BriefingEU Legislation in ProgressMay 2017

EPRS | European Parliamentary Research ServiceAuthor: Rafał MańkoMembers' Research Service

ENPE 603.892

Revision of EU financial rulesOVERVIEWIn September 2016, the Commission tabled a proposal for a new Financial Regulationwhich would replace the current one (together with its Rules of Application), as wellas amend 14 other sectoral regulations and a decision each also containing financialrules. The Commission justifies its proposal by the need to simplify EU financial rulesand make them more flexible. The proposal was submitted within the framework ofthe Multiannual Financial Framework (MFF) mid-term revision package. However, theCourt of Auditors, in its Opinion No 1/2017, identified a number of shortcomings inthe Commission proposal, especially with regard to its own financial governancestandards.

Proposal for a Regulation of the European Parliament and of the Council on the financialrules applicable to the general budget of the Union and amending Regulation (EC)No 2012/2002, Regulations (EU) No 1296/2013, (EU) No 1301/2013, (EU) No 1303/2013, EUNo 1304/2013, (EU) No 1305/2013, (EU) No 1306/2013, (EU) No 1307/2013, (EU)No 1308/2013, (EU) No 1309/2013, (EU) No 1316/2013, (EU) No 223/2014,(EU)No 283/2014, (EU) No 652/2014 of the European Parliament and of the Council andDecision No 541/2014/EU of the European Parliament and of the Council

Committees responsible:

Rapporteurs:

Shadow rapporteurs:

Budget (BUDG) and Budgetary Control(CONT) – jointly under Rule 55Ingeborg Gräßle (EPP, Germany)Richard Ashworth (ECR, UK)Petri Sarvamaa (EPP, Finland); InésAyala Sender (S&D, Spain) / VladimírMaňka (S&D, Slovakia); Nedzhmi Ali(ALDE, Bulgaria); Liadh Ní Riada(GUE/NGL, Ireland); Bart Staes(Greens/EFA, Belgium) / Indrek Tarand(Greens/EFA, Estonia); Marco Valli(EFD, Italy)

COM(2016) 60514.9.20162016/0282(COD)Ordinary legislativeprocedure (COD)(Parliament andCouncil on equalfooting – formerly‘co-decision’)

Next steps expected: Vote on draft report in committee

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IntroductionOn 14 September 2016,1 the Commission tabled a proposal for a new Financial Regulationwhich would replace the current version (together with its Rules of Application), as wellamend 14 other sectoral regulations and one decision2 also containing financial rules,jointly governing the establishment, spending and control of the EU budget and EU funds.As the European Commission ('EC') points out, users of EU funds have complained aboutthe increasing complexity and heterogeneity of EU financial rules, and it considers thatthere is a need to make these simpler and more flexible, to allow for a greater capacityof adaptation and responsiveness The last major reform of EU financial rules was enactedin 2012 (2010/0395(COD)) and was triggered by the requirement of a triennial revision,stipulated in the 2002 Financial Regulation, and by the need to adapt EU financial rulesto the requirements of the Lisbon Treaty. In 2014, two new directives on publicprocurement were adopted (2014/24 and 2014/23). As a result, the EC put forward aproposal to amend the Financial Regulation (2014/0180(COD)). The revision is applicablefrom 1 January 2016. The current proposal for revising the EU financial rules is part of theMultiannual Financial Framework (MFF) mid-term revision package, as well as featuringin the EU budget focused on results initiative.

Currently, the legal basis for the Financial Regulation is provided for in Article 322 TFEU. Prior tothe Treaty of Lisbon, its equivalent (Article 279 TEC) provided that the Financial Regulation isadopted unanimously by the Council, upon a proposal from the EC and after consulting the EPand obtaining an opinion of the European Court of Auditors (ECA). Article 322 TFEU clearly statesthat Financial Regulation is adopted in ordinary legislative procedure, i.e. jointly by the Parliamentand Council, after consulting the ECA.

Existing situationAt present, the body of EU financial rules consists of Regulation 966/2012 on the financialrules applicable to the general budget of the Union (the Financial Regulation), which setsout the operating principles and basic rules governing the EU budget, including the ruleson the budget principles, establishment, structure, implementation and audit. It issupplemented by Delegated Regulation No 1268/2012 of 29 October 2012 on the rulesof application of the Financial Regulation (Rules of Application) which contains detailedtechnical rules implementing the Financial Regulation. Article 211 of the FinancialRegulation states that it must be reviewed whenever necessary, but in any case no laterthan two years before the end of the first post-2013 multiannual financial framework.

Parliament's starting positionIn its resolution of 26 October 2016 on the mid-term revision of the MFF, the Parliamentindicated that it 'fully shares the Commission's intention of simplifying the financial rulesand considers this element to be an important part of the MFF mid-term revision' addingthat the proposal 'should aim at improving and rationalising the implementationenvironment for beneficiaries'. Parliament also committed itself 'to work towards asuccessful outcome in this spirit, in an appropriate timeframe'.

Preparation of the proposalA public consultation on the revision of the Financial Regulation was carried out in thespring of 2016. A total of 111 contributions were received, which demonstrated theoverall support for simplification and flexibility. With respect to simplifying EU grant rules,

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stakeholders continued to prefer the reimbursement of actual costs, but do not opposesimplified reimbursement through unit costs, lump sums or flat rates or reimbursementon the basis of pre-defined results, as long as those are not compulsory. The EC publisheda summary of the outcome of the consultation. An awareness-raising event took place inApril 2016 to allow stakeholders to voice their concerns and suggestions. However, theCommission did not perform an impact assessment, when, according to the Court ofAuditors, this should have been the case (see below).

The changes the proposal would bringMain aims of the proposal, as explained by the European CommissionThe EC presents its proposal as being aimed at increasing the simplification and flexibilityof EU financial rules. The proposal forms an integral part of the mid-term revision of themultiannual financial framework (MFF) 2014-2020. The proposal seeks to replace theexisting Financial Regulation (966/2012) and its implementing rules with a single text, aswell as to modify the sectoral acts accordingly.

Whilst today EU financial rules are split among the Financial Regulation, the delegated regulationcontaining the Rules of Application and sectoral regulations, the EC proposes to integrate the firsttwo instruments. Key provisions of the Rules of Application would be moved into the FinancialRegulation, while elements judged by the EC to be 'less important' would be regulated at the levelof EC internal rules or guidelines. However, the sectoral financial rules would remain in place.

Simplification for recipients of EU fundsSimplified forms of EU contributionThe proposal puts simplified forms of EU contribution on an equal footing with financingbased on reimbursement of eligible costs. The EC argues that this will alleviate theadministrative burden, reinforce certainty on the reimbursed amount to beneficiariesand stimulate the uptake of simplified forms of grants and their combinations.

Lump sums, unit costs and flat ratesThe proposal empowers authorising officers to approve simplified forms of payments(lump sums, unit costs and flat rates), regardless of the amount involved. According tothe rules currently in force, if an amount above €60 000 per grant is involved, the Collegeof Commissioners is required to take the decision. The EC justifies its proposal by pointingout that such decisions have a technical content (involving, inter alia, calculationmethodologies and overview of data). It also argues that the current system ofauthorisation is lengthy and burdensome.

Simplifying and clarifying the content of grant applicationsThe EC proposes to scrap the obligation to provide information demonstrating theapplicants' financial and operational capacity, if there is no verification of that capacity(e.g. in the case of public bodies), as well as to align the obligation to provide an auditreport with the applicable EU and national law in the area of accounting.

Removing the no-profit principle for grant recipientsCurrently, a no-profit principle is in place, whereby EU grants may not have the purposeor effect of producing a profit, and if such profit is generated by the recipient nonetheless,the EC may recover such profit from the beneficiary. The proposal would allow grantrecipients to make a profit on EU funds. The EC argues that revenue-generating projectsare in principle supported through financial instruments, and that for projects that are inprinciple not revenue-generating, the no-profit principle creates disincentives:beneficiaries are not encouraged to ensure that projects are sustainable or profitable.

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Unpaid volunteer work as eligible costsThe proposal intends to to allow recipients of EU funding to present the unpaid work ofvolunteers as costs incurred. The EC argues that this is necessary to facilitate theparticipation of small organisations in implementing EU policies.

Exemptions from the principle of non-cumulative award and double fundingThe EC proposes to exempt grants to natural persons for study, research, training, oreducational or direct support to unemployed persons or refugees, from the principle ofnon-cumulative award and double funding. The EC justifies this proposal by pointing outthat 'traditionally their value is quite low'.

Determination of the value of contributions in kind and simplified grants awardSimplifying the determination of the value of contributions in kind is also proposed. TheEC argues that these contributions do not constitute eligible costs and therefore theirexact value is irrelevant. The proposal extends the possibility to award direct grants toentities mandated by the Member States to the cases of a factual or legal monopoly orwhere direct beneficiaries have been chosen for their technical competencies, highdegree of specialisation, or administrative powers. The EC argues that such a reform willreduce administrative burdens and accelerate grant awards.

Simplification of record keepingThe EC proposes to introduce a uniform, five year record keeping period (and a shorter,three year period for funding below €60 000). This would also apply in cases of indirectimplementation. The proposal also envisages that, where grants are expressed only as anabsolute value (as opposed to a percentage of eligible costs), the eligibility of costs shouldbe verified at the latest at the time of the payment of the balance. The proposal allowsthe use of a simplified ('notional') approach.

Single set of rules for hybrid actions and combined measures or instrumentsThe proposal suggests that a single set of rules is applicable when methods ofimplementation or budget implementation instruments are combined. The same wouldapply if the EC is working with 'trusted partners', i.e. entities with which it has a moretrusted relationship based on an ex-ante assessment or on the requirement to usespecific procedures. The changes to the sectoral regulations also include the possibilityto combine the European Structural and Investment Funds (ESIF) with a European Fundfor Strategic Investments (EFSI) supported instrument.

Single regulatory framework for financial operationsThe proposal envisages a single regulatory framework for the different forms of EUfinancial operations. Furthermore, it suggests standardising the treatment of internallyassigned revenue generated by financial operations.

Creation of a common provision fundThe proposal envisages creating a common provisioning fund, and introducing aneffective provisioning rate. Global profits or losses from the investment of the resourceswould be allocated proportionately among the respective financial instruments,budgetary guarantees or financial assistance. The EC would keep a minimum amount ofresources of the fund in cash, or cash equivalents, in accordance with prudential rulesand the forecasts for payments provided by the authorising officers of the financialinstruments, budgetary guarantees, or financial assistance. The EC could enter intorepurchase agreements, with the assets of the common provisioning fund as collateral,to make payments out of the fund when this procedure is reasonably expected to be

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more beneficial for the budget of the Union than the divestment of assets within thetimeframe of the payment request.

Budgetary flexibility'Flexibility cushion'The proposal envisages creation of a 'flexibility cushion' for certain external actioninstruments, to allow the EC to carry forward up to 10 % of the annual appropriations ofthree budgetary instruments (Instrument for Pre-accession Assistance, the EuropeanNeighbourhood Instrument, and the financing instrument for development cooperation)to the following year. The EC justifies its proposal by pointing to the fact that the carriedforward money could actually be used to respond to unforeseen situations.

Relaxing rules concerning 'special instruments'The proposal would relax the rules concerning 'special instruments'. This would lead toincreased flexibility for autonomous transfers by the EC by enlarging the current scope,i.e. by also allowing transfers of operational expenditure between different titles if theyare covered by the same basic act, including support chapters, and from theadministrative support lines to the corresponding operational lines. Another aspect is thesimpler mobilisation of the EU Solidarity Fund and the European Globalisation Fund.

Other aspectsThe proposal would give the Member States a new option of transferring resourcesallocated to them under shared management to instruments managed at Union level.Finally, the proposal envisages changing the rules on carry overs and assigned revenue,to increase the funds available and the EC's scope to decide where and how they arespent, as well as increasing the EC's decision-making powers, in general, with regard tomaking budget transfers and moving funds between years.

Trust fundsThe proposal would enable trust funds to operate within internal policy instruments. Withregard to emergency, post-emergency or thematic actions, the EC would be allowed tocreate, after informing both the European Parliament and the Council, trust funds underan agreement concluded with other donors. The objectives of the trust funds would bedefined in its respective constitutive act. The EC decision establishing the trust fundwould have to include the following elements: description of the fund's objectives,justification for its creation, indication of its duration, preliminary agreements with otherdonors. The EP and the Council would have the right to request the EC to discontinueappropriations for a given trust fund or to revise the constitutive act. In such an event,any remaining funds would be returned on a pro rata basis to the budget as generalrevenue and to the contributing Member States and other donors.

Assigned revenue

Under the principle of universality, budget revenue may not be assigned to specific items ofexpenditure, and revenue and expenditure may not be set off against each other. As a result, therevenue is used without distinction to finance all expenditure. By way of exception, the currentFinancial Regulation allows for certain types of revenues to be assigned. As a result, they give riseto new payment appropriations in the same budget line and can be carried forward (for one year).

The proposal seeks to expand the use of reflows from assigned revenue and to allow theiruse to create payment appropriations in different budget lines. Revenue and repaymentsarising from financial operations would also be included under internal assignedrevenues, but the EC proposes that such revenue should be used for the same financial

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instrument or budgetary guarantee during the entire period of its implementation and atthe end of this period any outstanding amount from the EU budget would return there.

Payment based on conditions fulfilled or results achievedThe EC proposes to introduce a novel form of financing based on conditions fulfilled orresults achieved without requiring statements indicating the actual costs. This wouldapply for programmes under direct, indirect and shared management. The solution wouldbe additional to the reimbursement of costs and the simplified cost options alreadyavailable. Under the proposed scheme, the achievement of concretely specified outputswould become the default condition, triggering the payment of simplified forms of grantsawarded under direct and indirect implementation. Likewise, controls and checks onbeneficiaries related to simplified grant forms would also become output-focused. Inconsequence, ex-post checks would no longer challenge payments when authorisingofficer assess compliance ex ante, and allow recourse to usual cost accounting practicesin their decision.

The single lump sum would become a new option for financing simplified forms of grants underdirect and indirect implementation based on an estimated budget covering all eligible costsassessed ex-ante for compliance with the principles of economy, efficiency and effectiveness.European political parties would also benefit from the possibility of using forms of financing notlinked to the costs of the relevant operations based on the fulfilment of certain conditions ex anteor on achievement of results.

Performance frameworkThe EC proposes to overhaul the rules on sound financial management by introducing thenew concept of 'performance', specifying that appropriations must focus on performanceand therefore objectives should be established ex-ante, progress in the achievement ofobjectives should be monitored with performance indicators, and achievements shouldbe reported upon through the programme statements, as well as stipulating thatprogrammes and activities which entail significant spending must be evaluated.

Reporting and auditsThe rules on reporting would be simplified and consolidated under the proposal.Reporting obligations would be focused around two key moments: reports accompanyingthe draft budget (all reporting on EU-level financial instruments would be merged into asingle document accompanying the draft budget) and reports submitted as part of thedischarge process (the integrated financial reporting package).

The proposal would allow reliance on previous audits, if conducted by independentauditors, based on internationally accepted standards, providing reasonable assuranceand performed on the financial statements and reports setting out the use of the EUcontribution. The EC justifies this by the need to avoid multiple audits of the entitiesreceiving EU contributions, in particular international organisations which are audited byindependent external auditors.

Corporate sponsoring of the EU institutionsThe proposal envisages the possibility of private corporations sponsoring the EUinstitutions through in-kind support for events or activities. The corporation could act inpursuit of its own promotion, or for reasons of 'corporate social responsibility'.

Rules concerning farmersThe EC proposes to allow Member States to reduce the criteria applicants may use todemonstrate active farmer status, or to stop applying provisions requiring beneficiaries

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to be 'active farmers' as from 2018. It also proposes to remove the 90 hectare limit onpayment entitlements for young farmers.

Stakeholders' viewsThe European Association of Craft, Small and Medium-sized Enterprises (UEAPME), theSME umbrella organisation, pointed out that reporting requirements should be maximallysimplified, preserving the principle of proportionality.

The European Federation of Guarantee Institutions (AECM) indicated that it fully supportsthe EC's objectives, namely a simpler regulatory and financial set up, additional synergiesand flexibility for budget implementation and a clear accountability framework which arein line with the practical experience gained by AECM's members in using financialinstruments. AECM added that the main reason why some of its members do not workwith EU supported programmes is the existing reporting requirements, which theyconsider too extensive.

The European Association of Research & Technology Organisations (EARTO) expressedthe view that the increased use of financial instruments such as loans can only be acomplement to grants in the research and innovation (R&I) sector. Likewise, lump-sumflat rates and unit costs should not be generalised for R&I programmes which rely onactual costs. EARTO welcomed the willingness to simplify auditing and reporting rules fordirect beneficiaries and authorities under shared management, and sees a need to focuson reaching better synergies between funds as a means to create more impact from EUR&I funds. EARTO welcomed more flexibility in answering crises using the trust funds, butwarned that this should not entail situations in which existing and well-functioning fundsare scrapped and replaced with a new fund with different purposes.

The European University Association (EUA) contends that the revision of the FinancialRegulation should be guided by a number of key objectives, crucial from the point of viewof European universities, taking account of the specificities of sectors and beneficiaries,including the balancing result-focused budgeting with cost-based funding, speeding upadministrative processes, but leaving adequate time for beneficiaries, providing differentoptions for reimbursement, improving the compatibility of different funding instrumentsat EU and national levels as well as developing a trust-based approach towardsbeneficiaries. EUA is against the use of financial instruments to fund academic researchand education (which should remain grant-financed).

Advisory committeesEuropean Economic and Social CommitteeOn 14 December 2016, the European Economic and Social Committee (EESC) adopted itsopinion on the proposal (rapporteur: Stefano Palmieri, Italy). The EESC agreed with theCommission's objective of introducing simpler, more flexible general and sectoralfinancial rules, and therefore particularly welcomes the streamlining of administrativerequirements applying to beneficiaries of EU resources, as well as of controls, auditingand reporting. It also expressed support for incentives that can promote responsible andefficient spending, as well as putting in place an adequate and rapid system that couldmonitor objectives in the various sectors.

Committee of the RegionsFor its part, the Committee of the Regions (CoR) is expected to adopt an opinion duringits May plenary session (rapporteur: Michiel Rijsberman, ALDE, Netherlands). The CoRindicates that as the guardian of the interests of local and regional authorities it will

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evaluate whether the legislative proposal has taken on board the views of European Citiesand Regions and will possibly suggest amendments.

National parliamentsA number of national parliaments have scrutinised the proposal (Austria, Czechia,Germany, Ireland, Polish Senat), without raising any subsidiarity objections. The GermanBundesrat entered into political dialogue, indicating inter alia that simplifications offinancial rules must not jeopardise proper budget management. Other parliaments arestill scrutinising the proposal (Finland, Polish Sejmi, Slovakia, Sweden, UK).

Legislative processOpinion of the European Court of AuditorsOn 26 January 2017, the European Court of Auditors (ECA) adopted its OpinionNo 1/2017, pursuant to Article 322 TFEU concerning the EC proposal. On a formal note,the ECA considers that the EC should have performed an impact assessment beforepublishing the proposal, as this is – in their view – required on the basis of theInterinstitutional Agreement on Better Law-Making. However, the proposal waspresented without having performed such an impact assessment. To avoid similarsituations in the future, the Auditors proposed to introduce a formal requirement to carryout impact assessments for legislative and non-legislative initiatives, delegated acts andimplementing measures expected to have a significant economic, environmental or socialimpact, in the Financial Regulation.

Issues not addressed by the European CommissionThe ECA drew attention to a number of 'key points' not addressed in the proposal. Firstof all, with regard to the single accountability report, the ECA pointed out that the ECdoes not apply any 'recognised governance framework'. The ECA argues that where highlevels of irregularity exist, best practice requires both discussion of the risk andquantification of the level and likely impact of possible errors; the ECA thereforerecommends introducing a requirement that the EC publishes, as part of its annualaccounts or accompanying information, an estimate of the level of error based onconsistent methodology. According to the ECA, the EC's existing Audit ProgressCommittee diverges from best practices in the public sector because only a small minorityof its members are actually independent and its powers do not extend to financial report,irregularities and risk management, as was suggested in the ECA special report 27/2016.ECA itself would like to gain direct access to the EC's data, and to be able to analyse it atthe ECA's own premises, using the ECA's own tools. Finally, ECA would modify the auditingof EU agencies and public-private partnerships: in addition to the accounts, the externalauditor would also verify the legality and regularity of underlying transactions.

Abolition of the no-profit principle and use of unremunerated work of volunteersThe ECA does not support the idea of removing the 'no-profit' principle (whereby EUgrants 'shall not have the purpose or effect of producing a profit', and in such case, theEC would recover the profit from the beneficiary). Likewise, ECA is against the EC'sproposal whereby a beneficiary would be allowed to satisfy the requirement for co-financing solely by declaring the 'value' of the work of unremunerated volunteers.

Single set of rules applicable to hybrid actionsAs regards a single set of rules applied to hybrid actions or combination of measures andinstrument, the ECA believes that adequate safeguards are necessary to address the risks

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linked to combining funding sources (e.g. double funding, crowding out of privateinvestments, which will need to be managed).

Financial interventionsThe ECA recommends setting out the basis for the operation of the common provisioningfund and calculation of the effective provisioning rate, accepting the proposal onpayment of performance-based feeds, accepting the introduction of ex-ante evaluationsconcerning financial operations, as well as clarifying the period covered and theinformation included in the annual reporting document.

Budgetary flexibilityThe ECA pointed out that the EC did not quantify the likely budgetary implications of itsproposal. Therefore, the Court recommends rejecting the changes regarding the'flexibility cushion', the 'negative reserve' and 'carry overs', as they would bring aboutmore complexity.

Trust fundsIn line with its earlier opinion 6/2010, in which the ECA raised issues of administration,cost, audit and accountability with regard to the creation of trust funds for externalactions, the ECA pointed out that it is premature to consider the operation of the threeexisting trust funds to be success, which makes the ECA sceptical about the EC's proposal.

Internal assigned revenueWith regard to 'assigned revenue' (an exception from the principle of universality,whereby budget revenue may not be assigned to specific items of expenditure), the ECArecommends that there should be no expansion in the use of internal assigned revenueand that all internally generated revenue should be accounted for as general revenue(i.e. in compliance with the principle of universality mentioned above); in the Court'sopinion, this would actually be a 'significant simplification' and would allow budgetaryauthorities to decide how to spend that money in line with current priorities.

Conditions-based and results-based paymentThe ECA Annual Reports (2014, 2015) state that reimbursement spending is affected bymuch higher levels of error than entitlement-based spending, where payment is basedon meeting certain conditions; therefore, the ECA recommends that payments based onconditions achieved become the preferred option across the budget.

Performance framework and evaluationsThe ECA points out that the concept of 'performance' is not defined by the proposal,which gives rise to ambiguity, especially with regard to the relation of that concept to theconcept of 'sound financial management'. Furthermore, another flaw identified by theECA is that the terminology used on evaluation does not fully follow the 2016Interinstitutional Agreement on Better Law Making, nor the Better Regulation Guidelines.The ECA also questioned whether the reform of rules on evaluations, by making themmore flexible, is indeed appropriate.

Streamlining reporting – towards a complete reporting packageThe ECA considers regulating annual activity reports (AAR) in the Financial Regulationunnecessary, as they are internal EC documents. The ECA recommends that provisionalannual reports should be accompanied by certain specific information. Consolidatedaccounts should contain a long-term cash flow forecast, following internationalrecommended practices, as well as consolidated statements of the income andexpenditure of agencies, joint-undertaking and trust funds. The EC should also present a

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report based on Article 318 TFEU separately, which would explain the extent and findingsof evaluations across EU spending. Finally, the ECA suggests that the EC should present,each September, a combined report.

Audit arrangementsThe ECA recommends that payments based on results will apply to all organisationsimplementing EU funds. Furthermore, cross-reliance (on previous audits) should only bea possible, and not a mandatory, solution. Finally, the ECA would prefer the ECconsolidates all information concerning recoveries and corrections in one document,presented to the ECA together with the provisional accounts.

European Court of Auditors annual reportsAs regards the placing of the institutions' replies within ECA reports, the ECA takes theview that it is 'intrinsic to the administrative autonomy of the ECA' to decide on how topresent such reports in accordance with international standards on auditing. Specifically,the ECA considers that publishing the replies of each institution next to ECA observations'detracts from the fluency and readability of the text'. Therefore, they propose publishingthe replies for the annual report at the end of the text for each chapter. This would alsoalign the practice on annual reports with current practice for special reports.

Corporate sponsoring of the EU institutionsThe ECA considers that the legal framework on corporate sponsoring of the EUinstitutions needs to be reinforced and additional safeguards are therefore necessary.The ECA thinks that it is 'unlikely' that corporate sponsoring of the EU could be a cost-effective mechanism and does not support the EC's proposals in that regard. Itcontemplates three possible safeguards (limitation of corporate sponsoring to amaximum ceiling; award of sponsorship contracts following a call for interests; the dutyof EU institutions and bodies to report the list of their sponsors, including the value ofmoney received from a sponsor and the contractual conditions).

Rules on public procurementThe ECA highlighted its Special Report No 17/2016 in which it pointed out that the currentrules on public procurement are divided between the Financial Regulation and Rules ofApplication, which makes them difficult to understand. Furthermore, the ECA also notedits Opinion No 1/2015, which underscores that, under Article 290 TFEU only the non-essential elements of EU financial rules may be regulated at the level of the Rules ofApplication, which are a delegated act. In conclusion, regarding Special ReportNo 17/2016, the ECA calls for a single legal act on public procurement, encouraging SMEparticipation, as well as including rules on market prospection prior to building contracts,and on language regime for procurement procedures.3

Rules on recovery of undue paymentsThe ECA pointed to its Opinion 1/2012 according to which the change proposed by theEC creates a risk that the Member States would 'manage' the reporting and writing-offprocesses in order to avoid financial charges to national budgets. In conclusion, the ECAproposes that the Commission could lay down a de minimis threshold to avoid the needto follow-up on small debts, minimising the administrative burden.

Rules on common agricultural policy payments: active and young farmersThe ECA recalled its Opinion 1/2012 due to excessive administrative burdens both for theauthorities and farmers. However, in the view of the ECA, the reform proposed by the ECgoes too far, as it would completely end application of provisions requiring the

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beneficiaries to be 'active farmers'. As regards young farmers, the ECA is critical of theEC's proposal to lift the ceiling of 90 ha, due to the fact that a larger farm is no longer ina set-up or structural adjustment process.

Parliamentary considerationIn November 2016, the proposal was referred to the Budget Committee, with theBudgetary Control Committee consulted for opinion, although from January 2017 bothcommittees are jointly responsible (Rule 55 EP Rules of Procedure). Opinions will besought from five committees, consulted under Rule 54 and enjoying a special status asprovided for in a memorandum of understanding (the Committees on Agriculture & RuralDevelopment (AGRI), Regional Development (REGI), Employment & Social Affairs (EMPL),Transport (TRAN), and Industry (ITRE)), as well as from other four committees deliveringan opinion (the Committees on Fisheries (PECH), Civil Liberties, Justice & Home Affairs(LIBE), Foreign Affairs (AFET), and Development (DEVE)).

Co-rapporteurs' draft reportOn 10 March 2017, the co-rapporteurs presented a draft report. They share the broadobjectives put forward by the Commission, noting that some of the proposed changesmay lead to simplification in managing and receiving EU funds. However, at the sametime they consider that the Commission’s proposals are very ambitious in comparison tothe tight deadlines. They agree with the Court of Auditors that the proposal should havebeen preceded by an impact assessment. Whilst they support the Commission’ssimplification agenda with regard to recipients of EU funds in general, they nonethelessnote that many rules in the proposal are ambiguous and need to be rephrased to makethem more precise. Furthermore, they consider that the Commission has used the ideaof simplification to justify abandoning principles that have governed the EU budgetprocess for a long period, especially the no-profit principle. The draft report is scepticalabout the proposal to allow the creation of internal trust funds before any conclusionscould be drawn from their use in external policies. Whilst the draft report welcomes anumber of the Commission’s proposed measures on flexibility, it notes that such rulesshould not infringe upon long-established principles; instead, a balance ought to be struckbetween flexibility, sound financial management and the rights of the budgetaryauthority. The draft report also underlines that the goal of a 'budget focused on results'is not fully achieved in the Commission's proposal, although there are some steps in theright direction. The rapporteurs support the Commission's aim to increase cross-relianceon audits, nonetheless this principle should not be made mandatory. Finally, the draftreport makes a number of detailed proposals concerning reporting requirements.

CouncilWithin the Council, the Slovak Presidency entrusted the proposal to five Council workingparties: the Budget Committee (COMBUD), the Working Party on Structural Measures(SMWP), the Working Party on Social Questions (SQWP), the Special Committee onAgriculture (SCA), and the Working Party Transport - Intermodal Questions and Networks(INTERMODAL). Member States have asked for an impact assessment of the entireproposal and for concrete examples or case studies to be provided by the Commission inorder to justify the proposed changes. They generally welcomed the proposal's aim tosimplify budget management, create some flexibility and focus on results. TheCommission insisted on the need for speedy adoption to allow entry into force on1 January 2018 and has stressed that the co-legislators should avoid tabling additionalamendments beyond the original legislative proposal.

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On 29 March 2017, a compromise text on agricultural provisions was put forward by thePresidency which is the basis for further work in the Council in this area. It includes almostall changes proposed by the Commission as most delegations agree that these wouldcontribute to simplification. Almost all delegations have rejected the Commission'sproposal to eliminated the so-called '50/50' rule for the sharing of non-recoverableirregular payments. Key outstanding issues relating to rules on the CAP include directpayments to farmers, active farmer status and young farmer status.

EP supporting analysisA. D'Alfonso, 2014-2020 Multiannual Financial Framework (MFF): Mid-term revision, EPRSlegislation in progress briefing (2nd ed. 2017).A. D'Alfonso, B. Immenkamp, Trust funds for external action, EPRS briefing (2015).A. D'Alfonso, M. Sapała, Payments backlog in recent EU budgets, EPRS briefing (2015).M. Sapała, Mid-term review/revision of the MFF, EPRS briefing (2016).

Other sourcesFinancial rules applicable to the general budget of the Union: simplification, European Parliament,Legislative Observatory (OEIL)1 Although submitted by the Commission on 14 September 2016, the proposal was only made available in all official

languages two months later (on 14 November 2016), and only the latter date is considered as official reception bythe Parliament.

2 Regulations: 2012/2002 establishing the European Union Solidarity Fund, 1296/2013 on an EU programme foremployment and social innovation, 1301/2013 on the European Regional Development Fund, 1303/2013 on theEuropean Regional Development Fund, the European Social Fund, the Cohesion Fund, the European Agricultural Fundfor Rural Development and the European Maritime and Fisheries Fund, 1304/2013 on the European Social Fund,1305/2013 on the European Agricultural Fund for Rural Development, 1306/2013 on the financing, management andmonitoring of the CAP, 1307/2013 on direct payments to farmers, 1308/2013 on a common organisation ofagricultural markets, 1309/2013 on the European Globalisation Adjustment Fund, 1316/2013 establishing theConnecting Europe Facility, 223/2014 on the Fund for European Aid to the Most Deprived, 283/2014 on guidelinesfor trans-European networks, 652/2014 on the management of expenditure relating to the food chain, animal healthand animal welfare, and Decision 541/2014 on the Framework for Space Surveillance and Tracking Support.

3 The Commission proposal moves rules which used to be in the Rules of Application to Annex I to the proposedregulation. That annex can, however, be modified by a delegated act. The ECA would rather see all rules on publicprocurement in the main text of the regulation (which can be modified only by legislative act). It also calls for suchprovisions to be placed in one single location within the legislative act, instead of being scattered.

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