Documents considered by the committee on 10 November 2010, including the following recommendation for debate: Safety of offshore oil and gas activities - European Scrutiny Committee Contents

5   Financial management




COM(10) 71




COM(10) 72




COM(10) 73




COM(10) 403

Draft Regulation amending Council Regulation (EC, Euratom) No 1605/2002 on the Financial Regulation applicable to the general budget of the European Communities

Draft Council Regulation laying down the multi-annual financial framework for the years 2007-2013

Draft Inter-Institutional Agreement between the European Parliament, the Council and the Commission on cooperation in budgetary matters

Draft Decision amending the Inter-Institutional Agreement of 17 May 2006 on budgetary discipline and sound financial management as regards the multiannual Financial Framework, to address the financing needs of the ITER project

Legal base(a) Article 322(1) TFEU; co-decision; QMV

(b) Article 312(2) TFEU; consent; unanimity

(c) Article 295 TFEU; —; QMV

(d) —; co-decision; QMV

DepartmentHM Treasury
Basis of considerationMinister's letter of 6 November 2010
Previous Committee Report(a)-(c) HC 5-xiv (2009-10), chapter 6 (17 March 2010)

(d) HC 428-ii (2010-11), chapter 9 (15 September 2010) and HC 428-iv (2010-11), chapter 2 (20 October 2010)

To be discussed in CouncilNot known
Committee's assessmentPolitically important
Committee's decision(a)-(c) Cleared (decision reported on 17 March 2010)

(d) Not cleared; further information requested


5.1  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. The current Inter-Institutional Agreement was agreed in June 2006 and its Financial Framework spans spending over 2007-2013.[8]

5.2  The current agreement also contains instruments, such as the European Solidarity Fund, outside the Financial Framework and rules for:

  • operation of the Financial Framework and the case where a Financial Framework has not been agreed;
  • the annual budgetary procedure;
  • cooperation between the Council, the European Parliament and the Commission in budgetary matters; and
  • sound financial management.

5.3  The TFEU requires Member States in the Council to adopt a Regulation, laying down the Financial Framework.

5.4  Rules governing the operation and management of the EU's annual budget are laid down in Council Regulation (EC, Euratom) No 1605/2002, known as the Financial Regulation, and accompanying Implementing Rules.[9]

5.5  In March 2010 the previous Committee cleared three documents designed to implement aspects of financial management, largely technical, consequent on the coming into operation of the Lisbon Treaty:

  • a draft Council Regulation, document (b), to incorporate the existing 2007-2013 Financial Framework into a new Regulation, referred to as the Multiannual Financial Framework Regulation;
  • a draft Regulation, document (a), to amend the Financial Regulation to reflect some of the changes introduced by the TFEU. This would incorporate some provisions of the current Inter-Institutional Agreement into the Multiannual Financial Framework Regulation and others into the amended Financial Regulation or its Implementing Rules; and
  • a draft Inter-Institutional Agreement on cooperation in budgetary matters, document (c), for those provisions that the Commission considered did not fit into either the Multiannual Financial Framework Regulation or the Financial Regulation and that were not rendered obsolete by the TFEU.

5.6  On 4 May 2010 the Commission presented a Communication, ITER status and possible way forward, which, amongst other things, identified a shortfall in funding for the International Thermonuclear Experimental Reactor (ITER).[10] On 12 July 2010 the Council adopted conclusions that confirmed the short-term financing need for additional commitment appropriations for ITER, identified by the Commission as €1.4 billion (£1.24 billion) in 2012 and 2013 — that includes €800 million (£710.48 million) in 2012 and €600 million (£532.86 million) in 2013. The Council called on the Commission to propose securing this funding within the overall ceiling of the current Financial Framework, based primarily on redeployment of funds within Heading 1a of the budget (competitiveness for growth and employment). At the same time, the Council said that the EU contribution to ITER's construction phase must be limited to €6.6 billion (£5.86 billion) (in 2008 values) over the period 2007-2020, and called for greater cost control and containment.[11]

5.7  The draft Decision, document (d), is intended to amend the Inter-Institutional Agreement on EU financial management so as to change the Financial Framework for 2007-2013 in order to meet the Council's conclusions of July 2010 on ITER financing. In July 2010 the Commission put forward this as a means of securing €860 million (£763.77 million) of the €1.4 billion (£1.24 billion) additionally required for 2012 and 2013 — it suggested that:

  • €460 million (£408.53 million) be secured through redeployment of funds within the 7th Research Framework Programme under Heading 1a; and
  • a further €400 million (€355.24 million) be transferred, from the unallocated margin of Heading 2 (preservation and management of natural resources) in 2010, to Heading 1a in 2012 and 2013.

This would result in no overall increase to the Financial Framework.

5.8  When we considered this document, in September 2010, we heard that:

  • the Government supports ITER as a vital step to practical fusion energy supply, while considering that important management issues need to be addressed, along with the rising costs of the project;
  • for this reason the Government supported the Council conclusions of 12 July 2010 on ITER, including the call for cost control and containment and for further improvement of the governance of the ITER project;
  • it would argue, therefore, for full identification of the funding shortfall for ITER and for a more substantial proportion of that shortfall to be met through redeployment of funds within Heading 1a; and
  • it was important to note in this context that the Financial Framework already foresees a substantial increase of funding for the 7th Research Framework Programme from 2010-2013, reflecting the continued strategic importance to the EU of research, innovation and development work.

We commented that, whilst we recognised the importance of the ITER project, we shared the Government's concern about the use of unallocated margins. So before considering the proposal further we asked to hear from about developments in the Government's push for a more substantial proportion of the funding shortfall for ITER to be met through redeployment of funds within Heading 1a. On 20 October 2010 we reported an interim account from the Government on the negotiations, from which we learned that a large number of Member States shared the Government view when the Commission's proposal was discussed in the Council's budget committee on 6 September 2010. The document continued to remain under scrutiny.[12]

The Minister's letter

5.9  The Economic Secretary to the Treasury (Justine Greening) writes now about the draft Council Regulation to incorporate the existing 2007-2013 Financial Framework into a Multiannual Financial Framework Regulation, document (b), and the proposal about additional financing for ITER, document (d), both of which she expects to decided on in the context of the discussion of the 2011 Draft Budget by a conciliation Committee of the Council and the European Council on 11 November 2010.

5.10  On the draft Multiannual Financial Framework Regulation, document (b), the Minister tells us that:

  • it has become apparent this autumn that, for legal reasons, it might not be possible to transpose an existing provision that allows for the Financial Framework to be revised by up to 0.03% of EU GNI, by QMV in the Council, into the new Regulation, which must be agreed by unanimity;
  • in order to resolve any legal uncertainty, the Presidency has proposed amending the draft Regulation to replace the QMV revision procedure with creation of a new 'contingency margin', with the aim of preserving the flexibility that existed in the budgetary rules before entry into force of the Lisbon Treaty; and
  • under the proposal, as previously for Financial Framework revision, this new margin would be capped at €3.5 billion (£3.11 billion) per year (approximately 0.03% of EU GNI), would be provisioned only if needed and would be accessed through a QMV decision by the Council — technically it would sit above the Financial Framework ceilings.

5.11  The Minister continues that there was a preliminary discussion of this issue in the Council's budget committee on 3 November 2010, when it was clear that opinions differed amongst Member States. She says that:

  • some Member States, including the UK, raised questions over the precise implications of this change;
  • the change has not yet been discussed with the European Parliament;
  • but, given its consistent push for increased resources for the EU budget, the Government expects it to support the Presidency's proposal, and possibly even to wish to expand it;
  • the Government acknowledges that this proposal is designed as part of a series of technical changes to transpose the existing Financial Framework and budgetary rules into a new legal framework that reflects the entry into force of the Lisbon Treaty;
  • it broadly supports the Commission's and Presidency's technical approach;
  • in these circumstances, however, the Government will explore ways of limiting the Presidency's proposed contingency margin, as a reflection of the period of deep fiscal consolidation throughout the EU; and
  • it would be completely unacceptable for this new proposal to result in any higher potential EU spending level than that previously enshrined in the Inter-Institutional Agreement.

5.12  On the question of funding the ITER project the Minister tells us that on 2 November 2010 a Commission non-paper was circulated to Member States on this issue. In it the Commission explained that, as the end of the budget year approaches, it is possible to predict with some certainty the final amounts that will be unused in the budget margins for this year:

  • there is a reduction in 2010 of €358 million (£317.9 million) in commitment appropriations in Heading 2 (Preservation and management of natural resources) — this increases the unused margin in the Heading to €814 million (£722.91 million);
  • there is a reduction of €15 million (£13.3 million) in commitment appropriations in Heading 1a (Competitiveness for growth and employment) in 2010;
  • the margin in Heading 3a (Freedom, Security and Justice) of €18 million (£15.99 million) will not be used this year; and
  • due to estimated decreases in the adjustment of the institutions' staff salary for the period of July 2010-June 2011, around €39 million (£34.64 million) will be freed up in Heading 5 (Administration) in 2010 — adding this to the existing unused budget margin will give a total available of €93 million (£82.59 million) in the Heading.

5.13  The Commission explains that, taking these total available margins, and the €460 million (£408.53) redeployment within Heading 1a already proposed, leads to a total of €1.4 billion (£1,24 billion). It therefore proposes a revision of the Financial Framework to allocate these unused margins to Heading 1a in 2012 and 2013. In practice, the Financial Framework would be reduced in 2010 and increased correspondingly in 2012 and 2013. The Minister comments that:

  • this change would affect commitment appropriations only;
  • associated payment appropriations, and thus any impact on the UK's contribution to the EU budget, would not flow until after the end of this Financial Framework;
  • there would be no overall increase to the Framework — any such increase would be completely unacceptable to the Government;
  • the European Parliament has pushed for the entire shortfall in ITER financing to be funded through an overall increase to the Financial Framework;
  • the Council and European Parliament positions therefore remain some distance apart and it is not yet clear how they will be reconciled when this is discussed at the conciliation committee meeting on 11 November 2010;
  • it is reassuring that the Commission has proposed a means of meeting the entire ITER funding shortfall, while respecting the overall Financial Framework ceiling;
  • the Government's objectives remain to secure the full amount required to finance ITER, while limiting the additional contributions required from Member States and adhering to the Council's call for the solution to be primarily based on redeployment within Heading 1a;
  • the Commission's non-paper is helpful insofar as it identifies some 'unspent' commitments in 2010 that can in essence be reallocated to ITER in future years, with no additional cost to Member States;
  • the Government is concerned, however, by the proposed use of unallocated margins, which would entail additional cost to Member States; and
  • it will continue to push for the Council's call for redeployment within Heading 1a to be more fully respected.


5.14  We are grateful to the Minister for drawing to our attention the proposed change to the draft Regulation, document (b), cleared by the previous Committee and applaud the Government's intention to seek a limitation of the proposed contingency margin.

5.15  As for the funding shortfall for ITER, document (d), we note that an entirely satisfactory resolution of this issue has not yet been achieved. So we do not wish to clear the document now. But we recognise that the Government may need to acquiesce in a conclusion on this matter in the course of the conciliation committee budgetary discussions on 11 November 2010, even though the document remains under scrutiny. Therefore, if the Minister judges it appropriate in that context, we agree, in terms of paragraph (3)(b) of the House of Commons Scrutiny Reserve Resolution of 17 November 1998, that she may join an agreement on the draft Decision. We do, of course, wish to hear in due course what transpires on the issue.

8   See  Back

9   See  Back

10   See  Back

11   (31601) 9424/10 + ADD 1: see HC 428-i (2010-11), chapter 27 (8 September 2010). Back

12   See headnote. Back

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