Documents considered by the Committee on 9 February 2011 - European Scrutiny Committee Contents


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 baseArticle 322(1) TFEU; co-decision; QMV
Document originated(b) 22 December 2010
Deposited in Parliament(b) 13 January 2011
DepartmentHM Treasury
Basis of considerationEM 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 CouncilNot known
Committee's assessmentPolitically important
Committee's decisionDecision recommending document (a) for debate rescinded (decision reported 15 September 2010)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.
SubjectArticles numbered in the ECA Opinion Equivalent article in the revised Financial Regulation
Budgetary principlesArticles 3 to 30 Articles 3 to 30
Assigned revenueArticles 10 and 18 Articles 10 and 18
Carry over rules Article 10 Article 10
Distinction between external and internal assigned revenue Article 18Article 18
Tolerable risk of error (TRE)Article 28b Article 29
Commission's responsibilities when preparing new spending proposals Article 49Article 51
Methods of implementation and obligations of the Member States Articles 53 and 53aArticles 55 and 56
Management modes of the general budget Article 53Methods of implementation of the budget — Article 55
Shared management with Member States — Article 53aArticle 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 PrizesArticles 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 143Article 153
Statements of preliminary findingsArticle 144a Article 155
Deadline for annual reportsArticle 60(8) Article 63(9)
Rules and procedure on the auditArticle 140(2) Article 150(2)
European trust funds Article 164 Article 178
Model Financial Regulation for public-private partnerships Article 185aArticle 201

SubjectArticles 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 entitiesArticle 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-financingArticle 81 Article 87
Responsibilities of the accounting officer Article 123134
Presentation of the accounts and accounting Title VIITitle IX of Part One
Financial regulations of agencies and other bodies set up under the Treaty Article 185(4)Article 200(4)
Reporting requirementsArticles 121 and 122 Articles 132 and 133
Framework Financial Regulation for agencies and bodies set up under the TFEU and the Euratom Treaty
Article 185Article 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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