14 Financing EU external action: 11th
European Development Fund
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| European Court of Auditors Opinion No. 3/2013 on a Draft Council Regulation on the Financial Regulation applicable to the 11th European Development Fund
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| Legal base | Article 287(4) TFEU; —
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| Department | International Development
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| Basis of consideration | EM of 17 October 2013
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| Previous Committee Report | None; but see (35334) 14081/13: HC 83-xix (2013-14), chapter 2 (30 October 2013); also see (33559) 18726/11 et al. at chapter 3 of this Report.
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| Discussion in Council | To be determined
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| Committee's assessment | Politically important
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| Committee's decision | Cleared; further information requested
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Background
14.1 The European Development Fund (EDF) is the main
instrument for delivering EU assistance for development cooperation
under the Cotonou Agreement with ACP States and for financing
EU cooperation with the Overseas Countries and Territories (OCT).
Each EDF is concluded for a multi-annual period. The EDF is funded
outside the EU budget by the Member States on the basis of specific
contribution keys. The UK's share is 14.68%.
14.2 The Multi-Annual Financial Framework (MFF) agreed
at the February 2013 European Council included an overall figure
of €30.5 billion for the EDF for the period 2014-20. This
is part of a total package covering Heading 4 of the EU budget,
on External Action, involving a range of other financial instruments
(pre-accession finance, European Neighbourhood Partnership, Stability
Instrument, etc.). The UK's contribution to EDF11 is €4.478
billion, equating to 14.68% of the total EDF.
14.3 The full background thus far is set out in our
report under reference and those referred to therein.[81]
In essence, the EDF element was de-coupled from the rest of the
Heading 4 process. Several parts of the EDF agreement —
the Internal Agreement; the Implementing Regulation; and the Financial
Regulation — specify the allocation and management of the
fund.
The EDF11 Internal Agreement
14.4 An Internal Agreement establishes the resources
for each EDF and the allocation to broad sub-categories, and includes
provisions on implementation and financial monitoring. In June,
the Committee cleared the Commission Communication and Council
Decision that incorporated the "top line" elements,
prior to the June EU/ACP Council of Ministers; having been agreed
with the ACP, it now forms a new annex to the Cotonou Agreement.
The Implementing Regulation
14.5 The Implementing Regulation sets out the programming
process and monitoring framework for all EDF11 funds that will
be spent on country and regional programmes, intra-ACP programmes
such as the Africa Peace Facility, and the Cotonou Investment
Facility. The Committee considered it on 11 September. The fundamentals
appeared to be sound — more differentiation; increased focus
on poverty and fragile states; measures to increase effectiveness;
a results-based approach. However, as the Parliamentary Under-Secretary
of State at the Department for International Development (Lynne
Featherstone) noted, the details of some important elements had
yet to be finalised. The Committee accordingly retained it under
scrutiny, pending further information on the outcome of the further
Working Party negotiations (see our earlier Report under reference
for further details).
The draft Financial Regulation
14.6 Then, in October, the Committee considered the
draft Financial Regulation. The Commission's main aim with the
Financial Regulation has been simplification and alignment where
possible with the EU budget Financial Regulation and its Rules
of Application, agreed by Member States in 2012. Alignment has
additionally been sought with the relevant provisions of the Common
Implementing Regulation (CIR) which governs the common rules and
procedures for the implementation of the Union's instruments for
external action. These have been transposed to this 11th EDF Financial
Regulation where they are relevant. By doing so, the Commission
hopes to reduce the diversity of Union external action funding
rules, which create a burden for recipients, the Commission and
other actors. However, the Regulation also notes that the EDF
has its own distinct framework for financial implementation, including
the Cotonou partnership agreement, and so cannot be fully aligned.
14.7 The Minister's helpful analysis of and comments
on the proposal, which she broadly welcomed, are set out in our
earlier Report under reference.[82]
She noted that the Financial Regulation was to be negotiated
by Member States in ACP Working Group from the end of October,
with the aim of agreement by unanimity by the end of the year.
Our assessment
14.8 As with the Implementing Regulation, the direction
of travel with the draft Financial Regulation appeared to be satisfactory,
but some important aspects had yet to be finalised; in this case,
ensuring that:
· Member States retain access to the necessary
information to provide a strong oversight role;
· the commitments in the recently signed
EDF Internal Agreement requiring the Commission to report on
efficiency savings, to implement a comprehensive results framework
and to improve financial management and forecasting, are put into
practice; and
· any further Trust Funds are well-managed
and that the Commission does not overlap, or set itself up in
competition with, the work already done by the EIB, but instead
concentrates its work where it has the necessary skills, expertise,
and comparative advantage over other organisations.
14.9 We therefore asked the Minister to write to
us again when the negotiations had progressed further, and in
good time for the outcome to be debated prior to adoption by the
Council, should we so decide, to explain how the important issues
outlined above had been addressed.
14.10 In the meantime, we retained the document under
scrutiny.[83]
European Court of Auditors' Opinion No 3/2013
14.11 On 29 September 2013, the Commission asked
the European Court of Auditors (ECA) for its Opinion on the draft
Financial Regulation.
14.12 In her Explanatory Memorandum of 17 December
2013, the Minister (Lynne Featherstone) notes that the Court has
commented on the following areas: transparency, simplification,
modes of implementation, procurement, grants, budget support,
and external audit and discharge.
14.13 The Minister helpfully summarises them thus:
"Transparency — The Court notes that the
proposal is difficult to understand due to its references to other
documents, paraphrasing of language and amendment of certain terms
used in the general Financial Regulation. They believe this complexity
could lead to legal uncertainty as well as misunderstanding of
provisions leading to errors in application. The Court further
suggests that the Financial Regulation should have been written
as a document which would be applicable to all present and future
EDFs rather than just for the 11th EDF.
"Simplification —The Court notes the importance
of simplifying spending rules to avoid administrative burdens
and considers that this has taken place with regards to the administration
of grants.
"Modes of Implementation — The proposal
allows for bodies (such as ACP countries) to sub contract implementation
of programmes to other organisations, including to non-public
bodies e.g. NGOs/private sector. The Court suggests this presents
a significant risk of obscuring where responsibility lies for
the proper spending of EDF monies. They recommend that the Council
assess whether advantages of maintaining a flexible approach to
this outweigh the risks.
"Procurement — The Court states that the
provision concerning compliance with procurement rules has been
weakened through reference to the principle of proportionality.
As the principle of proportionality is a general principle of
law, they recommend removing this reference as all procurement
is subject to this principle.
"Grants — The provision concerning grants
requests that the Commission take into account specific needs
and contexts when defining methods of financing. This does not
appear in the general Financial Regulation, and the Court questions
whether it is necessary in the EDF Financial Regulation.
"Budget Support — The Court suggests that
provisions on budget support go beyond what is appropriate in
a financial regulation as they include general statements of policy.
The Court also notes that the language employed by the Commission
could be interpreted in such a way that it justifies taking a
relatively relaxed view on the need for budget support payments
to be rigorously conditional. Therefore, the Court recommends
the Commission reviews and strengthens the language employed.
"External Audit and Discharge — The Commission
proposal for external audit and discharge encourages national
audit authorities of the ACP states and OCTs to participate in
the work of the Court. The Court notes this is not aligned with
the general Financial Regulation and does not deem it appropriate
to oblige the Court to encourage their participation in its work.
The Court suggests this be revised so that it may invite
national auditing authorities to cooperate with the Court at its
invitation."
The Government's view
14.14 The Minister notes that the Court's opinion
is not binding and does not compel the Commission or the Council
to undertake any specific actions in response, but "should
be seriously considered during the on-going negotiations in working
group."
14.15 The Minister then comments as follows:
"We support the Commission's drive to simplify
the Financial Regulation and for coherent procedures between the
EDF and the EC budget where this leads to more effective management
and implementation of programmes, particularly for cross-regional
programmes which draw financial resources from both budget lines.
"We welcome the Court's efforts to ensure rigorous
financial management of taxpayers' money. We agree with the Court
of Auditors' main contention that the document is difficult to
comprehend due to significant cross-referencing to the general
Financial Regulation. This complexity may create legal uncertainty
as well as misunderstanding of provisions leading to errors in
application. The Commission has argued that it would be very
difficult to restructure it to avoid the cross-referencing. We
will press for simplification of the text where this can be achieved.
The Court of Auditors report annually on the EDF annual accounts
and underlying processes which will provide a regular check on
whether the regulation is being applied.
"Transparency — The Court's suggestion
for a standalone Financial Regulation applicable to all present
and future EDFs is sensible. However the future of the EDF beyond
2020 is at present uncertain. The Cotonou agreement (the basis
for the EDF) expires at the end of 2020, beyond this point there
is potential for a possible change in practice that will see EU
development funding included on the general budget. Any future
EDFs may therefore operate very differently from the current with
a corresponding review of the Financial Regulation likely to be
needed at this point.
"Modes of Implementation — We think that
it is valid for the Commission and partner countries to sub contract
implementation of programmes (e.g. to NGOs, private sector) if
sufficiently robust financial management systems are in place.
This is a provision that was also included under the 10th EDF.
We agree with the Court's view that guidance and procedures should
be set out very clearly to ensure that it is understood who holds
responsibility for ensuring proper spending of EDF monies. The
Commission has stated that the contractual framework with the
third country will contain special provisions in the service contract
to secure sound financial management and protect the EU's financial
interests. The Court of Auditors annual report on the EDF accounts
and their underlying transactions will be an opportunity to assess
whether this is sufficient to mitigate the risks highlighted by
the Court.
"Budget support — We consider the current
provisions for budget support included in the regulation, along
with the Commission's recently revised Guidelines on Budget Support,
sufficiently balanced on the use of conditionality. Whilst achievement
of clear, measurable objectives and targets is important, this
also needs some degree of flexibility and to take into account
the context and progress made by partner governments. We remain
vigilant about disbursement of budget support where conditions
are not being met and we will continue to raise specific concerns
with the Commission where necessary.
"Procurement, Grants, External Audit and Discharge
— The Commission has agreed to revise the proposal in line
with the Court's recommendations on procurement, external audit
and discharge. On grants, whilst the Court identifies that there
is no equivalent position in the general Financial Regulation
concerning outlining of specific needs and contexts when applying
instruments, we believe this is in line with the Cotonou agreement
and are satisfied that this should remain in the document."
14.16 The Minister concludes by noting that the proposal
continues to be negotiated in the ACP working group, and that
she expects these negotiations to culminate by February 2014.
Conclusion
14.17 As noted in the headnote, we consider elsewhere
the latest developments on the wider negotiations on all the EU's
external action instruments, within which the Court's Opinion
sits. There, we ask the Minister to provide us with a further
update on those negotiations. When she does so, we ask her to
include an assessment of the extent to which the Court's Opinion
on this Regulation has been taken into account in the final stages
of negotiation.
14.18 In the meantime, we clear this document.
81 See headnote. Back
82
See (35334) 14081/13: HC 83-xix (2013-14), chapter 2 (30 October
2013). Back
83
See headnote: (35334) 14081/13, HC 83-xix (2013-14), chapter
2 (30 October 2013). Back
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