Explanatory Memorandum to COM(2010)815 - Financial rules applicable to the annual budget of the Union - Main contents
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This page contains a limited version of this dossier in the EU Monitor.
| dossier | COM(2010)815 - Financial rules applicable to the annual budget of the Union. |
|---|---|
| source | COM(2010)815  |
| date | 22-12-2010 |
The present proposal takes into account recent legislative and political developments regarding the Financial Regulation (hereinafter FR i).
1. For the sake of legal clarity and in order to facilitate the negotiations of the European Parliament and the Council (hereinafter 'the legislative authority'), it merges and replaces two earlier Commission proposals on the revision of the FR in a single text and under a standard legislative format (no recast). These two earlier proposals concerned on the one hand, the triennial revision of the Financial Regulation (COM(2010)260 final), which notably addressed the genuine necessity of revisiting budget delivery mechanisms in the current economic context and in view of the future policy challenges; and, on the other hand, the revision of the FR to align it with the Lisbon Treaty (COM(2010)71 final), including the obligations of Member States concerning internal control and audit and their resulting responsibilities in shared management. Therefore, these two earlier proposals (COM(2010)260 final) and (COM(2010)71 final) are withdrawn.
2. Additionally, it also incorporates the changes to the FR due to the adoption of the Regulation No 1081/2010 regarding the creation of the European External Action Service (hereinafter the EEAS) i.
Since the entry into force of the Lisbon Treaty, the FR is to be revised in accordance with the ordinary legislative procedure foreseen in Article 322 TFEU. In order to allow the legislative authority to have a global view of the proposed modifications, the Implementing Rules of the Financial Regulation (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 proposal does not contain any change of substance compared to the two earlier proposals mentioned in point 1 above. As a consequence, the working document of the Commission services concerning the Implementing Rules to the FR (SEC(2010)), which has been put forward by the Commission together with the triennial revision, remains entirely valid.
It should be recalled that the present revision of the FR occurs while preparation for the post-2013 programmes is also under way. It should therefore 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, maintain 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 sector-specific legal bases. For this to be effective, they should aim at an agreement on the package (Financial Regulation and Implementing Rules) so that it could enter into application on 1.1.2012, which is a very ambitious timetable given the inherent constraints of the ordinary legislative procedure.
Budget is one of the key instruments to deliver EU policies. In 2011 more than EUR 126 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 FR contains all the principles and rules which govern the implementation of the budget. It has a horizontal character, being applicable to all areas of expenditure and all revenue.
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.
For the first time in decades, the Lisbon Treaty (Treaty on the Functioning of the European Union - TFEU), which entered into force on December 1, 2009, foresees important changes concerning budgetary and financial issues. These changes should be translated in the Financial Regulation and concern in particular:
- the introduction of the multiannual financial framework in the Treaty, and its link to annual budgetary procedure: in this regard, as a consequence of the introduction of the multiannual financial framework in the TFEU, some provisions of the Interinstitutional Agreement (IIA) on budgetary discipline and sound financial management should be introduced in the Financial Regulation;
- the new annual budgetary procedure and the abolition of the distinction between compulsory and non-compulsory expenditure, which have an impact on the provisions relating to transfers and the provisional twelfths;
- the new provisions introduced in Article 317 TFEU concerning the control and audit obligations of the Member States in the implementation of the budget, together with Point 44 of the Interinstitutional Agreement (IIA) on budgetary discipline and sound financial management (See point 4.3.1. for more details).
The present proposal also allows for the streamlining of the Financial Regulation in line with the Lisbon Treaty, through both technical adaptations and the deletion of obsolete provisions.
Contents
- RESULTS OF CONSULTATIONS WITH THE INTERESTED PARTIES
- 1.1. PROCEDURE
- 1.2. CALENDAR
- OBJECTIVE OF THE PROPOSAL
- 2.1. Basis for undertaking the present revision
- 2.2. NEED FOR A REFORM
- 2.3. ALIGNMENT WITH THE LISBON TREATY
- DETAILED CONTENT OF THE PROPOSAL
- 4.1. SIMPLIFICATION
- 4.2. Obtain more results with limited resources (leveraging)
- 4.3.1. Reshaping the various methods of implementation
- 4.3.2. Introducing the concept of Tolerable Risk of Error (TRE)
The proposal builds on the results of the public consultation of 19 October 2009 i, which resulted in 235 contributions of all type of stakeholders implementing or receiving Union funds such as citizens, public and private operators or regional and national administrations. In particular, its aims at addressing the major concern expressed in this public consultation, i.e. the excessive administrative burden imposed on recipients of Union funds.
The Commission has furthermore built on the experience of its operational services, which have been involved in a wide internal consultation, and lessons learned from previous revisions.
The present revision has three main objectives.
In order to simplify grant procedures and to shift towards a more result-oriented approach, the Commission proposes to facilitate the use of lump sums and other instruments allowing the Commission to reasonably assess and fix ex ante the amount necessary for achieving a project. In future, grant would, to a larger extent, be paid on the basis of such an ex ante assessment, upon evidence that the project is achieved.
Furthermore, the Commission proposes to revise rules requiring interest on pre-financing. The current FR imposes disproportionate administrative burden on grant beneficiaries when obliging them to open a separate bank account so as to able to reimburse interest on generated on the funds received. In practise, the amounts concerned are often very low. The Commission proposes to reverse the current approach: as a principle, interest on pre-financing would not be due to the Union unless, the grant agreement, for reasons of proportionality (ex: very large sums involved) and sound financial management, foresees that interest has to be invested in the project or recovered.
Regarding procurement rules the provisions related to bank guarantees to be provided by the contractor and the procedures for the award of small contracts are modified so as to achieve simplification.
The Commission sees the need to increase the leverage of Union funds against the background of two political developments: the Political Guidelines that Commission President Barroso adopted in 2009 for his second mandate, which proposed to maximise investment and devise innovative financial instruments, and the budgetary constraints both at national and Union levels, which will impact the negotiations on the future Multiannual financial framework (post 2013).
A number of instruments are proposed to leverage Union funds, including:
- The pooling of funds in external relations: together with the revised rules on external assigned revenue, the creation of EU Trust funds will allow pooling of funds from multiple sources (Member States, Union Budget, third countries);
- Synergy with EIB own funds: the proposal seeks to foster a systematic use of mixed Instruments (EU funds/EIB funds for risk capital, guarantee funds, long terms loans), which take into account the privileged partner status of the EIB under the EU Treaty, and its contribution to the reinforcement of the internal market;
- Synergy with private funds and public-private partnerships (PPPs) : the Commission proposes to facilitate the creation of PPPs, either via a simple delegation of the Commission to a private entity that has successfully passed an ex ante check (capacity to manage public funds in accordance with standards of sound financial management), or via a basic act entrusting a EU public body with the implementation of a PPP, within a 'light' framework regulation;
- Leveraging effect of prizes in the R&D sector : learning from successful experience abroad, the Commission proposes to clarify rules for the award prizes which could, in the future, be more extensively used to induce private R&D investments into R&D.
4.3. Increase accountability: responsibilities of implementing partners and Tolerable risk of error
The proposal seeks to simplify the different methods of implementation (centralised direct/indirect, shared, decentralised and joint management), to render the rules applicable to the different methods more coherent and to strengthen the accountability of the implementing partners so as to support the Commission in discharging its responsibility under the Treaty.
The Commission proposes a set of common principles that shall apply in all cases of indirect managed, i.e. whenever the Commission entrusts third parties with the implementation of the Union budget. These principles (which may be complemented by sector specific-rules) are:
- Ex ante verification of the capacity to manage EU funds, taking due account of the specific risks of the actions concerned (flexibility and proportionality);
- Management, control and audit obligations (sound financial management);
- A single chain of accountability, established notably through the annual management declarations of assurance to be signed by the Commission implementing partners and a regular clearance of the accounts.
Member States are the most important partner of the Commission and have a crucial role to play in the implementation of the budget (Article 317 i TFEU). The current FR and the Commission proposal take this into account by providing for specific rules, reflecting the common principles mentioned.
The proposal for shared management builds on what already exists and has proved to function well in the area of shared management. On the basis of Article 317 TFEU, requiring the FR to lay down the control and audit obligations of the Member States in the implementation of the budget and the resulting responsibilities, the proposal defines the key functions which management and control systems under shared management have to perform. The Member States have considerable flexibility in arranging their existing administrative structures around these functions.
Until now the benchmark for measuring how the Commission has managed risk has been the standard 2% materiality level applied by the Court of Auditors across the whole budget, irrespective of the risks and the cost of controls entailed in each policy area. In order to allow a more adequate yardstick for measuring the Commission's management of risk, the Commission proposes that a TRE is decided by the Council and the European Parliament for each policy area following a Commission proposal assessing the cost and benefits of controls.
A TRE defined for each policy area would therefore be a useful tool at the disposal of the Commission, to be used ex-ante, in order to adjust the way it manages programmes taking into account the risks involved. It does not interfere with control arrangements or corrective measures which are applied where errors are detected. Furthermore, the TRE would not entail differentiated levels of tolerable error between Member States but would be applicable to a policy area at Union level.