# C_2015422EN.01003301.xml

| 17.12.2015 | EN | Official Journal of the European Union | C 422/33 |
| --- | --- | --- | --- |

17.12.2015

EN

Official Journal of the European Union

C 422/33

---

REPORT

on the annual accounts of the European Joint Undertaking for ITER and the Development of Fusion Energy for the financial year 2014 together with the Joint Undertaking’s reply

(2015/C 422/05)

CONTENTS

CONTENTS

| | Paragraph | Page |
| --- | --- | --- |
| Introduction | 1-3 | 34 |
| Information in support of the statement of assurance | 4 | 34 |
| Statement of assurance | 5-17 | 34 |
| Opinion on the reliability of the accounts | 10 | 35 |
| Opinion on the legality and regularity of the transactions underlying the accounts | 11 | 35 |
| Emphasis of Matter | 12-16 | 36 |
| Comments on budgetary and financial management | 18-19 | 37 |
| Financial statements | 18 | 37 |
| Implementation of the budget | 19 | 37 |
| Comments on key controls of the Joint Undertaking’s supervisor and control systems | 20-25 | 37 |
| Operational procurement and grants | 21-22 | 38 |
| Overall control and monitoring of operational procurement contracts and grants | 23-25 | 39 |
| Other matters | 26-27 | 39 |
| Legal framework | 26 | 39 |
| Annual activity report | 27 | 39 |
| Follow-up of previous observations | 28-34 | 39 |
| Intellectual property rights and industrial policy | 28-31 | 39 |
| Conflicts of interest | 32 | 40 |
| Host State agreement | 33 | 40 |
| Rules implementing the Staff Regulations | 34 | 40 |

Paragraph

Paragraph

Page

Page

Introduction

1-3

34

Information in support of the statement of assurance

4

34

Statement of assurance

5-17

34

Opinion on the reliability of the accounts

10

35

Opinion on the legality and regularity of the transactions underlying the accounts

11

35

Emphasis of Matter

12-16

36

Comments on budgetary and financial management

18-19

37

Financial statements

18

37

Implementation of the budget

19

37

Comments on key controls of the Joint Undertaking’s supervisor and control systems

20-25

37

Operational procurement and grants

21-22

38

Overall control and monitoring of operational procurement contracts and grants

23-25

39

Other matters

26-27

39

Legal framework

26

39

Annual activity report

27

39

Follow-up of previous observations

28-34

39

Intellectual property rights and industrial policy

28-31

39

Conflicts of interest

32

40

Host State agreement

33

40

Rules implementing the Staff Regulations

34

40

INTRODUCTION

INTRODUCTION

| 1. | The European Joint Undertaking for ITER (1) and the Development of Fusion Energy (F4E) was set up in March 2007 (2) for a period of 35 years. While the main fusion facilities are to be developed at Cadarache in France, the Joint Undertaking is located in Barcelona. |
| --- | --- |

1.

The European Joint Undertaking for ITER (1) and the Development of Fusion Energy (F4E) was set up in March 2007 (2) for a period of 35 years. While the main fusion facilities are to be developed at Cadarache in France, the Joint Undertaking is located in Barcelona.

1

2

| 2. | The tasks of the Joint Undertaking are (3):






  (a) | to provide the contribution of Euratom to the ITER International Fusion Energy Organisation (4); |
| --- | --- | --- |

2.

The tasks of the Joint Undertaking are (3):

3

(a)

to provide the contribution of Euratom to the ITER International Fusion Energy Organisation (4);

4

| (b) | to provide the contribution of Euratom to ‘Broader Approach’ (complementary joint fusion research) activities with Japan for the rapid development of fusion energy; |
| --- | --- |

(b)

to provide the contribution of Euratom to ‘Broader Approach’ (complementary joint fusion research) activities with Japan for the rapid development of fusion energy;

| (c) | to prepare and coordinate a programme of activities in preparation for the construction of a demonstration fusion reactor and related facilities, including the International Fusion Materials Irradiation Facility. |
| --- | --- |

(c)

to prepare and coordinate a programme of activities in preparation for the construction of a demonstration fusion reactor and related facilities, including the International Fusion Materials Irradiation Facility.

| 3. | The members of the Joint Undertaking are Euratom, represented by the European Commission, the Member States of Euratom and other countries which have concluded cooperation agreements with Euratom in the field of controlled nuclear fusion (as of 31 December 2014: Switzerland). |
| --- | --- |

3.

The members of the Joint Undertaking are Euratom, represented by the European Commission, the Member States of Euratom and other countries which have concluded cooperation agreements with Euratom in the field of controlled nuclear fusion (as of 31 December 2014: Switzerland).

INFORMATION IN SUPPORT OF THE STATEMENT OF ASSURANCE

INFORMATION IN SUPPORT OF THE STATEMENT OF ASSURANCE

| 4. | The audit approach taken by the Court comprises analytical audit procedures, testing of transactions at the level of the Joint Undertaking and an assessment of key controls of the supervisory and control systems. This is supplemented by evidence provided by the work of other auditors (where relevant) and an analysis of management representations. |
| --- | --- |

4.

The audit approach taken by the Court comprises analytical audit procedures, testing of transactions at the level of the Joint Undertaking and an assessment of key controls of the supervisory and control systems. This is supplemented by evidence provided by the work of other auditors (where relevant) and an analysis of management representations.

| STATEMENT OF ASSURANCE









  5. | Pursuant to the provisions of Article 287 of the Treaty on the Functioning of the European Union (TFEU), the Court has audited:






  (a) | the annual accounts of the Joint Undertaking for ITER and the Development of Fusion Energy (5), which comprise the financial statements and the reports on the implementation of the budget (6) for the financial year ended 31 December 2014; and |
| --- | --- | --- |

STATEMENT OF ASSURANCE

STATEMENT OF ASSURANCE

5.

Pursuant to the provisions of Article 287 of the Treaty on the Functioning of the European Union (TFEU), the Court has audited:

(a)

the annual accounts of the Joint Undertaking for ITER and the Development of Fusion Energy (5), which comprise the financial statements and the reports on the implementation of the budget (6) for the financial year ended 31 December 2014; and

5

6

| (b) | the legality and regularity of the transactions underlying those accounts. |
| --- | --- |

(b)

the legality and regularity of the transactions underlying those accounts.

The management’s responsibility

The management’s responsibility

| 6. | In accordance with Articles 39 and 50 of Commission Delegated Regulation (EU) No 1271/2013 (7), the management is responsible for the preparation and fair presentation of the annual accounts of the Joint Undertaking and the legality and regularity of the underlying transactions.






  (a) | The management’s responsibilities in respect of the Joint Undertaking’s annual accounts include designing, implementing and maintaining an internal control system relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error, selecting and applying appropriate accounting policies on the basis of the accounting rules adopted by the Commission’s accounting officer (8), and making accounting estimates that are reasonable in the circumstances. The Director approves the annual accounts of the Joint Undertaking after its accounting officer has prepared them on the basis of all available information and established a note to accompany the accounts in which he declares, inter alia, that he has reasonable assurance that they present a true and fair view of the financial position of the Joint Undertaking in all material respects. |
| --- | --- | --- |

6.

In accordance with Articles 39 and 50 of Commission Delegated Regulation (EU) No 1271/2013 (7), the management is responsible for the preparation and fair presentation of the annual accounts of the Joint Undertaking and the legality and regularity of the underlying transactions.

7

(a)

The management’s responsibilities in respect of the Joint Undertaking’s annual accounts include designing, implementing and maintaining an internal control system relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error, selecting and applying appropriate accounting policies on the basis of the accounting rules adopted by the Commission’s accounting officer (8), and making accounting estimates that are reasonable in the circumstances. The Director approves the annual accounts of the Joint Undertaking after its accounting officer has prepared them on the basis of all available information and established a note to accompany the accounts in which he declares, inter alia, that he has reasonable assurance that they present a true and fair view of the financial position of the Joint Undertaking in all material respects.

8

| (b) | The management’s responsibilities in respect of the legality and regularity of the underlying transactions and compliance with the principle of sound financial management consist of designing, implementing and maintaining an effective and efficient internal control system comprising adequate supervision and appropriate measures to prevent irregularities and fraud and, if necessary, legal proceedings to recover funds wrongly paid or used. |
| --- | --- |

(b)

The management’s responsibilities in respect of the legality and regularity of the underlying transactions and compliance with the principle of sound financial management consist of designing, implementing and maintaining an effective and efficient internal control system comprising adequate supervision and appropriate measures to prevent irregularities and fraud and, if necessary, legal proceedings to recover funds wrongly paid or used.

The auditor’s responsibility

The auditor’s responsibility

| 7. | The Court’s responsibility is, on the basis of its audit, to provide the European Parliament and the Council (9) with a statement of assurance as to the reliability of the annual accounts and the legality and regularity of the underlying transactions. The Court conducts its audit in accordance with the IFAC International Standards on Auditing and Codes of Ethics and the INTOSAI International Standards of Supreme Audit Institutions. These standards require the Court to plan and perform the audit to obtain reasonable assurance as to whether the annual accounts of the Joint Undertaking are free from material misstatement and the underlying transactions are legal and regular. |
| --- | --- |

7.

The Court’s responsibility is, on the basis of its audit, to provide the European Parliament and the Council (9) with a statement of assurance as to the reliability of the annual accounts and the legality and regularity of the underlying transactions. The Court conducts its audit in accordance with the IFAC International Standards on Auditing and Codes of Ethics and the INTOSAI International Standards of Supreme Audit Institutions. These standards require the Court to plan and perform the audit to obtain reasonable assurance as to whether the annual accounts of the Joint Undertaking are free from material misstatement and the underlying transactions are legal and regular.

9

| 8. | The audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the accounts and the legality and regularity of the underlying transactions. The procedures selected depend on the auditor’s judgement, which is based on an assessment of the risks of material misstatement of the accounts and material non-compliance by the underlying transactions with the requirements in the legal framework of the European Union, whether due to fraud or error. In assessing these risks, the auditor considers any internal controls relevant to the preparation and fair presentation of the accounts, as well as the supervisory and control systems that are implemented to ensure the legality and regularity of underlying transactions, and designs audit procedures that are appropriate in the circumstances. The audit also entails evaluating the appropriateness of accounting policies, the reasonableness of accounting estimates and the overall presentation of the accounts. |
| --- | --- |

8.

The audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the accounts and the legality and regularity of the underlying transactions. The procedures selected depend on the auditor’s judgement, which is based on an assessment of the risks of material misstatement of the accounts and material non-compliance by the underlying transactions with the requirements in the legal framework of the European Union, whether due to fraud or error. In assessing these risks, the auditor considers any internal controls relevant to the preparation and fair presentation of the accounts, as well as the supervisory and control systems that are implemented to ensure the legality and regularity of underlying transactions, and designs audit procedures that are appropriate in the circumstances. The audit also entails evaluating the appropriateness of accounting policies, the reasonableness of accounting estimates and the overall presentation of the accounts.

| 9. | The Court considers that the audit evidence obtained is sufficient and appropriate to provide a basis for the opinions set out below. |
| --- | --- |

9.

The Court considers that the audit evidence obtained is sufficient and appropriate to provide a basis for the opinions set out below.

Opinion on the reliability of the accounts

Opinion on the reliability of the accounts

| 10. | In the Court’s opinion, the Joint Undertaking’s annual accounts present fairly, in all material respects, its financial position as at 31 December 2014 and the results of its operations and its cash flows for the year then ended, in accordance with the provisions of its financial rules and the accounting rules adopted by the Commission’s accounting officer. |
| --- | --- |

10.

In the Court’s opinion, the Joint Undertaking’s annual accounts present fairly, in all material respects, its financial position as at 31 December 2014 and the results of its operations and its cash flows for the year then ended, in accordance with the provisions of its financial rules and the accounting rules adopted by the Commission’s accounting officer.

Opinion on the legality and regularity of the transactions underlying the accounts

Opinion on the legality and regularity of the transactions underlying the accounts

| 11. | In the Court’s opinion, the transactions underlying the annual accounts of the Joint Undertaking for the year ended 31 December 2014 are, in all material respects, legal and regular. |
| --- | --- |

11.

In the Court’s opinion, the transactions underlying the annual accounts of the Joint Undertaking for the year ended 31 December 2014 are, in all material respects, legal and regular.

Emphasis of Matter

Emphasis of Matter

| 12. | Without calling into question the opinions expressed in paragraphs 10 and 11, the Court draws attention to the following. The Council conclusions adopted on 7 July 2010 (10) approved 6,6 billion euro (in 2008 values) for the Joint Undertaking contribution to the ITER construction phase of the project. This figure, which doubled the initial budgeted costs for this phase of the project, did not include 663 million euro proposed by the European Commission in 2010 to cover potential contingencies (11). |
| --- | --- |

12.

Without calling into question the opinions expressed in paragraphs 10 and 11, the Court draws attention to the following. The Council conclusions adopted on 7 July 2010 (10) approved 6,6 billion euro (in 2008 values) for the Joint Undertaking contribution to the ITER construction phase of the project. This figure, which doubled the initial budgeted costs for this phase of the project, did not include 663 million euro proposed by the European Commission in 2010 to cover potential contingencies (11).

10

11

| 13. | The complexity of F4E activities (12) implies that the amount of the Joint Undertaking contribution to the construction phase of the project is exposed to significant risks of increase (13). These risks mainly result from changes in the scope (14) of the project deliverables and delays in the current schedule which is considered unrealistic (15). The release of a new ITER project baseline (scope, schedule and costs) by ITER IO Council (16), planned for June 2015, has been postponed until November 2015. The slippage for the construction phase of the project was estimated by the Joint Undertaking at the time of the audit (March 2015) to be at least 43 months. |
| --- | --- |

13.

The complexity of F4E activities (12) implies that the amount of the Joint Undertaking contribution to the construction phase of the project is exposed to significant risks of increase (13). These risks mainly result from changes in the scope (14) of the project deliverables and delays in the current schedule which is considered unrealistic (15). The release of a new ITER project baseline (scope, schedule and costs) by ITER IO Council (16), planned for June 2015, has been postponed until November 2015. The slippage for the construction phase of the project was estimated by the Joint Undertaking at the time of the audit (March 2015) to be at least 43 months.

12

13

14

15

16

| 14. | The latest estimate of the shortfall (‘negative contingency’) until the finalisation of the construction phase, calculated by the Joint Undertaking in November 2014, was 428 million euro (2008 values) (17). F4E is currently working on a more accurate and updated estimate. |
| --- | --- |

14.

The latest estimate of the shortfall (‘negative contingency’) until the finalisation of the construction phase, calculated by the Joint Undertaking in November 2014, was 428 million euro (2008 values) (17). F4E is currently working on a more accurate and updated estimate.

17

| 15. | The Joint Undertaking is still developing a central and uniform system to integrate all the operational data and to allow regular monitoring and controlling of estimates, costs and deviations (18). Moreover, it has not updated the valuation of the Joint Undertaking contribution to the ITER project beyond the finalisation of the construction phase. |
| --- | --- |

15.

The Joint Undertaking is still developing a central and uniform system to integrate all the operational data and to allow regular monitoring and controlling of estimates, costs and deviations (18). Moreover, it has not updated the valuation of the Joint Undertaking contribution to the ITER project beyond the finalisation of the construction phase.

18

| 16. | As a result of the challenges currently faced by the ITER project, the new Director General of ITER IO presented to the ITER Council an action plan with specific measures to address the main constraints that are currently affecting the development of the project (19). As regards F4E Joint Undertaking, the new Acting Director (20) presented to the Governing Board a F4E action plan which largely supports the ITER IO action plan (21). At the time of the audit, the practical measures for the implementation of both action plans were still being defined. |
| --- | --- |

16.

As a result of the challenges currently faced by the ITER project, the new Director General of ITER IO presented to the ITER Council an action plan with specific measures to address the main constraints that are currently affecting the development of the project (19). As regards F4E Joint Undertaking, the new Acting Director (20) presented to the Governing Board a F4E action plan which largely supports the ITER IO action plan (21). At the time of the audit, the practical measures for the implementation of both action plans were still being defined.

19

20

21

| 17. | The comments which follow do not call the Court’s opinions into question. |
| --- | --- |

17.

The comments which follow do not call the Court’s opinions into question.

COMMENTS ON BUDGETARY AND FINANCIAL MANAGEMENT

COMMENTS ON BUDGETARY AND FINANCIAL MANAGEMENT

Financial statements

Financial statements

| 18. | In the notes to the financial statements, the table and the information included under heading 4.3.1.1 ‘ITER Procurement Arrangement (ITER IO)’, reflects the Procurement Arrangements signed (Column 3) and the Procurement Arrangements credited so far (Column 4). However, the table does not show the degree of advancement of the works in-progress and the text contains limited information. This is essential to reflect the status and value of the activities carried out so far by the Joint Undertaking. |
| --- | --- |

18.

In the notes to the financial statements, the table and the information included under heading 4.3.1.1 ‘ITER Procurement Arrangement (ITER IO)’, reflects the Procurement Arrangements signed (Column 3) and the Procurement Arrangements credited so far (Column 4). However, the table does not show the degree of advancement of the works in-progress and the text contains limited information. This is essential to reflect the status and value of the activities carried out so far by the Joint Undertaking.

Implementation of the budget

Implementation of the budget

| 19. | The final 2014 budget available for implementation included commitment appropriations of 1  168,8 million euro and payment appropriations of 567,6 million euro. The utilisation rates for commitment and payment appropriations were 100 % and 88,5 % respectively. However, the implementation rate for payment appropriations with respect to the 2014 initial budget was 73 % (22). Regarding commitment appropriations of 1  125,2 million euro available for operational activities, 23 % were implemented through direct individual commitments while the remaining 77 % were implemented through global commitments. The low rate of implementation by individual commitment is explained by the overall slippage of the ITER project and the multiple change requests coming from ITER IO. |
| --- | --- |

19.

The final 2014 budget available for implementation included commitment appropriations of 1  168,8 million euro and payment appropriations of 567,6 million euro. The utilisation rates for commitment and payment appropriations were 100 % and 88,5 % respectively. However, the implementation rate for payment appropriations with respect to the 2014 initial budget was 73 % (22). Regarding commitment appropriations of 1  125,2 million euro available for operational activities, 23 % were implemented through direct individual commitments while the remaining 77 % were implemented through global commitments. The low rate of implementation by individual commitment is explained by the overall slippage of the ITER project and the multiple change requests coming from ITER IO.

22

COMMENTS ON KEY CONTROLS OF THE JOINT UNDERTAKING’S SUPERVISORY AND CONTROL SYSTEMS

COMMENTS ON KEY CONTROLS OF THE JOINT UNDERTAKING’S SUPERVISORY AND CONTROL SYSTEMS

| 20. | The Court of Auditors notes that significant progress has been achieved in many areas. At the time of the audit (March 2015), F4E was still addressing a number of key actions for the management of the Joint Undertaking:






  — | F4E is still developing a central and uniform system to integrate all the operational data and to allow for estimates and cost deviations to be regularly monitored and controlled, including the system to estimate the value of each work item at contract level. At the time of the audit, F4E had completed an update of its cost baseline (23) at level 4 of the Working Base Structure (WBS) but not at contract level (level 6). In addition, the system to provide information on the degree of implementation of the activities (Earn Value Management) still has to be developed. |
| --- | --- | --- |

20.

The Court of Auditors notes that significant progress has been achieved in many areas. At the time of the audit (March 2015), F4E was still addressing a number of key actions for the management of the Joint Undertaking:

—

F4E is still developing a central and uniform system to integrate all the operational data and to allow for estimates and cost deviations to be regularly monitored and controlled, including the system to estimate the value of each work item at contract level. At the time of the audit, F4E had completed an update of its cost baseline (23) at level 4 of the Working Base Structure (WBS) but not at contract level (level 6). In addition, the system to provide information on the degree of implementation of the activities (Earn Value Management) still has to be developed.

23

| — | The action plans adopted by the Joint Undertaking, in response to the internal audits on the financial circuits, grant management and expert contracts, were fully or mostly implemented at the time of the audit (March 2015). As regards the overall status of all the actions plans adopted by F4E in response to the internal audits carried out so far (24), at the date of the audit, out of 46 recommendations still in progress, the deadline for implementation of 29 recommendations was overdue. |
| --- | --- |

—

The action plans adopted by the Joint Undertaking, in response to the internal audits on the financial circuits, grant management and expert contracts, were fully or mostly implemented at the time of the audit (March 2015). As regards the overall status of all the actions plans adopted by F4E in response to the internal audits carried out so far (24), at the date of the audit, out of 46 recommendations still in progress, the deadline for implementation of 29 recommendations was overdue.

24

| — | In 2014 the Joint Undertaking Internal Audit Capability (IAC) performed a review of the monitoring of contract implementation in the area of the ITER buildings (25) and outlined the existence of important risk factors such as the immature design of some of the ITER activities, the large number of project change requests, the unrealistic project schedule and the current delay in the implementation of the activities. It is difficult for F4E to mitigate some of these risks effectively, as their ownership belongs to ITER IO. The review also identified that stronger controls and changes to processes are needed, in particular in management and change control, financial management of contracts and the management of non-conformities. |
| --- | --- |

—

In 2014 the Joint Undertaking Internal Audit Capability (IAC) performed a review of the monitoring of contract implementation in the area of the ITER buildings (25) and outlined the existence of important risk factors such as the immature design of some of the ITER activities, the large number of project change requests, the unrealistic project schedule and the current delay in the implementation of the activities. It is difficult for F4E to mitigate some of these risks effectively, as their ownership belongs to ITER IO. The review also identified that stronger controls and changes to processes are needed, in particular in management and change control, financial management of contracts and the management of non-conformities.

25

| — | The European Commission’s Internal Audit Service (IAS) carried out a limited review on the contract management (26) and outlined that F4E is moving from an organisation which is mainly procurement-oriented to an organisation which mainly manages contracts. While the review concluded that F4E is progressing in establishing entity-wide controls to address the risks related to the implementation of the contracts, it also identified a certain number of areas where the controls in place are not yet mature enough, in particular as regards the management of contract amendments and contingencies. |
| --- | --- |

—

The European Commission’s Internal Audit Service (IAS) carried out a limited review on the contract management (26) and outlined that F4E is moving from an organisation which is mainly procurement-oriented to an organisation which mainly manages contracts. While the review concluded that F4E is progressing in establishing entity-wide controls to address the risks related to the implementation of the contracts, it also identified a certain number of areas where the controls in place are not yet mature enough, in particular as regards the management of contract amendments and contingencies.

26

| — | The F4E internal corporate risk management system identified 10 new risks in 2014. Of the 32 actions identified as at October 2014 to address the 6 very high risks, 13 actions were implemented, 9 actions were in progress, 1 action was cancelled as obsolete and 9 actions had not started. |
| --- | --- |

—

The F4E internal corporate risk management system identified 10 new risks in 2014. Of the 32 actions identified as at October 2014 to address the 6 very high risks, 13 actions were implemented, 9 actions were in progress, 1 action was cancelled as obsolete and 9 actions had not started.

Operational procurement and grants

Operational procurement and grants

| 21. | Negotiated procedures constituted 58 % of the 67 operational tendering procedures launched in 2014 (44 % in 2013). Although the Joint Undertaking operates in a very specialised technical field, it still needs to increase the competitiveness of procurement procedures. Regarding grants, the average number of proposals received was only 1 per call. |
| --- | --- |

21.

Negotiated procedures constituted 58 % of the 67 operational tendering procedures launched in 2014 (44 % in 2013). Although the Joint Undertaking operates in a very specialised technical field, it still needs to increase the competitiveness of procurement procedures. Regarding grants, the average number of proposals received was only 1 per call.

| 22. | Five operational procurement procedures were audited. The following weaknesses were identified:






  — | With one exception, F4E failed to provide the amount allocated to the different contracts from the 6,6 billion euro capped budget at the time of launching the procedure. In addition, nor did it provide the value for the estimate at completion (EAC) (27) of these activities. This information is essential to calculate the cost deviations from the capped budget. |
| --- | --- | --- |

22.

Five operational procurement procedures were audited. The following weaknesses were identified:

—

With one exception, F4E failed to provide the amount allocated to the different contracts from the 6,6 billion euro capped budget at the time of launching the procedure. In addition, nor did it provide the value for the estimate at completion (EAC) (27) of these activities. This information is essential to calculate the cost deviations from the capped budget.

27

| — | In one case, the deviation of the awarded value of the contract over the cost baseline was 29 % (12,4 million euro in 2008 values). This deviation was not reported in the evaluation committee report. |
| --- | --- |

—

In one case, the deviation of the awarded value of the contract over the cost baseline was 29 % (12,4 million euro in 2008 values). This deviation was not reported in the evaluation committee report.

| — | Deficiencies were found in the assessment of the financial offers by the evaluation committee. In one case, neither the contract options (amounting to 32 million euro) nor the additional costs to be incurred were taken into consideration in the assessment. In another case, the offers were not compared against the allocated value from the capped budget or against the cost baseline. In none of the procedures reviewed did the evaluation committee reports state the EAC for these contracts. |
| --- | --- |

—

Deficiencies were found in the assessment of the financial offers by the evaluation committee. In one case, neither the contract options (amounting to 32 million euro) nor the additional costs to be incurred were taken into consideration in the assessment. In another case, the offers were not compared against the allocated value from the capped budget or against the cost baseline. In none of the procedures reviewed did the evaluation committee reports state the EAC for these contracts.

| — | The performance of 1 procurement procedure was affected by a 21 month delay beyond the target date for completion. In 2 other procurement procedures, the contracts were awarded 10 and 5 months after the target date. |
| --- | --- |

—

The performance of 1 procurement procedure was affected by a 21 month delay beyond the target date for completion. In 2 other procurement procedures, the contracts were awarded 10 and 5 months after the target date.

| — | In 1 procurement procedure, the Joint Undertaking had to include an unforeseen and unbudgeted activity in the 2014 work programme (28). The value of the additional contract was 2,88 million euro. |
| --- | --- |

—

In 1 procurement procedure, the Joint Undertaking had to include an unforeseen and unbudgeted activity in the 2014 work programme (28). The value of the additional contract was 2,88 million euro.

28

| — | In 1 procurement procedure, the assessment of the technical award criteria provided by the evaluation committee in the evaluation report was too generic and the comments recorded were not sufficiently detailed to support the scores awarded. |
| --- | --- |

—

In 1 procurement procedure, the assessment of the technical award criteria provided by the evaluation committee in the evaluation report was too generic and the comments recorded were not sufficiently detailed to support the scores awarded.

| — | In 3 procurement procedures, although the Joint Undertaking published the corresponding contract notices and carried out a number of pre-procurement activities, it did not advertise the contracts by means of a pre information notice in order to increase visibility and competition, as advised by the Commission Vademecum on public procurement. |
| --- | --- |

—

In 3 procurement procedures, although the Joint Undertaking published the corresponding contract notices and carried out a number of pre-procurement activities, it did not advertise the contracts by means of a pre information notice in order to increase visibility and competition, as advised by the Commission Vademecum on public procurement.

Overall control and monitoring of operational procurement contracts and grants

Overall control and monitoring of operational procurement contracts and grants

| 23. | The Joint Undertaking has a system for performing audits (29) at the level of contractors with the aim of checking compliance with quality assurance requirements (30). |
| --- | --- |

23.

The Joint Undertaking has a system for performing audits (29) at the level of contractors with the aim of checking compliance with quality assurance requirements (30).

29

30

| 24. | As regards the overall control and monitoring of operational contracts (including financial and compliance verification), the Internal Audit Capability and the European Commission’s Internal Audit Service covered this area in their 2014 audit plans (31). |
| --- | --- |

24.

As regards the overall control and monitoring of operational contracts (including financial and compliance verification), the Internal Audit Capability and the European Commission’s Internal Audit Service covered this area in their 2014 audit plans (31).

31

| 25. | As regards ex-post audits on grants (as part of the F4E overall control and monitoring strategy), the exercise was not concluded at the time of the Court’s audit. |
| --- | --- |

25.

As regards ex-post audits on grants (as part of the F4E overall control and monitoring strategy), the exercise was not concluded at the time of the Court’s audit.

OTHER MATTERS

OTHER MATTERS

Legal framework

Legal framework

| 26. | The new Financial Regulation applicable to the general budget of the Union (32) was adopted on 25 October 2012 and took effect on 1 January 2013 (33). The framework financial regulation for the bodies (34) referred to in Article 208 of the new Financial Regulation entered into force on 8 December 2013. At the time of the audit, the financial rules of the Joint Undertaking have not yet been amended to reflect these changes. |
| --- | --- |

26.

The new Financial Regulation applicable to the general budget of the Union (32) was adopted on 25 October 2012 and took effect on 1 January 2013 (33). The framework financial regulation for the bodies (34) referred to in Article 208 of the new Financial Regulation entered into force on 8 December 2013. At the time of the audit, the financial rules of the Joint Undertaking have not yet been amended to reflect these changes.

32

33

34

Annual activity report

Annual activity report

| 27. | The Chair of F4E Governing Board refers in the 2014 annual activity report to the need to pursue all cost containment actions, while the Executive Director refers to the system of internal control being further enhanced and improved in order to appropriately mitigate the risks observed by the European Court of Auditors in the ‘Emphasis of Matter’ section of their 2013 annual report (35). |
| --- | --- |

27.

The Chair of F4E Governing Board refers in the 2014 annual activity report to the need to pursue all cost containment actions, while the Executive Director refers to the system of internal control being further enhanced and improved in order to appropriately mitigate the risks observed by the European Court of Auditors in the ‘Emphasis of Matter’ section of their 2013 annual report (35).

35

FOLLOW-UP OF PREVIOUS OBSERVATIONS

FOLLOW-UP OF PREVIOUS OBSERVATIONS

Intellectual property rights and industrial policy

Intellectual property rights and industrial policy

| 28. | The Decision on the implementation of the Fusion for Energy Industrial Policy and the Policy on Intellectual Property Rights and dissemination of information was adopted by the Joint Undertaking’s Governing Board on 27 June 2013. |
| --- | --- |

28.

The Decision on the implementation of the Fusion for Energy Industrial Policy and the Policy on Intellectual Property Rights and dissemination of information was adopted by the Joint Undertaking’s Governing Board on 27 June 2013.

| 29. | Several actions in relation to the implementation of intellectual property rights and industrial policy were finalised in 2014 (36) while some others are still being implemented (37), and three were pending further developments (38). Once the actions are implemented, F4E plans to carry out an impact assessment exercise in order to measure the impact of the different measures on the achievement of industrial policy objectives. |
| --- | --- |

29.

Several actions in relation to the implementation of intellectual property rights and industrial policy were finalised in 2014 (36) while some others are still being implemented (37), and three were pending further developments (38). Once the actions are implemented, F4E plans to carry out an impact assessment exercise in order to measure the impact of the different measures on the achievement of industrial policy objectives.

36

37

38

| 30. | One of the measures adopted by F4E in 2013, in order to attract the interest of the industry in the ITER project and to increase competition, is to offer contractors exclusive rights to the exploitation of the Intellectual Property they produce in fields outside fusion and non-exclusive rights in the field of fusion. |
| --- | --- |

30.

One of the measures adopted by F4E in 2013, in order to attract the interest of the industry in the ITER project and to increase competition, is to offer contractors exclusive rights to the exploitation of the Intellectual Property they produce in fields outside fusion and non-exclusive rights in the field of fusion.

| 31. | To mitigate the risks related to the obligation for the Joint Undertaking to retain the right to access the full Intellectual Property Rights (background and foreground) involved in the European in-kind contributions and to be able to transfer this access right to the ITER organisation when required, the Joint Undertaking has adopted specific contractual clauses applicable to F4E activities. |
| --- | --- |

31.

To mitigate the risks related to the obligation for the Joint Undertaking to retain the right to access the full Intellectual Property Rights (background and foreground) involved in the European in-kind contributions and to be able to transfer this access right to the ITER organisation when required, the Joint Undertaking has adopted specific contractual clauses applicable to F4E activities.

Conflicts of interest

Conflicts of interest

| 32. | The Rules on the management of conflicts of interest regarding staff members were adopted by F4E Governing Board and entered into force on 1 July 2014 (39). In accordance with Article 6 of the Conflict of Interest Rule, a register has been established to monitor the main cases, with information on the staff member concerned, the type of conflict of interest and the situation giving rise to the conflict of interest. It has also set up the database for the general declaration of interest forms, referred to in Article 7 of the Conflict of Interest Rules |
| --- | --- |

32.

The Rules on the management of conflicts of interest regarding staff members were adopted by F4E Governing Board and entered into force on 1 July 2014 (39). In accordance with Article 6 of the Conflict of Interest Rule, a register has been established to monitor the main cases, with information on the staff member concerned, the type of conflict of interest and the situation giving rise to the conflict of interest. It has also set up the database for the general declaration of interest forms, referred to in Article 7 of the Conflict of Interest Rules

39

Host State agreement

Host State agreement

| 33. | According to the Host State Agreement signed with the Kingdom of Spain on 28 June 2007, permanent premises should have been made available to the Joint Undertaking by June 2010. Following contacts between F4E and the Spanish Government, a formal offer was presented to the Joint Undertaking on 10 March 2015. The offer was presented to the Governing Board on 19 March 2015 and discussions with the Spanish authorities are currently taking place. |
| --- | --- |

33.

According to the Host State Agreement signed with the Kingdom of Spain on 28 June 2007, permanent premises should have been made available to the Joint Undertaking by June 2010. Following contacts between F4E and the Spanish Government, a formal offer was presented to the Joint Undertaking on 10 March 2015. The offer was presented to the Governing Board on 19 March 2015 and discussions with the Spanish authorities are currently taking place.

Rules implementing the Staff Regulations

Rules implementing the Staff Regulations

| 34. | During 2014, the Joint Undertaking adopted several EC rules implementing the Staff Regulations (40). At the time of the audit (March 2015), some specific EC rules were still to be adopted (41). |
| --- | --- |

34.

During 2014, the Joint Undertaking adopted several EC rules implementing the Staff Regulations (40). At the time of the audit (March 2015), some specific EC rules were still to be adopted (41).

40

41

This Report was adopted by Chamber IV, headed by Mr Milan Martin CVIKL, Member of the Court of Auditors, in Luxembourg at its meeting of 20 October 2015.

For the Court of Auditors

Vítor Manuel da SILVA CALDEIRA

President

---

(1)  ITER: International Thermonuclear Experimental Reactor.

1

(2)  Council Decision 2007/198/Euratom of 27 March 2007 establishing the European Joint Undertaking for ITER and the Development of Fusion Energy and conferring advantages upon it (OJ L 90, 30.3.2007, p. 58), amended by Council Decision 2013/791/Euratom of 13 December 2013 (OJ L 349, 21.12.2013, p. 100) and Council Decision (Euratom) 2015/224 of 10 February 2015 (OJ L 37, 13.2.2015, p. 8).

2

(3)  The Annex summarises the Joint Undertaking’s competences, activities and available resources. It is presented for information purposes.

3

Annex

(4)  The ITER International Fusion Energy Organisation was set up in October 2007 for an initial period of 35 years to implement the ITER project, which aims to demonstrate the scientific and technological feasibility of fusion energy. Its Members are Euratom, the People’s Republic of China, the Republic of India, Japan, the Republic of Korea, the Russian Federation and the United States of America.

4

(5)  These include the balance sheet and the statement of financial performance, the cash-flow table, the statement of changes in net assets, a summary of the significant accounting policies and other explanatory notes.

5

(6)  These comprise the reports on implementation of the budget, a summary of budgetary principles and other explanatory notes.

6

(7)  OJ L 328, 7.12.2013, p. 42.

7

(8)  The accounting rules adopted by the Commission’s accounting officer are derived from the International Public Sector Accounting Standards (IPSAS) issued by the International Federation of Accountants or, where relevant, the International Accounting Standards (IAS)/International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board.

8

(9)  Article 107 of Regulation (EU) No 1271/2013.

9

(10)  Council conclusions on ITER status of 7 July 2010 (Ref. 11902/10).

10

(11)  Communication from the Commission to the European Parliament and the Council of 4 May 2010 on ITER status and possible way forward (COM(2010) 226 final).

11

(12)  This results in particular from the innovative engineering solutions and technical challenges of many of the in-kind contributions to be provided to ITER International Organisation (ITER IO) and from the changes in technical specifications and in scope, which are the remit of ITER IO and over which F4E has little or no control.

12

(13)  As also reported in the Fusion for Energy Progress Report to the Council of the European Union of November 2014 and in the 3rd Annual assessment of Fusion for Energy-Report to the Council of the European Union of November 2014.

13

(14)  As regards the changes in the scope of the in-kind contributions to be provided to ITER IO, the current mechanism for compensating the cost increases resulting from these changes continues to be a matter of contention between ITER IO and F4E, with the latter considering that the current system is not applied in the intended manner and that F4E is left with uncompensated cost increases (2014 Fusion for Energy Progress Report to the Council of the European Union November 2014).

14

(15)  Paragraph 12, footnote 12, of the Court's 2013 report (OJ C 452, 16.12.2014, p. 44).

15

(16)  The Council of the ITER International Organisation (IO).

16

(17)  This represents a deviation of 7,2 % over the figure approved by the Council in 2010 (Fusion for Energy Progress Report to the European Competitiveness Council of November 2014). The increase in relation to the deviation reported in November 2013 (290 million euro) is of 138 million euro, mostly due to additional resources to ITER IO, and an additional contribution to Japan related to the EU procurements transferred to Japan, unforeseen in the initial cost baseline (see paragraph 2.7 of the 2014 F4E Accounts).

17

(18)  See paragraph 20.

18

(19)  On 5 March 2015 the ITER IO Council appointed the new Director General and endorsed the 2015 ITER IO action plan.

19

(20)  The new Acting Director was appointed by the Governing Board of F4E on 3 December 2014 for a period of 1 year starting 1 March 2015, pending the selection process of a new Director.

20

(21)  The Governing Board of F4E has endorsed the main principles set out in the F4E Action Plan and, in particular, the measures to support the creation of a new integrated organisation as envisioned by the new ITER IO DG, and requested the examination of any legal issue regarding the implementation of the action plan.

21

(22)  The initial budget available for payment appropriations adopted on 11 December 2013 was 698 million euro. It was then reduced to 567,6 million euro in the amending budgets of 11 June and 3 December 2014, mainly because of delays in the implementation of the activities related to the ITER construction budget chapter.

22

(23)  Cost Baseline (CB) as defined in footnote 3 of the 2014 Progress Report to the Council of the European Union: ‘The amount of money a project, a work breakdown structure component, a work package, or a schedule activity was estimated to cost when the Project Baseline was established. It reflects the cost estimates that were originally at the base of the 6,6 billion euro F4E budget, appropriately updated to add only the estimated costs associated with any scope changes that have occurred up to now. It is the reference against which F4E cost performance will be measured. The CB for a given amount of scope is given with a cost Probability Density Function (PDF).’

23

(24)  Internal audits on financial circuits, grant management, expert contracts, operational pre-procurement activities, procurement in the area of ITER buildings, selection and recruitment, monitoring of contract implementation in the area of ITER buildings, preparation of procurement arrangements in the EU JU for ITER and the development of fusion energy, review of the competitive dialogue procedure for the procurement of Tender Batch 03 (Tokamak Buildings) and limited review on contracts management.

24

(25)  F4E Internal Audit Capability review on monitoring of contracts implementation in the area of ITER buildings of October 2014.

25

(26)  IAS Limited Review of Contracts Management — Entity-wide Controls in the European Joint Undertaking for ITER and the Development of Fusion Energy of October 2014.

26

(27)  EAC as defined in footnote 4 of the 2014 Progress Report to the Council of the European Union: ‘The expected total cost of a scheduled activity, a work breakdown structure component, or the project when the defined scope of work is completed. In practice it covers all the most up-to-date cost estimates of F4E’s activities, including real costs of finished contracts, updated total cost estimates of current contracts, as well as forecast costs of future contracts. Thus the EAC also includes the cost of expected changes and of risks that may materialise during the execution of the current and future contracts. The EAC is given with a cost Probability Density Function (PDF).’

27

(28)  This resulted from the Joint Undertaking having to bear the cost of a failure in the production phase of the component.

28

(29)  Of the 19 quality audits carried out in 2014, 17 were closed by March 2015. The audits identified 21 situations of non-conformity with the procedures and 129 areas for improvement.

29

(30)  The audits covered the quality plan, situations of non-conformity (any condition that does not comply with a specified requirement), purchase control and subcontracting management, documentation and data management, changes and deviations management, the civil works quality control plan, the detailed project schedule, contract risk management and the technical works quality control plan.

30

(31)  See paragraph 20, points 4 and 5.

31

(32)  Regulation (EU, Euratom) No 966/2012 of the European Parliament and of the Council (OJ L 298, 26.10.2012, p. 1).

32

(33)  Article 214 of Regulation (EU, Euratom) No 966/2012 with the exemptions referred to.

33

(34)  OJ L 38, 7.2.2014, p. 2.

34

(35)  Paragraph 30 of the Court’s 2013 report (OJ C 452, 16.12.2014, p. 50).

35

(36)  Inter alia on explicit limitation of liability for indirect/consequential damages to the value of the contract price; payment by F4E of additional costs incurred by the contractor as a consequence of the change in the applicable legislation; sharing of risks for errors in the input technical documentation; indemnity to contractors in the event of suspension of the contract over a minimum defined period; reimbursement of additional costs incurred by the contractor in the event of delays in the supply of the free-issue items; plan for the improvement of F4E Industry Portal and the implementation of further e-procurement solutions; developing harmonised guidelines for the definition and application of selection and award criteria.

36

(37)  Guidelines on financial compensation for participation in a competitive dialogue.

37

(38)  Extended waiver from nuclear liabilities; transition to mostly performance-based procurements; and exploring the possibility of a two-stage Competitive Dialogue.

38

(39)  Decision of the Governing Board of Fusion for Energy adopting the rules on the prevention and management of conflicts of interest regarding staff members of the joint undertaking.

39

(40)  In particular as regards pensions, remunerations and allowances, working conditions, medical expenses, ethics and conduct and staff assigned outside the EU.

40

(41)  Inter alia on recruitment of temporary agents, use and engagement of contract staff, and procedures for the appraisal of officials and promotions.

41

---

ANNEX

European Joint Undertaking for ITER and the Development of Fusion Energy (Barcelona)

Competences and activities

| Areas of Union competence deriving from the Treaty


  (Articles 45 and 49 of the Treaty establishing the European Atomic Energy Community) | Chapter 5, on ‘Joint Undertakings’, of the Treaty establishing the European Atomic Energy Community, and in particular:
  Article 45
  ‘Undertakings which are of fundamental importance to the development of the nuclear industry in the Community may be established as Joint Undertakings within the meaning of this Treaty, in accordance with the following Articles ...’
  Article 49
  ‘Joint Undertakings shall be established by Council decision. Each Joint Undertaking shall have legal personality.’ |
| --- | --- |
| Competences of the Joint Undertaking


  (Council Decision 2007/198/Euratom, amended by Council Decision 2013/791/Euratom and by Council Decision/Euratom 2015/224) | Objectives







  — | To provide the contribution of the European Atomic Energy Community (Euratom) to the ITER International Fusion Energy Organisation; |

Areas of Union competence deriving from the Treaty

(Articles 45 and 49 of the Treaty establishing the European Atomic Energy Community)

Chapter 5, on ‘Joint Undertakings’, of the Treaty establishing the European Atomic Energy Community, and in particular:

Article 45

‘Undertakings which are of fundamental importance to the development of the nuclear industry in the Community may be established as Joint Undertakings within the meaning of this Treaty, in accordance with the following Articles ...’

Article 49

‘Joint Undertakings shall be established by Council decision. Each Joint Undertaking shall have legal personality.’

Competences of the Joint Undertaking

(Council Decision 2007/198/Euratom, amended by Council Decision 2013/791/Euratom and by Council Decision/Euratom 2015/224)

Objectives

—

To provide the contribution of the European Atomic Energy Community (Euratom) to the ITER International Fusion Energy Organisation;

| — | to provide the contribution of Euratom to Broader Approach activities with Japan for the rapid realisation of fusion energy; |
| --- | --- |

—

to provide the contribution of Euratom to Broader Approach activities with Japan for the rapid realisation of fusion energy;

| — | to prepare and coordinate a programme of activities in preparation for the construction of a demonstration fusion reactor and related facilities, including the International Fusion Materials Irradiation Facility (IFMIF). |
| --- | --- |

—

to prepare and coordinate a programme of activities in preparation for the construction of a demonstration fusion reactor and related facilities, including the International Fusion Materials Irradiation Facility (IFMIF).

Tasks

| — | Oversee preparation of the ITER project site; |
| --- | --- |

—

Oversee preparation of the ITER project site;

| — | provide components, equipment, materials and other resources to the ITER Organisation; |
| --- | --- |

—

provide components, equipment, materials and other resources to the ITER Organisation;

| — | manage procurement arrangements vis-à-vis the ITER Organisation and, in particular associated quality assurance procedures; |
| --- | --- |

—

manage procurement arrangements vis-à-vis the ITER Organisation and, in particular associated quality assurance procedures;

| — | prepare and coordinate Euratom’s participation in the scientific and technical exploitation of the ITER project; |
| --- | --- |

—

prepare and coordinate Euratom’s participation in the scientific and technical exploitation of the ITER project;

| — | coordinate scientific and technological research and development activities in support of Euratom’s contribution to the ITER Organisation; |
| --- | --- |

—

coordinate scientific and technological research and development activities in support of Euratom’s contribution to the ITER Organisation;

| — | provide Euratom’s financial contribution to the ITER Organisation; |
| --- | --- |

—

provide Euratom’s financial contribution to the ITER Organisation;

| — | arrange to make human resources available for the ITER Organisation; |
| --- | --- |

—

arrange to make human resources available for the ITER Organisation;

| — | interface with the ITER Organisation and carry out any other activities in furtherance of the ITER Agreement. |
| --- | --- |

—

interface with the ITER Organisation and carry out any other activities in furtherance of the ITER Agreement.

Governance

Governing Board, Director and other bodies

The Governing Board is responsible for the supervision of the Joint Undertaking in the pursuit of its objectives and ensures close collaboration between the Joint Undertaking and its members in the implementation of its activities. Together with the Governing Board and the Director, who is the chief executive officer responsible for the day-to-day management of the Joint Undertaking and its legal representative, the Joint Undertaking has several bodies:

Bureau, Technical Advisory Panel, Executive Committee, Administration & Finance Committee, Audit Committee.

Internal auditor: internal audit capability and the European Commission’s Internal Audit Service (IAS) since 1 January 2012.

External auditor: European Court of Auditors.

Discharge authority: the European Parliament, on a recommendation from the Council.

Resources available to the Joint Undertaking in 2014

Budget

550,6 million euro final revenue (payment appropriations) of which 77 % funded by Community contribution.

Staff at 31 December 2014

262 EU official and temporary agent posts provided for in the establishment plan, of which 249 posts were occupied;

144 contract agent posts occupied.

Activities and services provided in 2014

For detailed information concerning the activities and services provided in 2014, please consult the F4E website at: http://www.fusionforenergy.europa.eu/

Source: European Joint Undertaking for ITER and the Development of Fusion Energy.

---

THE JOINT UNDERTAKING’S REPLIES

| 13. | In the past years F4E has been asked to implement a project with inherent technical challenges and management boundary conditions which have hardly any precedent worldwide: in the context of the already huge challenges of implementing a first-of-a-kind technically complex device like ITER, technical specifications are based on inputs largely provided by another entity, the ITER Organization (IO), and deviations to specifications, even during contract implementation, are extremely frequent. F4E has been at the receiving end of these, having to implement them mostly without any compensation.
  The adoption in 2011 by the ITER Council of the so called ‘MAC-10 guidelines’, defining the responsibilities to be assumed for funding design changes and originally introduced with the objective to streamline decision making processes, has aggravated instead of improving the situation described above. This has led to a modest Systems/Value Engineering endeavour in the IO integration, with cost overruns and further tensions developing amongst IO and all Domestic Agencies (DAs). This problem is severe for all DAs, but in particular for F4E, where the impact of constant changes on components affects the buildings almost by ‘default’, as evidenced by the papers provided to the F4E Governing Board (GB) in its December 2014 meeting.
  Cost clearly depends on work scope (i.e. design), and even more so when alterations are required during the very construction phase. The fact that the latter is largely under the control of IO and its governance, and the former of F4E, clearly shows a misalignment of responsibilities.
  This is indeed one of the most challenging aspects of the ITER project, as well identified in the European Parliament’s 2013 study on cost effectiveness of the ITER project by Ernst and Young. Indeed the headings of the executive summary of this study state that ‘Cost increases have largely emanated from the project-level and are outside of the direct control of F4E’ and ‘F4E is a sui generis organisation operating in a complex environment, which constrains the possibilities for cost-efficiency’. In short, due to the very set up of the Agreement and its instruments, a significant fraction of the costs which F4E has to absorb are not under its direct control.
  Specifically on the matter of cost control, this being a key F4E objective, under the previous MAC-10 guidelines any control system limited within F4E would have not been able to limit the influx of changes from IO (who acts as owner and integrator). Only now, with the elimination of the MAC-10 guidelines and the introduction of a system to replace them for their intended purpose (the Reserve Fund of IO), as well as with the promise by the new IO management to implement a comprehensive configuration management system, it may be well possible, through gradual integration of technical management processes, to implement a more effective cost control system.
  Largely based on the above, the project stakeholders (IO and the DAs — including F4E) have come to the conclusion that the current schedule is not realistic — a fact which has been also confirmed by several independent assessments in the last 2 years (2013-14). For this reason IO/F4E, together with the other Parties’ DAs, are working on a new revised schedule which should be presented to the ITER Council in November 2015. The revised schedule shall then be assessed by the ITER Parties which should also take into account the available resources and the cost dimension, as these elements are closely related. It is therefore very probable that, as a result of the revised schedule, the overall cost estimate will have to be discussed and proposed. This will not affect the resources needed in the current MFF (Multiannual Financial Framework), but may have longer term consequences. |
| --- | --- |

13.

In the past years F4E has been asked to implement a project with inherent technical challenges and management boundary conditions which have hardly any precedent worldwide: in the context of the already huge challenges of implementing a first-of-a-kind technically complex device like ITER, technical specifications are based on inputs largely provided by another entity, the ITER Organization (IO), and deviations to specifications, even during contract implementation, are extremely frequent. F4E has been at the receiving end of these, having to implement them mostly without any compensation.

The adoption in 2011 by the ITER Council of the so called ‘MAC-10 guidelines’, defining the responsibilities to be assumed for funding design changes and originally introduced with the objective to streamline decision making processes, has aggravated instead of improving the situation described above. This has led to a modest Systems/Value Engineering endeavour in the IO integration, with cost overruns and further tensions developing amongst IO and all Domestic Agencies (DAs). This problem is severe for all DAs, but in particular for F4E, where the impact of constant changes on components affects the buildings almost by ‘default’, as evidenced by the papers provided to the F4E Governing Board (GB) in its December 2014 meeting.

Cost clearly depends on work scope (i.e. design), and even more so when alterations are required during the very construction phase. The fact that the latter is largely under the control of IO and its governance, and the former of F4E, clearly shows a misalignment of responsibilities.

This is indeed one of the most challenging aspects of the ITER project, as well identified in the European Parliament’s 2013 study on cost effectiveness of the ITER project by Ernst and Young. Indeed the headings of the executive summary of this study state that ‘Cost increases have largely emanated from the project-level and are outside of the direct control of F4E’ and ‘F4E is a sui generis organisation operating in a complex environment, which constrains the possibilities for cost-efficiency’. In short, due to the very set up of the Agreement and its instruments, a significant fraction of the costs which F4E has to absorb are not under its direct control.

Specifically on the matter of cost control, this being a key F4E objective, under the previous MAC-10 guidelines any control system limited within F4E would have not been able to limit the influx of changes from IO (who acts as owner and integrator). Only now, with the elimination of the MAC-10 guidelines and the introduction of a system to replace them for their intended purpose (the Reserve Fund of IO), as well as with the promise by the new IO management to implement a comprehensive configuration management system, it may be well possible, through gradual integration of technical management processes, to implement a more effective cost control system.

Largely based on the above, the project stakeholders (IO and the DAs — including F4E) have come to the conclusion that the current schedule is not realistic — a fact which has been also confirmed by several independent assessments in the last 2 years (2013-14). For this reason IO/F4E, together with the other Parties’ DAs, are working on a new revised schedule which should be presented to the ITER Council in November 2015. The revised schedule shall then be assessed by the ITER Parties which should also take into account the available resources and the cost dimension, as these elements are closely related. It is therefore very probable that, as a result of the revised schedule, the overall cost estimate will have to be discussed and proposed. This will not affect the resources needed in the current MFF (Multiannual Financial Framework), but may have longer term consequences.

| 14. | F4E is bound to implement the requirements and the changes in design imposed by IO, even though these might have cost impact and cost risks. At the same time, F4E is vigorously pursuing a large range of cost containment measures under close supervision of its GB to ensure that the budget ceiling allocated for the current MFF until 2020 is respected. Some of these measures are:






  — | Making better use of the different available types of procurement procedures allowing F4E to reduce costs and work more efficiently: this includes a more extensive use of the competitive dialogue and negotiated procedures, when allowed by the F4E Financial Regulation, that help us to identify cost effective solutions together with contractors; |
| --- | --- | --- |

14.

F4E is bound to implement the requirements and the changes in design imposed by IO, even though these might have cost impact and cost risks. At the same time, F4E is vigorously pursuing a large range of cost containment measures under close supervision of its GB to ensure that the budget ceiling allocated for the current MFF until 2020 is respected. Some of these measures are:

—

Making better use of the different available types of procurement procedures allowing F4E to reduce costs and work more efficiently: this includes a more extensive use of the competitive dialogue and negotiated procedures, when allowed by the F4E Financial Regulation, that help us to identify cost effective solutions together with contractors;

| — | Improving value for money of procurement procedures by broadening competition among potential suppliers: this includes using staged procurement strategies with multiple suppliers developing prototypes in parallel during the early stages and then competing for the series production; |
| --- | --- |

—

Improving value for money of procurement procedures by broadening competition among potential suppliers: this includes using staged procurement strategies with multiple suppliers developing prototypes in parallel during the early stages and then competing for the series production;

| — | Facilitating stronger value engineering, promoting efficient allocation of procurement obligations among different actors (IO and DAs), agreeing standards and exploiting economies of scale when possible. |
| --- | --- |

—

Facilitating stronger value engineering, promoting efficient allocation of procurement obligations among different actors (IO and DAs), agreeing standards and exploiting economies of scale when possible.

Cost control will continue to be a priority at global project management level under the leadership of the new Director General (DG) of the ITER Organization since March 2015.

As far as costing is concerned at F4E level, a detailed Estimate at Completion at WBS (Work Breakdown Structure) level 6 for the EU in-kind contributions is being carried out by taking into account risks and uncertainties. This result will lead to the evaluation of the new contingency requirements.

| 15. | As reported in previous occasions by F4E, the capped budget for the current MFF was established on the assumptions of the exercise carried out in 2008 (Toschi report) which were done at WBS levels 3 (System) and 4 (PA — Procurement Arrangement). This does not mean in any way that there is no system to monitor costs. In fact there is already a fully operational system to control and monitor costs at the level of the procurement arrangement, WBS level 4, and at the level of the system, WBS level 3 (as acknowledged by the Court in its report 2013). What indeed F4E did not have yet in place at the time of the audit (March 2015) was all the data at level 6 (contracts). This does not mean that F4E did not estimate costs at individual contracts, F4E did, but in the individual project teams and not in a centralised and uniform manner.
  While since years F4E employs a number of data management tools to maintain/manage its operational and financial data (e.g. ABAC, ABAC Contracts, Primavera, IDM, etc.) integrated by a core ‘Integrated Reporting System’, F4E confirms that work is progressing to improve its system to manage cost data and deviations. The first part, the system and methodology to monitor cost estimates and deviations at contract level, has been presented in September 2015 to the Internal Audit Service (IAS) of the Commission during their visit on the PA Preparation follow up audit. The second phase will be the implementation of a fully integrated Enterprise Resource Planning (ERP) system which will integrate data and processes: from budgeting, through procurement, all the way to deviation management and delivery. The implementation of the ERP has been agreed at GB level together with the establishment of a dedicated fourth Department within the F4E organisation whose focus will be project management (cost, scope, quality, schedule, and risk) and its infrastructure (data models, tools, processes).
  F4E confirms that an update, taking into account the past scope changes deriving from IO, of the cost baseline, as developed by the Toschi group in 2008, at level 4 was carried out and it is updated whenever changes to the baseline are approved (mainly through Project Change Requests) by the ITER Council. As the cost baseline at level 6 is concerned, the reconstruction of the Toschi cost estimates at such level has been possible only for some systems (e.g. the Magnet) as there are not enough data from the Toschi group results to allow a comprehensive (i.e. summing up to the whole scope) splitting of the level 4 values down to level 6.
  Therefore the focus of the work has been to rebuild a new Cost Baseline altogether, not only including risks affecting prices (as done during the Toschi analysis) but also taking into account the Estimate at Completion process for all planned level 6 activities.
  To that end, the F4E Director established a Task Force to define and apply a structured and traceable process to attain an Estimate At Completion at level 6 for the entire work to be completed by F4E to fulfil its obligations under the ITER Project. This also addresses the need to establish and maintain credibility of the cost estimates and the factors (e.g. risks and uncertainties) that affect the results and their reliability. The system and methodology has been already presented to the IAS during their follow up visit in September 2015.
  An update of the EU contribution to the ITER project beyond its construction phase has not been carried out and it is not planned until relevant information will be provided by the project to allow such analysis. |
| --- | --- |

15.

As reported in previous occasions by F4E, the capped budget for the current MFF was established on the assumptions of the exercise carried out in 2008 (Toschi report) which were done at WBS levels 3 (System) and 4 (PA — Procurement Arrangement). This does not mean in any way that there is no system to monitor costs. In fact there is already a fully operational system to control and monitor costs at the level of the procurement arrangement, WBS level 4, and at the level of the system, WBS level 3 (as acknowledged by the Court in its report 2013). What indeed F4E did not have yet in place at the time of the audit (March 2015) was all the data at level 6 (contracts). This does not mean that F4E did not estimate costs at individual contracts, F4E did, but in the individual project teams and not in a centralised and uniform manner.

While since years F4E employs a number of data management tools to maintain/manage its operational and financial data (e.g. ABAC, ABAC Contracts, Primavera, IDM, etc.) integrated by a core ‘Integrated Reporting System’, F4E confirms that work is progressing to improve its system to manage cost data and deviations. The first part, the system and methodology to monitor cost estimates and deviations at contract level, has been presented in September 2015 to the Internal Audit Service (IAS) of the Commission during their visit on the PA Preparation follow up audit. The second phase will be the implementation of a fully integrated Enterprise Resource Planning (ERP) system which will integrate data and processes: from budgeting, through procurement, all the way to deviation management and delivery. The implementation of the ERP has been agreed at GB level together with the establishment of a dedicated fourth Department within the F4E organisation whose focus will be project management (cost, scope, quality, schedule, and risk) and its infrastructure (data models, tools, processes).

F4E confirms that an update, taking into account the past scope changes deriving from IO, of the cost baseline, as developed by the Toschi group in 2008, at level 4 was carried out and it is updated whenever changes to the baseline are approved (mainly through Project Change Requests) by the ITER Council. As the cost baseline at level 6 is concerned, the reconstruction of the Toschi cost estimates at such level has been possible only for some systems (e.g. the Magnet) as there are not enough data from the Toschi group results to allow a comprehensive (i.e. summing up to the whole scope) splitting of the level 4 values down to level 6.

Therefore the focus of the work has been to rebuild a new Cost Baseline altogether, not only including risks affecting prices (as done during the Toschi analysis) but also taking into account the Estimate at Completion process for all planned level 6 activities.

To that end, the F4E Director established a Task Force to define and apply a structured and traceable process to attain an Estimate At Completion at level 6 for the entire work to be completed by F4E to fulfil its obligations under the ITER Project. This also addresses the need to establish and maintain credibility of the cost estimates and the factors (e.g. risks and uncertainties) that affect the results and their reliability. The system and methodology has been already presented to the IAS during their follow up visit in September 2015.

An update of the EU contribution to the ITER project beyond its construction phase has not been carried out and it is not planned until relevant information will be provided by the project to allow such analysis.

| 16. | F4E would like to point out that these two Action Plans aim, as far as is possible within the legal framework of the ITER Project, at measures that compensate for some of the weaknesses identified above.
  Firstly, on 5 March 2015 the ITER Council (at which Europe is represented by the Commission), appointed the new DG of IO and endorsed an Action Plan which he had prepared in response, among other things, to the ITER 2013 Management Assessment. In addition to the release of a new ITER Project baseline (scope, schedule and cost) the IO’s Action Plan proposed a number of specific measures such as:






  — | Setting up a new organisation characterised by a profound integration of the DAs and the IO’s Central Team (IO-CT); |
| --- | --- | --- |

16.

F4E would like to point out that these two Action Plans aim, as far as is possible within the legal framework of the ITER Project, at measures that compensate for some of the weaknesses identified above.

Firstly, on 5 March 2015 the ITER Council (at which Europe is represented by the Commission), appointed the new DG of IO and endorsed an Action Plan which he had prepared in response, among other things, to the ITER 2013 Management Assessment. In addition to the release of a new ITER Project baseline (scope, schedule and cost) the IO’s Action Plan proposed a number of specific measures such as:

—

Setting up a new organisation characterised by a profound integration of the DAs and the IO’s Central Team (IO-CT);

| — | Creating an Executive Project Board (EPB) composed of the IO DG and the DAs to allow for centralised and rapid decision-making on technical matters; |
| --- | --- |

—

Creating an Executive Project Board (EPB) composed of the IO DG and the DAs to allow for centralised and rapid decision-making on technical matters;

| — | Establishing a Reserve Fund to compensate DAs for cost increases that are incurred due to changes of the initial technical specifications by the IO-CT, hence so replacing the so called ‘MAC-10 Guidelines’ from 2011; |
| --- | --- |

—

Establishing a Reserve Fund to compensate DAs for cost increases that are incurred due to changes of the initial technical specifications by the IO-CT, hence so replacing the so called ‘MAC-10 Guidelines’ from 2011;

| — | Setting up common Project Teams of managers and staff from the IO-CT and DAs for specific areas and facilitating greater exchange and mobility of staff. |
| --- | --- |

—

Setting up common Project Teams of managers and staff from the IO-CT and DAs for specific areas and facilitating greater exchange and mobility of staff.

Secondly, the new F4E Acting Director prepared an Action Plan and presented it to F4E GB on 24 March 2015, where it was fully endorsed. F4E’s Action Plan complements the ITER Action Plan in a number of respects but also identifies further improvements in F4E’s own operations. The main elements are:

| — | Contribute to the realistic schedule allowing a more accurate commitment profiles and a better implementation of its budget in accordance to plans; |
| --- | --- |

—

Contribute to the realistic schedule allowing a more accurate commitment profiles and a better implementation of its budget in accordance to plans;

| — | Determining the cost estimates using an improved, more realistic, methodology and implementing a system for the management of funds. F4E has implemented a central and uniform system to manage costing data to better control estimates, costs and deviations. This will allow F4E to maintain to close control of the evolution of the budget and monitor cost deviations on a regular basis and ensure that the F4E Director and senior management can exercise an efficient and sound financial management of the project; |
| --- | --- |

—

Determining the cost estimates using an improved, more realistic, methodology and implementing a system for the management of funds. F4E has implemented a central and uniform system to manage costing data to better control estimates, costs and deviations. This will allow F4E to maintain to close control of the evolution of the budget and monitor cost deviations on a regular basis and ensure that the F4E Director and senior management can exercise an efficient and sound financial management of the project;

| — | Reinforcing F4E’s Risk Management Framework including setting an appropriate risk appetite so as to improve F4E’s agility and sound financial management; |
| --- | --- |

—

Reinforcing F4E’s Risk Management Framework including setting an appropriate risk appetite so as to improve F4E’s agility and sound financial management;

| — | Making further F4E organisation changes aimed at improving the efficiency of the organisation, in particular, for project management tools and processes. |
| --- | --- |

—

Making further F4E organisation changes aimed at improving the efficiency of the organisation, in particular, for project management tools and processes.

| — | Pursue the implementation of the audit recommendations issued by internal and external auditors to adequately mitigate the weaknesses of the F4E Internal Control System (Costing, Contract Management, Procurement activities, etc.), improve our internal processes and optimise our activities to further enhance our efficiency. |
| --- | --- |

—

Pursue the implementation of the audit recommendations issued by internal and external auditors to adequately mitigate the weaknesses of the F4E Internal Control System (Costing, Contract Management, Procurement activities, etc.), improve our internal processes and optimise our activities to further enhance our efficiency.

Since March 2015 these Action Plans are being implemented by IO and F4E and are expected to bring about improvements related to many of the observations raised by the ECA and the European Parliament in their report on the 2013 discharge. The implementation of these action plans is being closely followed at the highest levels of governance of the ITER Project, both in the IO and in F4E.

| 18. | F4E provides, on behalf of Europe, the in-kind contribution to the ITER project in the form of components. Once the design of a component is sufficiently mature, a so called Procurement Arrangement is concluded between F4E and the ITER Organization setting out what has to be provided, by when. As work is executed to the satisfaction of the ITER Organization, F4E is gradually awarded ITER credit in recognition of the progress of work associated to specific milestones agreed in advance. This is the system agreed by the ITER partners in proving the right level of information for the ITER Council, hence ensuring an integrated reporting from all DAs and being the proper measure of the project progress.
  In the financial statements 2014 (included in the F4E 2014 Annual Accounts) F4E included a table showing the value of procurement arrangements signed and the amounts of credits received from the IO so far, the latter being really low. The reason behind this is that the initial ITER Organization (IO) management distributed credits within PAs predominantly towards the end and this shortcoming induces some ‘pessimism’ in reports. This has been identified as a problem that needs to be solved and work has already started with IO to review credit distributions along the life of the PAs in a way that reflects more accurately the progress achieved by each DA. This is expected to be solved during the course of 2015.
  It is for that reason that F4E included in the financial statements 2014 an estimate of the percentage of works completed, based on the amount of expenses related to PA’s incurred in 2014 and comparing them to the estimated value of the contribution in kind to the project.
  In addition to this, F4E prepares an Annual Progress Report and an Annual Activity Report which provide detailed information on the overall progress of the European contribution to the ITER Project, together with the achievement of the annual KPI’s and Corporate Objectives. Moreover, F4E is subject to annual External Assessments where independent experts assess the project progress on the basis of existing reports to provide the GB and the European Council with an overview on the progress of the ITER Project. |
| --- | --- |

18.

F4E provides, on behalf of Europe, the in-kind contribution to the ITER project in the form of components. Once the design of a component is sufficiently mature, a so called Procurement Arrangement is concluded between F4E and the ITER Organization setting out what has to be provided, by when. As work is executed to the satisfaction of the ITER Organization, F4E is gradually awarded ITER credit in recognition of the progress of work associated to specific milestones agreed in advance. This is the system agreed by the ITER partners in proving the right level of information for the ITER Council, hence ensuring an integrated reporting from all DAs and being the proper measure of the project progress.

In the financial statements 2014 (included in the F4E 2014 Annual Accounts) F4E included a table showing the value of procurement arrangements signed and the amounts of credits received from the IO so far, the latter being really low. The reason behind this is that the initial ITER Organization (IO) management distributed credits within PAs predominantly towards the end and this shortcoming induces some ‘pessimism’ in reports. This has been identified as a problem that needs to be solved and work has already started with IO to review credit distributions along the life of the PAs in a way that reflects more accurately the progress achieved by each DA. This is expected to be solved during the course of 2015.

It is for that reason that F4E included in the financial statements 2014 an estimate of the percentage of works completed, based on the amount of expenses related to PA’s incurred in 2014 and comparing them to the estimated value of the contribution in kind to the project.

In addition to this, F4E prepares an Annual Progress Report and an Annual Activity Report which provide detailed information on the overall progress of the European contribution to the ITER Project, together with the achievement of the annual KPI’s and Corporate Objectives. Moreover, F4E is subject to annual External Assessments where independent experts assess the project progress on the basis of existing reports to provide the GB and the European Council with an overview on the progress of the ITER Project.

| 19. | The long delays accumulated by the project with respect to the current baseline (First Plasma in November 2020) have caused a shift in the commitments for many of the systems.
  In fact, the multiple change requests coming from IO have slowed down the project and induced delays, caused countless deviations to existing contracts, and induced global project delays. Although these events were mostly out of F4E’s control, it was asked to implement such deviations in accordance with the MAC-10 guidelines approved at the ITER Council (where Europe is represented by the Commission and not by F4E). Due to this frequent occurrence of changes F4E has also often decided to refrain from proceeding with some procurement actions that is until the specifications were deemed as relatively stable. Deviations applied to open contracts represent in fact a significant cause of cost increases and hence must be limited to the minimum in order to combat those issues regarding cost containment which the Court reports in other findings.
  In addition, the rigidity of the budget profile under the multiannual financial framework is difficult to reconcile with the evolution observed in an innovative project of this nature that needs a more realistic schedule. As a result, the implementation of F4E’s commitment appropriation was under pressure in the recent years. The plan for a European Strategic Fund for Investments allowed a shift of 500 million euro commitment appropriations from 2015 to 2018-20. This shift matches the implementation profile better and is more in line with the new realistic schedule.
  As for the payment appropriations, such delays in the project have slowed down the signature of contracts and consequently have not allowed for the planned pre-financings and other foreseen payments.
  The change of management in IO and the now ongoing rebaselining of the project should be the basis for an improvement of this problem in the future. |
| --- | --- |

19.

The long delays accumulated by the project with respect to the current baseline (First Plasma in November 2020) have caused a shift in the commitments for many of the systems.

In fact, the multiple change requests coming from IO have slowed down the project and induced delays, caused countless deviations to existing contracts, and induced global project delays. Although these events were mostly out of F4E’s control, it was asked to implement such deviations in accordance with the MAC-10 guidelines approved at the ITER Council (where Europe is represented by the Commission and not by F4E). Due to this frequent occurrence of changes F4E has also often decided to refrain from proceeding with some procurement actions that is until the specifications were deemed as relatively stable. Deviations applied to open contracts represent in fact a significant cause of cost increases and hence must be limited to the minimum in order to combat those issues regarding cost containment which the Court reports in other findings.

In addition, the rigidity of the budget profile under the multiannual financial framework is difficult to reconcile with the evolution observed in an innovative project of this nature that needs a more realistic schedule. As a result, the implementation of F4E’s commitment appropriation was under pressure in the recent years. The plan for a European Strategic Fund for Investments allowed a shift of 500 million euro commitment appropriations from 2015 to 2018-20. This shift matches the implementation profile better and is more in line with the new realistic schedule.

As for the payment appropriations, such delays in the project have slowed down the signature of contracts and consequently have not allowed for the planned pre-financings and other foreseen payments.

The change of management in IO and the now ongoing rebaselining of the project should be the basis for an improvement of this problem in the future.

| 20. | F4E welcomes that the Court recognises the significant progress made and considers the ongoing actions as part of the continuous improvement and development of its control systems.
  In relation to the central system to monitor costs: we refer to our reply to paragraph 15. F4E has now put in place a central system to monitor and control cost data at contract level.
  In relation to the action plans in response to internal audits: F4E is actively pursuing the implementation of the open actions according to the priorities set up by the Director and agreed by the Audit Committee and the Governing Board, addressing as a matter of urgency the recommendations rated as Critical and Very Important. Substantial progress has been made in the implementation of these action plans:






  — | For the audits on Grants Management, Experts Contracts and Operational Pre-procurement activities, the IAC performed follow up engagements. The results were discussed at the Audit Committee, which was satisfied with the result and therefore these audits are now considered as closed. |
| --- | --- | --- |

20.

F4E welcomes that the Court recognises the significant progress made and considers the ongoing actions as part of the continuous improvement and development of its control systems.

In relation to the central system to monitor costs: we refer to our reply to paragraph 15. F4E has now put in place a central system to monitor and control cost data at contract level.

In relation to the action plans in response to internal audits: F4E is actively pursuing the implementation of the open actions according to the priorities set up by the Director and agreed by the Audit Committee and the Governing Board, addressing as a matter of urgency the recommendations rated as Critical and Very Important. Substantial progress has been made in the implementation of these action plans:

—

For the audits on Grants Management, Experts Contracts and Operational Pre-procurement activities, the IAC performed follow up engagements. The results were discussed at the Audit Committee, which was satisfied with the result and therefore these audits are now considered as closed.

| — | The action plans adopted by F4E in response to the internal audits on Financial Circuits, Procurement Arrangement Preparation and TB03 Competitive Dialogue are now fully implemented and the IAS and the IAC are currently performing follow ups. |
| --- | --- |

—

The action plans adopted by F4E in response to the internal audits on Financial Circuits, Procurement Arrangement Preparation and TB03 Competitive Dialogue are now fully implemented and the IAS and the IAC are currently performing follow ups.

| — | For the audit on Selection and Recruitment, 34 actions are implemented, 2 actions in progress, 1 suspended and 1 obsolete. |
| --- | --- |

—

For the audit on Selection and Recruitment, 34 actions are implemented, 2 actions in progress, 1 suspended and 1 obsolete.

| — | For the audit on Procurement in the area of ITER buildings, 31 actions have been implemented, 2 are still in progress and 1 has been cancelled. |
| --- | --- |

—

For the audit on Procurement in the area of ITER buildings, 31 actions have been implemented, 2 are still in progress and 1 has been cancelled.

IAC review of the monitoring of contract implementation in the area of the ITER buildings: the action plan in response to this audit was adopted in February 2015 and significant progress has been achieved: out of the 24 actions proposed, 20 have been implemented, 1 has been cancelled and 3 are in progress.

IAS review on the contract management: the action plan was adopted in November 2014 and the current status is as follows: out of the 19 actions proposed, 12 have been implemented and 7 are in progress.

Corporate Risks: The update of the 2015 high level risks will be carried out in view of the next AC in November including setting an appropriate risk appetite so as to improve F4E’s agility and sound financial management.

| 21. | F4E would like to stress that the relative large fraction of negotiated procedures is the consequence of the complex and innovative context in which it operates. This results often in a limited competition or (in extreme cases) to monopoly or even lack of participation to calls for tender. In particular, in 15 out of the 39 negotiated procedures concluded in 2014, the particular circumstances of the market and/or the services/works to be procured made the negotiated procedure the best procurement option, in accordance with Article 100.2 of F4E Implementing Rules.
  The remaining 24 negotiated procedures correspond to low value contracts in accordance with Article 100.1 of F4E IR. It should be noted that these 24 contracts amount to 36 % of the total number of contracts signed (all type of procurement procedures) but only to 0,3 % in terms of value awarded. The low value negotiated procedures entail a much lower use of internal resources than the open, restricted or competitive dialogue ones (due to the procedural simplification), and therefore its use is considered by F4E as a valuable tool to be able to focus the limited internal resources on the high-value/high-risk procurements.
  F4E would like to recall that the nature of the activities related to the scope of the ITER Project are such that limited competition is regrettably a matter of fact for which F4E can have only a modest impact. Most opportunities that were in F4E’s hands in order to increase competition have been pursued (i.e. wide dissemination to industry in all member states through Industrial Liaison Officers (ILOs) and dedicated meetings, targeted and general purpose information days for industry in different locations around Europe, reinforcing efforts in relation to the stabilisation and better understanding of our supply chain, an internal policy about pre-information notices, intensification of market surveys, industry-standard Intellectual Property Rights (IPR) and liability provisions, etc.). F4E activities should be compared with similar first of a kind high-tech frontier projects worldwide. One cannot deny that even more effort to increase competition could be invested by F4E but this would clearly consume more internal resources and therefore impact negatively other areas.
  Similarly, in relation to the very low number of proposals received for the grant calls, this fact is mainly due to two factors: on the one hand the extremely specialised nature of F4E’s grants entails that the nature of the work is only of interest to a small number of applicants in Europe and on the other hand the success of the European fusion programme in creating a European research area in fusion with minimal duplication of efforts and close collaboration among teams active in one field. The latter manifests itself in pan-European consortia being behind most proposals in response to F4E calls. |
| --- | --- |

21.

F4E would like to stress that the relative large fraction of negotiated procedures is the consequence of the complex and innovative context in which it operates. This results often in a limited competition or (in extreme cases) to monopoly or even lack of participation to calls for tender. In particular, in 15 out of the 39 negotiated procedures concluded in 2014, the particular circumstances of the market and/or the services/works to be procured made the negotiated procedure the best procurement option, in accordance with Article 100.2 of F4E Implementing Rules.

The remaining 24 negotiated procedures correspond to low value contracts in accordance with Article 100.1 of F4E IR. It should be noted that these 24 contracts amount to 36 % of the total number of contracts signed (all type of procurement procedures) but only to 0,3 % in terms of value awarded. The low value negotiated procedures entail a much lower use of internal resources than the open, restricted or competitive dialogue ones (due to the procedural simplification), and therefore its use is considered by F4E as a valuable tool to be able to focus the limited internal resources on the high-value/high-risk procurements.

F4E would like to recall that the nature of the activities related to the scope of the ITER Project are such that limited competition is regrettably a matter of fact for which F4E can have only a modest impact. Most opportunities that were in F4E’s hands in order to increase competition have been pursued (i.e. wide dissemination to industry in all member states through Industrial Liaison Officers (ILOs) and dedicated meetings, targeted and general purpose information days for industry in different locations around Europe, reinforcing efforts in relation to the stabilisation and better understanding of our supply chain, an internal policy about pre-information notices, intensification of market surveys, industry-standard Intellectual Property Rights (IPR) and liability provisions, etc.). F4E activities should be compared with similar first of a kind high-tech frontier projects worldwide. One cannot deny that even more effort to increase competition could be invested by F4E but this would clearly consume more internal resources and therefore impact negatively other areas.

Similarly, in relation to the very low number of proposals received for the grant calls, this fact is mainly due to two factors: on the one hand the extremely specialised nature of F4E’s grants entails that the nature of the work is only of interest to a small number of applicants in Europe and on the other hand the success of the European fusion programme in creating a European research area in fusion with minimal duplication of efforts and close collaboration among teams active in one field. The latter manifests itself in pan-European consortia being behind most proposals in response to F4E calls.

| 22. | In relation to the 5 procurement procedures, F4E would like to provide the following comments:
  Amount allocated to the different contracts:
  The Court notes that at the time of launching the procurement procedures (2013 and 2014) F4E had not allocated a value from the 6,6 billion euro to the different contracts. As reported previously by F4E, the 6,6 billion euro capped budget was established on the assumptions of the Toschi report which were done at WBS levels 3 (System) and 4 (PA) and not at level 6 (Contracts). This was because, at that time, the level of detail on how the total scope would have been split among different contracts was not homogeneous across the different systems. Hence, the necessity of monitoring the evolution of the scope and its related cost at levels 3 and 4 which allowed a direct comparison with the Toschi baseline and so against the 6,6 billion euro.
  Deviation of the awarded value over the cost baseline:
  The case reported by the ECA corresponds to a procurement procedure in the area of buildings, where the low level of definition of the design (at functional specification level) and the continuously changing requirements posed by IO, also due to the new requests from the French Safety Authority, caused an escalation of the costs in this area going beyond the initial assigned share of the budget.
  To address the cost risks and minimise the cost impact resulting mainly from constant changes in the scope of the project deliverables which F4E has suffered in some areas under its responsibility, in particular for the buildings, a detailed analysis of the causes and the lessons learned was presented to F4E’s Governing Board in December 2014. It has been shown that delays in the delivery of input data and continuous change requests by IO and the increase of Safety requirements after Fukushima accident slows down the progress of work by F4E and leads to countless deviations with huge cost impact.
  Even if mitigation actions have been put in place by F4E to contain the costs, in many cases the implementation of changes imposed to the project, with their associated costs, has been unavoidable.
  Deficiencies in the assessment of the financial offers:
  F4E considers that there were no deficiencies in the assessment of the financial offers.
  It has to be kept in mind that at the time of those procurement procedures the tracking and control of the evolution of the scope and its related cost was done at levels 3 and 4. It should also be emphasised that, whenever F4E has awarded a major contract, on top of the mandatory recommendation by the Executive Committee, specific meetings have always been carried out with the Authorising Officer in order to provide a complete picture, prior to the contract award, on both costing and risk aspects. When these procurement procedures were launched, the Project Team Manager had already estimated the possible cost of the procurement (i.e. through own assessment, expert’s input or industrial estimate) and made sure that the original scope was covered and at a cost which would allow to keep the overall cost at WBS level 4 within the allocated ceiling. The now executed work, at central level, to define an EAC at WBS level 6 provides an improved approach for controlling and containing further the costs.
  In the case of the contract containing options amounting to 32 million euro and additional costs, it has to be noted that such options are intended to cover potential risks for the whole procurement arrangement (TF Coils). The financial impact of risks was managed at the level of Procurement Arrangement (so at WBS level 4). Indeed in this specific system a total saving was achieved by F4E: the total financial value of the 3 contracts placed for manufacture the TF coils is actually ~50 million euro below the financial value allocated to the TF coils level 4 (corresponding to the 6,6 billion euro capped budget. This amount is well above the 32 million euro associated to the options of this contract, and it is therefore more than adequate to cover risks not only to this contract but also the other 2 contracts. It is also important to note that, thanks to the risk mitigation strategy adopted by F4E for these 3 contracts, these risks have presently a low probability (presently below 5 %).
  Delays in procurement procedures:
  F4E considers that these delays do not constitute a weakness in the procurement procedures as in fact they respond to the exceptional environment in which F4E operates (lack of competition and contractual complexities) and to the needs to seek cost savings by ensuring that the specifications are mature enough before launching the procurement procedures.
  Unforeseen activity:
  F4E had to introduce in the 2014 Work Programme a material procurement activity, which indeed was not originally foreseen in the baseline for the JT60SA Broader Approach project. This was launched following experts opinion, in order to overcome an unforeseen technical difficulty. The activity, and the potential risks and reputational damage associated with avoiding it, was discussed at the December 2013 Governing Board who agreed to proceed with this material procurement as a matter of urgency. This additional activity was anyhow carried out within the contingency allocated to this specific project and that notwithstanding the urgency, F4E managed to maintain reasonable competition and to obtain an economical price.
  Assessment of technical award criteria:
  The technical specifications were prepared on the basis of the outcome of the expert review and the requirements contained in the specs were fully defining the material requirements. The explicit acceptance of all the requirements by each of the two bidders (in the form of a duly filled ‘Compliance Matrix’) together with the description of the proposed manufacturing process and the risk assessment attached to the offers, were giving full assurance of the technical quality of the bids. On this ground the evaluation committee unanimously agreed that the assignment of the maximum technical ranking to both the offers was justified.
  Use of pre-information notice:
  F4E considers that this did not constitute a weakness in the procurement procedure as mitigating actions were taken in order to increase competition.
  Indeed, in the 3 procedures identified by the ECA there was no publication of the pre-information notice, as this was not foreseen by internal procedures at the time (this changed in the meanwhile in order to address risks highlighted by other audits and now the use of pre-information notices is mandatory for procurements above 10 million euro). F4E considers to have mitigated the risk of poor competition by carrying out targeted actions (info days, events such as business forum, market surveys, use of ILO network, etc.). Such dissemination strategy is deemed to be more effective than the simple publication of a pre-information notice through the OJEU, as it is more directly addressing the concerned economic operators. |
| --- | --- |

22.

In relation to the 5 procurement procedures, F4E would like to provide the following comments:

Amount allocated to the different contracts:

The Court notes that at the time of launching the procurement procedures (2013 and 2014) F4E had not allocated a value from the 6,6 billion euro to the different contracts. As reported previously by F4E, the 6,6 billion euro capped budget was established on the assumptions of the Toschi report which were done at WBS levels 3 (System) and 4 (PA) and not at level 6 (Contracts). This was because, at that time, the level of detail on how the total scope would have been split among different contracts was not homogeneous across the different systems. Hence, the necessity of monitoring the evolution of the scope and its related cost at levels 3 and 4 which allowed a direct comparison with the Toschi baseline and so against the 6,6 billion euro.

Deviation of the awarded value over the cost baseline:

The case reported by the ECA corresponds to a procurement procedure in the area of buildings, where the low level of definition of the design (at functional specification level) and the continuously changing requirements posed by IO, also due to the new requests from the French Safety Authority, caused an escalation of the costs in this area going beyond the initial assigned share of the budget.

To address the cost risks and minimise the cost impact resulting mainly from constant changes in the scope of the project deliverables which F4E has suffered in some areas under its responsibility, in particular for the buildings, a detailed analysis of the causes and the lessons learned was presented to F4E’s Governing Board in December 2014. It has been shown that delays in the delivery of input data and continuous change requests by IO and the increase of Safety requirements after Fukushima accident slows down the progress of work by F4E and leads to countless deviations with huge cost impact.

Even if mitigation actions have been put in place by F4E to contain the costs, in many cases the implementation of changes imposed to the project, with their associated costs, has been unavoidable.

Deficiencies in the assessment of the financial offers:

F4E considers that there were no deficiencies in the assessment of the financial offers.

It has to be kept in mind that at the time of those procurement procedures the tracking and control of the evolution of the scope and its related cost was done at levels 3 and 4. It should also be emphasised that, whenever F4E has awarded a major contract, on top of the mandatory recommendation by the Executive Committee, specific meetings have always been carried out with the Authorising Officer in order to provide a complete picture, prior to the contract award, on both costing and risk aspects. When these procurement procedures were launched, the Project Team Manager had already estimated the possible cost of the procurement (i.e. through own assessment, expert’s input or industrial estimate) and made sure that the original scope was covered and at a cost which would allow to keep the overall cost at WBS level 4 within the allocated ceiling. The now executed work, at central level, to define an EAC at WBS level 6 provides an improved approach for controlling and containing further the costs.

In the case of the contract containing options amounting to 32 million euro and additional costs, it has to be noted that such options are intended to cover potential risks for the whole procurement arrangement (TF Coils). The financial impact of risks was managed at the level of Procurement Arrangement (so at WBS level 4). Indeed in this specific system a total saving was achieved by F4E: the total financial value of the 3 contracts placed for manufacture the TF coils is actually ~50 million euro below the financial value allocated to the TF coils level 4 (corresponding to the 6,6 billion euro capped budget. This amount is well above the 32 million euro associated to the options of this contract, and it is therefore more than adequate to cover risks not only to this contract but also the other 2 contracts. It is also important to note that, thanks to the risk mitigation strategy adopted by F4E for these 3 contracts, these risks have presently a low probability (presently below 5 %).

Delays in procurement procedures:

F4E considers that these delays do not constitute a weakness in the procurement procedures as in fact they respond to the exceptional environment in which F4E operates (lack of competition and contractual complexities) and to the needs to seek cost savings by ensuring that the specifications are mature enough before launching the procurement procedures.

Unforeseen activity:

F4E had to introduce in the 2014 Work Programme a material procurement activity, which indeed was not originally foreseen in the baseline for the JT60SA Broader Approach project. This was launched following experts opinion, in order to overcome an unforeseen technical difficulty. The activity, and the potential risks and reputational damage associated with avoiding it, was discussed at the December 2013 Governing Board who agreed to proceed with this material procurement as a matter of urgency. This additional activity was anyhow carried out within the contingency allocated to this specific project and that notwithstanding the urgency, F4E managed to maintain reasonable competition and to obtain an economical price.

Assessment of technical award criteria:

The technical specifications were prepared on the basis of the outcome of the expert review and the requirements contained in the specs were fully defining the material requirements. The explicit acceptance of all the requirements by each of the two bidders (in the form of a duly filled ‘Compliance Matrix’) together with the description of the proposed manufacturing process and the risk assessment attached to the offers, were giving full assurance of the technical quality of the bids. On this ground the evaluation committee unanimously agreed that the assignment of the maximum technical ranking to both the offers was justified.

Use of pre-information notice:

F4E considers that this did not constitute a weakness in the procurement procedure as mitigating actions were taken in order to increase competition.

Indeed, in the 3 procedures identified by the ECA there was no publication of the pre-information notice, as this was not foreseen by internal procedures at the time (this changed in the meanwhile in order to address risks highlighted by other audits and now the use of pre-information notices is mandatory for procurements above 10 million euro). F4E considers to have mitigated the risk of poor competition by carrying out targeted actions (info days, events such as business forum, market surveys, use of ILO network, etc.). Such dissemination strategy is deemed to be more effective than the simple publication of a pre-information notice through the OJEU, as it is more directly addressing the concerned economic operators.

| 25. | Of the 3 audits conducted in 2014, 2 final audit reports were received in December 2014 and have been shared with the Court. The preliminary audit report of the 3rd audit was received in December 2014 and discussions with the auditor and the beneficiary are currently ongoing.
  The planning of the 2015 ex-post audit exercise on F4E grants started in September 2014 with the selection of 3 beneficiaries and the signature in February 2015 of the specific contracts with the external audit firms. The corresponding 3 preliminary audit reports have been received and are currently being analysed. |
| --- | --- |

25.

Of the 3 audits conducted in 2014, 2 final audit reports were received in December 2014 and have been shared with the Court. The preliminary audit report of the 3rd audit was received in December 2014 and discussions with the auditor and the beneficiary are currently ongoing.

The planning of the 2015 ex-post audit exercise on F4E grants started in September 2014 with the selection of 3 beneficiaries and the signature in February 2015 of the specific contracts with the external audit firms. The corresponding 3 preliminary audit reports have been received and are currently being analysed.

| 26. | The F4E Financial Regulation (F4E FR) has to be amended to reflect the changes introduced by the revised Framework Financial Regulation (FFR) and the General Financial Regulation (GFR), in accordance with the observations made by the Court of Auditors.
  The F4E FR and its Implementing Rules (F4E IR) were submitted to the Commission by F4E on 25 July 2014 and since then, discussions are ongoing. The Commission would like to provide a global opinion on the F4E FR and IR once the provisions of the procurement rules of the new Directive 2014/24/EU of 26 February 2014 are transposed to the GFR and its IR and to the FFR and its IR.
  In order not to further delay the amendment of the F4E FR/IR, the GB agreed to follow a two-step procedure in this file at its last meeting of June 2015:






  — | F4E and the Commission should aim at finalising the discussions on F4E FR as soon as possible (without the procurement chapter). |
| --- | --- | --- |

26.

The F4E Financial Regulation (F4E FR) has to be amended to reflect the changes introduced by the revised Framework Financial Regulation (FFR) and the General Financial Regulation (GFR), in accordance with the observations made by the Court of Auditors.

The F4E FR and its Implementing Rules (F4E IR) were submitted to the Commission by F4E on 25 July 2014 and since then, discussions are ongoing. The Commission would like to provide a global opinion on the F4E FR and IR once the provisions of the procurement rules of the new Directive 2014/24/EU of 26 February 2014 are transposed to the GFR and its IR and to the FFR and its IR.

In order not to further delay the amendment of the F4E FR/IR, the GB agreed to follow a two-step procedure in this file at its last meeting of June 2015:

—

F4E and the Commission should aim at finalising the discussions on F4E FR as soon as possible (without the procurement chapter).

| — | As soon as the new Commission procurement rules are available, F4E and the Commission should start discussions with the aim of presenting a new procurement chapter for the GB approval in spring 2016. |
| --- | --- |

—

As soon as the new Commission procurement rules are available, F4E and the Commission should start discussions with the aim of presenting a new procurement chapter for the GB approval in spring 2016.

In the meantime on 3 July 2015 the Commission submitted to F4E the new draft procurement rules for considerations so depending on their approval process by the Council/EP (GFR) and by the Commission (RAP — Rules of Application of the GFR), a one-step procedure may still be possible.

| 29. | The relevant GB decision establishes the means for implementing the obligations as regards Intellectual Property (IP) in relation to the availability of technologies and the granting of user rights: both of these aspects are addressed through the wording of F4E’s model IP clauses. For what concerns the implementation of the other actions regarding industrial policy, it must be remarked that F4E had implemented, by the end of 2014, 24 out of the 32 actions foreseen.
  F4E considers that its approach to Intellectual Property Rights increases competition as the contractual conditions are more attractive to contractors, which both contributes to cost containment and to spreading our presence throughout Europe. |
| --- | --- |

29.

The relevant GB decision establishes the means for implementing the obligations as regards Intellectual Property (IP) in relation to the availability of technologies and the granting of user rights: both of these aspects are addressed through the wording of F4E’s model IP clauses. For what concerns the implementation of the other actions regarding industrial policy, it must be remarked that F4E had implemented, by the end of 2014, 24 out of the 32 actions foreseen.

F4E considers that its approach to Intellectual Property Rights increases competition as the contractual conditions are more attractive to contractors, which both contributes to cost containment and to spreading our presence throughout Europe.

| 33. | In March 2015, the Spanish Government offered new premises to F4E in a building to be shared with the Comisión Nacional de los Mercados y la Competencia (CNMC). This offer was welcomed by F4E and its approval was subject to a detailed inspection and expert analysis.
  In June 2015 an independent external architect performed an analysis in order to try to match the offer with the requirements. The result showed that there are still critical concerns, particularly concerning the available space in the short-to-mid-term, that need to be addressed by the Host State before the proposal can fully suit F4E needs.
  F4E and the Host state are assessing the way to move forward to address these critical issues to be able to find a final solution in the short term. |
| --- | --- |

33.

In March 2015, the Spanish Government offered new premises to F4E in a building to be shared with the Comisión Nacional de los Mercados y la Competencia (CNMC). This offer was welcomed by F4E and its approval was subject to a detailed inspection and expert analysis.

In June 2015 an independent external architect performed an analysis in order to try to match the offer with the requirements. The result showed that there are still critical concerns, particularly concerning the available space in the short-to-mid-term, that need to be addressed by the Host State before the proposal can fully suit F4E needs.

F4E and the Host state are assessing the way to move forward to address these critical issues to be able to find a final solution in the short term.

| 34. | In order to avoid a legal vacuum pending the formal adoption of outstanding Implementing Rules (IRs) to its Staff Regulations, F4E relied on two transitory measures as follows:






  — | Adoption of ad-hoc Director decisions detailing the implementation modalities of the relevant SR provisions. These typically mirrored the implementation principles and practices of the Commission albeit with certain adjustments to reflect the F4E specificities, and |
| --- | --- | --- |

34.

In order to avoid a legal vacuum pending the formal adoption of outstanding Implementing Rules (IRs) to its Staff Regulations, F4E relied on two transitory measures as follows:

—

Adoption of ad-hoc Director decisions detailing the implementation modalities of the relevant SR provisions. These typically mirrored the implementation principles and practices of the Commission albeit with certain adjustments to reflect the F4E specificities, and

| — | Adoption of Director decisions stating that model implementing rules applicable to agencies or European Commission rules would be applicable to the Joint Undertaking by analogy (except if otherwise mentioned). |
| --- | --- |

—

Adoption of Director decisions stating that model implementing rules applicable to agencies or European Commission rules would be applicable to the Joint Undertaking by analogy (except if otherwise mentioned).

Significant progress has been made and the number of IRs formally adopted by or applying by analogy to the Joint Undertaking currently stands at 26. A further 4 implementing rules are currently in the process of being adopted by Fusion for Energy by written procedure and are expected to be formally adopted by November 2015.

Regarding the remaining IRs to be adopted, following the 2014 EU Staff Reform:

| — | the Commission is currently adopting 5 new model IRs applicable to Agencies and Joint Undertakings. F4E will initiate the adoption process for these new rules as soon as they have been ‘released’ by the Commission. In keeping with Article 110 of the Staff Regulations, the JU will have 9 months to finalise its own adoption from the Commission’s ‘release’ date. |
| --- | --- |

—

the Commission is currently adopting 5 new model IRs applicable to Agencies and Joint Undertakings. F4E will initiate the adoption process for these new rules as soon as they have been ‘released’ by the Commission. In keeping with Article 110 of the Staff Regulations, the JU will have 9 months to finalise its own adoption from the Commission’s ‘release’ date.

| — | there are a further 8 IRs which are pending feedback from the Commission following F4E’s requests for opt-out or approval. |
| --- | --- |

—

there are a further 8 IRs which are pending feedback from the Commission following F4E’s requests for opt-out or approval.

---