Annexes to SEC(2007)1140 - Amending letter no 1 to the preliminary draft budget 2008 statement of expenditure by section - Section III - Commission

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dossier SEC(2007)1140 - Amending letter no 1 to the preliminary draft budget 2008 statement of expenditure by section - Section III - Commission.
document SEC(2007)1140 EN
date September 17, 2007
annex.

Introduction

The Amending Letter No 1 (AL 1) to the Preliminary Draft Budget for 2008 (PDB 2008) covers the following:

- the mobilisation of new funds for an amount of EUR 120 million in commitment appropriations and EUR 60 million in payment appropriations, to support the stability and development of Kosovo;

- the mobilisation of additional funds for an amount of EUR 142 million in commitment and EUR 85 million in payment appropriations to support the Palestinian Authority.

- the creation of a new budget article 03 03 02 Damage requests resulting from legal procedures against the Commission's decisions in the field of competition.

KOSOVO

BACKGROUND

Kosovo, whilst still legally a province of Serbia, has been effectively under United Nations (UN) administration since 1999 on the basis of UN Security Council resolution 1244. Negotiations on a new UN Security Council Resolution to provide Kosovo with a permanent status settlement on the basis of the plan submitted by Special Envoy to the UN Secretary General Martti Ahtisaari were initially expected to be reached during the first semester of 2007. However, the Secretary General of the UN has endorsed a Contact Group[3] initiative to allow a period of further engagement between the parties, mediated by a Troika composed of representatives from the European Union, United States and Russia. The Troika will report to the UNSCR on 10 of December 2007.

Notwithstanding these uncertainties, there is a case for envisaging substantially increased international financial support to Kosovo. The European Union has in many occasions indicated its support to the plan submitted by Special Envoy to the UN Secretary General Martti Ahtisaari and its will to play a significant role Kosovo. The last General Affairs and External Relations Council conclusions issued on 18 June underlined again the necessity of rapidly finding a solution to the Kosovo status issue. It must be recalled that as soon as a settlement is reached, its implementation will have to be immediate. This will entail significant additional expenditure from the Kosovo Consolidated Budget both in the form of start-up costs and running costs, e.g. for new institutions such as municipalities, ministries and services, as well as for the demobilisation of the Kosovo Protection Corps. Moreover, as a consequence of a status settlement, Kosovo will inherit a share of Serbia's external debt which will need to be serviced, adding considerable pressure to the budget. Thus, even if the date of a settlement remains uncertain, provisions have to be made in order to cater for a swift implementation

Moreover, and independently of the settlement process, Kosovo has very important and urgent development needs which it cannot address to a sufficient degree using its own resources. Given the uncertainties with regard to its final status, it appears all the more urgent to help redressing some of Kosovo's most pressing economic and infrastructural shortcomings.

It is also expected that the European Union will take a leading responsibility in Kosovo. Much planning for this role is already taking place. Two EU preparation teams (financed by the CFSP budget) are on the ground planning for the EU role in a future international civilian office (ICO) and for a rule of law mission. The latter will be the EU’s most important European Security and Defence Policy (ESDP) mission to date. In this connection it should be recalled that only EUR80 million is included in the Commission’s existing CFSP budget proposal (whereas the mission is now expected to cost more, leaving a shortfall in 2008) and that a reinforcement of the budget would have to be considered.

Success in securing political stability in Kosovo will depend, in part, on making visible socio-economic development to all Kosovars. For this to happen, not only is significant foreign assistance required, it will also need to be front-loaded, swiftly implemented and to deliver results as early as possible.

The Kosovo authorities, with the assistance of the International Financial Institutions, the European Commission and other international donors, are currently establishing a Medium-Term Expenditure Framework (MTEF) for the years 2008-2010 which will incorporate all foreseeable public revenue and expenditure. This MTEF will be endorsed by the government and highlight Kosovo's most urgent status-related spending needs and socio-economic development priorities. This document identifies a financing gap of more than EUR 1 billion for the years 2008 to 2010 which will need to be addressed by donors, in particular the European Community and the USA, but also EU Member States, International Financial Institutions and other bilateral donors. To that effect, a high level Donors' Conference will be called.

The share to be taken on by the EU budget is currently estimated at about half of the total amount, i.e. at least EUR 500 million. While EUR 199 million are already programmed under the Instrument for Pre-Accession Assistance (IPA) over the three-year period covered by the MTEF, and EUR 50 million are still available as macro-financial assistance (MFA), EUR 200 million is required as additional front-loaded assistance under the budget 2008. This amount is to be directed towards macro-financial assistance, including for debt repayment, and is due to take the form of direct budget support, as well as to development assistance via IPA and complemented by targeted assistance from existing appropriations under the Instrument for Stability (IfS) planned in PDB 2008. Project assistance provided under IPA would target in particular those capital investment projects that are identified as a priority under Kosovo’s MTEF. As for additional budget support, this would be conditional on Kosovo meeting its own fiscal policy objectives, as well as economic and fiscal policy framework to be agreed in the form of a Letter of Intent or a subsequent programme with the IMF.

Project assistance under the Instrument for Stability (IfS) aims at enhancing political stability in a post-crisis situation. Given the unpredictability of the political consequences of a settlement, all elements of which cannot yet be foreseen, a rapid intervention of this Instrument in support of the settlement may be warranted, but can only be evaluated once the final shape of the settlement is known. In addition, the IfS can also contribute around EUR10 million from its existing budget for the annual costs of the International Civilian Office (ICO) once it is established following the settlement

Budget lines, legal bases and remarks

The global amount needed (EUR 200 million in 2008) will be included under article 01 03 02 "Macro-financial assistance" of title "Economic and Financial Affairs", chapter 03 "International Economic and Financial Affairs" as well as article 22 02 02 "Transition and institution-building assistance to potential candidate countries" of title 22 "Enlargement", chapter 02 "Enlargement process and strategy". EUR 40 million of this can be covered by the commitment appropriations already entered under MFA in the PDB 2008.

Article 01 03 02 Macroeconomic assistance

Figures

Appropriations PDB 2008 | Amending Letter No 1 | New amount |

Commitments | Payments | Commitments | Payments | Commitments | Payments |

92 000 000 | 82 000 000 | 60 000 000 | 30 000 000 | 152 000 000 | 112 000 000 |

As mentioned in point 2.1, EUR 200 million are required as a front-loaded assistance under the budget 2008 of which EUR 100 million in the form of macro-financial assistance in addition to the assistance committed in 2006 (EUR 50 million). Based on the PDB 2008 proposed by the Commission for the budget line 01 03 02 "Macro-economic assistance", the amount of EUR 100 million of assistance could be financed as follows:

- EUR 40 million in commitment appropriations and EUR 30 million in payment appropriations already budgeted in the PDB 2008;

- Additional EUR 60 million in commitment appropriations and EUR 30 million in payment appropriations by letter of amendment.

Moreover, it is worth noting that macro-financial assistance to third countries is normally aimed at addressing urgent and exceptional external financing needs. Due to its specificity as a short-term crisis management instrument granting financial assistance in response to exogenous developments, possible new exceptional operations not foreseen at this stage of the budgetary procedure of the budget for 2008 could arise in the course of 2008. If the foreseen new amounts of EUR 152 million and EUR 112 million respectively for commitment and payment appropriations were insufficient to support possible new exceptional operations, the Commission could request specific transfer appropriations to the budgetary Authority in view of reinforcing the budget line 01 03 02.

Article 22 02 02 Transition and institution-building assistance to potential candidate countries

Figures

Appropriations PDB 2008 | Amending Letter No 1 | New amount |

Commitments | Payments | Commitments | Payments | Commitments | Payments |

376 700 000 | 88 625 400 | 60 000 000 | 30 000 000 | 436 700 000 | 118 625 400 |

As mentioned in point 2.1, EUR 200 million are requested as a front-loaded assistance under the budget 2008 of which EUR 100 million in the form of project assistance, that could be financed as follows:

- Additional EUR 60 million in commitment appropriations and EUR 30 million in payment appropriations by letter of amendment under budget line 22 02 02.

- The Instrument for Stability is aimed at enhancing political stability in a post-crisis situation. It is therefore the appropriate instrument to address non-debt related post-status issues such as decentralisation, new institutions, etc. The remaining resources required to meet the additional EUR 200 million assistance in the budget 2008 can be drawn from the final allocation envisaged under budget line 19 06 01 that might need to be reinforced, if necessary, during the year.

Of the global request for reinforcement mentioned under 2.1, about half is requested for front-loading socio-economic development needs that are not typically addressed through macro-financial assistance/debt pre-payment. These needs are, in particular, investment needs and costs of implementing the status agreement. Due to the high share of investment related assistance the typical lead times are expected. Therefore, payments represent half of the requested commitment appropriations.

PALESTINE

Background

The living conditions of the Palestinian population continue to deteriorate, especially in Gaza. The number of families falling below the poverty line is now broadly 66 % compared to 50 % in early 2006. Half of the population is affected by food insecurity. The unemployment rate is now 35 % in Gaza and 20 % in the West Bank. Overall GDP is estimated to have fallen by 5-10 % in 2006, with per capita GDP now 44 % below the level in 1999. Exports and investment are also estimated to have fallen sharply reflecting increased restrictions, a worsening security situation and higher uncertainty.

A 60 % fall in the gross revenues of the Palestinian Authority (PA) contributed to the severe fiscal crisis. Since March 2006 and mainly due to Israel's decision not to transfer clearance revenues, the government has been unable to pay most of its salary commitments to PA employees. The overall deficit of the Palestinian Authority in 2007 is estimated at EUR 1,6 billion.

It is difficult to estimate the precise overall needs in 2008 at this stage, in particular given the uncertainties related to the release of the withheld tax and customs revenues by Israel and security restrictions which have major implications for economic activity. If the current pattern of developments continues, the Commission expects for 2008 the situation to remain stable in the West Bank, but probably worsen further in the Gaza Strip. Therefore, the needs of the Palestinian population are likely to remain high, particularly in Gaza. The Gaza Strip, controlled by Hamas, remains effectively closed for trade and passenger traffic, and with difficult access for humanitarian aid. Lasting physical and financial isolation cannot be excluded.

In view of the dire situation and enormous needs set out above and considering the large deficit of the PA, even in the unlikely event that Israel releases in full the Palestinian clearance revenues (estimated at EUR 600 million) which it has withheld for the main part, until now and regular monthly transfers resumed, pressure for more external assistance, in particular from the EU, as the largest donor to the Palestinians, will remain high.

The GAERC of 18 June 2007 expressed its full support for President Abbas and for his decision to install an emergency government for the Palestinian Territories under Prime Minister Fayyad. It also stated that the EU will resume normal relations with the PA immediately and that the EU “ will develop the conditions for urgent practical and financial assistance ” and deploy intensive efforts to build the institutions of the future Palestinian state.

Future interventions of the European Commission, in particular in the areas of institution building and economic development, will be assessed in coordination with the priorities identified by Mr Tony Blair, the newly appointed Quartet Representative as his mandate covers institutional governance needs of the Palestinian state and Palestinian economic development.

An increased support to the Palestinians in 2008 is envisaged for:

- Financial assistance to the Palestinian Authority, in coordination with other donors and international organisations. It will also include continuation of a scheme for payment of private sector arrears. These actions will aim at improving the fiscal stability of the Palestinian Authority, and thereby at strengthening its capacity to deliver services to the Palestinian population and enforce law and order, as well as to boost the Palestinian economy and employment in the territories.

- Specific projects implemented by United Nations Relief and Works Agency (UNRWA), in its field of operation, and in particular in Gaza. Current pace of developments in Gaza points to the fact that more people may be dependent on external assistance and the pressure on UNRWA is likely to increase. Further support could also address the refugee issue beyond immediate humanitarian needs, e.g. by supporting UNRWA’s reform process.

- Building of institutions of the Palestinian Authority. The PA government of Salam Fayyad offers an opportunity to resume institution building efforts. The target of our assistance is to strengthen the PA ministries and other Palestinian institutions in the areas of management of public finances, rule of law, public administration, trade, customs administration, as well as creating the enabling environment for private sector investment. Community intervention will be based on the Agenda for Action of the Governance Strategy Group chaired by the Commission and will take into account future work of the Quartet Representative Mr Blair.

- Development projects. The EU will also consider, as appropriate, funding for development projects. Infrastructure and other development projects are envisaged to boost the economic development in the areas of job creation, water treatment, rehabilitation of electricity distribution networks, solid waste treatment, rehabilitation of schools and health care centres, electricity, transport etc.

- In the 2008 PDB, the level of funding for co-operation with the Palestinian Authority was the best possible estimate of needs given the political uncertainties at the time.

The situation in Palestine is volatile and evolving every day as the recent events show. This makes the task of estimating needs in the medium term difficult. In 2007 and 2006, the amounts allocated initially for the Palestinians were far below the actual needs. The Commission had to call on other budget lines within the Community budget to cover the gap.

In 2006, the assistance to the Palestinians on “MEDA”, “Peace Agreement” and “UNRWA” lines reached EUR 222 million, a large part of which being allocated to the Temporary International Mechanism and UNRWA.

The situation in the occupied territories further worsened in 2007. There was an initial allocation of EUR 172 million on the ENPI Palestinian budget line (which corresponds to the “MEDA”, “Peace Agreement” and “UNRWA” budget lines under MEDA Regulation). On top of this the Commission has already had to request reinforcements of the line through transfers. In the first half of 2007 alone the Commission has already committed EUR 247 million (not counting assistance under other budget lines in the form of humanitarian aid and food security). A new financing decision for EUR 90 million has been adopted and a transfer of a corresponding amount has been approved by the Budgetary Authority in early July. Overall commitments of ENPI resources for the Palestinians will largely exceed EUR 400 million in 2007.

Even in an optimistic scenario where emergency assistance in 2008 would be scaled down and return to a more “normal” situation similar to the past (e.g. in 2002-2005), the amount needed would be well above the present PDB figure of EUR 158 million. The average annual allocation in 2002-2005 on the budget lines equivalent to the ENPI (MEDA, Peace Agreement and UNRWA) was EUR 211 million, i.e. EUR 53 million more than foreseen in the PDB

In light of the need to continue a realistic level of funding in 2008, taking account of the state of Palestinian public finances and the requests for assistance from the Palestinian government, the Commission proposes to increase the budget line 19 08 01 02 in 2008 by EUR 142 million to reach EUR 300 million.

Due to the nature of the projects which envisage a quick disbursement, total needs of payment credits are estimated at EUR 200 million in 2008, this means an increase of EUR 85 million on the top of the PDB figure.

Budget lines, legal bases and remarks

The additional amount needed (EUR 142 million in 2008) will be included under item 19 08 01 02 "European Neighbourhood and Partnership financial assistance to Palestine, the peace process and UNRWA" of title "External Relations", chapter 19 08 "European Neighbourhood policy and relations with Russia".

Item 19 08 01 02 European Neighbourhood and Partnership financial assistance to Palestine, the peace process and UNRWA

Figures

Appropriations PDB 2008 | Letter of amendment No 1 | New amount |

Commitments | Payments | Commitments | Payments | Commitments | Payments |

158 000 000 | 115 000 000 | 142 000 000 | 85 000 000 | 300 000 000 | 200000 000 |

As mentioned above, EUR 142 million are requested in order to satisfy increased needs for financial assistance to Palestinian Authority after the resumption of normal relations, especially focusing on direct financial assistance to the government and institution building of the future Palestinian states as declared during the GAERC meeting on 18 June 2007.

EFFECT ON THE HEADING 4 MARGIN AND POSSIBLE ADDITIONAL FUNDING SOURCES

The combined additional needs for heading 4 amount to EUR 262 million in commitments, of which EUR 120 million for Kosovo and EUR 142 million for Palestine. This leaves a margin under the ceiling of EUR 67,8 million for Heading 4. The additional payment appropriations are EUR 145 million, of which EUR 60 million for Kosovo and EUR 85 million for Palestine.

Beyond this, a reinforcement of the CFSP budget would have to be considered once the cost estimates for the ESDP mission in Kosovo will be confirmed by Council.

COMPETITION POLICY

As a prudential measure, it is proposed that a new budget article 03 03 02 Damage requests resulting from legal procedures against the Commission's decisions in the field of competition should be created, to take into account the possibility of budgetary implications stemming from rulings of the Court of Justice or the Court of First Instance. The line will be endowed with a token entry ("p.m.").

The present article is intended to cover any expenditure originated by damages awarded by the Court to claimants and resulting from legal proceedings against Commission's decisions in the field of competition.

As a reasonable estimate of the financial impact on the EU budget cannot be established beforehand, a token entry ("p.m.") appears in this article. If necessary, the Commission will propose to make available the appropriations related to actual needs by means of transfers or through a preliminary draft amending budget.

SUMMARY TABLE BY HEADING OF THE FINANCIAL FRAMEWORK

Financial framework Heading/subheading | 2008 Financial Framework | PDB 2008 | AL 1/2008 | PDB 2008 + AL No 1/2008 |

|CA |PA |CA |PA |CA |PA |CA |PA | | 1. SUSTAINABLE GROWTH [4] | | | | | | | | | | 1a. Competitiveness for growth and employment |9 847 000 000 | |10 270 429 000 |9 538 679 600 | | |10 270 429 000 |9 538 679 600 | |1b. Cohesion for growth and employment |46 889 000 000 | |46 877 941 445 |40 622 714 507 | | |46 877 941 445 |40 622 714 507 | | Total |56 736 000 000 | |57 148 370 445 |50 161 394 107 | | |57 148 370 445 |50 161 394 107 | | Margin | | |87 629 555 | | | |87 629 555 | | | 2. PRESERVATION AND MANAGEMENT OF NATURAL RESOURCES | | | | | | | | | | Of which market related expenditure and direct payments |46 217 000 000 | |42 498 990 000 |42 447 050 500 | | |42 498 990 000 |42 447 050 500 | | Total |58 800 000 000 | |56 275 831 496 |54 770 478 053 | | |56 275 831 496 |54 770 478 053 | | Margin | | |2 524 168 504 | | | |2 524 168 504 | | | 3. CITIZENSHIP, FREEDOM, SECURITY AND JUSTICE | | | | | | | | | | 3a. Freedom, Security and Justice |747 000 000 | |691 034 000 |496 446 000 | | |691 034 000 |496 446 000 | |3b. Citizenship |615 000 000 | |598 493 000 |694 383 006 | | |598 493 000 |694 383 006 | | Total |1 362 000 000 | |1 289 527 000 |1 190 829 006 | | |1 289 527 000 |1 190 829 006 | | Margin | | |72 473 000 | | | |72 473 000 | | | 4. EU AS A GLOBAL PARTNER[5] |7 002 000 000 | | 6 911 414 000 |7 916 743 400 |+262 000 000 |+ 145 000 000 |7 173 414 000 |8 061 743 400 | | Margin | | | 329 804 000 | | | | 67 804 000 | | | 5. ADMINISTRATION[6] |7 380 000 000 | |7 286 417 754 |7 286 977 754 | | |7 286 417 754 |7 286 977 754 | | Margin | | | 170 582 246 | | | | 170 582 246 | | | 6. COMPENSATION |207 000 000 | |206 636 292 |206 636 292 | | |206 636 292 |206 636 292 | | Margin | | |363 708 | | | |363 708 | | | TOTAL |131 487 000 000 |129 481 000 000 |129 118 196 987 |121 533 058 612 |+262 000 000 |+ 145 000 000 |129 380 196 987 |121 678 058 612 | | Margin | | |3 185 021 013 |8 264 159 388 | | |2 923 021 013 |8 119 159 388 | |

[1] OJ L 248, 16.9.2002, p. 1.

[2] OJ L 390, 30.12.2006, p.1.

[3] The Contact Group consists of the USA, Russia, the United Kingdom (UK), France, Germany and Italy.

[4] The margin for heading 1 (sub-heading 1a) does not take into account the appropriations related to the European Globalisation Adjustment Fund (EUR 500 million).

[5] The 2008 margin for Heading 4 does not take into account the appropriations related to the Emergency Aid Reserve (EUR 239,2 million).

[6] For calculating the margin under the ceiling for Heading 5, account is taken of footnote (1) of the financial framework 2007-2013 for an amount of EUR 77 million for the staff contributions to the pension scheme.