without
identifying specific time frames;
- introducing in Article 185a a separate financial
regulation model applicable to public-private partnerships, which
should include a set of principles necessary to ensure sound financial
management of EU funds (as set out in Article 53b) and provide
partnerships with the opportunity to apply their own rules in
accordance with national laws; and
- setting out in Article 53(1) 2(G) private bodies
would be entrusted with implementation of a public-private partnership
and managing EU funds through indirect shared management.
The Government's view
1.29 In her Explanatory Memorandum on the Commission
Report on the Inter-Institutional Agreement, document (a), the
Economic Secretary to the Treasury (Justine Greening) tells us
that:
- as is said in the Government's
Coalition Agreement, it will strongly defend the UK's national
interests in the forthcoming EU budget negotiations;
- the EU Budget should only focus on those areas
where the EU should add value; and
- it is keen to limit contributions to the EU Budget,
at a time when consolidating public finances is a key priority
across the EU.
1.30 The Minister comments further that:
- the framework for the EU Budget,
including the current Inter-Institutional Agreement and Financial
Regulation, is being revised in light of the Lisbon Treaty;
- the Government acknowledges the Commission's
Report as a contribution to ongoing debates on the EU's future
budgetary framework, but has reservations about some of its conclusions;
- it is concerned, in particular, that the type
of flexibility proposed by the Commission might undermine fiscal
discipline, weaken incentives for sound financial management,
and increase the cost exposure of the UK;
- the Report also notes that revisions to the Financial
Framework might be made to meet new spending requirements —
the Government is clear that funds for such purposes must be found
by redeployment within the existing Financial Framework rather
than by increasing the aggregate ceilings of the framework;
- the Government believes that EU expenditure must
be subject to budgetary discipline and appropriate principles
of sound financial management; and
- it will continue to push for the EU budgetary
framework to support these objectives.
1.31 In her Explanatory Memorandum about the
Communication on the tolerable risk of error concept, document
(b), the Minister tells us that, while it is a helpful step towards
better understanding of the trade-offs involved in setting acceptable
error rates, the Government believes it is too soon to draw firm
conclusions or agree new levels of tolerable risk, saying that:
- before firm conclusions can
be drawn the full impact of the simplification of procedures,
guidance and regulations governing the 2007-2013 financial programme
Regulations needs to play out;
- there is, moreover, scope for further simplification
of rules and regulations;
- further responsibility needs to be taken by Member
States to improve the management of EU funds at national level
— increasing the tolerable risk of error could hinder progress
in this area; and
- it is important to be mindful of unintended consequences
— a narrow focus on financial cost-benefit analysis could
overlook additional benefits of greater controls, for example,
if higher tolerable risk of error lowers the intensity of controls,
this could open the door for greater fraud and other deliberate
abuse of EU funds.
1.32 The Minister continues that:
- while it is right to first
promote simplification efforts and allow these to play out before
revising acceptable error rates, there will ultimately be a limit
to how much can be done;
- error rates have fallen in recent years, but
achieving a positive DAS, without some changes to the current
system, looks unlikely; and
- the tolerable risk of error approach will eventually
allow a fairer view of different expenditure areas, to underscore
where the problems in financial management of the EU budget really
lie.
1.33 Turning, in her third Explanatory Memorandum,
to the proposed revision of the Financial Regulation, document
(c), the Minister first reiterates that the Government's overarching
objectives in relation to the EU Budget are to protect the UK's
financial interests, push for greater value for money and ensure
sound financial management in EU expenditure. She then tells us
that the Government welcomes the broad objectives of the Commission's
proposal and is pleased that it focuses on alleviating unnecessary
administrative burdens, streamlining methods of implementation
and modernising the system of risk management and control measures
— in particular, the Government supports the Commission's
acknowledgement that international financial instruments (such
as the European Investment Bank) should increasingly play a role
alongside the budget. The Minister comments that there are however
elements of the Commission's proposal that are of concern to the
Government, including:
- the proposal adds new administrative
burdens to the control and audit obligations of Member States
in the area of Structural and Cohesion Funds, without a convincing
justification;
- it raises the possibility of raising loans to
finance the purchase of EU institution buildings, which may present
additional spending implications, and which the Government will
question closely;
- introduction of a tolerable risk of error may
divert efforts to simplify rules and regulations and will require
further discussions before a firm conclusion can be drawn on the
Commission's proposal; and
- the Government believes that the revision should
go further in addressing the lack of transparency on how different
institutions currently deal with assigned revenue, and in taking
more significant steps required towards a risk-based approach
to audit and management of EU funds.
Conclusion
1.34 Given both the even greater importance
of budgetary discipline at the present time and their relevance
to the debate now beginning on the Financial Framework for the
period 2014-2020 we recommend these documents be debated in European
Committee. However this debate should not take place until the
Minister is able to provide us with a read out of the preliminary
reactions in the Council's Budget Committee to the Commission's
proposals for the Financial Regulation, including the matter of
tolerable risk of error levels.
1 See http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:C:2006:139:0001:0017:EN:PDF.
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2
(31401) 7183/10: see HC 5-xiv (2009-10), chapter 6 (17 March 2010). Back
3
Opinion 2/2004 of the Court of Auditors of the European Communities
on the single audit model (and a proposal for a Community internal
control framework) OJ No. C 107, 30.4.04, p.1 and (26652) 10326/05:
see HC 34-v (2005-06), chapter 43 (12 October 2005). Back
4
The DAS [Statement of Assurance] methodology, European Court of
Auditors: see http://eca.europa.eu/portal/page/portal/audit/StatementofAssurance.
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5
(30320) 17592/08 +ADD 1: see HC 19-viii (2008-09), chapter 8 (25
February 2009) and HC 19-xxvii (2008-09), chapter 33 (14 October
2009).
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