Analytical paper on the possibility to create a limited ring-fenced reserve fund for partially self-financed agencies 1
1. Summary and conclusions This paper provides an analysis of the possibility to create a limited ring-fenced reserve fund for partially self-financed agencies, as a follow-up to point 39 of the Common Approach on decentralised agencies, on which the European Parliament, the Council and the Commission reached an agreement in July 2012. The note starts with a summary of the analysis of agency revenue issues carried out in the context of the Inter-Institutional Working Group (IIWG), in the run-up to the Common Approach. The note then looks more specifically at the two partially self-financed agencies for which a reserve fund would appear to be most relevant, namely the European Medicines Agency (EMA) and the European Chemicals Agency (ECHA). The note concludes that the creation of a reserve fund is neither necessary nor appropriate in the current context of budgetary constraints; other budgetary tools are available to respond to an unforeseen shortfall in fee income. This is why the Commission has not included a provision allowing for the creation of a reserve fund in the revised Framework Financial Regulation for agencies, which will enter into force on 1 January 2014. 2. Background: IIWG analytical fiche no. 20 (Funding and budget revenues of agencies) One of the analytical fiches prepared in the context of the IIWG looked specifically at agency funding and budget revenues (fiche 20). In summary, this fiche explained that: - Most agencies are fully financed from the EU budget, with the exception of a relatively limited number of agencies which are either fully self-financed from fees, notably the Office for Harmonisation in the Internal Market (OHIM), the Community Plant Variety Office (CPVO) and the Translation Centre (CdT), or partially self-financed, notably the European Aviation Safety Agency (EASA), the European Chemicals Agency (ECHA), and the European Medicines Agency (EMA); - The role of the budget authority is to authorise the contribution from the EU budget only, whereas the agency budget that might be fully or partly financed by other revenue sources (such as fees from industry) is adopted by the Management Board 1 of the agency; - The EU contribution to the agencies for a given financial year is meant to balance agency revenue and expenditure for that given year ("balancing contribution "). In turn, an agency surplus for a given financial year has to be repaid to the EU budget (in the following year), up to the level of the total EU contribution paid; - Agency surpluses to be repaid to the EU budget are recovered as assigned revenues on the Commission lines in the following year (year n+1). These assigned revenues are used to reduce the fresh appropriations to be inscribed in the EU budget for year n+2, to arrive at the EU balancing contribution that is deemed necessary for that year; 1 The main internal body that is responsible for taking decisions on financial and budgetary matters, irrespective of the name given to it in the constituent act (cf. article 2 of the Framework Financial Regulation) 2
- Fee income from industry may be prone to market fluctuations. Dependence on other revenue sources therefore introduces an element of unpredictability in the funding structure of agencies. This is why accurate fee setting and forecasting of revenue and expenditure is of particular importance to partially self-financed agencies (as well as fully self-financed agencies). Nonetheless, a possible shortfall of agency fee revenue as compared to forecast in a given year could not be ruled out completely. Against this background, IIWG fiche 20 outlined two possible ways forward for partially self-financed agencies, which required further analysis: a) To maintain the status quo, i.e.: o o To fully deduct assigned revenues stemming from agency surpluses, thus limiting the level of fresh appropriations required in the EU budget of the following financial year, and To finance a possible shortfall of fee revenue from the margin under the expenditure ceiling set by the multiannual financial framework, or b) To create a limited, ring-fenced reserve fund on the side of the agency, so as to respond to a shortfall of fee revenue. As to option b), the fiche noted that traditionally an issue of this type would require an amendment of the relevant agency's constituent act. In addition, the fiche pointed to the possible need to modify the Framework Financial Regulation (FFR) applicable to agencies in this respect, for the sake of transparency. 3. Revision of the Framework Financial Regulation As part of the preparations for the revision of the Framework Financial Regulation 2, in 2012-2013 the Commission carried out a further analysis of the situation of partially self-financed agencies, with a view to investigating the possible need for a limited ring-fenced reserve fund, as foreseen in point 39 of the Common Approach. In particular, the Commission looked in more detail at the legal and budgetary arrangements currently applicable to the three partially self-financed agencies (EASA, ECHA and EMA). As set out in a Commission non-paper discussed with the agencies and presented to the representatives of the Member States and of the European Parliament within the expert group on the Framework Financial Regulation in spring 2013, the treatment of fees and the degree of distinction between fee-financed and EU-financed activities varies considerably across the partially self-financed decentralised agencies. In short, the situation for the three agencies concerned is currently as follows: EASA uses a system of double accounting, in which fees and charges for certain activities are treated as external assigned revenues in the agency's budget, to be carried over to the following year, whereas the balancing contribution for the agency's EU-funded activities is 2 Commission delegated Regulation (EU) No XXX/2013 of 30 September 2013 on the framework financial regulation for the bodies referred to in Article 208 of Regulation (EU, EURATOM) No 966/2012 of the European Parliament and the Council, which will be applicable as from 1 January 2014. 3
treated as general revenue. The full amount of the agency annual budget outturn is to be recovered by the Commission, up to the level of the balancing contribution. ECHA makes a clear distinction between its chemicals (REACH), biocides and PIC activities, with separate sections in the agency's budget. Hence, fees are treated separately in the agency s budget (as general revenue), and the need for a balancing contribution is calculated separately, for each of the three Regulations. The annual budget outturn for each Regulation is to be recovered by the Commission, up to the level of the balancing contribution. EMA does not have a clear distinction between fee-financed and EU activities; both types of funding (fees and EU contribution) are treated in the agency's budget as general revenue, whereas the annual budget outturn is to be recovered by the Commission, up to the level of the balancing contribution. 4. Comparing recent experience with a reserve fund As outlined above, the arrangements currently applicable to the partially self-financed agencies vary considerably. Consequently, the potential scope for a reserve fund to meet unexpected shortfalls in fee revenue varies as well: - Whereas the treatment of fees and charges as assigned revenues in EASA s budget works well in terms of avoiding the risks of possible shortfalls in fee revenues, this model does not respect the principle of universality of the budget. This is why the Commission does not support the ring-fencing of parts of agency budgets in future proposals. - However, the creation of a reserve fund could potentially be of use to those agencies for which fee income constitutes general revenue, i.e. EMA and ECHA. - The sections below look in more detail at recent experience with EMA and ECHA, on the basis of the current arrangements, as compared to two theoretical options for a limited reserve fund, based on 5% of the agency's fee revenue and 5% of the agency's total budget, respectively. 4.1 European Medicines Agency (EMA) Recent experience Annex 1 to this note presents an overview of the evolution of EMA's fee revenue, EU contribution and annual budget outturn over the years 2003-2013. The table shows a steady increase in fee income and a stabilisation of the EU contribution. In addition, the agency has been able to balance its budget in years when fee revenue was overestimated (notably 2010 and 2011), which shows that the agency has a certain flexibility to adjust its expenditure level to a lower level of fees. Overall, with the exception of 2011 when the agency recorded a small deficit, EMA's annual surplus has fluctuated between EUR 2 million and EUR 14 million. This trend is expected to be confirmed in 2013, since the actual level of fee income to be received this year is currently projected to be substantially above initial forecasts. Theoretical reserve fund The table in Annex 1 presents two theoretical options for a "limited reserve fund", based on 5% of the agency's fee revenue and 5% of the agency's total budget, respectively. The table shows that such a theoretical fund would have been of no use between 2003 and 2010, nor in 2012; the limited 4
budget deficit in 2011 has not required a reinforcement of the EU contribution. Therefore, the credits entered into the fund would have been frozen and remained unused, whereas the recovery of the annual surplus under the current rules has helped to reduce the EU contribution correspondingly. 4.2 European Chemicals Agency (ECHA) Chemicals activities (REACH) recent experience Annex 2 to this note presents an overview of the evolution of ECHA's fee revenue, EU contribution and annual budget outturn for its chemicals activities (REACH), over the years 2009-2013. The table shows that the cumulated difference between the estimated revenue from fees and the actual outturn over the period remains very substantial, at some EUR 200 million. Overall, this shows that the actual level of fee income in the first years of operation has been underestimated substantially. The anomaly in 2010 is linked to a start-up effect of the REACH system: even if a balancing contribution from the EU budget was necessary to cover ECHA s expenditure in the first part of the year, the fee income received by year-end 2010 was more than EUR 50 million above the forecast made at the beginning of the year 3. Moreover, the considerable fee income received in 2010 and 2011 originating from the first registration deadline has covered budget needs for 2011, 2012 and 2013. It is also expected to fully meet the budgetary needs for 2014. REACH fee income in 2012 was some EUR 10 million above forecast, whereas actual fee income in 2013 is currently expected to be above forecast again, for a substantial amount. As a result, the REACH surplus accumulated over the past years at the end of 2013 is expected to be higher than planned. All other things equal, this means that the need for a balancing contribution in 2015 will be correspondingly lower than foreseen in the 2014-2020 MFF. Reliability of the fee estimates will be checked at the end of this year, which saw the expiration of the second registration deadline in May 2013. Looking ahead, as the REACH section of the agency becomes less dependent on fee income (with a possible exception in 2018) and a larger share of its budget will be financed from the EU contribution, the exposure to the risk of unexpected shortfalls in fee income ought to decrease significantly 4. Chemicals activities (REACH) theoretical reserve fund As for EMA as described in section 4.1 above, the table for ECHA in Annex 2 presents two theoretical options for a reserve fund, based on 5% of the agency's fee revenue and 5% of the agency's total budget, respectively. The table shows that such a theoretical fund would have been of no use over the period 2009-2013, since the agency has been able to carry forward a substantial surplus stemming from the 2010 registration deadline, for a much larger amount than initially foreseen. Consequently, the agency has been fully self-financed over the past years, and will remain so for a longer period than planned. Chemicals activities (REACH) importance of fee setting As mentioned in section 2 above, the Commission attaches great importance of accurate fee setting. In this regard, the 2013 review of the REACH fee Regulation is a good example of how the co- 3 4 According to the financial statement included in the 2011 Draft Budget, EUR 330 million in fee revenues were expected to be received in 2010/2011. According to ECHA annual reports, however, a total amount of EUR 383 million has been cashed in 2010 and 2011. On average, fee revenues in 2014-2020 are expected to cover only one third of ECHA s budget in the REACH section. 5
operation between the agency and the Commission has allowed for an update of the fees that covers sufficiently the current needs of the agency without placing an excessive burden on industry. Biocides activities With regard to the start-up of ECHA s biocides activities, some problems were encountered, for which a temporary solution was found this year by mutual cooperation between the agency and the Commission services, through an additional balancing subsidy by a transfer from the Life budget in 2013. It is reasonable to expect that ECHA will improve the reliability of its forecasts in this section in the light of experience. 5. Disadvantages of a reserve fund The request for a 'reserve fund' must be placed in the context of the constraints which apply to the EU budget, in particular regarding the sub-ceilings set for decentralised agencies under the new MFF as well as the 5% staff reduction over five years agreed in the inter-institutional agreement 2014-2020. Setting aside and locking in appropriations in a reserve fund, whether at the level of an agency or at the level of the Commission, is difficult to justify, in particular when the expenditure ceilings agreed in the 2014-2020 MFF are significantly below both the current ceilings in 2013 and the initial Commission proposals for the new MFF. In addition, there is sufficient evidence showing that in case of exceptional circumstances the EU budget has been able to respond to unexpected revenue shortfalls in agencies. According to the Commission, the EU contribution is and should remain a balancing contribution. The basic principle of Budget Authority control over the EU budget expenditure is that the European Parliament and the Council authorise commitment and payment appropriations for an action before any expenditure on the action is incurred. Accordingly, the operation of any reserve fund would remain subject to this basic principle. 6. Possible solutions to address the risk of shortfalls on the revenue side It is the duty of all bodies financed from EU funding to plan and monitor their income and expenditure in such a way that it shall not exceed the budgeted estimates. The way to address the risk of shortages on the revenue side is to use all the room for manoeuvre available to the agency and the partner DG, namely: 1. Setting a proper level of fees and setting in motion in time the procedure for amending the fee level should shortages become recurrent; this is obviously a Commission competence and responsibility. However, the Commission strongly relies in the information and forecasts from the agency to be able to set a proper level of fees, which is why close cooperation between the Commission and the agency is particularly important. 2. Forecasting and monitoring revenue flows on a regular basis and anticipating major risks of shortfalls by requesting top-ups if appropriate and in due time. It would be advisable that the agency provides the Commission with quarterly updates of fee revenue forecasts for the different activities of the agency, which would give the Commission, advance warning should there be the need for remedial action. 3. Taking precautionary measures with regard to discretionary expenditure in case of expected shortages. 6
4. If necessary, ensuring the necessary agreement at the Commission level for making use of the assigned revenues stemming from the recovery of agency surpluses in year n-1. 5. In case of extreme need, the possibility of a transfer from other budget lines under the responsibility of the Commission should not be ruled out. For these reasons, the Commission considers that the current practice represents a sound and prudent approach, in line with the necessity of a strict control by the Commission and the Budget Authority. Should an unexpected shortfall in fees occur, a variety of tools are available to cope with such a situation, depending also on the order of magnitude of the experienced fee revenue shortfall. As stated above, accurate forecasting and monitoring of revenue and expenditure remains of key importance, and shortfalls will need to be detected at an early stage to allow for timely remedial action, in the first instance on the side of the agency, and if necessary on the side of the Commission. Conclusion Further to the assessment carried out in the context of this analytical paper, the Commission has not included a provision allowing for the creation of a reserve fund in the revised Framework Financial Regulation for agencies. The European Parliament and the Council have not raised objections to the Commission s proposals, and the revised Framework Financial Regulation will enter into force on 1 January 2014. The Commission therefore considers this issue as provisionally closed. An assessment of the management of short-term cash-flow difficulties, including at year-end, will be made in the upcoming Inter-Institutional working group on agencies, with a view to establishing a general approach for decentralised agencies. 7
Annex 1: evolution of the EU contribution, evaluation fees and surpluses of the European Medicines Agency (EMA) EMA evaluation fees (="own resources") 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 20 estimated value (*) 54.280,0 52.700,0 73.700,0 80.020,0 91.826,0 116.129,0 136.100,0 158.320,0 163.000,0 171.248,0 190.5 outturn (**) 56.742,0 67.350,0 71.895,0 92.580,0 111.753,0 126.318,0 141.023,3 153.681,0 151.211,0 182.912,0 difference 2.462,0 14.650,0-1.805,0 12.560,0 19.927,0 10.189,0 4.923,3-4.639,0-11.789,0 11.664,0 (*) source: PDB (DB) (**) source: 2003-2008 EMA annual report; from 2009 onwards: financial statement for EMA in Draft Budget EMA total budget 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 20 78.081,0 96.619,0 110.160,0 123.551,0 154.538,0 173.307,0 188.689,0 198.187,0 208.863,0 223.527,0 231.5 Budget outturn (rounded figures) 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 20 4.000,0 4.500,0 4.644,0 8.180,0 4.900,0 14.578,4 5.477,0 9.875,0-610,0 1.987,0 first 8
year option 1: reserve fund = 5,00% theoretical 2.837,1 3.367,5 3.594,8 4.629,0 5.587,7 6.315,9 7.051,2 7.684,1 7.560.5 9.145,6 of the outturn in evaluation fees actual 2.837,1 3.367,5 3.594,8 4.629,0 5.587,7 6.315,9 7.051,2 7.684,1 7.074,0 8.971,0 yearly increase of the reserve fund 530,4 227,3 1.034,3 958,7 728,3 735,3 632,9-610,0 1.897,0 first year option 2: reserve fund = 5,00% theoretical 3.904,1 4.831,0 5.508,0 6.177,6 7.726,9 8.665,4 9.434,5 9.909,4 10.443,2 11.176,4 of the total budget actual 3.904,1 4.831,0 5.508,0 6.177,6 7.726,9 8.665,4 9.434,5 9.909,4 9.299,4 11.176,4 yearly increase of the reserve fund 926,9 677,1 669,6 1.549,4 938,5 769,1 474,9-610,0 1,877,0 Note: some inconsistencies between the figures (taken from different sources) are possible, but the main results can hardly change. Annex 2: evolution of the EU contribution, evaluation fees and surpluses of the European Chemicals Agency (ECHA REACH) 9
ECHA (REACH) evaluation fees (="own resources") 2009 2010 2011 2012 2013 estimated value (*) 3.593,0 106.800,0 97.150,0 17.207,8 38.371,6 outturn (**) 2.658,6 349.652,3 33.522,4 26.611,8 86.244,2 difference -0.934,4 242.852,3-63.627,6 9.404,0 47.872,6 Cumulated difference 2009- XXXX 241.917,9 178.290,2 187.694,3 235.566,9 (*) source: working document DB year n+1, for instance: the estimate for the 2009 budget year is contained in the 2010 DB (**) source: 2009-2011 ECHA annual report; from 2011 onwards: financial statement for ECHA in Draft Budget. Outturn 2013: according to second amendment to ECHA budget 2013 (19/06/2013) ECHA (REACH) total budget 2009 2010 2011 2012 2013 Revenue (excluding accumulated surplus) 71.349,2 385.865,1 37.643,6 30.710,2 89.783,0 Expenditure 67.058,8 71.966,4 89.892,7 91.524,1 108.871,0 Budget outturn (rounded figures) 2009 2010 2011 2012 2013 10
4.290,5 313.898,7-52.249,1-60.814,0 option 1: reserve fund = 5,00% theoretical 0.132,9 17.482,6 1.676,1 1.330,6 of the outturn in evaluation fees actual 0.132,9 17.482,6 0 0 yearly increase of the reserve fund 17.349,7 0 0 first year option 2: reserve fund = 5,00% theoretical 3.352,9 3.598,3 4.494,6 4.576,2 of the total budget actual 3.352,9 3.598,3 0 0 yearly increase of the reserve fund 0.245,4 0 0 first year Note: some inconsistencies between the figures (taken from different sources) are possible, but the main results can hardly change. 11