1 Financial management
(a)
(31662)
10561/10
+ ADD 1
COM(10) 260
(b)
(32428)
5129/11
COM(10) 815
|
Draft Regulation on the Financial Regulation applicable to the general budget of the European Union (recast)
Draft Regulation on the financial rules applicable to the annual budget of the Union
|
Legal base | Article 322(1) TFEU; co-decision; QMV
|
Document originated | (b) 22 December 2010
|
Deposited in Parliament | (b) 13 January 2011
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Department | HM Treasury |
Basis of consideration | EM of 31 January 2011
|
Previous Committee Report | (a) HC 428-ii (2010-11), chapter 1 (15 September 2010) and HC 428-x (2010-11), chapter 2 (8 December 2010)
(b) None
|
To be discussed in Council | Not known
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Committee's assessment | Politically important
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Committee's decision | Decision recommending document (a) for debate rescinded (decision reported 15 September 2010)
Document (b) for debate in European Committee B
|
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. The current Inter-Institutional Agreement
was agreed in May 2006 and its Financial Framework spans spending
over 2007-2013.[1] It is
being replaced as part of the implementation of the Lisbon Treaty.[2]
1.2 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).
1.3 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 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. When the previous Committee 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.[3]
1.4 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.
1.5 In March 2010 the previous Committee cleared
from scrutiny a draft Regulation to amend the Financial Regulation
to take account of the Lisbon Treaty.[4]
The changes proposed have been discussed by the Council but remain
subject to negotiation with the European Parliament.
1.6 In April and May 2010 the Commission presented
three documents. The first, a Report on the functioning of the
Inter-Institutional Agreement, focused on three areas
implementation procedures related to the Financial Framework,
inter-institutional collaboration and sound financial management
of EU funds.[5] The second,
a Commission Communication and two accompanying Staff Working
Documents, developed its further ideas on the concept of tolerable
risk of error.[6] In the
third, document (a), the Commission presented its proposal for
the triennial revision of the Financial Regulation. It was in
the form of a recast (consolidation and amendment) of the existing
Financial Regulation, as amended. It was accompanied by a Staff
Working Document showing what the Commission intended as consequential
amendment of its Implementing Regulation.
1.7 When we considered these documents, in September
2010, we recommended (a decision we confirmed in December 2010)
that, given both the even greater importance of budgetary discipline
at the present time and their relevance to the debate now underway
on the Financial Framework for the period 2014-2020, they should
be debated in European Committee B.[7]
In December 2010 we recommended that a European Court of Auditors
Opinion on the proposed revision of the Financial Regulation,
document (a), should also be debated.[8]
1.8 There were preliminary discussions of the
draft Financial Regulation, document (a) in the second half of
2010 by the Council's Budget Committee, but negotiations have
not yet begun on Council's position.
The new document
1.9 The draft Regulation, document (b), merges
and replaces, in a single text and under a standard legislative
format (rather than the fast track recast procedure), the two
earlier sets of Commission proposals, the draft Regulation to
take account of the Lisbon Treaty and document (a). These have
now been formally withdrawn. The Commission explains that it has
done this for the sake of legal clarity and to facilitate negotiations
between the Council and European Parliament. In addition, the
new draft Regulation incorporates changes made to the Financial
Regulation by Regulation (EU, Euratom) No. 1081/2010 in connection
with creation of the European External Action Service.[9]
1.10 The Commission explains that there has been
no change of substance compared to its two earlier proposals.
For this reason, its Staff Working Document concerning the Implementing
Regulation, presented with its original proposal, document (a),
remains current.
1.11 The Commission reiterates that its goal
in the proposed amendments under the triennial revision is to
ensure, particularly in the current economic context, that the
EU Budget's delivery mechanisms work as efficiently as possible,
facilitating implementation of EU policies, while maintaining
sound treatment of EU taxpayers' money. It says that, to do this,
these mechanisms must be simple and transparent, allowing for
the leverage of non-budget resources and strengthening the Commission's
accountability for budget implementation. With this in mind, the
Commission sets out the benchmarks against which it has assessed
the need to propose changes of substance:
- reducing the administrative
burden for beneficiaries of EU Budget funds, contractors and implementing
partners;
- facilitating, wherever possible, the leveraging
of budget appropriations;
- facilitating the Commission's obligation to implement
the Budget and achieve policy goals through improving delivery
instruments and simplifying rules and procedures; and
- ensuring sound financial management and protecting
the EU's financial interests against fraud and other illegal activities.
1.12 The Commission explains that its three main
objectives are simplification, leveraging of limited budget resources
and increasing accountability. Proposed changes to achieve simplification
include:
- increasing the use of lump
sums and other instruments, including ex ante assessments,
to make grant procedures more straightforward and to move from
real-cost based management (inputs) to a more performance-based
(outputs) scheme;
- revising rules requiring interest on pre-financing
to remove the disproportionate administrative burden on grant
beneficiaries in this area;
- simplifying provisions concerning bank guarantees
and the award of small contracts under the procurement rules;
and
- introducing other areas of flexibility in the
application of budgetary principles, to alleviate unnecessary
administrative burdens for the recipients of EU funds.
1.13 In relation to leveraging limited budget
resources, including reflecting budgetary constraints both at
national and EU levels, the Commission proposes:
- pooling of funds in the external
relations area, through provision for the creation of multi-donor
trust funds and changes to the system governing external assigned
revenue;
- enhancing synergy with the European Investment
Bank's funds through promoting the use of mixed instruments such
as guarantee funds, long-term loans and the use of EU resources
with Bank funds for risk capital;
- facilitating creation of public-private partnerships;
and
- clarifying the rules to allow more extensive
use of prizes to encourage private investment into research and
development.
As for increasing accountability, the Commission
proposals fall into two main categories. First is a simplification
of the different systems for implementation of the Budget by different
actors, including the Commission, Member States, the European
Investment Bank and public and private operators. The Commission:
- proposes a set of common principles
to be applied whenever it entrusts a third party with implementation
of the Budget, comprising ex ante verification of the capacity
to manage EU funds, management, control and audit obligations
and a single chain of accountability; and
- aims to modernise the system of risk management
and control measures to make them more proportionate to the costs
involved and the likelihood of errors occurring.
Secondly, the Commission proposes to increase accountability
through introduction of a tolerable risk of error for each policy
area, to be decided by the Council and the European Parliament
on the basis of a Commission proposal assessing the cost and benefits
of relevant controls.
1.14 The Commission explains again that certain
changes to budgetary and financial issues, introduced by the Lisbon
Treaty, must be reflected in amendments to the Financial Regulation.
These include:
- introduction of the multiannual
Financial Framework into the TFEU requires that certain associated
provisions should be moved from the Inter-Institutional Agreement
into the Financial Regulation;
- changes to the annual budgetary procedure and
abolition of the distinction between compulsory and non-compulsory
expenditure, which have an impact on Financial Regulation provisions
relating to transfers and provisional twelfths;
- new provisions concerning the control and audit
obligations of Member States, which the Commission has chosen
to address as part of the triennial review;
- further technical changes and the deletion of
obsolete provisions for example, specific references to
'police and judicial cooperation' are removed, because they are
no longer needed, as this cooperation has now been integrated
with other EU policies and internal actions, and references to
information on the working of the guarantee fund for external
actions are omitted, as this fund is no longer the subject of
a special regime; and
- Lisbon Treaty provisions that the Implementing
Regulation should be limited to technical details and implementing
modalities only mean that certain existing provisions in the Implementing
Regulation, which define exceptions or derogations to the Financial
Regulation, need to be placed in the Financial Regulation itself.
1.15 The European Court of Auditors' Opinion
on the original proposed revision of the Financial Regulation,
document (a), remains relevant and we annex a table of equivalences
for the article numbers in the Opinion and in the new draft Regulation,
document (b).
The Government's view
1.16 The Economic Secretary to the Treasury (Justine
Greening) first comments on the proposed changes reflecting entry
into force of the Lisbon Treaty, saying that:
- the Government considers that
this should be a purely technical exercise of ensuring that the
existing budgetary rules are properly translated into the new
budgetary instruments;
- it can accept the Commission's proposals insofar
as they adhere to this principle; however
- in one specific area, that relating to the Commission's
flexibility in making in-year budgetary transfers, the Government
considers that the changes proposed are not necessary and has
challenged them.
1.17 Turning to the proposed triennial review
of the Financial Regulation the Minister tells us that the Government
fully supports the Commission's overall objectives of simplifying
complex rules, alleviating cumbersome administrative burdens that
inhibit efficient implementation, enhancing the possibility of
using budget funds to leverage further resources and strengthening
accountability for EU budget spending. She says that these are
in line with the Government's overarching objectives in relation
to the EU Budget of protecting the UK's financial interests, pushing
for greater value for money and ensuring sound financial management.
1.18 However, she continues that the Government:
- has concerns over some of the
specific suggestions made by the Commission, including in the
areas of the control and audit obligations of Member States, introduction
of a tolerable risk of error and proposed changes to the Institutions'
buildings policies; and
- believes that the proposed revision should have
been more robust in some areas, for example in some transparency
provisions and in making progress on a more proportionate, risk-based
approach to the control and audit of EU funds.
The Minister adds that more detail on the Government's
position remains as told to us in relation to the earlier proposal.
That is:
- the Government welcomes the
focus on, amongst other things, modernising the system of risk
management and control measures;
- it supports the Commission's acknowledgement
that international financial instruments (such as the European
Investment Bank) should increasingly play a role alongside the
Budget;
- it is concerned that 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 will question closely the possibility the
Commission suggests of raising loans to finance the purchase of
EU Institution buildings, which may present additional spending
implications; and
- 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.
Conclusion
1.19 As the original draft Regulation, document
(a), has been formally withdrawn our recommendation that it be
debated is redundant, so we rescind it.
1.20 Instead we recommend that the new proposal,
document (b), be debated in European Committee B, together with
the other documents, for which our earlier recommendations are
recalled in paragraph 7 of this chapter.
Annex: Table of Equivalences
Articles numbered in Opinion No.6/2010 of the
European Court of Auditors and the Commission's revised Financial
Regulation proposal.
Subject | Articles numbered in the ECA Opinion
| Equivalent article in the revised Financial Regulation
|
Budgetary principles | Articles 3 to 30
| Articles 3 to 30 |
Assigned revenue | Articles 10 and 18
| Articles 10 and 18 |
Carry over rules | Article 10
| Article 10 |
Distinction between external and internal assigned revenue
| Article 18 | Article 18 |
Tolerable risk of error (TRE) | Article 28b
| Article 29 |
Commission's responsibilities when preparing new spending proposals
| Article 49 | Article 51 |
Methods of implementation and obligations of the Member States
| Articles 53 and 53a | Articles 55 and 56
|
Management modes of the general budget |
Article 53 | Methods of implementation of the budget Article 55
|
Shared management with Member States
| Article 53a | Article 56 |
Fixing deadlines for activities described in Article 53a(b)
| Article 53a(b) | The activities are now described in Article 56(6)
|
Fiduciary accounts | Article 61(4)
| Article 65(7) |
Accounts managed by entities listed in |
Article 53(1) point (2)(c) and (d) | Managed by entities listed in point (iii) and (iv) of Article 55(1)(b)
|
Grants and Prizes | Articles 108 to 120a
| Articles 115 to 129 |
Financial Instruments | Articles 120b and 120c
| Articles 130 and 131 |
External audit | Articles 129, 140, 143 to 144a
| Articles 139, 150, 153 to 155 |
Court's special reports | Article 144
| Article 154 |
Annual report of the Court of Auditors |
Article 143 | Article 153 |
Statements of preliminary findings | Article 144a
| Article 155 |
Deadline for annual reports | Article 60(8)
| Article 63(9) |
Rules and procedure on the audit | Article 140(2)
| Article 150(2) |
European trust funds | Article 164
| Article 178 |
Model Financial Regulation for public-private partnerships
| Article 185a | Article 201
|
Subject | Articles numbered in the ECA Opinion
| Equivalent article in the revised Financial Regulation
|
Indirect management with entities and persons other than Member States
| Article 53(b) | Article 57
|
Entrusted entities | Article 53(1) point (2)(e)
| Article 55(1)(b) point (v) |
Financing the purchase of buildings | Article 179(3)b
| Article 195(3)fourth subparagraph |
Clearance of pre-financing | Article 81
| Article 87 |
Responsibilities of the accounting officer |
Article 123 | 134 |
Presentation of the accounts and accounting
| Title VII | Title IX of Part One
|
Financial regulations of agencies and other bodies set up under the Treaty
| Article 185(4) | Article 200(4)
|
Reporting requirements | Articles 121 and 122
| Articles 132 and 133 |
Framework Financial Regulation for agencies and bodies set up under the TFEU and the Euratom Treaty
| Article 185 | Article 200 |
1 See http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:C:2006:139:0001:0017:EN:PDF.
Back
2
(31401) 7183/10: see HC 5-xiv (2009-10), chapter 6 (17 March 2010). Back
3
(30320)17592/08+ADD1:seeHC19-viii(2008-09),chapter8(25February2009)andHC19-xxvii(2008-09),chapter33(14October2009). Back
4
(31399)7180/10:seeHC5-xiv(2009-10),chapter6(17March2010). Back
5
(31571) 9193/10: see HC 428-ii (2010-11), chapter 1 (15 September
2010). Back
6
(31652) 10346/10 + ADDs 1-2: see HC 428-ii (2010-11), chapter
1 (15 September 2010). Back
7
See headnote. Back
8
(32142) 15759/10: see HC 428-xi (2010-11), chapter 5 (15 December
2010). Back
9
(31446) 8134/10 + ADD 1: see HC 5-xvii (2009-10), chapter 2 (7
April 2010). Back
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