Thank you for your letter dated 23 October 2007[8] concerning my EM on the Commission's proposal to revise the multi-annual financial framework and for the support you express for the Government's position.

  I take note of your on-going hope that a PPP deal can be struck for Galileo. The Government has always argued strongly for the involvement of the private sector funding through a PPP arrangement as the most cost effective way of delivering the project. Regrettably, however, since the end of negotiations between the private sector consortium and the Commission in spring this year, the argument that the project should be delivered through public procurement has gained increasing support. If the majority of our partners wish to proceed with the public procurement of a full operating capability for Galileo, we will nevertheless work to retain as many of the financial and project management benefits that the PPP structure offered as possible. These include: the incentive to rapidly reach full service commencement; the optimisation of revenue generation potential; and strong project and risk management through effective governance. We also continue to believe that the Community should be looking for ways to involve private sector expertise and funding at the earliest opportunity. The Commission has said that they share this view and has suggested the option of a PPP model for the operation and replenishment of the system.

  I agree that a rigorous evaluation of the EIT should take place before funding is expanded. The Government has indeed consistently argued for a phased approach to the establishment of the EIT. We have been successful in ensuring that it will initially only be made up of a maximum of 3 Knowledge and Innovation Communities so that lessons can be learned before progressing further with the project. We will continue to argue that before the EIT and its budget is further expanded, a thorough evaluation of the organisation's performance should be undertaken.

  You ask whether the Government is content with the scale of the proposed reductions to the margins of Headings 2 and 5 in 2008. The Government is concerned with the Commission's proposal to use the margins of other headings in 2008 to fund new requirements of the Galileo programme. We remain committed to the principle that margins should ideally be maintained to cater for unforeseen needs of existing programmes in year.

  An initial discussion on Galileo and the Commission's funding proposal took place at the October ECOFIN Council when this was covered under Any Other Business. The Government's concern with the Commission proposal was shared by a number of Member States. The Presidency agreed that a full agenda item should be devoted to the Commission's financing proposal in an upcoming ECOFIN. It is on the agenda for November ECOFIN.

13 November 2007

  Thank you for your letter dated 13 November regarding EM 13237/07. This was considered by Sub-Committee A at their meeting on 20 November and the item was cleared from scrutiny. The Sub-Committee hope that the Government will continue to press its case on these matters, and in particular hope that the margins are maintained to cater for unforeseen needs of existing programmes in future years.

  The Sub-Committee would be grateful if you could inform them, in due course, of the outcome of the discussions in the various Council meetings.

21 November 2007

  Thank you for your letter of 21 November which I received on 23 November.

  I represented the UK at Budget ECOFIN on 23 November. At this meeting, and subject to the European Parliament's 2nd Reading, the Council and European Parliament's Budget Committee reached agreement on the 2008 EC Budget. I will write to you in the coming days to report formally to your Committee on the outcome of this agreement.

  The multi-annual· financing of Galileo was one of the principal points of discussion at the Budget ECOFIN. The UK's concerns at the proposal to revise the multi-annual financing framework, and our view that a budget disciplined approach should require reprioritisation of funds from within Heading 1a, as outlined in EM 13237/07, have been set out consistently, including at the July, October and November ECOFINs. I again made these arguments during Friday's Council 2nd Reading discussion.

  However, during the course of the Council's conciliation with the European Parliament, it became apparent that no agreement would be reached on the 2008 EC Budget without also reaching agreement on the multi-annual financing of GaliIeo.

  Agreement was therefore reached, subject to subsequent formal approval by the European Parliament and Council, on the substance of the Commission's proposal to amend the Interinstitutional Agreement (IIA) of 17 May 2006,[9] as a means of financing the Galileo project and the European Institute of Technology (EIT)—the subject of EM 13237/07, your letter of 21 November to me, and a House of Commons European Standing Committee debate on Monday 26 November. I am therefore writing to you immediately on this issue.

GALILEO AND EIT FINANCING

  I took the view that it was in the UK's best interests to reach agreement on the multi-annual financing of Galileo and the EIT at Friday's meeting, in the context of an acceptable overall deal on the 2008 Budget when it became clear that a number of member states were only aligning themselves with a potential blocking minority for tactical reasons in order to pursue industrial interests, which were divergent from our own. For this reason, I do not believe that a blocking minority against the revision of the Financial Perspective could have been sustained after ECOFIN Budget.

  My judgement was that in the absence of a sustainable blocking minority capable of preventing revision of the multi-annual framework, the UK's top priorities should be to: minimise the scale of any revision, impose the greatest degree of budget discipline on the Galileo project going forward, and secure the UK's other objectives in the 2008 Budget.

  As a result, the UK, working in close partnership with Dutch and Swedish .colleagues, secured a one-third reduction in the size of the multi-annual framework revision; a commitment from the Council and the European Parliament that the 2007-13 multi-annual framework would not be revised subsequently to finance Galileo; a recognition that this revision is exceptional and does not set a precedent for future years; and that procurement of the Galileo work streams, currently the subject of negotiations in the Transport Council, should be open and competitive, thereby encouraging cost discipline while being fair to all commercial interests, including the UK's; and a doubling of the amount re-allocated from existing programmes within heading 1a. The maximum additional cost to the UK of the multi-annual financing solution for Galileo and the EIT is consequently reduced by an estimated €40-€45 million, or £27-£31 million[10] (€325-€330 million, or £226-£230 million, maximum additional cost). I believe the agreement reached represents the best possible outcome under the circumstances.

  Annex A gives a detailed breakdown of the financing solution. The relevant text of the accompanying joint Council, European Parliament and Commission Declaration is at Annex B.

NEXT STEPS

  The European Parliament will formally agree the non-compulsory expenditure part of 2008 EC Budget in their Second Reading culminating in their plenary session on 13 December. This will mark the formal adoption of the Budget.

  The Commission will also bring forward the formal, final legal proposal for the revision of the multi-annual financial perspective, as amended by Budget ECOFIN, which we expect will be agreed at COREPER II on 5 December and then formally agreed at the next available ministerial Council. This will then be forwarded to the European Parliament for formal agreement to the revision of the financial perspective, also likely to be on 13 December.

28 November 2007

SUMMARY OF AGREEMENT REACHED WITH THE EUROPEAN PARLIAMENT, BUDGET ECOFIN 23 NOVEMBER 2007

	Source of funding	Additonal cost (€million)	Additional cost (£ million) [11]
Galileo & EIT additional commitments	Multiannual framework revision	1,600	1,115
	Funds made avaialble from 7th Framework Programme within Heading 1a	400	279
	Funds re-allocated from non co-decided programmes within heading 1a	200	139
	2008 Flexibility Instrument	200	139
	Heading 1a margin	300	209
Total		2,700	1,881
NB: Sterling figures may not add up due to rounding.

DECLARATION AGREED BY EP, COUNCIL AND COMMISSION

  The European Parliament, the Council and the Commission:

Affirm Financial Perspective revision and the use of funds from the margin of the previous year is an exceptional measure and will in no way set a precedent for future revisions.

Affirm the principle to the commitment to robust and fair competition in the programme to help ensure cost control, mitigation of risk from single supply, value for money and improved efficiency. All work packages for Galileo should be open to maximum possible competition, in line with EU procurement principles, and to ensure procurement in space programmes are more widely open to new entrants and SMEs. This should be without prejudice to the details elaborated in Transport Council.

  Affirm that any further call on resources concerning Galileo can only be considered if accommodated within the ceilings of the agreed Multi-annual Financial Framework and without reverting to the use of Points 21-23 of the Inter-institutional Agreement of 17 May on budgetary discipline and sound financial management.

9   "The Interinstitutional Agreement between the European Parliament, the Council and the Commission on budgetary discipline and sound financial management". Back

10   Sterling figures converted at the exchange rate on 30 September, as in EM 13237/07. Back

11   €1 = £0.6968 Sterling figures converted at the exchange rate on 30 September, as in EM 13237/07. Back