Explanatory Memorandum to COM(2010)260 - Financial Regulation applicable to the general budget of the EU (Recast) - Main contents
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| dossier | COM(2010)260 - Financial Regulation applicable to the general budget of the EU (Recast). |
|---|---|
| source | COM(2010)260  |
| date | 28-05-2010 |
Budget is one of the key instruments to deliver EU policies. In 2011 more than EUR 130 billion is planned for allocation to EU policies benefitting the Union and its citizens. In the current economic context it is even more important that the delivery mechanisms of the budget operate in the most efficient way and facilitate the implementation of EU policies, while securing sound treatment of European taxpayers' money. In particular, it is important that these mechanisms are simple and transparent (especially to final recipients of EU funds), provide the possibility for leverage of non-EU budget resources and at the same time strengthen the Commission's accountability for implementation of the budget as set in Article 317 TFEU.
The Financial Regulation (hereinafter FR i) contains all the principles and rules which govern the implementation of the Union's Budget. It has a horizontal character, being applicable to all areas of expenditure and all revenue. The FR is subject to revision every three years, or whenever it proves necessary and the present proposal represents such a triennial revision. It also reflects the genuine necessity of revisiting budget delivery mechanisms in the current economic context and in view of the future policy challenges i.
For the first time this triennial revision is handled in accordance with the ordinary legislative procedure foreseen in Article 322 TFEU. It is presented as a recast in accordance with the Interinstitutional Agreement of 28 November 2001 on a more structured use of the recasting technique for legal acts i. In order to allow the legislative authority to have a global view of the proposed modifications, the Implementing Rules of the FR (hereinafter IR i) are presented, in a Commission Staff working document, together with the FR in a single package. The Implementing Rules, which contain more detailed provisions complementing the FR, will be adopted under the delegated powers of the Commission according to Article 290 TFEU.
The present revision does not cover the changes stemming from the entry into force of the Lisbon Treaty, except for the obligations of Member States concerning internal control and audit and their resulting responsibilities in shared management which are included in the present revision. The Commission has treated other Lisbon-related changes, due to their very specific nature, in two separate ad hoc proposals: one related to the creation of the European External Action Service i, and the other related to the new budgetary rules i (introduction of the multiannual financial framework in the Treaty and new annual budgetary procedure in particular).
This proposal builds on the results of the public consultation of 19 October 2009 i, which resulted in a total of 235 contributions of stakeholders who implement or receive Union funds: from citizens to public and private operators, regional and national administrations. The Commission has adopted its proposal on the basis of the results of that consultation, as well as the experience of its operational services and lessons learned from previous revisions.
Contents
- 2. CALENDAR
- 3. BASIS FOR UNDERTAKING THE PRESENT REVISION
- 4. NEED FOR A REFORM
- 5. MODIFICATIONS PROPOSED BY THE COMMISSION
- 5.1. Exceptions to budgetary principles
- 5.2. Implementation of the budget
- 5.2.1. Streamline methods of implementation from 5 to 2 modes (Article 53 FR)
- 5.2.2. Control and audit obligations of Member States (Article 53a FR)
- 5.2.4. Revenue operations (Article 73b, 74 FR)
- 5.2.5. Procurement (Articles 88-107 FR)
- 5.2.6. Grants (Articles 108-120 FR)
- 5.2.7. Prizes (New Title VIa , Article 120a FR)
- 5.2.8. Financial instruments managed by IFIs (New Title VI B , Articles 120b, 120c FR)
- 5.2.9. Court of Auditors' reports and statements of preliminary findings. (Articles 143 and 144)
- 5.2.10. Union trust funds (Article 164 FR)
- 5.2.11. Possibility to raise loans to finance the acquisitions of buildings (Article 179(3)b FR)
- 5.2.12. A flexible approach for Public and Private Partnerships (PPPs)
- 5.3. Final provisions (Articles 182-187 FR)
- ê 1605/2002 (adapted)
The FR revision will be negotiated while preparation for the post-2013 programmes will also be under way, and should be considered in this wider context. For this reason, it is important that all the actors concerned in the legislative process, in particular the European Parliament and the Council, agree on an ambitious timetable for the present revision and on the need to ensure coherence between the financial rules enshrined in the FR and on the content of sectoral basic acts. For this to be effective, they should aim at an agreement on the package (FR + IR) that could enter into application by the end of 2011, which is a very ambitious timetable given the inherent constraints of the ordinary legislative procedure.
The FR should only contain the fundamental principles (FR, Title II) and the basic rules of budgetary and financial management, leaving the details to be specified in the IR and soft law such as internal guidelines. These principles must be respected in all legislative acts i and by all institutions; they should be kept stable and derogations to them limited to a strict minimum.
In terms of content, the key elements of the financial reforms should be preserved, in particular: the role of financial actors, the importance of the financing decision adopted by the College for operational expenditure, the integration of controls with operational services, the internal audit function, activity-based budgeting, and modernisation of accounting principles and basic rules applicable to grants. Procurement rules should be preserved in line with the procurement Directives.
Moreover, it should be borne in mind that not all problems encountered with the application of the rules require modifications of the FR. In the vast majority of cases, the difficulties raised during the public consultation do not find their source in the Financial Regulation or could be solved by interpretation of the rules. Difficulties also stem from sector-based regulations, whose level of detail and complexity increase significantly the risk of error or misinterpretation.
In terms of method, any modification of substance has been assessed against the following benchmarks:
- reduce the administrative burden for beneficiaries, contractors and implementing partners;
- facilitate, whenever possible, the leveraging of budget appropriations;
- facilitate the Commission’s obligation under Article 317 of the Treaty to implement the budget and accomplish the policy objectives by improving delivery instruments and simplifying the rules and procedures;
- ensure sound financial management and protect the financial interests of the Union against fraud and other illegal activities i.
Reform is necessary with a view to adapting the financial rules to the new requirements of budget implementation (co-financing with other donors, specific financial instruments, PPPs) or where the basic principles create disproportionate workload (interests on pre-financing) or may unduly impede efficiency (prohibition of budget implementation through private sector bodies). The award of small grants and contracts also needs to be facilitated.
Furthermore, the new procedure applicable to the IR, as set out in the Lisbon Treaty, should lead to a new articulation between the FR and the IR, imposing a complete review of the whole set of financial rules. In this regard, some IR provisions which currently define exceptions or derogations to FR provisions should be introduced in the FR itself, while the IR should be limited to technical details and implementing modalities i.
In this context, the Commission has based its proposal on the following objectives:
- to introduce more flexibility in the application of budgetary principles, which should better suit operational needs and alleviate unnecessary administrative burden for recipients of Union funds;
- to streamline relations with implementing partners to which the Commission entrusts the management of programmes or part of programming actions (projects), in particular taking account of the nature of the implementing partner (Member States, agencies, EIB, public and private operators, etc.) and the financial risks entailed (proportionality);
- to shift the regime of grants from a real-cost based management (inputs) towards a performance-based scheme (outputs), in order to better target policy objectives and achieve significant simplification of procedural and documentary requirements for the benefit of beneficiaries, and facilitate the use of lump sums;
- to ensure sound financial management while leaving significant room for manoeuvre for Authorising Officers so that they can adapt the means to their operational constraints and the financial risks they are faced with;
- to modernise the system of risk management and control measures so as to make them more proportional to the probability of errors and to the cost involved.
Regarding the principle of unity of the budget , the rules governing interests generated by prefinancing should be simplified (Articles 5, 5a FR) as they generate excessive administrative burden on both sides and misunderstandings with operators and partners (particularly in the current period of low interest rates). These interests are collected in accordance with the principle of sound financial management and represent non negligible revenue of the Union Budget (+/- EUR50 M per year). Therefore, the changes proposed focus on grant beneficiaries and the obligation to generate pre-financing interest and to recover such interest is suppressed except otherwise foreseen in a delegation agreement. This means that national agencies will be allowed to re-use interest generated for the programmes they manage, and interests generated by EU bodies will continue to be recovered annually. This measure will entail a limited loss for the Union miscellaneous revenue (+/- EUR 15 M).
Regarding the principle of universality , a dual regime for assigned revenue is proposed (Article 18 FR) with the distinction between: 1. the re-use for the same purpose of funds initially assigned by the Budget Authority ( internal assigned revenue ), for which the current regime is maintained (carry over only for one year and once carried over it has to be used first before fresh appropriations) and; 2. revenue collected from and assigned by various donors to a specific programme or action ( external assigned revenue : contribution of EFTA and third countries to a Union programme, co-financing of external actions from Member States and other donors...), for which the carry over regime should be more flexible in order to guarantee the purpose assigned by the donor. An appropriate regime of reporting to the Budget Authority is provided.
In relation to the principle of specification of the budget , the rules governing transfers of appropriations should be clarified and more flexibility allowed in the adoption procedure of some transfers decided by the Commission (Articles 21, 23, 26 FR), to respond to the needs of better budget implementation, especially in relation to payments appropriations, assigned revenues and administrative appropriations which are common to several titles. It is also proposed to simplify the rules concerning transfers which require the budgetary authority to be informed in order to avoid recurrent delays in their carrying out.
Regarding the principle of sound financial management which includes the concept of proportionality, the FR should introduce the notion of tolerable risk (Article 28b FR). The objective of this proposal, made during the last revision but now backed-up by solid analysis of the costs and benefits of control, is to decide on a level of tolerable risk of error per policy area , taking into account the costs of control, the risk or error and the benefits of the policy. This will mean in some areas fixing a tolerable risk level above the 2% materiality threshold used by the Court of Auditors across all policy areas to conclude on the legality and regularity of the underlying transactions. The tolerable risk levels would be decided by the Legislative Authority and would set a cost-effective level of control to provide a more appropriate basis for the Discharge Authority (i.e. the EP) to judge the quality of the Commission's management of risk.
Regarding the principle of annuality, no amendment to the FR is proposed except for carry over rules for external assigned revenue (Article 10 FR), in order to take into account the dual regime proposed for assigned revenue. However, the Commission is fully aware of the concerns expressed by some of its implementing partners in multi-annual programmes (EIB, ITER, Galileo, research programmes managed by Joint Technological Initiatives, etc) who request, before signing a contract or agreement with the Commission, assurance regarding the duration of the commitment of the Union budget towards a specific project sometimes going even beyond the current Multiannual Financial Framework. It should be noted that such assurance currently exists through annual instalments where the basic act fixes the annual amounts throughout the duration of the Multiannual Financial Framework (e.g. Structural Funds), or even beyond (e.g. ITER), in accordance with Article 76 i FR. Although such financial programming i is indicative, it gives appropriate information on the annual amounts foreseen for important programmes, e.g. for the Joint Technological Initiatives and, most importantly, it gives the medium term perspective of Union funding that some of the Union’s implementing partners are looking for. Moreover, the degree of certainty provided by annual amounts which are enshrined in legal bases has increased with the extension of legislative codecision, which is now the ordinary legislative procedure.
Finally, no amendment is proposed regarding the principle of transparency.
Provisions concerning methods of implementation are a key element of the 2001 Reform and govern the conditions of externalisation of budgetary tasks to third parties . Their objective is to ensure that, whatever the mode chosen, expenditure is executed with a level of control and transparency equivalent to that expected from Commission services as set out in the FR.
However, these provisions have become so complex over the years that their underlying rationale is lost. The Commission proposal therefore aims at establishing a clear distinction between:
- situations where the budget is implemented directly (by the Commission or executive agencies – Article 53 i point (1));
- and situations where the budget is implemented indirectly in shared management with Member States or through other entities or persons (Articles 53 i point (2)).
The proposal sets out common requirements for all types of indirect management with specific provisions foreseen for indirect management with Member States (Article 53a FR).
The proposal aims in particular at finding the right balance between, on the one hand, facilitating the task of the authorising officer to determine the mode of budget implementation appropriate for the specific action, and, on the other hand, providing the AO with a more secure environment. This balance is established by the following two elements:
- operational needs of services are taken into account by introducing more proportionality in ex-ante controls, depending on the specific risks of the action and its overall control environment including the measures by the Commission to supervise and support the implementation. Furthermore, provisions are proposed to accommodate the needs of newly developing financial instruments such as those with the EIB and Private and Public Partnerships;
- the responsibility of Member States and entrusted entities or persons under indirect management is strengthened, and control and audit obligations of the Commission across all budget management types are streamlined.
At the same time, provisions are proposed to strengthen sound financial management in order to ensure the Commission accountability for the implementation of the budget. They concern:
- control and audit obligations, which Member States and entrusted entities have to comply with in order to provide for a sufficient level of protection of the Union's financial interests;
- management declarations of assurance for all indirect budget management types not subject to a separate discharge from the budgetary authority, which should strengthen the responsibility of Member States and the entrusted entities and give more assurance to the Authorising Officer, notably in his reporting duties;
- control and audit obligations for the Commission, including clearance of accounts procedures and the possibility to suspend or interrupt payments .
New provisions based on Article 317 TFEU are introduced in the present proposal and contain the following elements: a harmonised administrative structure in the Member States; common management and control obligations for these structures; annual management declaration of assurance with independent audit opinion thereon by which the accredited national body assumes responsibility for the management of Union funds it has been entrusted with; financial clearance, suspension and correction mechanisms operated by the Commission.
These provisions should apply only to the next generation of sector-specific regulations, i.e. post-2013 (Article 187 FR).
5.2.3. Payments and fiduciary accounts (Article 61 i FR)
FR provisions only cover bank accounts opened for cash management under the responsibility of the Accountant. The creation of fiduciary accounts, dedicated to the implementation of a programme under indirect management by financial institutions, should be allowed. These fiduciary accounts would be opened under the responsibility of Authorising Officers with the agreement of the Accounting Officer.
Furthermore, the rules related to pre-financing have been reviewed (Article 81 FR) to allow a single pre-financing payment, which will have to be cleared in line with the progress of the action. This should provide recipients of EU grants with more security on the amount they receive, as the Commission would approve the eligibility of costs on a regular basis through interim payments.
The rules on recovery should be strengthened in order to bring more efficiency to safeguarding the financial interests of the Union. In particular, recoveries should be treated by Member States in the same way as they treat their own claims on their territory.
It is also proposed to simplify the regime of forecasts of revenue in line with budgetary needs. Registration should be required when the revenue is expected with a certain degree of probability and can be reasonably translated into figures.
Within the limits authorised by the 2004 procurement Directive i, provisions concerning procurement are reviewed in order to simplify the rules (thresholds, bank guarantees) take into account the specific status of the EIB in the Treaty and define the scope of some provisions more precisely, notably for the selection of experts. In addition, a vendor database should enable more efficient communication with potential tenderers for such contract values below the thresholds laid down in the procurement directive.
Concerning the rules on exclusion, derogation from the obligation of exclusion is introduced in Article 93 FR for overriding requirements of general interest, in particular to preserve service continuity of institutions. This provision aims at aligning FR rules with the relevant Directive. A provision is introduced in Articles 95 FR for the ECB and EIB to give them access to the central exclusion database on the same footing as EU institutions.
Finally a provision is inserted in Article 96 i FR to provide for a sound legal basis for the publication of administrative decisions of exclusion and financial penalties, in line with data protection requirements.
Rules for grants were first introduced in the FR and IR in the 2002 recast. The 2006 revision made only limited modifications, which have proved insufficient to alleviate administrative burden imposed on operational services and beneficiaries.
This administrative burden prevents services from using their resources on policy objectives and on timely delivery, while it implies excessive red tape for beneficiaries. It has two direct causes: excessive similarity between procurement and grant rules/procedures, although the objectives are different (acquisition vs. support); and the fact that controls for grants focus on real costs (real-cost based grant) rather than on expected results (deliverables) of projects.
It is therefore proposed to shift the Union scheme towards a performance-based system, based on the definition of agreed indicators and objectives (outputs and outcomes), and to proceed to a robust simplification of lump sums (lump sums, standard scale of unit costs and flat rates), clearly disconnected from any verification of actual costs of implementation (Article 109 FR). This new approach should be essentially enshrined in the Implementing Rules and would encompass the methods of control (including operational audits), while ensuring the respect of common principles applicable to grants. For these reasons, the maximum threshold per lump sum (EUR 25,000) should be deleted and be left to the College to decide when adopting a specific lump sum framework.
To ensure that the recourse to lump sums is part of a risk assessment made by the Authorising Officer and to safeguard equal treatment between beneficiaries, the framework to be used for the determination of lump sums (consistency with the funded activities, maximum amount, basis and methods of calculation) should be adopted by the Commission, except for schemes of low value grants (≤ EUR 50,000). The Authorising Officer would then be able, within the programme duration, to establish lump sums, scales of unit costs and flat rates on the basis of a provisional budget submitted by the applicant taking into account its internal accounting practices, including only acceptable cost categories, which are consistently applied to similar operations by the applicant (no bias detrimental to EU Funds).
In parallel, the real-cost regime, maintained as the default regime, should be reviewed (clarification of various types of costs, costs actually incurred, in kind contributions, profit) and the possible profit of an action should be recovered on a prorata basis (where EU funds 50% of the costs, only 50% of the profit should be recovered).
Concerning the gradual decrease of operating grants (Article 113 i FR), it is proposed to review the application of this rule over four years, rather than completely abandoning it, because it is justified in principle.
Procedures for the award of grants in the IR are reviewed to leave the choice of modalities as much as possible to the Authorising Officer (decision vs. agreement, bank guarantees and documents serving to assess operational and financial capacity). Furthermore, the award of low value grants should be made easier, by removing excessive administrative requirements in line with the principle of proportionality and increasing the current threshold (from EUR 25,000 to EUR 50,000). This follows the trend started in 2006.
Rules authorising exceptionally cascading grants have proven too strict and should be eased (Article 120 i FR) in order to allow a beneficiary to redistribute its grant by way of subsidies to third parties. This should improve the implementation of programmes targeting a large group of physical persons which can only be reached through two levels of dispatch (Universities for Erasmus, NGOs for cash transfer programmes in external actions). The Commission proposes to facilitate cascading grants by removing or relaxing some of the current restrictions where the redistribution of funds is the primary aim of the action, and, if appropriate guarantees are presented by the first ranking beneficiary as regards the recovery of the amounts. The principle which limits discretion in the redistribution of grants by the primary beneficiary is preserved.
Furthermore, flexibility should be given to Authorising Officers to consider as a sole beneficiary a group of implementing partners such as a consortium being part of a network. Procedural flexibility is also given, in Article 109 i FR when awarding grants to the EIB reflecting its special position under the Treaty.
Finally, provisions are proposed for the extension of findings for systemic errors within the real-costs regime when such errors have been detected during an ex-post audit. In these cases, the responsible Authorising Officer should be entitled to apply the same proportion of financial correction to other non audited projects implemented by the same beneficiary and recover the relevant amounts if the beneficiary cannot demonstrate that the error does not affect non audited projects.
Prizes are given as a reward after a contest and constitute a different instrument of Union contribution than grants. It is therefore proposed to introduce provisions related to prizes in a separate Title of the FR. The Union contribution in this context would be completely disconnected from any reference to predictable costs.
Financial instruments are increasingly identified as an adequate means of leverage of EU funds, in particular when they are pooled with others funds (guarantee funds, risk capital, blended instruments mixing a Community grant with a loan or a guarantee).
It is proposed to provide for a new type of financial contribution because these financial instruments, currently mostly implemented by EIB and EIF, cannot be assimilated to services or grants. They should be subject to specific provisions to take into account the specificities of their implementation (revolving funds, cascade of contributions through banking networks) while respecting the principles of responsibility (such as the share of risks or co-financing, and penalties for non-performance) and sound financial management (limitation of the risks incurred by public funds).
5.2.9. Court of Auditors' reports and statements of preliminary findings. (Articles 143 and 144)
A series of amendments is proposed concerning the annual and special reports of the Court of Auditors, in order to reflect the current practices (the contradictory procedure, the publication of the replies of each Institution next to or after the observations of the ECA, the transmission of the Member States replies) or aimed at streamlining the timetable. Finally, a new provision formalises the practice of the statement of preliminary findings sent by the ECA to Commissioners, bodies and Member States.
It is proposed to authorise the Commission to set up and manage Union trust funds for external actions, which would intervene in emergency, post-emergency crisis operations (e.g. Haiti), or for thematic actions, and would pool the contribution of the Union budget with funds from other donors.
The main objective of such delivery instrument is to allow the Union to act as a major and more visible player in the field of development aid.
5.2.11. Possibility to raise loans to finance the acquisitions of buildings (Article 179(3)b FR)
For both transparency and cost-efficiency reasons, the Commission proposes to introduce the possibility to raise loans, in the sole case where institutions envisage buying their premises. This would considerably simplify the current system, be more cost-efficient as institutions could profit from lower interest rates due to the Union AAA rating in the financial market and would allow institutions to develop a long term real estate policy (in particular for delegations, OIB and OIL).
In practice, only annual loan instalments (reimbursement of the loan) would appear in the budget, but the 'building' loans themselves are to be considered outside the budget since they do not finance the budget but the acquisition of assets. For this reason, the modification is introduced in Article 179 FR instead of Article 14 FR. Article 96 IR, which defines administrative expenditure covered by provisional commitments, is also modified, as the payment of each annual (or periodic) instalment is to be treated as recurring administrative expenditure, similar to a rent payment.
The Commission proposal aims at facilitating a wider use of PPPs, notably in the research field, which is a strong request of most operators concerned. The flexibility proposed should accommodate a vast range of PPPs, depending on their structure and on the precise definition of the funded activity (clearly identified projects or R&D themes). It is thus proposed to add to the existing two possibilities of structure (community bodies under Article 185 FR , as the Joint Technological Initiatives are today, consortium of partners structured under a private legal entity or purely contractual network, which receive a grant-Art.108 FR ) two new ones. In particular, it is foreseen to:
- allow private bodies to be entrusted with the implementation of a PPP and to manage EU funds (e.g. awarding grants) to that effect in the framework of indirect management ( Article 53 i 2(g) FR );
- provide for the adoption under delegated powers of a separate light model financial regulation applicable to bodies created in a basic act and charged with the implementation of a PPP ( Article 185a FR ). Such model financial regulation will comprise a common set of principles which will be mandatory in order to ensure sound management of EU funds and adequate protection of the Union's financial interests. However, PPPs would be able to apply their own rules (accounting, internal and external audit, procurement...) within the framework of applicable national law and the basic act.
It would thus be possible to choose the structure best adapted to the objectives and nature of the activities to be implemented, in a range varying from contractual to institutionalised ("incorporated") arrangements, the latter including a Union body (Article 185 FR), a private sector body (Article 53 i 2(g) FR) and a mixed body (Article 185a and 53 i 2(e) FR).
The regular triennial revision of the FR as currently foreseen does not ensure enough legal security and stability of the financial rules. Additionally, the revision mechanism is very rigid and does not take into account the multiannual programming cycle of the EU budget and related sector legislation. As a consequence, it is proposed that future revisions of the Financial Regulation are made whenever it proves necessary without resorting to specific time frames.
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