# C_2018357EN.01000101.xml

| 4.10.2018 | EN | Official Journal of the European Union | C 357/1 |
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4.10.2018

EN

Official Journal of the European Union

C 357/1

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In accordance with the provisions of Article 287(1) and (4) of the TFEU and Articles 148(1) and 162(1) of Regulation (EU, Euratom) No 966/2012 of the European Parliament and of the Council of 25 October 2012 on the financial rules applicable to the general budget of the Union and repealing Council Regulation (EC, Euratom) No 1605/2002 and Articles 43, 48 and 60 of Council Regulation (EC) No 215/2008 of 18 February 2008 on the Financial Regulation applicable to the 10th European Development Fund, as amended by Regulation (EU) No 567/2014

the Court of Auditors of the European Union, at its meeting of 12 July 2018, adopted its

ANNUAL REPORTS

concerning the financial year 2017

The reports, together with the institutions’ replies to the Court’s observations, were transmitted to the authorities responsible for giving discharge and to the other institutions.

The Members of the Court of Auditors are:

Klaus-Heiner LEHNE (President), Henri GRETHEN, Ladislav BALKO, Lazaros S. LAZAROU, Pietro RUSSO, Baudilio TOMÉ MUGURUZA, Iliana IVANOVA, George PUFAN, Neven MATES, Alex BRENNINKMEIJER, Danièle LAMARQUE, Nikolaos MILIONIS, Phil WYNN OWEN, Oskar HERICS, Bettina JAKOBSEN, Janusz WOJCIECHOWSKI, Samo JEREB, Jan GREGOR, Mihails KOZLOVS, Rimantas ŠADŽIUS, Leo BRINCAT, João FIGUEIREDO, Juhan PARTS, Ildikó GÁLL-PELCZ, Eva LINDSTRÖM, Tony MURPHY, Hannu TAKKULA, Annemie TURTELBOOM.

ANNUAL REPORT ON THE IMPLEMENTATION OF THE BUDGET

(2018/C 357/01)

TABLE OF CONTENTS

| General introduction | 7 |
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| Chapter 1 | — The statement of assurance and supporting information | 9 |
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Chapter 1

| Chapter 2 | — Budgetary and financial management | 45 |
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Chapter 2

| Chapter 3 | — Getting results from the EU budget | 81 |
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Chapter 3

| Chapter 4 | — Revenue | 167 |
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Chapter 4

| Chapter 5 | — ‘Competitiveness for growth and jobs’ | 181 |
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Chapter 5

| Chapter 6 | — ‘Economic, social and territorial cohesion’ | 201 |
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Chapter 6

| Chapter 7 | — ‘Natural resources’ | 245 |
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Chapter 7

| Chapter 8 | — ‘Security and citizenship’ | 279 |
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Chapter 8

| Chapter 9 | — ‘Global Europe’ | 291 |
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Chapter 9

| Chapter 10 | — ‘Administration’ | 305 |
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Chapter 10

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GENERAL INTRODUCTION

0.1.

The European Court of Auditors was established as an Institution by the Treaty on European Union (1). The Treaty on the Functioning of the European Union (2) defines its role as the external auditor of the EU’s finances. In this capacity, we act as the independent guardian of the financial interests of all EU citizens, notably by helping to improve the EU’s financial management. More information on our work can be found in our annual activity reports, our special reports, our landscape reviews and our opinions on new or updated EU laws or other decisions with financial management implications (3).

0.2.

This annual report, our 41st on the implementation of the EU budget, covers the 2017 financial year. A separate annual report covers the European Development Funds.

0.3.

The EU’s general budget is approved annually by the Council and the European Parliament. Our annual report, together with our special reports, provides a basis for the discharge procedure in which the Parliament, acting on a recommendation from the Council, decides whether the Commission has satisfactorily met its budgetary responsibilities. On publication, we forward it to national parliaments, the European Parliament and the Council.

0.4.

The central part of our annual report is the statement of assurance on the reliability of the EU consolidated accounts and the legality and regularity of transactions (‘regularity of transactions’). This statement is supplemented by specific assessments for each major area of EU activity.

0.5.

| — | chapter 1 contains the statement of assurance and a summary of the results of our audit on the reliability of accounts and the regularity of transactions; |
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chapter 1 contains the statement of assurance and a summary of the results of our audit on the reliability of accounts and the regularity of transactions;

| — | chapter 2 presents our analysis of budgetary and financial management; |
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chapter 2 presents our analysis of budgetary and financial management;

| — | chapter 3 focuses on the Commission’s use of performance information, presents significant results from our 2017 special reports on performance, and analyses the Commission’s implementation of the recommendations we made in special reports published in 2014; |
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chapter 3 focuses on the Commission’s use of performance information, presents significant results from our 2017 special reports on performance, and analyses the Commission’s implementation of the recommendations we made in special reports published in 2014;

| — | chapter 4 presents our findings on EU revenue; |
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chapter 4 presents our findings on EU revenue;

| — | chapters 5 to 10 show, for the main headings of the current multiannual financial framework (MFF) (4), the results of our testing of the regularity of transactions and our examination of the Commission’s annual activity reports, other elements of its internal control systems and other governance arrangements. |
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chapters 5 to 10 show, for the main headings of the current multiannual financial framework (MFF) (4), the results of our testing of the regularity of transactions and our examination of the Commission’s annual activity reports, other elements of its internal control systems and other governance arrangements.

0.6.

As there are no separate financial statements for individual MFF headings, the conclusions to each chapter do not constitute an audit opinion. Instead, the chapters describe significant issues specific to each MFF heading.

0.7.

We aim to present our observations in a clear and concise way. We cannot always avoid using terms specific to the EU, its policies and budget, or to accounting and auditing. On our website, we have published a glossary with definitions and explanations of most of these specific terms (5). The terms defined in the glossary appear in italics when they first appear in each chapter.

0.8.

The Commission’s replies to our observations (or, where appropriate, the replies of other EU institutions and bodies) are presented with this report and should be taken into consideration alongside it. However, it is our responsibility, as external auditor, to report our audit findings and draw the necessary conclusions so as to provide an independent and impartial assessment of the reliability of the accounts and the regularity of transactions.

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(1)  Article 13 of the Treaty on European Union, also known as the Maastricht Treaty (OJ C 191, 29.7.1992, p. 1). However, the European Court of Auditors was first established as the new Community body to carry out the external audit function by the Treaty of Brussels (OJ L 359, 31.12.1977, p. 1).

1

(2)  Articles 285 to 287 (OJ C 326, 26.10.2012, p. 169-171).

2

(3)  Available on our website: www.eca.europa.eu.

3

(4)  Chapter 8 covers heading 3 (‘Security and citizenship’), Chapter 9 covers heading 4 (‘Global Europe’). The analysis of headings 3 and 4 do not include an estimated level of error. We do not provide a specific assessment for spending under heading 6 (‘Compensations’) or for expenditure outside the MFF.

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(5)  https://www.eca.europa.eu/Lists/ECADocuments/GLOSSARY_AR_2017/GLOSSARY_AR_2017_EN.pdf

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CHAPTER 1

The statement of assurance and supporting information

TABLE OF CONTENTS

| The Court's Statement of Assurance provided to the European Parliament and the Council — independent auditor’s report | I-XXXI |
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| Introduction | 1.1-1.5 |
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| The role of the European Court of Auditors | 1.1-1.3 |
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| EU spending is a significant tool for achieving policy objectives | 1.4-1.5 |
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| Audit findings for the 2017 financial year | 1.6-1.46 |
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| The accounts were not affected by material misstatements | 1.6-1.8 |
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| Key audit matters | 1.9 |
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| Regularity of transactions | 1.10 |
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| Our audit covers expenditure accepted by the Commission in 2017 | 1.11-1.15 |
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| Our 2017 audit results show that error is confined to specific areas of the EU budget | 1.16 |
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| The way EU funds are disbursed has an impact on the risk of error | 1.17-1.29 |
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| The Commission’s estimate of error is at the lower end ofour range | 1.30-1.34 |
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| The individual components of the Commission's estimate are not always in line with our findings | 1.35-1.36 |
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| Future corrections and recoveries significantly affectthe amount at risk at closure | 1.37-1.38 |
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| The Commission’s estimate for corrections and recoveries is based on an adjusted historical average | 1.39-1.41 |
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| Further differentiation between the the impact of preventive and corrective action is needed | 1.42-1.46 |
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| We report suspected fraud to OLAF | 1.47-1.51 |
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| Conclusions | 1.52-1.54 |
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| Audit results | 1.53-1.54 |
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| Annex 1.1 — | Audit approach and methodology |
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Annex 1.1 —

| THE COURT'S STATEMENT OF ASSURANCE PROVIDED TO THE EUROPEAN PARLIAMENT AND THE COUNCIL — INDEPENDENT AUDITOR’S REPORT |
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| Opinion |
| I. | We have audited:






  (a) | the consolidated accounts of the European Union, which comprise the consolidated financial statements (1) and the budgetary implementation reports (2) for the financial year ended 31 December 2017, approved by the Commission on 27 June 2018, and |

THE COURT'S STATEMENT OF ASSURANCE PROVIDED TO THE EUROPEAN PARLIAMENT AND THE COUNCIL — INDEPENDENT AUDITOR’S REPORT

Opinion

I.

We have audited:

(a)

the consolidated accounts of the European Union, which comprise the consolidated financial statements (1) and the budgetary implementation reports (2) for the financial year ended 31 December 2017, approved by the Commission on 27 June 2018, and

| (b) | the legality and regularity of the transactions underlying those accounts, as required by Article 287 of the Treaty on the Functioning of the European Union (TFEU). |
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(b)

the legality and regularity of the transactions underlying those accounts, as required by Article 287 of the Treaty on the Functioning of the European Union (TFEU).

Reliability of the accounts

Opinion on the reliability of the accounts

| II. | In our opinion, the consolidated accounts of the European Union (EU) for the year ended 31 December 2017 present fairly, in all material respects, the EU’s financial position as at 31 December 2017, the results of its operations, its cash flows and the changes in its net assets for the year then ended, in accordance with the Financial Regulation and with accounting rules based on internationally accepted accounting standards for the public sector. |
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II.

In our opinion, the consolidated accounts of the European Union (EU) for the year ended 31 December 2017 present fairly, in all material respects, the EU’s financial position as at 31 December 2017, the results of its operations, its cash flows and the changes in its net assets for the year then ended, in accordance with the Financial Regulation and with accounting rules based on internationally accepted accounting standards for the public sector.

Legality and regularity of the transactions underlying the accounts

Revenue

Opinion on the legality and regularity of revenue underlying the accounts

| III. | In our opinion, the revenue underlying the accounts for the year ended 31 December 2017 is legal and regular in all material respects. |
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III.

In our opinion, the revenue underlying the accounts for the year ended 31 December 2017 is legal and regular in all material respects.

Payments

Qualified opinion on the legality and regularity of payments underlying the accounts

| IV. | In our opinion, except for the effects of the matter described in the ‘Basis for qualified opinion on the legality and regularity of payments underlying the accounts’ paragraph, the payments underlying the accounts for the year ended 31 December 2017 are legal and regular in all material respects. |
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IV.

In our opinion, except for the effects of the matter described in the ‘Basis for qualified opinion on the legality and regularity of payments underlying the accounts’ paragraph, the payments underlying the accounts for the year ended 31 December 2017 are legal and regular in all material respects.

Basis for opinion

| V. | We conducted our audit in accordance with the IFAC International Standards on Auditing (ISAs) and Codes of Ethics and the INTOSAI International Standards of Supreme Audit Institutions (ISSAIs). Our responsibilities under those standards are further described in the ‘Auditor’s responsibilities’ section of our report. We are independent, in accordance with the International Ethics Standards Board for Accountants (IESBA) Code of Ethics for Professional Accountants, and we have fulfilled our other ethical responsibilities under those standards and requirements and the IESBA Code. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. |
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V.

We conducted our audit in accordance with the IFAC International Standards on Auditing (ISAs) and Codes of Ethics and the INTOSAI International Standards of Supreme Audit Institutions (ISSAIs). Our responsibilities under those standards are further described in the ‘Auditor’s responsibilities’ section of our report. We are independent, in accordance with the International Ethics Standards Board for Accountants (IESBA) Code of Ethics for Professional Accountants, and we have fulfilled our other ethical responsibilities under those standards and requirements and the IESBA Code. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

Basis for qualified opinion on the legality and regularity of payments underlying the accounts

| VI. | The expenditure recorded in 2017 covering spending on a reimbursement basis (3) is materially affected by error. Our estimated level of error for payments made on a reimbursement basis is 3,7  %. Our overall estimated level of error (2,4  %) is still above our materiality threshold, but it is not pervasive. Payments made on an entitlement basis are not affected by a material level of error (4). |
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VI.

The expenditure recorded in 2017 covering spending on a reimbursement basis (3) is materially affected by error. Our estimated level of error for payments made on a reimbursement basis is 3,7  %. Our overall estimated level of error (2,4  %) is still above our materiality threshold, but it is not pervasive. Payments made on an entitlement basis are not affected by a material level of error (4).

Key audit matters

| VII. | Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the European Union’s consolidated accounts of the current period. These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, but we do not provide a separate opinion on these matters. |
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VII.

Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the European Union’s consolidated accounts of the current period. These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, but we do not provide a separate opinion on these matters.

We assessed the accounting treatment of the European Fund for Strategic Investments (EFSI) guarantee for the equity portfolios

| VIII. | The European Fund for Strategic Investments (EFSI) is a joint initiative launched in 2015 (5) by the EU and the EIB Group, to encourage investment across the EU by increasing the risk-bearing capacity of the EIB Group. Under this initiative, the EU budget will provide a guarantee of up to 16 (6) billion euros to cover potential losses on EFSI operations for ’Infrastructure and Innovation Window (IIW)’ and ’Small and Medium-sized Enterprises Window (SMEW)’ investments (7). |
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VIII.

The European Fund for Strategic Investments (EFSI) is a joint initiative launched in 2015 (5) by the EU and the EIB Group, to encourage investment across the EU by increasing the risk-bearing capacity of the EIB Group. Under this initiative, the EU budget will provide a guarantee of up to 16 (6) billion euros to cover potential losses on EFSI operations for ’Infrastructure and Innovation Window (IIW)’ and ’Small and Medium-sized Enterprises Window (SMEW)’ investments (7).

| IX. | We focused on this area in previous years because the set-up of the EFSI had given rise to a number of complex accounting issues resulting from the arrangements between the EU and the EIB. In November 2017, the Commission’s Accounting Officer consulted the Advisory Group of experts in relation to the appropriate accounting treatment of the SMEW equity operations guaranteed by the EU. In line with the advice received, and applying professional judgement, the Commission’s Accounting Officer decided that the Commission does not have control over the EFSI or share such control with the EIB (8). This implies for the 2017 EU consolidated annual accounts that the EU guarantee granted to the EIB Group is treated:






  (a) | as a financial guarantee liability for the IIW debt portfolio, |
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IX.

We focused on this area in previous years because the set-up of the EFSI had given rise to a number of complex accounting issues resulting from the arrangements between the EU and the EIB. In November 2017, the Commission’s Accounting Officer consulted the Advisory Group of experts in relation to the appropriate accounting treatment of the SMEW equity operations guaranteed by the EU. In line with the advice received, and applying professional judgement, the Commission’s Accounting Officer decided that the Commission does not have control over the EFSI or share such control with the EIB (8). This implies for the 2017 EU consolidated annual accounts that the EU guarantee granted to the EIB Group is treated:

(a)

as a financial guarantee liability for the IIW debt portfolio,

| (b) | as a financial provision for the SMEW debt portfolio, and |
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(b)

as a financial provision for the SMEW debt portfolio, and

| (c) | as a derivative (financial asset or liability at fair value through surplus or deficit) for both equity portfolios. |
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(c)

as a derivative (financial asset or liability at fair value through surplus or deficit) for both equity portfolios.

| X. | We have assessed the accounting treatment of the EFSI guarantee for the equity portfolios. We consider that it does not affect the true and fair view given in the 2017 EU consolidated annual accounts. |
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X.

We have assessed the accounting treatment of the EFSI guarantee for the equity portfolios. We consider that it does not affect the true and fair view given in the 2017 EU consolidated annual accounts.

We assessed the liability for pension and other employee benefits

| XI. | The EU balance sheet includes a liability for pension and other employee benefits amounting to 73,1  billion euros at the end of 2017. This is one of the most significant liabilities in the balance sheet, accounting for almost a third of the total 2017 liabilities of 236,5  billion euros. |
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XI.

The EU balance sheet includes a liability for pension and other employee benefits amounting to 73,1  billion euros at the end of 2017. This is one of the most significant liabilities in the balance sheet, accounting for almost a third of the total 2017 liabilities of 236,5  billion euros.

| XII. | Most of this liability for pension and other employee benefits (64,0  billion euros) relates to the Pension Scheme of Officials and Other Servants of the European Union (PSEO). This pension liability covers the ‘defined benefit’ guaranteed by Article 83 of the Staff Regulations of Officials of the European Communities (the ‘Staff Regulations’) and Article 4(3) of the Treaty on the European Union (the ‘TEU’). The liability recorded in the accounts reflects the amount, which would have been included in a pension fund, had one been set up to pay existing retirement pension obligations (9). In addition to retirement pensions, it covers invalidity pensions and pensions paid to widows/orphans of EU staff. Under Article 83 of the Staff Regulations, the benefits paid under the pension scheme are charged to the EU budget. Member States jointly guarantee the payment of the benefits and officials contribute one third of the cost of financing the scheme. |
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XII.

Most of this liability for pension and other employee benefits (64,0  billion euros) relates to the Pension Scheme of Officials and Other Servants of the European Union (PSEO). This pension liability covers the ‘defined benefit’ guaranteed by Article 83 of the Staff Regulations of Officials of the European Communities (the ‘Staff Regulations’) and Article 4(3) of the Treaty on the European Union (the ‘TEU’). The liability recorded in the accounts reflects the amount, which would have been included in a pension fund, had one been set up to pay existing retirement pension obligations (9). In addition to retirement pensions, it covers invalidity pensions and pensions paid to widows/orphans of EU staff. Under Article 83 of the Staff Regulations, the benefits paid under the pension scheme are charged to the EU budget. Member States jointly guarantee the payment of the benefits and officials contribute one third of the cost of financing the scheme.

| XIII. | The PSEO is a mandatory occupational pension scheme for EU civil servants, under which contributions from staff and from the institutions and bodies that employ them are used to finance future pensions. It is designed, through adjustments to the rate of contribution to the scheme and to pensionable age, to be in actuarial balance by default. The number and variety of parameters used to calculate a long-term projection of pension costs underlines the actuarial nature of this calculation, which is performed by Eurostat on an annual basis. |
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XIII.

The PSEO is a mandatory occupational pension scheme for EU civil servants, under which contributions from staff and from the institutions and bodies that employ them are used to finance future pensions. It is designed, through adjustments to the rate of contribution to the scheme and to pensionable age, to be in actuarial balance by default. The number and variety of parameters used to calculate a long-term projection of pension costs underlines the actuarial nature of this calculation, which is performed by Eurostat on an annual basis.

| XIV. | As part of our audit, we evaluated the actuarial assumptions and the resulting valuation for the pension liability. We checked the numerical data, the actuarial parameters and the calculation of the liability, as well as the presentation made in the consolidated balance sheet and the notes to the consolidated financial statements. As stated in note 2.9 to the consolidated financial statements, the Commission is continuing to work towards strengthening its processes for calculating the employee benefits liability, which we will keep under review. |
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XIV.

As part of our audit, we evaluated the actuarial assumptions and the resulting valuation for the pension liability. We checked the numerical data, the actuarial parameters and the calculation of the liability, as well as the presentation made in the consolidated balance sheet and the notes to the consolidated financial statements. As stated in note 2.9 to the consolidated financial statements, the Commission is continuing to work towards strengthening its processes for calculating the employee benefits liability, which we will keep under review.

We assessed the accrued charges presented in the accounts

| XV. | At year-end 2017, the estimated value of incurred eligible expenses due to beneficiaries but not yet reported was 101 billion euros (year-end 2016: 102 billion euros). These amounts were recorded as accrued expenses (10). |
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XV.

At year-end 2017, the estimated value of incurred eligible expenses due to beneficiaries but not yet reported was 101 billion euros (year-end 2016: 102 billion euros). These amounts were recorded as accrued expenses (10).

| XVI. | We examined the methodologies and control systems applied for year-end estimates in the main Directorates-General. We took samples of invoices and pre-financing payments and carried out work on these elements to address the risk of the accrual having been misstated. We sought additional clarification from the Commission’s accounting services on the general methodology. |
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XVI.

We examined the methodologies and control systems applied for year-end estimates in the main Directorates-General. We took samples of invoices and pre-financing payments and carried out work on these elements to address the risk of the accrual having been misstated. We sought additional clarification from the Commission’s accounting services on the general methodology.

| XVII. | We can conclude that the estimate of the overall amount of accrued charges stated in the consolidated balance sheet is fair. |
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XVII.

We can conclude that the estimate of the overall amount of accrued charges stated in the consolidated balance sheet is fair.

We assessed the potential impact on the 2017 accounts of the United Kingdom’s withdrawal from the European Union

| XVIII. | On 29 March 2017, the United Kingdom (UK) formally notified the European Council of its intention to leave the European Union (EU). On 22 May 2017, the negotiations started for the withdrawal agreement between the EU and the UK. |
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XVIII.

On 29 March 2017, the United Kingdom (UK) formally notified the European Council of its intention to leave the European Union (EU). On 22 May 2017, the negotiations started for the withdrawal agreement between the EU and the UK.

| XIX. | Part Five (Financial Provisions) of the draft withdrawal agreement of 19 March 2018 concerning the financial settlement states that the UK will pay all its obligations under the current and previous Multiannual Financial Frameworks as if it were still a Member State. |
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XIX.

Part Five (Financial Provisions) of the draft withdrawal agreement of 19 March 2018 concerning the financial settlement states that the UK will pay all its obligations under the current and previous Multiannual Financial Frameworks as if it were still a Member State.

| XX. | Based on this, we conclude that the accounts as at 31 December 2017 correctly reflect the withdrawal process. |
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XX.

Based on this, we conclude that the accounts as at 31 December 2017 correctly reflect the withdrawal process.

Other matters

| XXI. | Management is responsible for providing ‘other information’, a term which encompasses the Financial Statement Discussion and Analysis but not the consolidated accounts or our report thereon. Our opinion on the consolidated accounts does not cover this other information, and we do not express any form of assurance conclusion thereon. Our responsibility in connection with the audit of the consolidated accounts is to read the other information and consider whether it is materially inconsistent with the consolidated accounts or the knowledge we have obtained in the audit or otherwise appears to be materially misstated. If we conclude that there is a material misstatement of the other information, we are required to report this accordingly. We have nothing to report in this regard. |
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XXI.

Management is responsible for providing ‘other information’, a term which encompasses the Financial Statement Discussion and Analysis but not the consolidated accounts or our report thereon. Our opinion on the consolidated accounts does not cover this other information, and we do not express any form of assurance conclusion thereon. Our responsibility in connection with the audit of the consolidated accounts is to read the other information and consider whether it is materially inconsistent with the consolidated accounts or the knowledge we have obtained in the audit or otherwise appears to be materially misstated. If we conclude that there is a material misstatement of the other information, we are required to report this accordingly. We have nothing to report in this regard.

Responsibilities of management

| XXII. | In accordance with Articles 310 to 325 of the TFEU and with the Financial Regulation, management is responsible for preparing and presenting the EU’s consolidated accounts on the basis of internationally accepted accounting standards for the public sector, and for the legality and regularity of the underlying transactions. This responsibility includes designing, implementing and maintaining internal control relevant to the preparation and presentation of financial statements that are free from material misstatement, whether due to fraud or error. Management is also responsible for ensuring that the activities, financial transactions and information reflected in the financial statements are in compliance with the authorities which govern them. The Commission is ultimately responsibility for the legality and regularity of the transactions underlying the EU’s accounts (Article 317 of the TFEU). |
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XXII.

In accordance with Articles 310 to 325 of the TFEU and with the Financial Regulation, management is responsible for preparing and presenting the EU’s consolidated accounts on the basis of internationally accepted accounting standards for the public sector, and for the legality and regularity of the underlying transactions. This responsibility includes designing, implementing and maintaining internal control relevant to the preparation and presentation of financial statements that are free from material misstatement, whether due to fraud or error. Management is also responsible for ensuring that the activities, financial transactions and information reflected in the financial statements are in compliance with the authorities which govern them. The Commission is ultimately responsibility for the legality and regularity of the transactions underlying the EU’s accounts (Article 317 of the TFEU).

| XXIII. | When preparing the consolidated accounts, management is responsible for assessing the EU’s ability to continue as a going concern, disclosing any relevant matters and using the going concern basis of accounting unless it either intends to liquidate the entity or to cease operations, or has no realistic alternative but to do so. |
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XXIII.

When preparing the consolidated accounts, management is responsible for assessing the EU’s ability to continue as a going concern, disclosing any relevant matters and using the going concern basis of accounting unless it either intends to liquidate the entity or to cease operations, or has no realistic alternative but to do so.

| XXIV. | The Commission is responsible for overseeing the EU’s financial reporting process. |
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XXIV.

The Commission is responsible for overseeing the EU’s financial reporting process.

| XXV. | According to the Financial Regulation (Title IX), the accounting officer of the Commission has to present for audit the consolidated accounts of the EU first as provisional accounts by 31 March of the following year and as final accounts by 31 July. The provisional accounts should already give a true and fair view of the financial position. It is therefore imperative that all items of the provisional accounts are presented as final calculations allowing us to perform our task in line with Title X of the Financial Regulation and in the given deadlines. Changes between provisional and final accounts would normally only result from our observations. |
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XXV.

According to the Financial Regulation (Title IX), the accounting officer of the Commission has to present for audit the consolidated accounts of the EU first as provisional accounts by 31 March of the following year and as final accounts by 31 July. The provisional accounts should already give a true and fair view of the financial position. It is therefore imperative that all items of the provisional accounts are presented as final calculations allowing us to perform our task in line with Title X of the Financial Regulation and in the given deadlines. Changes between provisional and final accounts would normally only result from our observations.

Auditor's responsibilities for the audit of the consolidated accounts and underlying transactions

| XXVI. | Our objectives are to obtain reasonable assurance as to whether the EU’s consolidated accounts are free from material misstatement and the underlying transactions are legal and regular and on the basis of our audit, to provide the European Parliament and the Council with a statement of assurance as to the reliability of the accounts and the legality and regularity of the transactions underlying them. Reasonable assurance is a high level of assurance, but it is not a guarantee that the audit has necessarily detected all instances of a material misstatement or non-compliance that may exist. These can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions taken by users on the basis of these consolidated accounts. |
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XXVI.

Our objectives are to obtain reasonable assurance as to whether the EU’s consolidated accounts are free from material misstatement and the underlying transactions are legal and regular and on the basis of our audit, to provide the European Parliament and the Council with a statement of assurance as to the reliability of the accounts and the legality and regularity of the transactions underlying them. Reasonable assurance is a high level of assurance, but it is not a guarantee that the audit has necessarily detected all instances of a material misstatement or non-compliance that may exist. These can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions taken by users on the basis of these consolidated accounts.

| XXVII. | For revenue, our examination of VAT and GNI-based own resources takes as its starting point the macroeconomic aggregates from which these are calculated, and assesses the Commission's systems for processing these up to the point at which the Member States’ contributions have been received and recorded in the consolidated accounts. For traditional own resources, we examine the accounts of the customs authorities and analyse the flow of duties up to the point at which the amounts have been received by the Commission and recorded in the accounts. |
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XXVII.

For revenue, our examination of VAT and GNI-based own resources takes as its starting point the macroeconomic aggregates from which these are calculated, and assesses the Commission's systems for processing these up to the point at which the Member States’ contributions have been received and recorded in the consolidated accounts. For traditional own resources, we examine the accounts of the customs authorities and analyse the flow of duties up to the point at which the amounts have been received by the Commission and recorded in the accounts.

| XXVIII. | For expenditure, we examine payment transactions once expenditure has been incurred, recorded and accepted. This examination covers all categories of payments (including those made for the purchase of assets) other than advances at the point they are made. Advance payments are examined once the recipient of funds has provided evidence of their proper use and the Institution or body has accepted that evidence by clearing the advance payment, which might not happen until a subsequent year. |
| --- | --- |

XXVIII.

For expenditure, we examine payment transactions once expenditure has been incurred, recorded and accepted. This examination covers all categories of payments (including those made for the purchase of assets) other than advances at the point they are made. Advance payments are examined once the recipient of funds has provided evidence of their proper use and the Institution or body has accepted that evidence by clearing the advance payment, which might not happen until a subsequent year.

| XXIX. | As part of an audit in accordance with ISAs and ISSAIs, we exercise professional judgment and maintain professional scepticism throughout the audit. We also:






  (a) | Identify and assess the risks of material misstatement of the consolidated accounts and of material non-compliance of the underlying transactions with the requirements of EU law, whether due to fraud or error. We design and perform audit procedures responsive to those risks and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. Instances of material misstatement or non-compliance resulting from fraud are more difficult to detect than those resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. Consequently, there is a greater risk of such instances not being detected. |
| --- | --- | --- |

XXIX.

As part of an audit in accordance with ISAs and ISSAIs, we exercise professional judgment and maintain professional scepticism throughout the audit. We also:

(a)

Identify and assess the risks of material misstatement of the consolidated accounts and of material non-compliance of the underlying transactions with the requirements of EU law, whether due to fraud or error. We design and perform audit procedures responsive to those risks and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. Instances of material misstatement or non-compliance resulting from fraud are more difficult to detect than those resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. Consequently, there is a greater risk of such instances not being detected.

| (b) | Obtain an understanding of internal control relevant to the audit in order to design appropriate audit procedures, but not for the purpose of expressing an opinion on the effectiveness of the internal control. |
| --- | --- |

(b)

Obtain an understanding of internal control relevant to the audit in order to design appropriate audit procedures, but not for the purpose of expressing an opinion on the effectiveness of the internal control.

| (c) | Evaluate the appropriateness of the accounting policies used by management and the reasonableness of management’s accounting estimates and related disclosures. |
| --- | --- |

(c)

Evaluate the appropriateness of the accounting policies used by management and the reasonableness of management’s accounting estimates and related disclosures.

| (d) | Conclude as to the appropriateness of management’s use of the going concern basis of accounting and, based on the audit evidence obtained, as to whether material uncertainty exists owing to events or conditions that may cast significant doubt on the entity’s ability to continue as a going concern. If we conclude that such material uncertainty exists, we are required to draw attention in our report to the related disclosures in the consolidated accounts or, if these disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our report. However, future events or conditions may cause the entity to cease to continue as a going concern. |
| --- | --- |

(d)

Conclude as to the appropriateness of management’s use of the going concern basis of accounting and, based on the audit evidence obtained, as to whether material uncertainty exists owing to events or conditions that may cast significant doubt on the entity’s ability to continue as a going concern. If we conclude that such material uncertainty exists, we are required to draw attention in our report to the related disclosures in the consolidated accounts or, if these disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our report. However, future events or conditions may cause the entity to cease to continue as a going concern.

| (e) | Evaluate the overall presentation, structure and content of the consolidated accounts, including all disclosures, and assess whether the consolidated accounts represent the underlying transactions and events in a manner that achieves fair presentation. |
| --- | --- |

(e)

Evaluate the overall presentation, structure and content of the consolidated accounts, including all disclosures, and assess whether the consolidated accounts represent the underlying transactions and events in a manner that achieves fair presentation.

| (f) | Obtain sufficient appropriate audit evidence regarding the financial information on the entities covered by the EU’s scope of consolidation to express an opinion on the consolidated accounts and the underlying transactions. We are responsible for directing, supervising and carrying out the audit, and are solely responsible for our audit opinion. |
| --- | --- |

(f)

Obtain sufficient appropriate audit evidence regarding the financial information on the entities covered by the EU’s scope of consolidation to express an opinion on the consolidated accounts and the underlying transactions. We are responsible for directing, supervising and carrying out the audit, and are solely responsible for our audit opinion.

| XXX. | We communicate with management regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including findings of any significant deficiencies in internal control. |
| --- | --- |

XXX.

We communicate with management regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including findings of any significant deficiencies in internal control.

| XXXI. | Of the matters discussed with the Commission and other audited entities, we determine which were of most significance in the audit of the consolidated accounts and are therefore the key audit matters for the current period. We describe these matters in our report unless law or regulation precludes public disclosure or, as happens extremely rarely, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh any public interest benefits. |
| --- | --- |

XXXI.

Of the matters discussed with the Commission and other audited entities, we determine which were of most significance in the audit of the consolidated accounts and are therefore the key audit matters for the current period. We describe these matters in our report unless law or regulation precludes public disclosure or, as happens extremely rarely, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh any public interest benefits.

12 July 2018

Klaus-Heiner LEHNE

President

European Court of Auditors

12, rue Alcide De Gasperi, Luxembourg, LUXEMBOURG

THE COURT’S OBSERVATIONS

INTRODUCTION

The role of the European Court of Auditors

| 1.1. | We are the European Union’s independent auditor. In accordance with the Treaty on the Functioning of the European Union (TFEU), we:






  (a) | give our opinion on the EU’s accounts; |
| --- | --- | --- |

1.1.

We are the European Union’s independent auditor. In accordance with the Treaty on the Functioning of the European Union (TFEU), we:

(a)

give our opinion on the EU’s accounts;

| (b) | check whether the EU budget is used in accordance with applicable laws and regulations; |
| --- | --- |

(b)

check whether the EU budget is used in accordance with applicable laws and regulations;

| (c) | report on whether EU spending is economic, efficient and effective (11); and |
| --- | --- |

(c)

report on whether EU spending is economic, efficient and effective (11); and

| (d) | advise on proposed legislation with a financial impact. |
| --- | --- |

(d)

advise on proposed legislation with a financial impact.

| 1.2. | The work we do for the statement of assurance (explained in
  Annex 1.1
  ) fulfils the first and second of these objectives. In key EU spending areas (12), the work we do for the annual report also addresses the economy, efficiency and effectiveness of spending. We report on different aspects of the system put in place by the Commission to ensure that EU funds are well spent (13). Taken together, our audit work also provides a key input into our opinions on proposed legislation. |
| --- | --- |

1.2.

The work we do for the statement of assurance (explained in
  Annex 1.1
  ) fulfils the first and second of these objectives. In key EU spending areas (12), the work we do for the annual report also addresses the economy, efficiency and effectiveness of spending. We report on different aspects of the system put in place by the Commission to ensure that EU funds are well spent (13). Taken together, our audit work also provides a key input into our opinions on proposed legislation.

| 1.3. | This chapter of the annual report:






  (a) | sets out the background to our statement of assurance and gives an overview of our findings and conclusions on the reliability of accounts and the regularity of transactions; |
| --- | --- | --- |

1.3.

This chapter of the annual report:

(a)

sets out the background to our statement of assurance and gives an overview of our findings and conclusions on the reliability of accounts and the regularity of transactions;

| (b) | includes information on cases of suspected fraud we report to OLAF; |
| --- | --- |

(b)

includes information on cases of suspected fraud we report to OLAF;

| (c) | summarises our audit approach (see
  Annex 1.1
  ). |
| --- | --- |

(c)

summarises our audit approach (see
  Annex 1.1
  ).

EU spending is a significant tool for achieving policy objectives

| 1.4. | EU spending is an important — but not the only — means of achieving policy objectives. Other important means include the use of legislation and the freedom for goods, services, capital and people to move throughout the EU. In 2017, EU spending amounted to 137,4 billion euros (14), representing 2,0  % of EU Member States’ total general government spending and 0,9  % of EU gross national income (
  Box 1.1
  ). |
| --- | --- |

1.4.

EU spending is an important — but not the only — means of achieving policy objectives. Other important means include the use of legislation and the freedom for goods, services, capital and people to move throughout the EU. In 2017, EU spending amounted to 137,4 billion euros (14), representing 2,0  % of EU Member States’ total general government spending and 0,9  % of EU gross national income (
  Box 1.1
  ).

Box 1.1 —   2017 EU spending as a share of gross national income (GNI) and general government expenditure

Image

| Source: | Member States GNI: 2017 annual accounts of the European Commission — Annex A — Revenue;
  Member States general government expenditure: Eurostat — annual national accounts;
  EU spending: European Commission — 2017 consolidated annual accounts of the European Union. |
| --- | --- |

Source:

Member States GNI: 2017 annual accounts of the European Commission — Annex A — Revenue;

Member States general government expenditure: Eurostat — annual national accounts;

EU spending: European Commission — 2017 consolidated annual accounts of the European Union.

THE COURT’S OBSERVATIONS

| 1.5. | EU funds are disbursed to beneficiaries either through single payments/annual instalments or through a series of payments within multiannual spending schemes. In 2017, payments from the EU budget totalled 137,4 billion euros, comprising 29,7 billion euros as pre-financing and 107,7 billion euros as single, interim or final payments. As
  Box 1.2
  shows, the largest share of the EU budget went to ‘Natural resources’ (56,7 billion euros; 41 % of total) followed by ‘Cohesion’ (35,7 billion euros; 26 % of total) and ‘Competitiveness’ (21,4  billion euros; 15,6  % of total). |
| --- | --- |

1.5.

EU funds are disbursed to beneficiaries either through single payments/annual instalments or through a series of payments within multiannual spending schemes. In 2017, payments from the EU budget totalled 137,4 billion euros, comprising 29,7 billion euros as pre-financing and 107,7 billion euros as single, interim or final payments. As
  Box 1.2
  shows, the largest share of the EU budget went to ‘Natural resources’ (56,7 billion euros; 41 % of total) followed by ‘Cohesion’ (35,7 billion euros; 26 % of total) and ‘Competitiveness’ (21,4  billion euros; 15,6  % of total).

Box 1.2 —   2017 payments per MFF heading

Image

MFF 1a — Competitiveness for growth and jobs (‘Competitiveness’)

MFF 1b — Economic, social and territorial cohesion (‘Cohesion’)

MFF 2 — Natural resources

MFF 3 — Security and citizenship

MFF 4 — Global Europe

MFF 5 — Administration

Source: ECA.

THE COURT’S OBSERVATIONS

AUDIT FINDINGS FOR THE 2017 FINANCIAL YEAR

The accounts were not affected by material misstatements

| 1.6. | Our observations concern the European Union’s consolidated accounts (15) (the ‘accounts’) for the financial year 2017. We received them, together with the accounting officer’s letter of representation, on 27 June 2018, before the final date for presentation allowed under the Financial Regulation (16). The accounts are accompanied by a ‘Financial Statement Discussion and Analysis’ (17). This analysis is not covered by our audit opinion. In accordance with the auditing standards, however, we have assessed its consistency with the information in the accounts. |
| --- | --- |

1.6.

Our observations concern the European Union’s consolidated accounts (15) (the ‘accounts’) for the financial year 2017. We received them, together with the accounting officer’s letter of representation, on 27 June 2018, before the final date for presentation allowed under the Financial Regulation (16). The accounts are accompanied by a ‘Financial Statement Discussion and Analysis’ (17). This analysis is not covered by our audit opinion. In accordance with the auditing standards, however, we have assessed its consistency with the information in the accounts.

| 1.7. | The accounts published by the Commission show that, at 31 December 2017, total liabilities amounted to 236,5  billion euros compared with 166,2  billion euros of total assets. The economic result for 2017 is 8,1  billion euros. |
| --- | --- |

1.7.

The accounts published by the Commission show that, at 31 December 2017, total liabilities amounted to 236,5  billion euros compared with 166,2  billion euros of total assets. The economic result for 2017 is 8,1  billion euros.

| 1.8. | Our audit found that the accounts were not affected by material misstatements. We present our observations on the financial and budgetary management of EU funds in Chapter 2. |
| --- | --- |

1.8.

Our audit found that the accounts were not affected by material misstatements. We present our observations on the financial and budgetary management of EU funds in Chapter 2.

Key audit matters

| 1.9. | Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the financial statements of the current period. These matters were addressed in the context of our audit of the financial statements as a whole and in forming our opinion thereon, but we do not provide a separate opinion on these matters. In accordance with International Standard on Auditing 701 (18), we report on key audit matters in our statement of assurance. |
| --- | --- |

1.9.

Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the financial statements of the current period. These matters were addressed in the context of our audit of the financial statements as a whole and in forming our opinion thereon, but we do not provide a separate opinion on these matters. In accordance with International Standard on Auditing 701 (18), we report on key audit matters in our statement of assurance.

Regularity of transactions

| 1.10. | We examine EU revenue and expenditure to assess whether it is in compliance with applicable laws and regulations. We present our audit results for revenue in chapter 4 and for expenditure in chapters 5 to 10. |
| --- | --- |

1.10.

We examine EU revenue and expenditure to assess whether it is in compliance with applicable laws and regulations. We present our audit results for revenue in chapter 4 and for expenditure in chapters 5 to 10.

Our audit covers expenditure accepted by the Commission in 2017

| 1.11. | To carry out our audit, we examined the transactions underlying the EU’s accounts. These comprised transfers of funds from the EU budget to final recipients of EU spending, contributions from Member States to the EU budget and revenue from other sources. We examine expenditure at the point when final recipients of EU funds have undertaken activities or incurred costs, and when the Commission has accepted the expenditure (‘accepted expenditure’). In practice, this means that our population of transactions covers interim and final payments. We did not examine pre-financed amounts unless they had been cleared in 2017. |
| --- | --- |

1.11.

To carry out our audit, we examined the transactions underlying the EU’s accounts. These comprised transfers of funds from the EU budget to final recipients of EU spending, contributions from Member States to the EU budget and revenue from other sources. We examine expenditure at the point when final recipients of EU funds have undertaken activities or incurred costs, and when the Commission has accepted the expenditure (‘accepted expenditure’). In practice, this means that our population of transactions covers interim and final payments. We did not examine pre-financed amounts unless they had been cleared in 2017.

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

| 1.12. | The European Parliament and Council made several changes to the 2014-2020 sectoral legislation for ‘Economic, social and territorial cohesion’ (see paragraphs 6.5 to 6.10) as compared to the rules applicable to the 2007-2013 period. Most importantly, Member State programme authorities must now submit an annual assurance package, including the accounts and covering expenditure certified to the Commission in the accounting year. The Commission accepts the accounts if, in the audit authorities’ opinion, the accounts are complete, accurate and true. It assesses the assurance package to ensure that the residual error rate remains below the materiality threshold of 2 % for each programme and applies financial corrections if necessary. |
| --- | --- |

1.12.

The European Parliament and Council made several changes to the 2014-2020 sectoral legislation for ‘Economic, social and territorial cohesion’ (see paragraphs 6.5 to 6.10) as compared to the rules applicable to the 2007-2013 period. Most importantly, Member State programme authorities must now submit an annual assurance package, including the accounts and covering expenditure certified to the Commission in the accounting year. The Commission accepts the accounts if, in the audit authorities’ opinion, the accounts are complete, accurate and true. It assesses the assurance package to ensure that the residual error rate remains below the materiality threshold of 2 % for each programme and applies financial corrections if necessary.

| 1.13. | The modifications to the sectoral legislation for ‘Economic, social and territorial cohesion’ have an impact on what the Commission considers as ‘accepted expenditure’ in this area. As a result, our audit population for this MFF heading differs from previous years and consists of final payments (including pre-financing which had been cleared) for the 2007-2013 period and expenditure covered by accounts accepted on an annual basis by the Commission, for the 2014-2020 period (see paragraphs 2 to 6 of
  Annex 1.1.
  and paragraphs 6.16-6.19). This means that we tested transactions for which all relevant corrective actions had been implemented at Member State level. |
| --- | --- |

1.13.

The modifications to the sectoral legislation for ‘Economic, social and territorial cohesion’ have an impact on what the Commission considers as ‘accepted expenditure’ in this area. As a result, our audit population for this MFF heading differs from previous years and consists of final payments (including pre-financing which had been cleared) for the 2007-2013 period and expenditure covered by accounts accepted on an annual basis by the Commission, for the 2014-2020 period (see paragraphs 2 to 6 of
  Annex 1.1.
  and paragraphs 6.16-6.19). This means that we tested transactions for which all relevant corrective actions had been implemented at Member State level.

| 1.13. | The Commission notes that accepted expenditure may still be subject to financial corrections in later years where appropriate, for instance following Commission subsequent audits and checks. |
| --- | --- |

1.13.

| 1.14. | For MFF 1b, interim payments made in 2017 for the 2014-2020 period amounted to around 21 billion euros. We will include these interim and pre-financing payments in our population in a later year once the accounts have been accepted by the Commission and cleared through an annual decision. |
| --- | --- |

1.14.

For MFF 1b, interim payments made in 2017 for the 2014-2020 period amounted to around 21 billion euros. We will include these interim and pre-financing payments in our population in a later year once the accounts have been accepted by the Commission and cleared through an annual decision.

Box 1.3 —   Comparison of our 2017 audit population and 2017 EU budget by MFF heading

Image

| (*) | For MFF1b, the 30,7 billion euros pre-financing amount includes interim payments for the 2007-2013 and 2014-2020 programming period amounting to 21,7 billion euros. In line with our approach for this area, these payments are not part of our audit population for the 2017 annual report. |
| --- | --- |

(*)

For MFF1b, the 30,7 billion euros pre-financing amount includes interim payments for the 2007-2013 and 2014-2020 programming period amounting to 21,7 billion euros. In line with our approach for this area, these payments are not part of our audit population for the 2017 annual report.

Source: ECA.

THE COURT’S OBSERVATIONS

| 1.15. | Box 1.3
  shows the breakdown of our 2017 audit population into single, interim (where accepted by the Commission) and final payments, clearings of pre-financing and annual decisions to accept the accounts. For 2017, we audited transactions worth a total of 100,2 billion euros. This year ‘Natural resources’ makes up the largest share of our overall population (57 %), while in contrast to previous years the weight of MFF 1b ‘Cohesion’ is relatively small (around 8 %) (
  Box 1.4
  ). |
| --- | --- |

1.15.

Box 1.3
  shows the breakdown of our 2017 audit population into single, interim (where accepted by the Commission) and final payments, clearings of pre-financing and annual decisions to accept the accounts. For 2017, we audited transactions worth a total of 100,2 billion euros. This year ‘Natural resources’ makes up the largest share of our overall population (57 %), while in contrast to previous years the weight of MFF 1b ‘Cohesion’ is relatively small (around 8 %) (
  Box 1.4
  ).

Box 1.4 —   Overview of our 2017 audit population by MFF heading

Image

Source: ECA.

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

Our 2017 audit results show that error is confined to specific areas of the EU budget

| 1.16. | For the regularity of EU revenue and expenditure, our key findings were: |
| --- | --- |

1.16.

For the regularity of EU revenue and expenditure, our key findings were:

1.16.

| (a) | Revenue was free from material error. The revenue-related systems were effective overall, but the key internal traditional own resources (TOR) controls we assessed at the Commission and in certain Member States were partially effective (paragraph 4.21); |
| --- | --- |

(a)

Revenue was free from material error. The revenue-related systems were effective overall, but the key internal traditional own resources (TOR) controls we assessed at the Commission and in certain Member States were partially effective (paragraph 4.21);

| (b) | For expenditure, our overall audit evidence indicates that the level of error was material. We estimate the overall level of error in expenditure at 2,4  %, but material error was confined mainly to reimbursement-based expenditure representing around 47 % of the audited population. Our overall estimated level of error decreased on previous years (
  Box 1.5
  ). |
| --- | --- |

(b)

For expenditure, our overall audit evidence indicates that the level of error was material. We estimate the overall level of error in expenditure at 2,4  %, but material error was confined mainly to reimbursement-based expenditure representing around 47 % of the audited population. Our overall estimated level of error decreased on previous years (
  Box 1.5
  ).

| (b) | The Commission notes with satisfaction that this year represents a further significant improvement in results. |
| --- | --- |

(b)

The Commission notes with satisfaction that this year represents a further significant improvement in results.

Box 1.5 —   The estimated level of error (2015 to 2017)

Image

Source: ECA.

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

The way EU funds are disbursed has an impact on the risk of error

| 1.17. | The evolution of our audit results makes the overall estimation of error no longer the sole basis for our statement of assurance. Our 2017 audit results confirm our findings from 2015 and 2016: namely, that the way expenditure is disbursed has an impact on the risk of error. In general, we found that entitlement-based expenditure (19) was free from material error, but reimbursement-based expenditure continued to be affected by material error (
  Box 1.6
  ). |
| --- | --- |

1.17.

The evolution of our audit results makes the overall estimation of error no longer the sole basis for our statement of assurance. Our 2017 audit results confirm our findings from 2015 and 2016: namely, that the way expenditure is disbursed has an impact on the risk of error. In general, we found that entitlement-based expenditure (19) was free from material error, but reimbursement-based expenditure continued to be affected by material error (
  Box 1.6
  ).

| 1.17. | The results on legality and regularity are improving year after year. The Commission considers that this is the consequence of the actions taken by the Commission and Member States to ameliorate further the management of funds (see Commission replies to paragraphs 6.26, 7.10 and 7.11). |
| --- | --- |

1.17.

Box 1.6 —   2017 entitlement-based payments are free from material error

Image

Source: ECA.

THE COURT’S OBSERVATIONS

Entitlement-based payments are free from material error

| 1.18. | We estimate the level of error for entitlement-based expenditure (excluding some rural development schemes) to be below our materiality threshold of 2 %, as it was in 2016. In entitlement-based expenditure, beneficiaries receive payment if they meet certain conditions. Such payments represent a lower risk of error if the conditions set are not overly complex. The payments concerned
  (Box 1.7)
  include student and research fellowships (MFF 1a — chapter 5), direct aid for farmers (MFF 2 — chapter 7) and budget support to third countries (MFF 4 — chapter 9). Administrative payments mainly consist of the salaries and pensions of EU civil servants (MFF 5 — chapter 10). Overall, entitlement-based expenditure represents around 53 % of our audit population. |
| --- | --- |

1.18.

We estimate the level of error for entitlement-based expenditure (excluding some rural development schemes) to be below our materiality threshold of 2 %, as it was in 2016. In entitlement-based expenditure, beneficiaries receive payment if they meet certain conditions. Such payments represent a lower risk of error if the conditions set are not overly complex. The payments concerned
  (Box 1.7)
  include student and research fellowships (MFF 1a — chapter 5), direct aid for farmers (MFF 2 — chapter 7) and budget support to third countries (MFF 4 — chapter 9). Administrative payments mainly consist of the salaries and pensions of EU civil servants (MFF 5 — chapter 10). Overall, entitlement-based expenditure represents around 53 % of our audit population.

Box 1.7 —   Breakdown of reimbursement-based and entitlement-based expenditure of the EU budget by MFF heading

Image

Source: ECA.

THE COURT’S OBSERVATIONS

Material error persists in reimbursement-based expenditure

| 1.19. | Where complex conditions are in place, we found an increased risk of error. This applies to reimbursement-based expenditure and to a small proportion of entitlement-based expenditure where complex conditions apply (some rural development schemes). This type of high-risk expenditure represents around 47 % of our audit population. We estimate the level of error in this type of expenditure at 3,7  % (2016: 4,8  %), which significantly exceeds the materiality threshold of 2 % (
  Box 1.6
  ). |
| --- | --- |

1.19.

Where complex conditions are in place, we found an increased risk of error. This applies to reimbursement-based expenditure and to a small proportion of entitlement-based expenditure where complex conditions apply (some rural development schemes). This type of high-risk expenditure represents around 47 % of our audit population. We estimate the level of error in this type of expenditure at 3,7  % (2016: 4,8  %), which significantly exceeds the materiality threshold of 2 % (
  Box 1.6
  ).

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

| 1.20. | Reimbursement-based expenditure covers beneficiaries’ claims for eligible costs they have incurred. To this end, they must provide information demonstrating that they are engaged in an activity eligible for support and showing costs incurred for which they may claim reimbursement. In doing so, they have to follow complicated rules regarding what can be claimed (eligibility) and how costs can be properly incurred. This complexity leads to errors which affect our conclusion for MFF headings 1a ‘Competitiveness’ (paragraphs 5.31-5.32), 1b ‘Cohesion’ (paragraphs 6.73-6.76) and 2 ‘Natural resources’ (paragraphs 7.40-7.41). |
| --- | --- |

1.20.

Reimbursement-based expenditure covers beneficiaries’ claims for eligible costs they have incurred. To this end, they must provide information demonstrating that they are engaged in an activity eligible for support and showing costs incurred for which they may claim reimbursement. In doing so, they have to follow complicated rules regarding what can be claimed (eligibility) and how costs can be properly incurred. This complexity leads to errors which affect our conclusion for MFF headings 1a ‘Competitiveness’ (paragraphs 5.31-5.32), 1b ‘Cohesion’ (paragraphs 6.73-6.76) and 2 ‘Natural resources’ (paragraphs 7.40-7.41).

| 1.20. | The Commission notes that reimbursement-based expenditure comprises both expenditure reimbursed on the basis of actual costs and on the basis of simplified cost options. The ECA has confirmed in previous years that projects implemented based on simplified cost options are less error-prone. Simplified cost options represent a significant percentage of ESF, ERDF and CF operations (see Commission reply to paragraph 6.77).

  The Omnibus proposal, in its drafting resulting from the political agreement between the Council and Parliament, significantly broadens the scope and applicability of simplified cost options and payments based on conditions. The Commission legislative proposal for 2021-2027 provides further possibilities for the use of simplified cost options and payments against conditions to further reduce complexity. |
| --- | --- |

1.20.

The Omnibus proposal, in its drafting resulting from the political agreement between the Council and Parliament, significantly broadens the scope and applicability of simplified cost options and payments based on conditions. The Commission legislative proposal for 2021-2027 provides further possibilities for the use of simplified cost options and payments against conditions to further reduce complexity.

| 1.21. | Most reimbursement-based EU funds are spent on research projects (Competitiveness), training schemes (Cohesion), projects in regional and rural development (Cohesion and Rural development) and development projects (Global Europe). As shown in
  Box 1.8
  , ‘European Agriculture Guarantee Fund (EAGF) market measures, rural development, environment, climate action and fisheries’ and ‘Competitiveness’ were the biggest contributors to our 2017 estimated level of error for reimbursement-based expenditure, followed by ‘Cohesion’ and ‘Global Europe’. This distribution is different from previous years. This is mainly due to the low volume of accepted expenditure in ‘Cohesion’. |
| --- | --- |

1.21.

Most reimbursement-based EU funds are spent on research projects (Competitiveness), training schemes (Cohesion), projects in regional and rural development (Cohesion and Rural development) and development projects (Global Europe). As shown in
  Box 1.8
  , ‘European Agriculture Guarantee Fund (EAGF) market measures, rural development, environment, climate action and fisheries’ and ‘Competitiveness’ were the biggest contributors to our 2017 estimated level of error for reimbursement-based expenditure, followed by ‘Cohesion’ and ‘Global Europe’. This distribution is different from previous years. This is mainly due to the low volume of accepted expenditure in ‘Cohesion’.

Box 1.8 —   Contribution of each MFF heading to the 2017 estimated level of error in reimbursement-based expenditure (%)

Image

Source: ECA.

THE COURT’S OBSERVATIONS

We found a material level of error in spending on ‘Competitiveness’, ‘Cohesion’ and ‘Natural resources’

| 1.22. | This year, we provide a specific assessment for four MFF headings: ‘Competitiveness’, ‘Cohesion’, ‘Natural resources’ and ‘Administrative expenditure’. We do not estimate levels of error for other areas of expenditure, including MFF headings 3 (chapter 8) and 4 (chapter 9). In total, expenditure covered by our statement of assurance in these areas amounted to 11,1 billion euros (11,1  % of the expenditure covered by our audit). Work performed in these areas continues to contribute to our overall conclusions on 2017. |
| --- | --- |

1.22.

This year, we provide a specific assessment for four MFF headings: ‘Competitiveness’, ‘Cohesion’, ‘Natural resources’ and ‘Administrative expenditure’. We do not estimate levels of error for other areas of expenditure, including MFF headings 3 (chapter 8) and 4 (chapter 9). In total, expenditure covered by our statement of assurance in these areas amounted to 11,1 billion euros (11,1  % of the expenditure covered by our audit). Work performed in these areas continues to contribute to our overall conclusions on 2017.

| 1.23. | ‘Competitiveness’ (chapter 5): expenditure is affected by material error. Around 90 % of expenditure is reimbursement-based, and the errors here essentially reflect different categories of ineligible costs (in particular personnel and other costs, ineligible projects and beneficiaries). |
| --- | --- |

1.23.

‘Competitiveness’ (chapter 5): expenditure is affected by material error. Around 90 % of expenditure is reimbursement-based, and the errors here essentially reflect different categories of ineligible costs (in particular personnel and other costs, ineligible projects and beneficiaries).

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

| 1.24. | ‘Cohesion’ (chapter 6): Expenditure in this area is dominated by reimbursements. The main type of error detected by audit authorities was ineligible costs. For these errors, Member State authorities generally applied corrections in order to reduce the residual error rates for programmes to below the 2 % materiality threshold. However, we also found errors that audit authorities had not detected, including, in the case of one audit authority, ineligible recipients financed through financial instruments. Neither the Member State authorities nor the Commission applied any corrections for these errors. Based on errors that either audit authorities or we ourselves detected, and considering all relevant financial corrections, we estimate that the level of error is material. |
| --- | --- |

1.24.

‘Cohesion’ (chapter 6): Expenditure in this area is dominated by reimbursements. The main type of error detected by audit authorities was ineligible costs. For these errors, Member State authorities generally applied corrections in order to reduce the residual error rates for programmes to below the 2 % materiality threshold. However, we also found errors that audit authorities had not detected, including, in the case of one audit authority, ineligible recipients financed through financial instruments. Neither the Member State authorities nor the Commission applied any corrections for these errors. Based on errors that either audit authorities or we ourselves detected, and considering all relevant financial corrections, we estimate that the level of error is material.

| 1.24. | The Commission notes that the ECA’s estimate of the level of error for Cohesion policy this year represents a significant improvement, taking into account all financial corrections already applied by programme authorities. Accepted expenditure may still be subject to financial corrections in later years where appropriate, for instance following Commission subsequent audits and checks.

  Simplification represents the most effective way of reducing the costs and burden of control and the risk of errors. Policy areas which are subject to sound management and control systems and less complex eligibility rules are also less error-prone (see Commission reply to paragraph 1.20). |
| --- | --- |

1.24.

Simplification represents the most effective way of reducing the costs and burden of control and the risk of errors. Policy areas which are subject to sound management and control systems and less complex eligibility rules are also less error-prone (see Commission reply to paragraph 1.20).

| 1.25. | ‘Natural resources’ (chapter 7): as a whole, this area is materially affected by error. However, direct payments from the EAGF account for around three quarters of expenditure in this area and are free from material error. Direct payments to farmers are entitlement-based and have benefited from simplified land eligibility rules and an effective ex-ante control system (IACS) that allows automated cross-checks between databases. We continue to find a persistently high level of error in the other spending areas (rural development, EAGF market measures, environment, climate action and fisheries). Expenditure in these areas is mostly disbursed through reimbursement of costs. Ineligible beneficiaries, activities, projects or expenditure contribute around two thirds of the estimated level of error for this MFF heading. |
| --- | --- |

1.25.

‘Natural resources’ (chapter 7): as a whole, this area is materially affected by error. However, direct payments from the EAGF account for around three quarters of expenditure in this area and are free from material error. Direct payments to farmers are entitlement-based and have benefited from simplified land eligibility rules and an effective ex-ante control system (IACS) that allows automated cross-checks between databases. We continue to find a persistently high level of error in the other spending areas (rural development, EAGF market measures, environment, climate action and fisheries). Expenditure in these areas is mostly disbursed through reimbursement of costs. Ineligible beneficiaries, activities, projects or expenditure contribute around two thirds of the estimated level of error for this MFF heading.

| 1.26. | ‘Administration’ (chapter 10): this area is free from material error. Most expenditure in this area takes the form of salaries, pensions and allowances paid by EU institutions and bodies. |
| --- | --- |

1.26.

‘Administration’ (chapter 10): this area is free from material error. Most expenditure in this area takes the form of salaries, pensions and allowances paid by EU institutions and bodies.

Eligibility errors continue to contribute most to the estimated level of error for reimbursement-based expenditure

| 1.27. | This year, we focused more closely on the types of error found in reimbursement-based spending as this is the area in which material error persists.
  Box 1.9
  provides a breakdown of the 2017 estimated level of error 3,7  % for reimbursement-based spending by error type. It also provides the comparable figures for the 2016 estimate (4,8  %) (20). |
| --- | --- |

1.27.

This year, we focused more closely on the types of error found in reimbursement-based spending as this is the area in which material error persists.
  Box 1.9
  provides a breakdown of the 2017 estimated level of error 3,7  % for reimbursement-based spending by error type. It also provides the comparable figures for the 2016 estimate (4,8  %) (20).

Box 1.9 —   Breakdown of the estimated level of error for reimbursement-based expenditure by type of error

Image

Source: ECA.

| 1.28. | Similarly to 2016, eligibility errors (i.e. ineligible costs in costs claims, non-respect of agri-environment-climate commitments (rural development) and ineligible projects/activities or beneficiaries) contribute most to the 2017 estimated level of error. However, their impact increased significantly compared with 2016 (2017: 93 %; 2016: 73 %). This was due to the fact that we found very few public procurement errors this year. |
| --- | --- |

1.28.

Similarly to 2016, eligibility errors (i.e. ineligible costs in costs claims, non-respect of agri-environment-climate commitments (rural development) and ineligible projects/activities or beneficiaries) contribute most to the 2017 estimated level of error. However, their impact increased significantly compared with 2016 (2017: 93 %; 2016: 73 %). This was due to the fact that we found very few public procurement errors this year.

| 1.28. | The Commission will follow up the cases identified by the ECA and will propose action as it deems necessary.

  The Commission considers that the non-respect of agri-environment climate commitments is not necessarily an eligibility issue. A proportionate sanction, that only in exceptional and limited numbers of cases can reach the 100 %, is applied. See also paragraph 7.19. |
| --- | --- |

1.28.

The Commission considers that the non-respect of agri-environment climate commitments is not necessarily an eligibility issue. A proportionate sanction, that only in exceptional and limited numbers of cases can reach the 100 %, is applied. See also paragraph 7.19.

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

| 1.29. | In contrast to 2016, serious errors in public procurement contributed less than 1 % (2016: 18 %) to our estimated level of error. This can be explained by the relatively low level of expenditure accepted under the European Regional Development Fund and the Cohesion Fund (paragraph 6.18). Our previous audit results show that these funds are more prone to errors in public procurement procedures. |
| --- | --- |

1.29.

In contrast to 2016, serious errors in public procurement contributed less than 1 % (2016: 18 %) to our estimated level of error. This can be explained by the relatively low level of expenditure accepted under the European Regional Development Fund and the Cohesion Fund (paragraph 6.18). Our previous audit results show that these funds are more prone to errors in public procurement procedures.

| 1.29. | The Commission underlines that its various preventive and corrective actions under its 2013 Action plan on public procurement as well as the specific ex ante conditionality in relation to public procurement introduced in the 2014-2020 legal framework for the ESI funds have also contributed to address weaknesses identified in that area. |
| --- | --- |

1.29.

The Commission’s estimate of error is at the lower end of our range

| 1.30. | According to Article 317 of the TFEU, the Commission is ultimately responsible for implementing the EU budget and manages EU spending together with Member States (21). The Commission accounts for its actions in three reports which together form the ‘Integrated Financial Reporting Package’ (22):






  (a) | EU consolidated accounts (provisional in March; final in June); |
| --- | --- | --- |

1.30.

According to Article 317 of the TFEU, the Commission is ultimately responsible for implementing the EU budget and manages EU spending together with Member States (21). The Commission accounts for its actions in three reports which together form the ‘Integrated Financial Reporting Package’ (22):

(a)

EU consolidated accounts (provisional in March; final in June);

| (b) | Annual Management and Performance Report (AMPR) (no provisional version; final in June); |
| --- | --- |

(b)

Annual Management and Performance Report (AMPR) (no provisional version; final in June);

| (c) | Report on the follow-up to the discharge of the previous financial year (July). |
| --- | --- |

(c)

Report on the follow-up to the discharge of the previous financial year (July).

| 1.31. | Under our 2018-2020 strategy, we set out to base our statement of assurance on an attestation approach, meaning that we intend to provide assurance on the Commission’s (management) statement. This builds on our experience of applying this approach since 1994 when auditing the reliability of the accounts. For the regularity of transactions underlying the accounts, we are working with the Commission to establish the conditions necessary to progress towards this approach. An important element is the timely availability of information for compilation and audit (23). |
| --- | --- |

1.31.

Under our 2018-2020 strategy, we set out to base our statement of assurance on an attestation approach, meaning that we intend to provide assurance on the Commission’s (management) statement. This builds on our experience of applying this approach since 1994 when auditing the reliability of the accounts. For the regularity of transactions underlying the accounts, we are working with the Commission to establish the conditions necessary to progress towards this approach. An important element is the timely availability of information for compilation and audit (23).

| 1.31. | The Commission supports the idea of an evolution which would make greater use of the legality and regularity information provided by the auditee, including the corrective action taken as well as more qualitative elements, while accommodating the specificities of the different policy areas, including multiannuality. However, at this stage, further clarification is needed as regards the exact implications or consequences of an attestation approach for the Commission, Member States' authorities and beneficiaries, in particular in terms of costs, administrative burden and timing. |
| --- | --- |

1.31.

| 1.32. | In the AMPR, the Commission presents its assessment of the amounts at risk. The amount at risk at payment represents the Commission’s estimate of the amount not paid according to the applicable rules at the moment of payment. This figure is closest to our estimated level of error. |
| --- | --- |

1.32.

In the AMPR, the Commission presents its assessment of the amounts at risk. The amount at risk at payment represents the Commission’s estimate of the amount not paid according to the applicable rules at the moment of payment. This figure is closest to our estimated level of error.

| 1.32. | The Commission has made progress on limiting the overall error rate at payment.

  In addition, the overall amount at risk at closure for 2017 presented in the Annual Management and Performance Report is estimated to be less than 2 % of total relevant expenditure after taking into account estimated future corrections. |
| --- | --- |

1.32.

In addition, the overall amount at risk at closure for 2017 presented in the Annual Management and Performance Report is estimated to be less than 2 % of total relevant expenditure after taking into account estimated future corrections.

| 1.33. | As well as the amount at risk at payment, the Commission presents other regularity indicators.
  Box 1.10
  shows how the amount at risk at payment ties in with these other indicators. |
| --- | --- |

1.33.

As well as the amount at risk at payment, the Commission presents other regularity indicators.
  Box 1.10
  shows how the amount at risk at payment ties in with these other indicators.

Box 1.10 —   Relationship between the amount at risk at payment and the amount at risk at reporting/the overall amount at risk at closure

Image

Source: Commission — AMPR 2016, p. 71.

| 1.34. | Box 1.11
  compares the Commission’s figures for the amount at risk at payment to the range of our estimate of error. The AMPR does not follow the same procedure as the EU consolidated accounts, of which we obtain a provisional version end of March. Therefore, we do not examine the information in the AMPR as such. The amount at risk at payment calculated by the Commission for 2017 and presented in the AMPR is at the lower end of our range at 1,7  % (compared to 2,1  %-2,6  % for 2016). Our estimated level of error is 2,4  % (2016: 3,1  %) in a range between 1,4  % and 3,4  %. |
| --- | --- |

1.34.

Box 1.11
  compares the Commission’s figures for the amount at risk at payment to the range of our estimate of error. The AMPR does not follow the same procedure as the EU consolidated accounts, of which we obtain a provisional version end of March. Therefore, we do not examine the information in the AMPR as such. The amount at risk at payment calculated by the Commission for 2017 and presented in the AMPR is at the lower end of our range at 1,7  % (compared to 2,1  %-2,6  % for 2016). Our estimated level of error is 2,4  % (2016: 3,1  %) in a range between 1,4  % and 3,4  %.

| 1.34. | The AMPR is adopted mid-June in accordance with the Financial Regulation and, for the amount at risk at payment referred to by the ECA, it is built on the detailed information in the Annual Activity Reports (AARs) of the Directors-General. The AARs are, in principle, made available to the ECA as soon as they are signed. Sufficient time is needed for the preparation of the AARs and the AMPR in order to review and assess key data provided by Member States. |
| --- | --- |

1.34.

Box 1.11 —   The Commission’s estimate for the amount at risk at payment compared to our estimate

Image

Source: ECA.

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

The individual components of the Commission’s estimate are not always in line with our findings

| 1.35. | The Commission uses the declarations of assurance made by its directors-general in their annual activity reports (AARs) as the basis for its overall assessment of legality and regularity. Chapters 4 to 10 include a section on selected AARs, in which we assess whether they are consistent with our own findings. |
| --- | --- |

1.35.

The Commission uses the declarations of assurance made by its directors-general in their annual activity reports (AARs) as the basis for its overall assessment of legality and regularity. Chapters 4 to 10 include a section on selected AARs, in which we assess whether they are consistent with our own findings.

| 1.35. | The AARs are the key reports of the Directors-General to the College of Commissioners on the performance of their duties. The AARs provide an account of the achievement towards the general and specific objectives as set in the Directorates-Generals’ strategic and management plans. They also include the achievement in the field of financial management, internal control as well as organisational management. |
| --- | --- |

1.35.

| 1.36. | The regularity indicators (figures disclosed in the AARs for amounts at risk at payment): |
| --- | --- |

1.36.

The regularity indicators (figures disclosed in the AARs for amounts at risk at payment):

1.36.

| (a) | are broadly in line with our own findings for MFF heading 2 ‘Natural resources’ and MFF 5 ‘Administration’; |
| --- | --- |

(a)

are broadly in line with our own findings for MFF heading 2 ‘Natural resources’ and MFF 5 ‘Administration’;

| (b) | are below our estimated level of error for MFF 1a ‘Competitiveness for growth and jobs’ and MFF 1b ‘Cohesion’. |
| --- | --- |

(b)

are below our estimated level of error for MFF 1a ‘Competitiveness for growth and jobs’ and MFF 1b ‘Cohesion’.

| (b) | As regards MFF heading 1a ‘Competitiveness for growth and jobs’, the Commission considers that the information presented in the AARs in relation to regularity of underlying transactions has improved (see paragraphs 5.23-5.25).

  The Commission notes that its aggregate estimated 2017 amount at risk at payment for ‘Cohesion’ under MFF heading 1b as stemming from the AARs of DGs REGIO and EMPL is within the range calculated by the ECA. |
| --- | --- |

(b)

As regards MFF heading 1a ‘Competitiveness for growth and jobs’, the Commission considers that the information presented in the AARs in relation to regularity of underlying transactions has improved (see paragraphs 5.23-5.25).

Future corrections and recoveries significantly affect the amount at risk at closure

| 1.37. | The amount at risk at closure, referred to in
  Box 1.10
  , is influenced by estimated future corrections and recoveries that managers of EU funds expect to make. These are an important management tool which can reduce the impact of irregular expenditure on the EU budget. |
| --- | --- |

1.37.

The amount at risk at closure, referred to in
  Box 1.10
  , is influenced by estimated future corrections and recoveries that managers of EU funds expect to make. These are an important management tool which can reduce the impact of irregular expenditure on the EU budget.

| 1.37. | The concept ‘amount at risk at closure’ completes the global picture of the multiannual programmes as it gives additional information on the amount at risk that remains once all corrective actions are taken into account, including the ‘corrective capacity’, i.e. a best estimate of the corrections that will be made in the years following the expenditure. |
| --- | --- |

1.37.

| 1.38. | The Commission uses corrections and recoveries applied in past years as a basis for estimating future corrections and recoveries. The amount at risk at closure reported in the AMPR is the amount at risk at payment (paragraph 1.32) minus the estimate for future corrections and recoveries.
  Box 1.12
  shows the links between actual figures and future estimates for corrections and recoveries, as at the end of the reporting year. |
| --- | --- |

1.38.

The Commission uses corrections and recoveries applied in past years as a basis for estimating future corrections and recoveries. The amount at risk at closure reported in the AMPR is the amount at risk at payment (paragraph 1.32) minus the estimate for future corrections and recoveries.
  Box 1.12
  shows the links between actual figures and future estimates for corrections and recoveries, as at the end of the reporting year.

| 1.38. | The Commission departments’ estimates are conservative in order to avoid any possible overestimation of the corrective capacity. Such estimates are indeed to some extent based on the average of the actual corrections made in previous years. However, this historical basis is not always fully relevant for the estimation of future corrections and may need to be duly adjusted. See also Commission reply to paragraph 1.39. |
| --- | --- |

1.38.

Box 1.12 —   Commission's estimated future corrections and recoveries and amounts at risk

Image

Source: ECA.

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

The Commission’s estimate for corrections and recoveries is based on an adjusted historical average

| 1.39. | To prepare an estimate of future corrections and recoveries, the Commission uses a historical average based on transactions over the previous years. The Commission considers this the best available indication of its corrective capacity. To ensure it is relevant for current programmes, DG BUDG requires the other DGs to adjust the historical average or to use another estimation method as appropriate (24). |
| --- | --- |

1.39.

To prepare an estimate of future corrections and recoveries, the Commission uses a historical average based on transactions over the previous years. The Commission considers this the best available indication of its corrective capacity. To ensure it is relevant for current programmes, DG BUDG requires the other DGs to adjust the historical average or to use another estimation method as appropriate (24).

| 1.39. | The historical data may be affected by one-off events or related to previous programmes with different risk profiles than the current ones (which may have been simplified and have become less error-prone). For these reasons, the historical data is adjusted or replaced accordingly. |
| --- | --- |

1.39.

| 1.40. | While we noted an improvement for the 2017 financial year, historical data continued to be affected by classification and input errors or included elements not relevant for the calculation (25). |
| --- | --- |

1.40.

While we noted an improvement for the 2017 financial year, historical data continued to be affected by classification and input errors or included elements not relevant for the calculation (25).

| 1.40. | Historical data is relevant for estimating future corrections but sometimes needs to be duly adjusted. This is precisely one of the reasons why the Commission departments are asked to consider the need for adjusting/replacing the historical basis.

  The Commission has been continuously improving the reporting of the financial corrections and recoveries and the quality of the underlying data over recent years. |
| --- | --- |

1.40.

The Commission has been continuously improving the reporting of the financial corrections and recoveries and the quality of the underlying data over recent years.

| 1.41. | Most Commission DGs adjusted their estimates. We found that the 2017 estimates were better than in previous years. However, some DGs still did not sufficiently disclose in their AARs the main underlying assumptions for estimating future corrections and recoveries. |
| --- | --- |

1.41.

Most Commission DGs adjusted their estimates. We found that the 2017 estimates were better than in previous years. However, some DGs still did not sufficiently disclose in their AARs the main underlying assumptions for estimating future corrections and recoveries.

| 1.41. | The 2017 AAR instructions, template and guidance have been clarified as a response to the ECA’s 2016 recommendations. In line with the instructions, DGs in their 2017 AARs improved their presentation of the main assumptions of the adjustments/replacements made, in order to underline the best and conservative estimate for the future corrections and recoveries which are relevant for the current programmes. |
| --- | --- |

1.41.

Further differentiation between the impact of preventive and corrective action is needed

| 1.42. | The Commission and, for programmes under shared management, Member State authorities, can protect the EU budget from irregular spending by either preventing it from occurring or offsetting its impact. Prevention is the first line of defence against errors. If preventive mechanisms do not successfully prevent all errors from occurring, the Commission has to take corrective action to offset their impact. |
| --- | --- |

1.42.

The Commission and, for programmes under shared management, Member State authorities, can protect the EU budget from irregular spending by either preventing it from occurring or offsetting its impact. Prevention is the first line of defence against errors. If preventive mechanisms do not successfully prevent all errors from occurring, the Commission has to take corrective action to offset their impact.

| 1.43. | The Commission’s key preventive mechanisms include interrupting and suspending payments, as well as carrying out ex-ante checks leading to the rejection of ineligible amounts before the Commission accepts expenditure and makes payments. The Commission's main corrective mechanisms include ex-post checks on amounts it has accepted and paid out. In shared management, these lead to financial corrections and in direct and indirect management, they result in recoveries from final recipients. |
| --- | --- |

1.43.

The Commission’s key preventive mechanisms include interrupting and suspending payments, as well as carrying out ex-ante checks leading to the rejection of ineligible amounts before the Commission accepts expenditure and makes payments. The Commission's main corrective mechanisms include ex-post checks on amounts it has accepted and paid out. In shared management, these lead to financial corrections and in direct and indirect management, they result in recoveries from final recipients.

| 1.44. | We found that the Commission reports amounts resulting from both its preventive and corrective mechanisms under a single heading ‘Financial corrections and recoveries’ in the Financial Statement Discussion and Analysis (FSDA) of the EU annual accounts. This makes it difficult for the reader to distinguish between the impact of preventive and corrective actions. |
| --- | --- |

1.44.

We found that the Commission reports amounts resulting from both its preventive and corrective mechanisms under a single heading ‘Financial corrections and recoveries’ in the Financial Statement Discussion and Analysis (FSDA) of the EU annual accounts. This makes it difficult for the reader to distinguish between the impact of preventive and corrective actions.

| 1.44 and 1.45. | The information on financial corrections and recoveries included in the Financial Statement Discussion and Analysis (FSDA) is intended to explain in a very concise way the main elements and measures the Commission uses to protect the EU budget and their financial impact. All detailed information on financial corrections and recoveries is included in the AMPR, which distinguishes between amounts resulting from preventive and corrective actions. In addition, in the 2017 FSDA, the amount for corrective actions has been separately disclosed and a link has been provided to the relevant sections of the AMPR. |
| --- | --- |

1.44 and 1.45.

| 1.45. | However, the Commission does have the necessary details to differentiate between the two categories. In our annual reports for 2014, 2015 and 2016 we used data the Commission provided to us to differentiate between amounts resulting from preventive and corrective mechanisms. |
| --- | --- |

1.45.

However, the Commission does have the necessary details to differentiate between the two categories. In our annual reports for 2014, 2015 and 2016 we used data the Commission provided to us to differentiate between amounts resulting from preventive and corrective mechanisms.

| 1.46. | The 2017 FSDA reports total implemented ‘financial corrections and recoveries’of 2,8 billion euros. As in previous years, this figure includes, together with the amounts resulting from corrective mechanisms, the following results of preventive actions:






  (a) | in shared management, 78 million euros deducted by the Member States from new expenditure declarations to the Commission (corrections ‘at source’) in Cohesion and internal policies, and 275 million euros of payment reductions in Agriculture; |
| --- | --- | --- |

1.46.

The 2017 FSDA reports total implemented ‘financial corrections and recoveries’of 2,8 billion euros. As in previous years, this figure includes, together with the amounts resulting from corrective mechanisms, the following results of preventive actions:

(a)

in shared management, 78 million euros deducted by the Member States from new expenditure declarations to the Commission (corrections ‘at source’) in Cohesion and internal policies, and 275 million euros of payment reductions in Agriculture;

| (b) | in direct and indirect management, 539 million euros of ineligible expenditure deducted from claims before the corresponding payments from the EU budget. |
| --- | --- |

(b)

in direct and indirect management, 539 million euros of ineligible expenditure deducted from claims before the corresponding payments from the EU budget.

| 1.46. | Detailed information on financial corrections and recoveries is provided in the AMPR, like in 2016, and before that in the respective Commission Communications on the Protection of the EU Budget. The amounts of corrections and recoveries at source demonstrate that the Commission focusses on preventive measures to protect the EU budget before accepting expenditure. |
| --- | --- |

1.46.

THE COURT’S OBSERVATIONS

WE REPORT SUSPECTED FRAUD TO OLAF

| 1.47. | We report cases of suspected fraud to the European Anti-Fraud Office (OLAF), whether we identify them during our audit (including our work on performance) or on the basis of information provided directly to us by third parties. We cannot comment on individual cases or on OLAF’s response to these. In 2017:






  (a) | we assessed the regularity of 703 transactions for our audit work on the annual report and produced 28 special reports; |
| --- | --- | --- |

1.47.

We report cases of suspected fraud to the European Anti-Fraud Office (OLAF), whether we identify them during our audit (including our work on performance) or on the basis of information provided directly to us by third parties. We cannot comment on individual cases or on OLAF’s response to these. In 2017:

(a)

we assessed the regularity of 703 transactions for our audit work on the annual report and produced 28 special reports;

| (b) | we reported to OLAF 13 instances of suspected fraud found during our audits (11 in 2016), as well as 6 cases based on information provided by third parties (5 in 2016). |
| --- | --- |

(b)

we reported to OLAF 13 instances of suspected fraud found during our audits (11 in 2016), as well as 6 cases based on information provided by third parties (5 in 2016).

| 1.48. | In 2017, the suspected fraud cases arising from our work which we transferred to OLAF most frequently concerned the artificial creation of the necessary conditions for EU financing, the declaration of costs not meeting the eligibility criteria and procurement irregularities. |
| --- | --- |

1.48.

In 2017, the suspected fraud cases arising from our work which we transferred to OLAF most frequently concerned the artificial creation of the necessary conditions for EU financing, the declaration of costs not meeting the eligibility criteria and procurement irregularities.

| 1.49. | As at 31 December 2017, seven of the 13 cases arising from audit work reported to OLAF in 2017 had already resulted in the opening of an investigation and one was still under consideration. OLAF decided to dismiss the five other cases on the grounds that they could be better dealt with by another authority or EU institution, body, office or agency, that there was insufficient evidence of fraud, or for proportionality reasons. |
| --- | --- |

1.49.

As at 31 December 2017, seven of the 13 cases arising from audit work reported to OLAF in 2017 had already resulted in the opening of an investigation and one was still under consideration. OLAF decided to dismiss the five other cases on the grounds that they could be better dealt with by another authority or EU institution, body, office or agency, that there was insufficient evidence of fraud, or for proportionality reasons.

| 1.50. | As regards the six cases arising from information provided by third parties and forwarded by us, two had resulted in investigation and the other four were dismissed on the grounds that they could be better dealt with by another authority or EU institution, body, office or agency, or that there was insufficient evidence of fraud. |
| --- | --- |

1.50.

As regards the six cases arising from information provided by third parties and forwarded by us, two had resulted in investigation and the other four were dismissed on the grounds that they could be better dealt with by another authority or EU institution, body, office or agency, or that there was insufficient evidence of fraud.

| 1.51. | Between 2010 and 2017, OLAF recommended recoveries totalling 294,7  million euros in cases which we referred to it. Where OLAF closed a case without recommending further action, its most common conclusion was that there was no evidence of fraud or irregularity affecting the EU’s financial or other interests. |
| --- | --- |

1.51.

Between 2010 and 2017, OLAF recommended recoveries totalling 294,7  million euros in cases which we referred to it. Where OLAF closed a case without recommending further action, its most common conclusion was that there was no evidence of fraud or irregularity affecting the EU’s financial or other interests.

CONCLUSIONS

| 1.52. | The key function of this chapter is to support the audit opinion presented in the statement of assurance. |
| --- | --- |

1.52.

The key function of this chapter is to support the audit opinion presented in the statement of assurance.

Audit results

| 1.53. | We conclude that the accounts were not affected by material misstatements. |
| --- | --- |

1.53.

We conclude that the accounts were not affected by material misstatements.

| 1.54. | As for the regularity of transactions, we conclude that revenue was free from material error. For payments, our audit results show continuous improvements over the last few years. Similarly to last year, we conclude that entitlement-based expenditure is free from material error. A material level of error is confined to reimbursement-based expenditure, which this year accounted for 47 % of our audit population. On this basis, we conclude that error is not pervasive. |
| --- | --- |

1.54.

As for the regularity of transactions, we conclude that revenue was free from material error. For payments, our audit results show continuous improvements over the last few years. Similarly to last year, we conclude that entitlement-based expenditure is free from material error. A material level of error is confined to reimbursement-based expenditure, which this year accounted for 47 % of our audit population. On this basis, we conclude that error is not pervasive.

---

(1)  The consolidated financial statements comprise the balance sheet, the statement of financial performance, the cash flow statement the statement of changes in net assets, and a summary of significant accounting policies and other explanatory notes (including segment reporting).

(2)  The budgetary implementation reports also comprise explanatory notes.

(3)  This amounted to 46,7 billion euros. We provide further information in paragraphs 1.19 to 1.21 of our 2017 annual report.

(4)  This amounted to 53,5 billion euros. We provide further information in paragraph 1.18 of our 2017 annual report.

(5)  Regulation (EU) 2015/1017 of the European Parliament and of the Council of 25 June 2015 on the European Fund for Strategic Investments, the European Investment Advisory Hub and the European Investment Project Portal and amending Regulations (EU) No 1291/2013 and (EU) No 1316/2013 — the European Fund for Strategic Investments (OJ L 169, 1.7.2015, p. 1) (the ‘EFSI Regulation’).

(6)  The guarantee was increased up to 26 billion euros in accordance with the amended EFSI Regulation of December 2017 (Regulation (EU) 2017/2396 of the European Parliament and of the Council of 13 December 2017 amending Regulations (EU) No 1316/2013 and (EU) 2015/1017, OJ L 345, 27.12.2017, p. 34) and the EFSI Agreement amended in March 2018.

(7)  See paragraphs 1.12-1.16 of our 2015 annual report.

(8)  The EFSI Facility’s governance structure could be taken as an indication that it is under joint control, as could the use and allocation of the EU guarantee. However, according to the Commission, unanimous consent is not required for decisions on most relevant activities in relation to the SMEW Equity Product or the EFSI initiative as a whole, and therefore the Commission’s Accounting Officer concluded that joint control cannot exist.

(9)  See International Public Sector Accounting Standard (IPSAS) 25 — Employee benefits. For the PSEO, the defined benefit obligation reflects the present value of expected future payments that the EU will be required to make to settle the pension obligations resulting from employee service in the current and prior periods.

(10)  These comprise accrued charges on the liabilities side of the balance sheet of 64 billion euros and, on the asset side of the balance sheet, 37 billion euros reducing the value of pre-financing.

(11)  See glossary: sound financial management.

(12)  See parts 2 of chapters 5, 6 and 7.

(13)  See chapter 3.

(14)  See 2017 consolidated annual accounts of the EU, Budgetary implementation reports and explanatory notes, 4.3 MFF: Implementation of payment appropriations.

(15)  The consolidated accounts comprise:

| (a) | the consolidated financial statements covering the balance sheet (presenting the assets and liabilities at the end of the year), the statement of financial performance (recognising the income and expenses of the year), the cashflow statement (disclosing how changes in the accounts affect cash and cash equivalents) and the statement of changes in net assets as well as the notes to the financial statements; |
| --- | --- |

(a)

the consolidated financial statements covering the balance sheet (presenting the assets and liabilities at the end of the year), the statement of financial performance (recognising the income and expenses of the year), the cashflow statement (disclosing how changes in the accounts affect cash and cash equivalents) and the statement of changes in net assets as well as the notes to the financial statements;

| (b) | the budgetary implementation reports covering the revenue and expenditure for the year as well as the related notes. |
| --- | --- |

(b)

the budgetary implementation reports covering the revenue and expenditure for the year as well as the related notes.

(16)  Regulation (EU, Euratom) No 966/2012 of the European Parliament and of the Council of 25 October 2012 on the financial rules applicable to the general budget of the Union and repealing Council Regulation (EC, Euratom) No 1605/2002 (OJ L 298, 26.10.2012, p. 1), as amended.

(17)  See Recommended Practice Guideline 2 (RPG 2) ‘Financial Statement Discussion and Analysis’ of International Public Sector Accounting Standards Board (IPSASB).

(18)  Auditors are required to report on key audit matters as a result of the introduction of International Standard on Auditing 701 in 2015.

(19)  Entitlement-based expenditure includes administrative expenditure.

(20)  These figures were not published in box 1.6 of the 2016 annual report.

(21)  Article 317 of the TFEU:

The Commission shall implement the budget in cooperation with the Member States, in accordance with the provisions of the regulations made pursuant to Article 322, on its own responsibility and within the limits of the appropriations, having regard to the principles of sound financial management. Member States shall cooperate with the Commission to ensure that the appropriations are used in accordance with the principles of sound financial management.

(22)  http://ec.europa.eu/budget/biblio/media/2018package_en.cfm

(23)  See Special Report 27/2016 ‘Governance at the European Commission — best practice?’, recommendation 2(f).

(24)  ‘Guidance on the content of the AAR Section 2.1: Financial management and internal control’; ‘Guideline: Key concepts and definitions for determining error rates, amounts at risk and estimated future corrections’, ‘User's guide to the BO reports for the preparation of the 2017 AAR’.

(25)  See for example paragraphs 1.13 to 1.15 of our 2013 annual report; paragraphs 1.43 and 1.44 of our 2014 annual report and footnote 35 in our 2015 annual report. Our examination of financial corrections and recoveries recorded in 2017 showed some classification and input errors.

ANNEX 1.1

AUDIT APPROACH AND METHODOLOGY

| 1. | Our audit approach is set out in the Financial and Compliance Audit Manual available on our website (1). We use an assurance model to plan our work. In our planning, we consider the risk of errors occurring (inherent risk) and the risk of errors not being prevented or detected and corrected (control risk). |
| --- | --- |

1.

PART 1 — Our 2018-2020 strategy for the statement of assurance

| 2. | A key goal of our 2018-2020 strategy is to improve the added value of our statement of assurance by providing more qualitative assessments in relation to EU financial management, strengthened reporting on performance and better information on EU action in Member States and regions. |
| --- | --- |

2.

| 3. | Our current approach for assessing whether transactions underlying the accounts comply with EU rules is to rely mainly on direct testing of compliance for a large random representative sample of transactions. Our recent annual reports show improvements in management and control systems and in the availability of legality and regularity information provided by our auditees. |
| --- | --- |

3.

| 4. | In light of these developments, for our 2018-2020 statements of assurance, we will strive to make better use of our auditee’s legality and regularity information in areas where this is feasible. Our ultimate goal is to move in future years towards an attestation approach (2). Under this approach, the auditor gathers sufficient and appropriate evidence to provide a conclusion on the assurance expressed by the responsible entity. In practice, this would mean that in areas where we can draw assurance from the legality and regularity information provided by our auditee, we review and re-perform their work. |
| --- | --- |

4.

| 5. | In 2017, we have amended our audit approach for MFF 1b ‘Economic, social and territorial cohesion’ to take account of changes in the design of the control systems for the 2014-2020 programming period. Our objective is, in addition to contributing to the 2017 statement of assurance, to conclude on the reliability of the Commission’s key legality and regularity indicator for this area — the residual risk of error (3). |
| --- | --- |

5.

| 6. | We have included in our population all payments that relate to closure decisions (by which the Commission accepts the accounts) taken by the Commission in 2017 for the 2014-2020 operational programmes. The Commission takes these decisions to clear expenditure incurred between 1 July 2015 and 30 June 2016 which has been included in the certified financial accounts submitted by Member States by 15 February 2017. We will, as part of future audits, test interim payments relating to 2014-2020 programmes and registered in the 2017 accounts. |
| --- | --- |

6.

PART 2 — Audit approach and methodology for the reliability of accounts

| 7. | We examine the EU’s consolidated accounts to determine their reliability. These consist of:






  (a) | the consolidated financial statements; and |
| --- | --- | --- |

7.

(a)

the consolidated financial statements; and

| (b) | the budgetary implementation reports. |
| --- | --- |

(b)

the budgetary implementation reports.

| 8. | The consolidated accounts should properly present, in all material respects:






  (a) | the financial position of the European Union at year end; |
| --- | --- | --- |

8.

(a)

the financial position of the European Union at year end;

| (b) | the results of its operations and cash flows; and |
| --- | --- |

(b)

the results of its operations and cash flows; and

| (c) | the changes in net assets for the year ended. |
| --- | --- |

(c)

the changes in net assets for the year ended.

| 9. | In our audit, we:






  (a) | evaluate the accounting control environment; |
| --- | --- | --- |

9.

(a)

evaluate the accounting control environment;

| (b) | check the functioning of key accounting procedures and the year-end closure process; |
| --- | --- |

(b)

check the functioning of key accounting procedures and the year-end closure process;

| (c) | analyse the main accounting data for consistency and reasonableness; |
| --- | --- |

(c)

analyse the main accounting data for consistency and reasonableness;

| (d) | analyse and reconcile accounts and/or balances; |
| --- | --- |

(d)

analyse and reconcile accounts and/or balances;

| (e) | perform substantive tests of commitments, payments and specific balance sheet items, based on representative samples; |
| --- | --- |

(e)

perform substantive tests of commitments, payments and specific balance sheet items, based on representative samples;

| (f) | use the work of other auditors where possible, in accordance with international standards on auditing, particularly when auditing borrowing and lending activities managed by the Commission for which external audit certificates are available. |
| --- | --- |

(f)

use the work of other auditors where possible, in accordance with international standards on auditing, particularly when auditing borrowing and lending activities managed by the Commission for which external audit certificates are available.

PART 3 — Audit approach and methodology for the regularity of transactions

| 10. | Auditing the transactions underlying the accounts for regularity involves testing whether they comply with the relevant rules and regulations. |
| --- | --- |

10.

| 11. | In our audit work, we consider whether we can make efficient use of the checks on regularity already performed by others. If we want to use the results of these checks, in line with audit standards, we assess the independence and competence of the other party and the scope and adequacy of its work. |
| --- | --- |

11.

How we test transactions

| 12. | Under each MFF heading where we provide a specific assessment (chapters 5, 6, 7 and 10), we test a representative sample of transactions in order to estimate the share of irregular transactions in the overall population. |
| --- | --- |

12.

| 13. | For each selected transaction, we determine whether or not the claim or payment was made for the purpose approved in the budget and specified in legislation. We examine how the amount of the claim or payment was calculated (for larger claims: based on a selection representative of all items in the transaction). This involves tracing the transaction from the budgetary accounts to the final recipient (e.g. a farmer, or the organiser of a training course or development aid project), testing compliance at each level. |
| --- | --- |

13.

| 14. | When testing revenue transactions, our examination of value added tax and GNI-based own resources takes as a starting point the macroeconomic aggregates based on which these are calculated. We examine the Commission’s controls on these Member State contributions up to the point they were received and recorded in the consolidated accounts. For traditional own resources, we examine the customs authorities’ accounts and the flow of duties — again up to the point they were received and recorded by the Commission. |
| --- | --- |

14.

| 15. | On the expenditure side, we examine payments once expenditure has been incurred, recorded and accepted. This applies to all categories of payments (including those made to purchase assets). We do not examine advances at the point they were made, but rather once:






  (a) | the final recipient of EU funds (e.g. a farmer, a research institute, a company providing publicly procured works or services) has provided evidence of their use; and |
| --- | --- | --- |

15.

(a)

the final recipient of EU funds (e.g. a farmer, a research institute, a company providing publicly procured works or services) has provided evidence of their use; and

| (b) | the Commission (or other institution or body managing EU funds) has accepted the final use of the funds by clearing the advance. |
| --- | --- |

(b)

the Commission (or other institution or body managing EU funds) has accepted the final use of the funds by clearing the advance.

| 16. | Our audit sample is designed to provide an estimate of the level of error for the expenditure as a whole rather than for individual transactions (e.g. a particular project). We use monetary unit sampling to select claims or payments and, at a lower level, individual items within a transaction (e.g. project invoices, parcels in a claim by a farmer). The error rates reported for these items should not be seen as a conclusion on their respective transactions, but rather contribute directly to the overall level of error for EU expenditure as a whole. |
| --- | --- |

16.

| 17. | We do not examine transactions in every Member State, beneficiary state and region in any given year. While we may name certain Member States, beneficiary states and/or regions, this does not mean that the examples do not occur elsewhere. The illustrative examples presented in this report do not form a basis for conclusions to be drawn on the specific Member States, beneficiary states and/or regions concerned. |
| --- | --- |

17.

| 18. | Our approach is not designed to gather data on the frequency of error in the whole population. Therefore, figures presented on the number of errors detected in an MFF heading, in expenditure managed by a DG or in spending in a particular Member State are not an indication of the frequency of error in EU-funded transactions or in individual Member States. Our sampling approach applies different weightings to different transactions, according to the value of the expenditure concerned and the intensity of our audit work. This weighting is removed in frequency information, which gives as much weight to rural development as to direct support for natural resources, and to European Social Fund expenditure as to regional and cohesion payments. |
| --- | --- |

18.

How we evaluate and present the results of transaction testing

| 19. | An error may concern all or part of the amount involved in an individual transaction. We consider whether errors are quantifiable or non-quantifiable, i.e. whether or not it is possible to measure how much of the amount examined was affected by the error. Errors detected and corrected prior to and independently of our checks are excluded from the calculation and frequency of error, since their detection and correction demonstrate that the control systems have worked effectively. |
| --- | --- |

19.

| 20. | Our criteria for the quantification of public procurement errors are described in the document ‘Non-compliance with the rules on public procurement — types of irregularities and basis for quantification’ (4). |
| --- | --- |

20.

| 21. | Our quantification may differ from that used by the Commission or Member States when deciding how to respond to the misapplication of the public procurement rules. |
| --- | --- |

21.

Estimated level of error

| 22. | What we estimate is the ‘most likely error’ rate (MLE). We do this for most MFF headings and for overall budget spending. The MLE takes account of quantifiable errors only and is expressed as a percentage. Examples of errors are quantifiable breaches of applicable regulations, rules, and contract and grant conditions. We also set the lower error limit (LEL) and the upper error limit (UEL). |
| --- | --- |

22.

| 23. | We use the level of 2 % as materiality threshold for our opinion. We also take account of the nature, amount and context of errors. |
| --- | --- |

23.

How we examine systems and report the results

| 24. | The Commission, other EU institutions and bodies, Member State authorities, beneficiary countries and regions establish systems for managing the risks to the budget and overseeing/ensuring the regularity of transactions. It is helpful to examine these systems in order to identify areas for improvement. |
| --- | --- |

24.

| 25. | Each MFF heading, including revenue, involves many individual systems. We select a sample of systems each year and present the results together with recommendations for improvement. |
| --- | --- |

25.

How we arrive at our opinions in the statement of assurance

| 26. | We plan our work to obtain sufficient, relevant and reliable audit evidence for our opinion on the regularity of transactions underlying the EU’s consolidated accounts. This work is reported on in chapters 4 to 10. Our opinion is set out in the statement of assurance. Our work allows us to arrive at an informed opinion as to whether errors in the population exceed or fall within the materiality limits. |
| --- | --- |

26.

| 27. | Where we find a material level of error and determine its impact on the audit opinion, we must determine whether or not the errors, or the absence of audit evidence, are ‘pervasive’. In doing so, we apply the guidance contained in ISSAI 1705 (extending this guidance to apply to issues of legality and regularity, in accordance with our mandate). Where errors are material and pervasive, we present an adverse opinion. |
| --- | --- |

27.

| 28. | An error or an absence of audit evidence are deemed ‘pervasive’ if, in the auditor’s judgment, they are not confined to specific elements, accounts or items of the financial statements (i.e. they are spread throughout the accounts or transactions tested), or, if they are so confined, they represent or could represent a substantial proportion of the financial statements, or relate to disclosures which are fundamental to users’ understanding of the financial statements. |
| --- | --- |

28.

| 29. | Our best estimate of the level of error for overall spending in 2017 is 2,4 %. We did not assess this error as pervasive, as it is confined to a specific type of spending in only some spending areas. The estimated level of error found for the different MFF headings varies, as described in chapters 5 to 7 and 10. |
| --- | --- |

29.

Suspected fraud

| 30. | If we have reason to suspect that fraudulent activity has taken place, we report this to OLAF, the EU’s anti-fraud office. OLAF is responsible for carrying out any resulting investigations. We report several cases per year to OLAF. |
| --- | --- |

30.

PART 4 — Link between the audit opinions on the reliability of accounts and on the regularity of transactions

| 31. | We have issued:






  (a) | an audit opinion on the consolidated accounts of the European Union for the financial year ended; and |
| --- | --- | --- |

31.

(a)

an audit opinion on the consolidated accounts of the European Union for the financial year ended; and

| (b) | audit opinions on the regularity of the revenue and payments underlying those accounts. |
| --- | --- |

(b)

audit opinions on the regularity of the revenue and payments underlying those accounts.

| 32. | Our work and our opinions follow the IFAC’s International Standards on Auditing and Codes of Ethics and INTOSAI’s International Standards of Supreme Audit Institutions. |
| --- | --- |

32.

| 33. | Where auditors issue audit opinions on both the reliability of accounts and the regularity of transactions underlying those accounts, these standards state that a modified opinion on the regularity of transactions does not, in itself, lead to a modified opinion on the reliability of accounts. The financial statements, on which we express an opinion, recognise that there is a material issue in relation to breaches of the rules governing expenses charged to the EU budget. Accordingly, we have decided that the existence of a material level of error affecting regularity is not, in itself, a reason to modify our separate opinion on the reliability of the accounts. |
| --- | --- |

33.

---

(1)  https://www.eca.europa.eu/en/Pages/AuditMethodology.aspx.

(2)  See ISSAI 4000, paragraph 40.

(3)  See background paper: The ECA’s modified approach to the Statement of Assurance audits in Cohesion available on our website (https://www.eca.europa.eu/en/Pages/DocItem.aspx?did=44524)

(4)  http://www.eca.europa.eu/Lists/ECADocuments/Guideline_procurement/Quantification_of_public_procurement_errors.pdf.

---

CHAPTER 2

Budgetary and financial management

TABLE OF CONTENTS

| Introduction | 2.1-2.2 |
| --- | --- |

| Budgetary management in 2017 | 2.3-2.12 |
| --- | --- |

| Compared to budget, commitments were high and payments remained low in the fourth year of the MFF | 2.3-2.5 |
| --- | --- |

| Outstanding budgetary commitments exceeded last year’s record | 2.6-2.8 |
| --- | --- |

| Global margin for payments and special instruments are an important part of flexibility | 2.9-2.12 |
| --- | --- |

| Financial management issues related to the 2017 budget | 2.13-2.45 |
| --- | --- |

| Using available resources from the ESI funds is still proving challenging for Member States | 2.13-2.19 |
| --- | --- |

| Member States submitted their final structural funds claims for the 2007-2013 MFF | 2.20-2.22 |
| --- | --- |

| Aid to non-EU countries makes increased use of alternative financing models | 2.23-2.27 |
| --- | --- |

| EU funding for financial instruments has increased substantially | 2.28-2.41 |
| --- | --- |

| Financial Instruments under Shared Management face challenges | 2.29-2.35 |
| --- | --- |

| The European Fund for Strategic Investments has gained momentum | 2.36-2.39 |
| --- | --- |

| Establishment of the European Fund for Sustainable Development | 2.40-2.41 |
| --- | --- |

| Exposure of the EU budget continues to be significant | 2.42-2.45 |
| --- | --- |

| Risks and challenges for the future EU budget | 2.46-2.51 |
| --- | --- |

| The possibility of an abnormal backlog of unpaid claims exists | 2.47 |
| --- | --- |

| Financing of outstanding commitments from 2014-2020 MFF is an issue for the next MFF | 2.48-2.49 |
| --- | --- |

| The United Kingdom is leaving the EU | 2.50 |
| --- | --- |

| The accountability gap could be at risk of widening further | 2.51 |
| --- | --- |

| Conclusions and recommendations | 2.52-2.62 |
| --- | --- |

| Conclusions | 2.52-2.61 |
| --- | --- |

| Recommendations | 2.62 |
| --- | --- |

| Annex 2.1 — | Main points of interest in amending budgets |
| --- | --- |

Annex 2.1 —

| Annex 2.2 — | Increase in special instruments |
| --- | --- |

Annex 2.2 —

| THE COURT’S OBSERVATIONS | |
| --- | --- |
| INTRODUCTION |
| 2.1. | This chapter presents the results of our review of key EU budgetary and financial management issues. It also identifies some risks and challenges for future budgets and builds, in parts, on views in a number of special reports and briefing papers. |

THE COURT’S OBSERVATIONS

INTRODUCTION

2.1.

This chapter presents the results of our review of key EU budgetary and financial management issues. It also identifies some risks and challenges for future budgets and builds, in parts, on views in a number of special reports and briefing papers.

| 2.2. | As part of the welcome reflection on the future of the EU, in June 2017 the Commission presented a ‘Reflection paper on the future of EU finances’, which highlighted options for future financing. (1) We contributed to the ongoing debate by publishing two briefing papers (2). On 2 May 2018, the Commission presented a proposal for a new Multiannual Financial Framework (MFF) starting in 2021 (3). |
| --- | --- |

2.2.

As part of the welcome reflection on the future of the EU, in June 2017 the Commission presented a ‘Reflection paper on the future of EU finances’, which highlighted options for future financing. (1) We contributed to the ongoing debate by publishing two briefing papers (2). On 2 May 2018, the Commission presented a proposal for a new Multiannual Financial Framework (MFF) starting in 2021 (3).

BUDGETARY MANAGEMENT IN 2017

Compared to budget, commitments were high and payments remained low in the fourth year of the MFF

| 2.3. | In 2017, the EU committed 158,7  billion euros (99,3  %) of the total commitment appropriations of 159,8  billion euros available in the adopted budget (4). Taking into account the special instruments, amounts committed exceeded the MFF ceiling by 3,1  billion euros (see
  Box 2.1
  ). |
| --- | --- |

2.3.

In 2017, the EU committed 158,7  billion euros (99,3  %) of the total commitment appropriations of 159,8  billion euros available in the adopted budget (4). Taking into account the special instruments, amounts committed exceeded the MFF ceiling by 3,1  billion euros (see
  Box 2.1
  ).

Box 2.1 —   Budget implementation in 2017

Image

| Note: | The MFF ceiling is the maximum annual amount that can be used under the current MFF Regulation. However, commitment appropriations and their use are allowed to exceed the ceiling by the value of special instruments (see Article 3(2) of the MFF Regulation). |
| --- | --- |

Note:

The MFF ceiling is the maximum annual amount that can be used under the current MFF Regulation. However, commitment appropriations and their use are allowed to exceed the ceiling by the value of special instruments (see Article 3(2) of the MFF Regulation).

| Source: | Consolidated annual accounts of the European Union — Financial year 2017, Budgetary implementation reports and explanatory notes — notes 4.1 — 4.3 and the 2017 technical adjustment. |
| --- | --- |

Source:

Consolidated annual accounts of the European Union — Financial year 2017, Budgetary implementation reports and explanatory notes — notes 4.1 — 4.3 and the 2017 technical adjustment.

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

| 2.4. | As in 2016, total payments in 2017 were much lower than anticipated. They were 18,2  billion euros below the ceiling set in the MFF (see
  Box 2.1
  ). In anticipation of lower payments, the budgetary authority set the initial 2017 budget at 134,5  billion euros, 8,4  billion euros below the MFF ceiling for payment appropriations of 142,9  billion euros (5). Due to slow implementation in the first eight months of the year, the Commission proposed amending budget 06/2017 which reduced payment appropriations by 7,7  billion euros (see
  Annex 2.1
  ). This, and the update on the revenue side (mainly fines), reduced Member States' contributions by 9,8 billion euros for 2017, but could lead to correspondingly higher calls in years 2018-2020. Significantly higher payment needs towards the end of the current MFF may lead to pressure on the ceilings for payment appropriations. |
| --- | --- |

2.4.

As in 2016, total payments in 2017 were much lower than anticipated. They were 18,2  billion euros below the ceiling set in the MFF (see
  Box 2.1
  ). In anticipation of lower payments, the budgetary authority set the initial 2017 budget at 134,5  billion euros, 8,4  billion euros below the MFF ceiling for payment appropriations of 142,9  billion euros (5). Due to slow implementation in the first eight months of the year, the Commission proposed amending budget 06/2017 which reduced payment appropriations by 7,7  billion euros (see
  Annex 2.1
  ). This, and the update on the revenue side (mainly fines), reduced Member States' contributions by 9,8 billion euros for 2017, but could lead to correspondingly higher calls in years 2018-2020. Significantly higher payment needs towards the end of the current MFF may lead to pressure on the ceilings for payment appropriations.

| 2.4. | The Commission continuously monitors the implementation of the EU budget. Where appropriate, it makes proposals to the budgetary authority to adjust the level of appropriations. |
| --- | --- |

2.4.

| 2.5. | The low level of payments was mainly due to lower than anticipated claims being submitted by the Member States for the multiannual programmes of the 2014-2020 European Structural and Investment (ESI) funds. For analysis of the reasons stated by the Commission and Member States, see paragraphs 2.15-2.16. |
| --- | --- |

2.5.

The low level of payments was mainly due to lower than anticipated claims being submitted by the Member States for the multiannual programmes of the 2014-2020 European Structural and Investment (ESI) funds. For analysis of the reasons stated by the Commission and Member States, see paragraphs 2.15-2.16.

| 2.5. | The 2017 ESI funds budgetary implementation for the 2014-2020 programming period improved compared to 2016. The payments made in 2017 were 1,5 times higher than the 2016 level. In 2017, after the reduction of payment appropriations by EUR 5,9 billion via amending budget 6/2017 full implementation of the voted budget was achieved. In addition, EUR 5,4 billion in assigned revenue was also consumed. |
| --- | --- |

2.5.

THE COURT’S OBSERVATIONS

Outstanding budgetary commitments exceeded last year’s record

| 2.6. | The almost full use of the amount available for commitment and the low level of payments (see paragraphs 2.4–2.5) increased outstanding budgetary commitments to a new record of 267,3  billion euros (2016: 238,8  billion euros). This is 72,9 billion euros higher than the outstanding budgetary commitments in 2010 (194,4 billion euros), the fourth year of the previous MFF (see
  Box 2.2
  ). Given that the 2014-2020 MFF is similar in size to the 2007-13 MFF, the increase is substantial. The Commission considered the 2016 and 2017 increases to be part of the normal cycle of implementation for the ESI funds (6)
   (7). |
| --- | --- |

2.6.

The almost full use of the amount available for commitment and the low level of payments (see paragraphs 2.4–2.5) increased outstanding budgetary commitments to a new record of 267,3  billion euros (2016: 238,8  billion euros). This is 72,9 billion euros higher than the outstanding budgetary commitments in 2010 (194,4 billion euros), the fourth year of the previous MFF (see
  Box 2.2
  ). Given that the 2014-2020 MFF is similar in size to the 2007-13 MFF, the increase is substantial. The Commission considered the 2016 and 2017 increases to be part of the normal cycle of implementation for the ESI funds (6)
   (7).

| 2.7. | Our projections (8) indicate that outstanding budgetary commitments will rise even higher by the end of the MFF in 2020 (see
  Box 2.2)
  . |
| --- | --- |

2.7.

Our projections (8) indicate that outstanding budgetary commitments will rise even higher by the end of the MFF in 2020 (see
  Box 2.2)
  .

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

| 2.8. | In 2018-2020, the risk that available payment appropriations will be insufficient to settle all payment claims will increase significantly (see paragraphs 2.12 and 2.47). A more accurate payment forecast for the future years would help to manage this risk. |
| --- | --- |

2.8.

In 2018-2020, the risk that available payment appropriations will be insufficient to settle all payment claims will increase significantly (see paragraphs 2.12 and 2.47). A more accurate payment forecast for the future years would help to manage this risk.

| 2.8. | According to the medium-term payment forecast provided to the Council and the European Parliament in October 2017, the Commission considers that the adjusted payment ceiling will be sustainable until the end of MFF in 2020, taking into account the transfer of the Global Margin for Payments (GMP) of 2017 to the years 2019 and 2020.

  The Commission underlines that the precision of the mid-term forecast depends partly on the forecasts presented by the Member States for the shared managed programmes. Furthermore, the level of the payment appropriations effectively granted in any annual budget procedure depends on the decision of the budgetary authorities. |
| --- | --- |

2.8.

The Commission underlines that the precision of the mid-term forecast depends partly on the forecasts presented by the Member States for the shared managed programmes. Furthermore, the level of the payment appropriations effectively granted in any annual budget procedure depends on the decision of the budgetary authorities.

Box 2.2 —   Outstanding commitments, commitments and payments including projections to the end of the current MFF

Image

| Source: | For 2007-2017: Consolidated annual accounts of the European Union. For projections by the European Court of Auditors for 2018-2020: MFF Regulation and 2017 technical adjustment. |
| --- | --- |

Source:

For 2007-2017: Consolidated annual accounts of the European Union. For projections by the European Court of Auditors for 2018-2020: MFF Regulation and 2017 technical adjustment.

THE COURT’S OBSERVATIONS

Global margin for payments and special instruments are an important part of flexibility

| 2.9. | Following the mid-term review of the MFF (9), the budgetary authority amended the MFF Regulation (10), in particular to increase the Global Margin for Payments (GMP) (11), and make changes to four special instruments
   (12). |
| --- | --- |

2.9.

Following the mid-term review of the MFF (9), the budgetary authority amended the MFF Regulation (10), in particular to increase the Global Margin for Payments (GMP) (11), and make changes to four special instruments
   (12).

| 2.10. | The maximum GMP available for use in 2018-2020 will be 36,5  billion euros, 5,9  billion euros higher than before (see
  Box 2.3
  ). This is a substantial amount that could help to reduce any future payments backlog (see paragraph 2.47). The value of the GMP amounts to the difference between payments made and the MFF payment ceilings (13). By the end of 2017, the amounts accumulated for the GMP had reached around 33,5  billion euros (14). |
| --- | --- |

2.10.

The maximum GMP available for use in 2018-2020 will be 36,5  billion euros, 5,9  billion euros higher than before (see
  Box 2.3
  ). This is a substantial amount that could help to reduce any future payments backlog (see paragraph 2.47). The value of the GMP amounts to the difference between payments made and the MFF payment ceilings (13). By the end of 2017, the amounts accumulated for the GMP had reached around 33,5  billion euros (14).

Box 2.3 —   Global margin for payments

Image

| Source: | European Court of Auditors based on the MFF Regulation. |
| --- | --- |

Source:

European Court of Auditors based on the MFF Regulation.

THE COURT’S OBSERVATIONS

| 2.11. | Special instruments have been enhanced in two ways. Firstly, the amounts available for the Emergency Aid Reserve and for the Flexibility Instrument have been increased (see
  Annex 2.2
  ). Secondly, it has been made possible, from 2017 onwards, to transfer to the Flexibility Instrument amounts lapsing from the European Globalisation Adjustment Fund and the European Union Solidarity Fund. |
| --- | --- |

2.11.

Special instruments have been enhanced in two ways. Firstly, the amounts available for the Emergency Aid Reserve and for the Flexibility Instrument have been increased (see
  Annex 2.2
  ). Secondly, it has been made possible, from 2017 onwards, to transfer to the Flexibility Instrument amounts lapsing from the European Globalisation Adjustment Fund and the European Union Solidarity Fund.

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

| 2.12. | Despite the increase in the flexibility of the budget to address possible challenges, the risk exists that it will still not be enough. Furthermore, as we have previously reported, the issue of whether or not special instruments should be counted within the ceilings for payment appropriations (15) has not been resolved yet. This uncertainty adds to the risk of a payments backlog (see paragraph 2.47). |
| --- | --- |

2.12.

Despite the increase in the flexibility of the budget to address possible challenges, the risk exists that it will still not be enough. Furthermore, as we have previously reported, the issue of whether or not special instruments should be counted within the ceilings for payment appropriations (15) has not been resolved yet. This uncertainty adds to the risk of a payments backlog (see paragraph 2.47).

| 2.12. | The Commission recalls that the Council has refused its proposal to solve the issue of the payment of special instruments during the Mid-term revision of the MFF in 2016/2017.

  In its proposal for the MFF Regulation for the 2021-27 period, the Commission has proposed to solve this problem (see Article 2(2) of the 2021-2027 MFF Regulation (COM(2018)322 of 2.5.2018).


  The Commission maintains furthermore that the risk of payment backlog in this MFF is very limited. The Commission refers to its reply under paragraph 2.8. |
| --- | --- |

2.12.

In its proposal for the MFF Regulation for the 2021-27 period, the Commission has proposed to solve this problem (see Article 2(2) of the 2021-2027 MFF Regulation (COM(2018)322 of 2.5.2018).

The Commission maintains furthermore that the risk of payment backlog in this MFF is very limited. The Commission refers to its reply under paragraph 2.8.

FINANCIAL MANAGEMENT ISSUES RELATED TO THE 2017 BUDGET

Using available resources from the ESI funds is still proving challenging for Member States

| 2.13. | For some Member States, outstanding commitments of the European Structural and Investment funds (ESI funds) represent a considerable percentage of their general government expenditure. This can be seen in
  Box 2.4
  , together with the amount of payments made to each Member State in 2017 and their outstanding commitments at the end of 2017. |
| --- | --- |

2.13.

For some Member States, outstanding commitments of the European Structural and Investment funds (ESI funds) represent a considerable percentage of their general government expenditure. This can be seen in
  Box 2.4
  , together with the amount of payments made to each Member State in 2017 and their outstanding commitments at the end of 2017.

| 2.13. | The level of outstanding commitments for the ESI Funds at that stage is part of the normal cycle of implementation observed for these funds. The smooth annual profile of the commitment appropriations over the 2014-2020 period, the introduction of the n+3 rule and the slow implementation led to a significant increase in outstanding commitments.

  The Commission refers to its reply under paragraph 2.14 of ECA's 2016 annual report. |
| --- | --- |

2.13.

The Commission refers to its reply under paragraph 2.14 of ECA's 2016 annual report.

| Box 2.4 — | Outstanding commitments at the end of 2017 and payments made in 2017 by Member State in million euros |
| --- | --- |

Box 2.4 —

Outstanding commitments as a percentage of their 2017 general government expenditure

Image

| Source: | European Court of Auditors based on information from the Commission. Eurostat data on general government expenditure for 2017: April 2018. |
| --- | --- |

Source:

European Court of Auditors based on information from the Commission. Eurostat data on general government expenditure for 2017: April 2018.

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

| 2.14. | Absorption (16) has been particularly slow. In 2017, the fourth year of the MFF, Member States absorbed an average of 16,4  % (2010: 22,1  %) of the amounts allocated to them.
  Box 2.5
  provides a comparison of each Member State’s absorption in 2017 (17) with their absorption in 2010 (18). |
| --- | --- |

2.14.

Absorption (16) has been particularly slow. In 2017, the fourth year of the MFF, Member States absorbed an average of 16,4  % (2010: 22,1  %) of the amounts allocated to them.
  Box 2.5
  provides a comparison of each Member State’s absorption in 2017 (17) with their absorption in 2010 (18).

| 2.14. | The Commission does not see a higher absorption risk at the end of the programming period for 2014-2020 than for 2007-2013. Taking into account the n+3 rule and current selection rates as well as certified payments the Commission considers that potentially the same level of absorption by the end of the period could be achieved for 2014-2020 as for 2007-2013. |
| --- | --- |

2.14.

Box 2.5 —   Absorption rates by Member State by the end of 2017 and by the end of 2010

Image

| Source: | European Court of Auditors based on information from the Commission. |
| --- | --- |

Source:

European Court of Auditors based on information from the Commission.

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

| 2.15. | The Commission found that the delays were mainly due to the later closure of the previous MFF, the late adoption of legal acts and difficulties in adapting to and implementing substantial changes introduced in the current MFF (19). |
| --- | --- |

2.15.

The Commission found that the delays were mainly due to the later closure of the previous MFF, the late adoption of legal acts and difficulties in adapting to and implementing substantial changes introduced in the current MFF (19).

| 2.15. | As for EAFRD, delays due to the late adoption of the legal acts were quickly recuperated and the payments for 2014-2020 period are very well on track. |
| --- | --- |

2.15.

| 2.16. | We conducted a survey of six Member States (20) with the lowest levels of absorption by the end of 2017. Their replies largely confirmed the Commission’s main reasons (see
  Box 2.6)
  . |
| --- | --- |

2.16.

We conducted a survey of six Member States (20) with the lowest levels of absorption by the end of 2017. Their replies largely confirmed the Commission’s main reasons (see
  Box 2.6)
  .

Box 2.6 —   Results of our survey

| Level of contribution | Reasons given by the Commission rated ‘medium’ or ‘high’: |
| --- | --- |
| | — | There was a delay in the adoption of certain legal acts and guidance for the 2014-2020 operational programmes and the adoption of the operational programme(s) itself/themselves. |

Level of contribution

Reasons given by the Commission rated ‘medium’ or ‘high’:

Image

—

There was a delay in the adoption of certain legal acts and guidance for the 2014-2020 operational programmes and the adoption of the operational programme(s) itself/themselves.

| — | It took longer than expected to complete the process of designating the responsible authorities. |
| --- | --- |

—

It took longer than expected to complete the process of designating the responsible authorities.

| — | Delays in the absorption of EU funds and the closure procedures for the 2007-2013 period had a knock-on effect on the designation process. |
| --- | --- |

—

Delays in the absorption of EU funds and the closure procedures for the 2007-2013 period had a knock-on effect on the designation process.

| — | The validation of the designation of the responsible authorities by an independent audit body took longer than expected. |
| --- | --- |

—

The validation of the designation of the responsible authorities by an independent audit body took longer than expected.

| — | It took longer than expected to ensure the fulfilment of ex-ante conditionalities when adopting operational programme(s). |
| --- | --- |

—

It took longer than expected to ensure the fulfilment of ex-ante conditionalities when adopting operational programme(s).

| — | The urgency of submitting payment claims to the Commission was reduced by the extension of the claim period by one year (N+3 de-commitment rule). |
| --- | --- |

—

The urgency of submitting payment claims to the Commission was reduced by the extension of the claim period by one year (N+3 de-commitment rule).

| Note: | In a questionnaire sent to the Permanent Representations, we asked the six Member States to rate whether the reasons given by the Commission had made a high, medium, low or no contribution to their delays in absorption. For our analysis, the contribution of a reason was rated as ‘medium’ or ‘high’ if the majority of replies rated that reason as ‘medium’ or ‘high’. None of the reasons were rated by a majority of respondents as ‘low’ or ‘no’. |
| --- | --- |

Note:

In a questionnaire sent to the Permanent Representations, we asked the six Member States to rate whether the reasons given by the Commission had made a high, medium, low or no contribution to their delays in absorption. For our analysis, the contribution of a reason was rated as ‘medium’ or ‘high’ if the majority of replies rated that reason as ‘medium’ or ‘high’. None of the reasons were rated by a majority of respondents as ‘low’ or ‘no’.

| Source: | European Court of Auditors’ survey. |
| --- | --- |

Source:

European Court of Auditors’ survey.

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

| 2.17. | In our 2016 annual report, we already pointed out that Member States may face challenges in identifying sufficient high-quality projects. Our audit work has confirmed there is a trade-off for Member States between absorbing funds quickly and coming up with high-quality projects, which takes time (21). |
| --- | --- |

2.17.

In our 2016 annual report, we already pointed out that Member States may face challenges in identifying sufficient high-quality projects. Our audit work has confirmed there is a trade-off for Member States between absorbing funds quickly and coming up with high-quality projects, which takes time (21).

| 2.18. | We have published two special reports that are relevant here: one on the arrangements for the closure of 2007-2013 MFF programmes and one on the effectiveness of the Commission’s support for Member States in absorbing funds (22). We found, among other things, that the late adoption of the legal framework had created delays that had a knock-on effect during implementation, and that the overlap between MFF periods had added to the delays. To help avoid absorption problems in the next MFF, the timely adoption of legal acts and a high level of stability in the legal framework governing the ESI funds will be crucial. |
| --- | --- |

2.18.

We have published two special reports that are relevant here: one on the arrangements for the closure of 2007-2013 MFF programmes and one on the effectiveness of the Commission’s support for Member States in absorbing funds (22). We found, among other things, that the late adoption of the legal framework had created delays that had a knock-on effect during implementation, and that the overlap between MFF periods had added to the delays. To help avoid absorption problems in the next MFF, the timely adoption of legal acts and a high level of stability in the legal framework governing the ESI funds will be crucial.

| 2.18. | The Commission has on several occasions stressed the importance of a timely adoption of the legal acts by the co-legislators. As regards the 2021-2027 programming period, the Commission has tabled its legislative proposals in May and June 2018, i.e. 30 months before the planned start of the eligibility period of the programming period. |
| --- | --- |

2.18.

| 2.19. | The increased overlap between MFF periods creates additional burden on Member States’ administration, leading to additional delays. |
| --- | --- |

2.19.

The increased overlap between MFF periods creates additional burden on Member States’ administration, leading to additional delays.

| 2.19. | The Commission considers that the overlap of eligibility periods is only one of several factors which contribute to some delay in the implementation of the subsequent periods. Other important factors interplay such as the level of pre-financing, the decommitment rule and the introduction of net financial corrections if serious irregularities remain in accounts submitted to the Commission. To reduce the overlap, the Commission made various proposals for the next 2021-2027 programming period (returning to the n+2 decommitment rule, streamlining the level of advances and a full roll-over of management and control systems to ensure a smooth implementation). |
| --- | --- |

2.19.

Member States submitted their final structural funds claims for the 2007-2013 MFF

| 2.20. | Member States submitted their final claims for structural funds (23) of the 2007-2013 MFF by the end of March 2017 (24). |
| --- | --- |

2.20.

Member States submitted their final claims for structural funds (23) of the 2007-2013 MFF by the end of March 2017 (24).

| 2.21. | At the end of 2017, outstanding commitments on structural funds amounted to 11,7  billion euros or 3,4  % of the total amounts allocated for the 2007-2013 MFF (see 
  Box 2.7
  ). |
| --- | --- |

2.21.

At the end of 2017, outstanding commitments on structural funds amounted to 11,7  billion euros or 3,4  % of the total amounts allocated for the 2007-2013 MFF (see 
  Box 2.7
  ).

| 2.21. | The Commission will close in 2018 an important number of programmes which will reduce drastically the outstanding commitments.

  As at end May 2018, the total amount of outstanding commitments for ERDF and CF is 8,1 billion euros and for ESF 1,9 billion euros. The Commission expects to be able to close the vast majority of the outstanding commitments in 2018 and 2019, as mentioned in the Annual Activity reports of DG REGIO and DG EMPL. |
| --- | --- |

2.21.

As at end May 2018, the total amount of outstanding commitments for ERDF and CF is 8,1 billion euros and for ESF 1,9 billion euros. The Commission expects to be able to close the vast majority of the outstanding commitments in 2018 and 2019, as mentioned in the Annual Activity reports of DG REGIO and DG EMPL.

Box 2.7 —   Outstanding commitments of 2007-2013 MFF structural funds at the end of 2017

Image

| Source: | European Court of Auditors based on information from the Commission. |
| --- | --- |

Source:

European Court of Auditors based on information from the Commission.

THE COURT’S OBSERVATIONS

| 2.22. | De-commitments from the structural funds were 4,4  billion euros (1,3  %) of the total allocated for the 2007-2013 MFF) (see
  Box 2.8
  ). They represent a very small share of total commitments (25). |
| --- | --- |

2.22.

De-commitments from the structural funds were 4,4  billion euros (1,3  %) of the total allocated for the 2007-2013 MFF) (see
  Box 2.8
  ). They represent a very small share of total commitments (25).

Box 2.8 —   Amounts de-committed from structural funds between 2011 and 2017 by Member State

Image

| Note: | The individual figures show the total at closure and for N+2/N+3. |
| --- | --- |

Note:

The individual figures show the total at closure and for N+2/N+3.

| Source: | European Court of Auditors based on information from the Commission. |
| --- | --- |

Source:

European Court of Auditors based on information from the Commission.

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

Aid to non-EU countries makes increased use of alternative financing models

| 2.23. | EU Trust Funds and the Facility for Refugees in Turkey differ from the Commission’s standard mechanisms for delivering aid. They use multiple financing sources and various distribution channels, which adds to complexity. EU Trust Funds are managed outside the EU budget, whereas the Facility for Refugees in Turkey is managed within it. Below is an overview of these mechanisms. Another new vehicle for providing aid to non-EU countries is the European Fund for Sustainable Development (EFSD) (see paragraphs 2.40-2.41). |
| --- | --- |

2.23.

EU Trust Funds and the Facility for Refugees in Turkey differ from the Commission’s standard mechanisms for delivering aid. They use multiple financing sources and various distribution channels, which adds to complexity. EU Trust Funds are managed outside the EU budget, whereas the Facility for Refugees in Turkey is managed within it. Below is an overview of these mechanisms. Another new vehicle for providing aid to non-EU countries is the European Fund for Sustainable Development (EFSD) (see paragraphs 2.40-2.41).

| 2.23. | The Commission considers that the EU Trust Funds per se do not add to complexity as they have been created to pool EU funding, from various sources plus from contributing donors, into one single mechanism, hence reducing the complexity of multiple interventions.

  The Facility is a coordination mechanism that facilitates, rather than complicates. It is not a new instrument. The facility allows for the swift, effective and efficient mobilisation of EU assistance to refugees in Turkey and ensures the optimal use of EU and EU Member State resources, as a humanitarian and development assistance in a comprehensive and coordinated manner. |
| --- | --- |

2.23.

The Facility is a coordination mechanism that facilitates, rather than complicates. It is not a new instrument. The facility allows for the swift, effective and efficient mobilisation of EU assistance to refugees in Turkey and ensures the optimal use of EU and EU Member State resources, as a humanitarian and development assistance in a comprehensive and coordinated manner.

| 2.24. | EU Trust Funds are separate legal arrangements with a distinct financial structure in which several donors jointly finance an action based on commonly agreed objectives. The Commission has created four EU Trust Funds to date: the Bêkou Fund, the Madad Fund, the Africa Fund and the Colombia Fund (26) (see
  Box 2.9
  ). |
| --- | --- |

2.24.

EU Trust Funds are separate legal arrangements with a distinct financial structure in which several donors jointly finance an action based on commonly agreed objectives. The Commission has created four EU Trust Funds to date: the Bêkou Fund, the Madad Fund, the Africa Fund and the Colombia Fund (26) (see
  Box 2.9
  ).

Box 2.9 —   Key information on Trust Funds

Image

| Note: | Differences in the sum of pledges are due to rounding. |
| --- | --- |

Note:

Differences in the sum of pledges are due to rounding.

| Source: | European Court of Auditors based on information from the Commission, Article 187 of the Financial Regulation and the Constitutive Agreements establishing the Trust Funds. |
| --- | --- |

Source:

European Court of Auditors based on information from the Commission, Article 187 of the Financial Regulation and the Constitutive Agreements establishing the Trust Funds.

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

| 2.25. | We examined the set-up and management of the first EU Trust Fund managed by the Commission — the Bêkou Fund (27). Among other things, we noted that the Fund had attracted aid, but few additional donors. |
| --- | --- |

2.25.

We examined the set-up and management of the first EU Trust Fund managed by the Commission — the Bêkou Fund (27). Among other things, we noted that the Fund had attracted aid, but few additional donors.

| 2.25. | The Bekou Trust Fund operates in the Central African Republic which in the past had difficulties attracting donors. However, the Bekou Trust Fund managed to significantly step up aid from donors such as Italy, the Netherlands and Germany who were not previously substantial donors to the Central African Republic. |
| --- | --- |

2.25.

| 2.26. | The Financial Regulation lays down strict requirements to justify the creation of Trust Funds, such as EU added value, better management, better control of risks, better control of disbursements and additionality (see
  Box 2.9
  ). In our 2016 annual report, we pointed out that funding arrangements should not be more complex than necessary to meet EU policy objectives and guarantee accountability, transparency and auditability (28). |
| --- | --- |

2.26.

The Financial Regulation lays down strict requirements to justify the creation of Trust Funds, such as EU added value, better management, better control of risks, better control of disbursements and additionality (see
  Box 2.9
  ). In our 2016 annual report, we pointed out that funding arrangements should not be more complex than necessary to meet EU policy objectives and guarantee accountability, transparency and auditability (28).

| 2.26. | The White Paper on the Future of Europe in 2025 launched an overall debate and reflection process preceding the next MFF preparations. In this context, the Commission adopted a reflection paper on the future of EU finances in June 2017 that laid the ground for the Commission's proposal of a new EU financial architecture for the next MFF. The Commission is proposing a more coherent, focused and transparent budget bringing fragmented funding sources together into new integrated programmes and streamlining the use of financial instruments. |
| --- | --- |

2.26.

| 2.27. | The Facility for Refugees in Turkey was established in January 2016 to help Turkey deal with the massive flow of refugees (see
  Box 2.10
  ). |
| --- | --- |

2.27.

The Facility for Refugees in Turkey was established in January 2016 to help Turkey deal with the massive flow of refugees (see
  Box 2.10
  ).

Box 2.10 —   Key information on the Facility for Refugees in Turkey

Image

Source:

| (a) | Commission Decision of 24 November 2015 on the coordination of the actions of the Union and of the Member States through a coordination mechanism — the Refugee Facility for Turkey. |
| --- | --- |

(a)

Commission Decision of 24 November 2015 on the coordination of the actions of the Union and of the Member States through a coordination mechanism — the Refugee Facility for Turkey.

| (b) | Commission Decision of 10 February 2016 on the Facility for Refugees in Turkey amending Commission Decision C(2015) 9500 of 24 November 2015. |
| --- | --- |

(b)

Commission Decision of 10 February 2016 on the Facility for Refugees in Turkey amending Commission Decision C(2015) 9500 of 24 November 2015.

| (c) | Second Annual Report on the Facility for Refugees in Turkey (COM(2018) 91 final of 14.3.2018). |
| --- | --- |

(c)

Second Annual Report on the Facility for Refugees in Turkey (COM(2018) 91 final of 14.3.2018).

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

| Box 2.10 | The Commission points out that Member States have fulfilled all their obligations. Member States’ contributions — as external assigned revenue — are to be paid until 2019 according to agreed payment schedules. So far, there is a satisfactory match between Member States' payments into the Facility and the disbursements financed by those contributions from the Facility. |
| --- | --- |

Box 2.10

EU funding for financial instruments has increased substantially

| 2.28. | EU budget support for various financial instruments has increased substantially (see
  Box 2.11
  ). |
| --- | --- |

2.28.

EU budget support for various financial instruments has increased substantially (see
  Box 2.11
  ).

Box 2.11 —   Support from the EU budget to financial instruments

| (in billion euros) |
| --- |
| | 2007-2013 MFF | 2014-2020 MFF |
| Under shared management | | |
| Financial Instruments under Shared Management (FISMs) | 11,3 | 20,0 |
| Under direct/indirect management and budgetary guarantees | | |
| Financial instruments under indirect management | 3,0  (55) | 5,9  (56) |
| European Fund for Strategic Investments (EFSI) — Guarantee | 0 | 26,0 |
| EFSD — Guarantee | 0 | 1,5 |
| Total | 14,3 | 53,4 |
| As at end of December 2017.







  Source: | European Court of Auditors based on reports from the Commission and relevant regulations. |

(in billion euros)

2007-2013 MFF

2014-2020 MFF

Under shared management

Financial Instruments under Shared Management (FISMs)

11,3

20,0

Under direct/indirect management and budgetary guarantees

Financial instruments under indirect management

3,0  (55)

5,9  (56)

European Fund for Strategic Investments (EFSI) — Guarantee

0

26,0

EFSD — Guarantee

0

1,5

Total

14,3

53,4

As at end of December 2017.

Source:

European Court of Auditors based on reports from the Commission and relevant regulations.

THE COURT’S OBSERVATIONS

Financial Instruments under Shared Management face challenges

Closure of the 2007-2013 period revealed inaccuracies and double counting

| 2.29. | In 2017, Financial Instruments under Shared Management (FISMs) for the 2007-2013 MFF were in the process of being closed as part of the closure of their corresponding operational programmes. |
| --- | --- |

2.29.

In 2017, Financial Instruments under Shared Management (FISMs) for the 2007-2013 MFF were in the process of being closed as part of the closure of their corresponding operational programmes.

| 2.30. | According to the Commission (29), FISMs were paid 11,3 billion euros from the structural funds. An additional 5,1 billion euros came from national co-financing (see
  Box 2.12
  ). |
| --- | --- |

2.30.

According to the Commission (29), FISMs were paid 11,3 billion euros from the structural funds. An additional 5,1 billion euros came from national co-financing (see
  Box 2.12
  ).

Box 2.12 —   FISM amounts paid to and used by Member States by 31 March 2017

Image

| Source: | Report ‘Summary of data on the progress made in financing and implementing financial engineering instruments reported by the managing authorities in accordance with Article 67(2)(j) of Council Regulation (EC) No 1083/2006 — 2007-2013 programming period; situation as at 31 March 2017 (at closure)’. |
| --- | --- |

Source:

Report ‘Summary of data on the progress made in financing and implementing financial engineering instruments reported by the managing authorities in accordance with Article 67(2)(j) of Council Regulation (EC) No 1083/2006 — 2007-2013 programming period; situation as at 31 March 2017 (at closure)’.

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

| 2.31. | According to the data Member States provided to the Commission, 93 % of the total amount paid to FISMs (15,2  billion euros) was disbursed to final recipients. However, the Commission estimates that the actual disbursement rate to final recipients may be up to seven percentage points lower, due to the possibly incorrect inclusion of repayments on loans that were used again (30), and of interest from treasury management or ‘overbooking’. These over-reported amounts total up to 0,9  billion euros. These, along with the 1,2 billion euros remaining in specific funds, are subject to the closure procedures for the operational programmes, and may have to be returned to the EU budget after deducting management costs and fees. Furthermore, out of 981 specific funds, there are still 45 which, at closure, have either not yet made any investments or have failed to report on them. Therefore, the ‘summary of data’ report does not provide a full and accurate (31) picture. |
| --- | --- |

2.31.

According to the data Member States provided to the Commission, 93 % of the total amount paid to FISMs (15,2  billion euros) was disbursed to final recipients. However, the Commission estimates that the actual disbursement rate to final recipients may be up to seven percentage points lower, due to the possibly incorrect inclusion of repayments on loans that were used again (30), and of interest from treasury management or ‘overbooking’. These over-reported amounts total up to 0,9  billion euros. These, along with the 1,2 billion euros remaining in specific funds, are subject to the closure procedures for the operational programmes, and may have to be returned to the EU budget after deducting management costs and fees. Furthermore, out of 981 specific funds, there are still 45 which, at closure, have either not yet made any investments or have failed to report on them. Therefore, the ‘summary of data’ report does not provide a full and accurate (31) picture.

| 2.31. | The Commission underlines that its ‘Summary of data’ reflects information received from Member States, and that management fees and costs reported by Member States represent 889 million euros.

  Closure procedures for operational programmes are ongoing, and the Commission will take corrective action where appropriate. Decisions on amounts to be returned to the EU budget are taken at the level of operational programmes and not at the level of specific financial instruments, which are only one form of support in an operational programme. |
| --- | --- |

2.31.

Closure procedures for operational programmes are ongoing, and the Commission will take corrective action where appropriate. Decisions on amounts to be returned to the EU budget are taken at the level of operational programmes and not at the level of specific financial instruments, which are only one form of support in an operational programme.

| 2.32. | The resources available in the 2007-2013 FISMs after use (32) belong to the Member States (the managing authorities have estimated this amount at 8,5  billion euros, attributable to the structural funds). Member States should use them for the same purposes as originally intended. |
| --- | --- |

2.32.

The resources available in the 2007-2013 FISMs after use (32) belong to the Member States (the managing authorities have estimated this amount at 8,5  billion euros, attributable to the structural funds). Member States should use them for the same purposes as originally intended.

| 2.33. | We published a special report (33) on the implementation of the 2007-2013 FISMs. Among other things, the report found that the funds in Member States had experienced difficulties disbursing their endowments, they had attracted only limited private capital and their reporting had been late. We also recommended that the Commission take appropriate measures to ensure that Member States maintain the revolving nature of the funds (i.e. continue to allow the same funds to be used in multiple cycles). |
| --- | --- |

2.33.

We published a special report (33) on the implementation of the 2007-2013 FISMs. Among other things, the report found that the funds in Member States had experienced difficulties disbursing their endowments, they had attracted only limited private capital and their reporting had been late. We also recommended that the Commission take appropriate measures to ensure that Member States maintain the revolving nature of the funds (i.e. continue to allow the same funds to be used in multiple cycles).

| 2.33. | The Commission underlines that, as of end March 2017 the level of payments to final recipients was 93 %, to which expenditure of 6,7  % for management costs and fees has to be added.

  Furthermore, the Commission indicated in the ECA Special report 19/2016 that the goal of attracting private capital should not be overemphasised in particular for sectors exposed to major market failures and that the managing authorities are obliged to ensure and present to the Commission proper measures to comply with the legal requirements in relation to the legacy resources. |
| --- | --- |

2.33.

Furthermore, the Commission indicated in the ECA Special report 19/2016 that the goal of attracting private capital should not be overemphasised in particular for sectors exposed to major market failures and that the managing authorities are obliged to ensure and present to the Commission proper measures to comply with the legal requirements in relation to the legacy resources.

Disbursements from FISMs to final recipients under the 2014-2020 MFF were low

| 2.34. | Out of the total resources the ESI funds committed from operational programmes under the 2014-2020 MFF, 30 % was paid into FISMs. Of this amount, 38 % (1,2 billion euros) was committed to final recipients from the FISMs. By the start of 2017, after three years of the current MFF, less than 10 % of the total ESI funding available through FISM had so far reached recipients to finance productive investments and activities (see
  Box 2.13
  ). |
| --- | --- |

2.34.

Out of the total resources the ESI funds committed from operational programmes under the 2014-2020 MFF, 30 % was paid into FISMs. Of this amount, 38 % (1,2 billion euros) was committed to final recipients from the FISMs. By the start of 2017, after three years of the current MFF, less than 10 % of the total ESI funding available through FISM had so far reached recipients to finance productive investments and activities (see
  Box 2.13
  ).

| 2.34. | The Commission considers that a more reasonable comparator would be the amounts paid to financial instruments and the amounts paid to final recipients.

  At 31 December 2016, 32 % of the amounts paid to financial instruments were actually disbursed to final recipients. |
| --- | --- |

2.34.

At 31 December 2016, 32 % of the amounts paid to financial instruments were actually disbursed to final recipients.

Box 2.13 —   Status of FISMs for the 2014-2020 MFF as at December 2016

Image

| Source: | European Commission ‘Financial Instruments under the European Structural and Investment Funds, situation as at 31 December 2016’, December 2017. |
| --- | --- |

Source:

European Commission ‘Financial Instruments under the European Structural and Investment Funds, situation as at 31 December 2016’, December 2017.

| 2.35. | The current MFF requires more comprehensive reporting from Member States. However, the last available report on FISMs for the 2014-2020 MFF is the report as at the end of 2016, which was published in December 2017. Although this is in line with existing requirements, the gap between the end of the period and the corresponding report remains long. |
| --- | --- |

2.35.

The current MFF requires more comprehensive reporting from Member States. However, the last available report on FISMs for the 2014-2020 MFF is the report as at the end of 2016, which was published in December 2017. Although this is in line with existing requirements, the gap between the end of the period and the corresponding report remains long.

| 2.35. | The timeframe of the reporting between managing authorities and the reporting of the Commission reflects the shared management context. |
| --- | --- |

2.35.

THE COURT’S OBSERVATIONS

The European Fund for Strategic Investments has gained momentum

| 2.36. | The budgetary authority increased the EFSI guarantee from 16 billion euros to 26 billion euros (34) and the target investment volume from 315 billion euros to 500 billion euros. The EFSI Guarantee Fund increased by 1,1  billion euros (35), from 8,0  billion euros to 9,1  billion euros, as a result of transfers and reflows. This increase led to a significant reduction of the provisioning rate from 50 % to 35 %. |
| --- | --- |

2.36.

The budgetary authority increased the EFSI guarantee from 16 billion euros to 26 billion euros (34) and the target investment volume from 315 billion euros to 500 billion euros. The EFSI Guarantee Fund increased by 1,1  billion euros (35), from 8,0  billion euros to 9,1  billion euros, as a result of transfers and reflows. This increase led to a significant reduction of the provisioning rate from 50 % to 35 %.

| 2.37. | At the end of 2017, the EFSI Guarantee Fund consisted of assets of 3,5  billion euros (2016: 1,0  billion euros). In addition, 2,6  billion euros had been committed from the EU budget but not yet paid (36). The remaining 3,0  billion euros will be gradually paid in by 2022 (37). By the end of 2017, no payments had been made from the EFSI Guarantee Fund. |
| --- | --- |

2.37.

At the end of 2017, the EFSI Guarantee Fund consisted of assets of 3,5  billion euros (2016: 1,0  billion euros). In addition, 2,6  billion euros had been committed from the EU budget but not yet paid (36). The remaining 3,0  billion euros will be gradually paid in by 2022 (37). By the end of 2017, no payments had been made from the EFSI Guarantee Fund.

| 2.38. | By the end of 2017, the EIB Group had signed 36,7  billion euros worth of contracts (2016: 21,3  billion euros) (38).
  Box 2.14
  shows its distribution of this amount by Member State. |
| --- | --- |

2.38.

By the end of 2017, the EIB Group had signed 36,7  billion euros worth of contracts (2016: 21,3  billion euros) (38).
  Box 2.14
  shows its distribution of this amount by Member State.

Box 2.14 —   EFSI funding per Member State (in million euros)

Image

| Source: | EIB Report ‘European Fund for Strategic Investments — IIW and SMEW — Schedule II of the EFSI Agreement — Year-end Operational Report — Reporting date: 31 December 2017’. |
| --- | --- |

Source:

EIB Report ‘European Fund for Strategic Investments — IIW and SMEW — Schedule II of the EFSI Agreement — Year-end Operational Report — Reporting date: 31 December 2017’.

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

| 2.39. | We note that 64 % of the total value of EFSI contracts the EIB Group had signed by the end of 2017 was concentrated in six Member States. We are currently examining whether the EFSI is on-track to reach its policy objective of supporting additional investment in Europe. |
| --- | --- |

2.39.

We note that 64 % of the total value of EFSI contracts the EIB Group had signed by the end of 2017 was concentrated in six Member States. We are currently examining whether the EFSI is on-track to reach its policy objective of supporting additional investment in Europe.

| 2.39. | EFSI is a demand driven instrument with no country pre-allocations. Projects are selected on clearly established eligibility and additionality criteria and all Member States are encouraged to present projects that meet such criteria. Moreover, when comparing the EFSI investment mobilised with the Member States’ GDP, the breakdown favours smaller Member States, with top three beneficiaries being Estonia, Bulgaria and Greece. |
| --- | --- |

2.39.

Establishment of the European Fund for Sustainable Development

| 2.40. | The budgetary authority established the EFSD in September 2017 (39). The EFSD will follow similar principles to the EFSI. |
| --- | --- |

2.40.

The budgetary authority established the EFSD in September 2017 (39). The EFSD will follow similar principles to the EFSI.

| 2.41. | The EFSD Regulation allows the Commission to conclude EFSD Guarantee agreements also with non-EU bodies as eligible counterparts, such as international organisations and bodies governed by private law in a Member State or partner country (40). The eligible counterparts can approve financing and investment operations and make calls on the EFSD Guarantee supported by the EU budget. Unlike the EFSI, where the EIB is effectively the sole intermediary, the EFSD allows other international organisations and private sector bodies to transmit the benefits of the EU Guarantee and eventually to call on the guarantee. Thus, as yet the EFSD represents the most far-reaching example, in terms of the range of partners, of the delegation of powers to assume liabilities on behalf of the EU budget. |
| --- | --- |

2.41.

The EFSD Regulation allows the Commission to conclude EFSD Guarantee agreements also with non-EU bodies as eligible counterparts, such as international organisations and bodies governed by private law in a Member State or partner country (40). The eligible counterparts can approve financing and investment operations and make calls on the EFSD Guarantee supported by the EU budget. Unlike the EFSI, where the EIB is effectively the sole intermediary, the EFSD allows other international organisations and private sector bodies to transmit the benefits of the EU Guarantee and eventually to call on the guarantee. Thus, as yet the EFSD represents the most far-reaching example, in terms of the range of partners, of the delegation of powers to assume liabilities on behalf of the EU budget.

| 2.41. | The EFSD operates as a ‘one-stop shop’ to receive financing proposals from financial institutions and public or private investors and deliver a wide range of financial support to eligible investments. The key objective of the EFSD is to provide an integrated financial package to finance investments starting in regions of Africa and the Neighbourhood, thereby creating growth and employment opportunities, maximising additionality, delivering innovative products and crowding-in private sector funds. |
| --- | --- |

2.41.

Exposure of the EU budget continues to be significant

| 2.42. | The EU budget is exposed to an accumulation of legal obligations to make payments at a future date, subject to various conditions. Among these obligations, there are contingent liabilities in form of guarantees that may need funding if a future event occurs (41) (see
  Box 2.15
  ). |
| --- | --- |

2.42.

The EU budget is exposed to an accumulation of legal obligations to make payments at a future date, subject to various conditions. Among these obligations, there are contingent liabilities in form of guarantees that may need funding if a future event occurs (41) (see
  Box 2.15
  ).

Box 2.15 —   Exposure of the EU budget to guarantees (as at the end of 2017)

Image

Notes:

| (1) | See notes 2.4.1 and 4.1.1 to the 2017 EU accounts. |
| --- | --- |

(1)

See notes 2.4.1 and 4.1.1 to the 2017 EU accounts.

| (2) | See notes 2.11.1 and 4.1.2 to the 2017 EU accounts. |
| --- | --- |

(2)

See notes 2.11.1 and 4.1.2 to the 2017 EU accounts.

| (3) | See notes 2.4.1 and 4.1.3 to the 2017 EU accounts. |
| --- | --- |

(3)

See notes 2.4.1 and 4.1.3 to the 2017 EU accounts.

| (4) | At 31.12.2017, no legal commitments had been signed for the EFSD Guarantee or the additional EFSI Guarantee. |
| --- | --- |

(4)

At 31.12.2017, no legal commitments had been signed for the EFSD Guarantee or the additional EFSI Guarantee.

| Source: | 2017 EU accounts. |
| --- | --- |

Source:

2017 EU accounts.

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

| 2.43. | When presenting proposals that include the creation or addition of sizeable contingent liabilities, the Commission prepares an analysis of the particular contingent liability in question. It does not accompany this with an overview of all contingent liabilities supported by the EU budget and analysis of stress test scenarios so that decision-makers can appreciate the overall impact. |
| --- | --- |

2.43.

When presenting proposals that include the creation or addition of sizeable contingent liabilities, the Commission prepares an analysis of the particular contingent liability in question. It does not accompany this with an overview of all contingent liabilities supported by the EU budget and analysis of stress test scenarios so that decision-makers can appreciate the overall impact.

| 2.43. | The Commission is continuously improving its reporting on contingent liabilities. In that context, the new Financial Regulation foresees every year a working document accompanying the draft budget proposal with an ‘assessment of the sustainability of the contingent liabilities borne by the general budget of the Union arising from financial operations’. |
| --- | --- |

2.43.

| 2.44. | The Commission proposed in the new Financial Regulation
   (42) to pool all provisions in a common provisioning fund. The amount included in this fund will be determined based on an effective provisioning rate, which will be a percentage of each of the individual rates used until now. This should provide more flexibility in terms of treasury management. However, the funds set aside may not be sufficient if multiple financial risks materialise at the same time. |
| --- | --- |

2.44.

The Commission proposed in the new Financial Regulation
   (42) to pool all provisions in a common provisioning fund. The amount included in this fund will be determined based on an effective provisioning rate, which will be a percentage of each of the individual rates used until now. This should provide more flexibility in terms of treasury management. However, the funds set aside may not be sufficient if multiple financial risks materialise at the same time.

| 2.44. | As stipulated in Article 213(1) of the new Financial Regulation, the effective provisioning rate has to provide an equivalent level of protection against the financial liabilities of the Union that the one that would be provided without the pooling of assets provisioned. The pooling and the effective provisioning rate do not increase the financial risk. |
| --- | --- |

2.44.

| 2.45. | Furthermore, the EU staff pension liability has increased from 67,2  billion euros in 2016 to 73,1  billion euros in 2017 (43). It is the biggest long-term item on the EU balance sheet (44). This liability exists because the EU does not set aside an amount each year to fund future pension payments. The Member States jointly guarantee the pension liability (45). They undertake to pay the amounts due for pensions each year. This amount is included in the EU budget. |
| --- | --- |

2.45.

Furthermore, the EU staff pension liability has increased from 67,2  billion euros in 2016 to 73,1  billion euros in 2017 (43). It is the biggest long-term item on the EU balance sheet (44). This liability exists because the EU does not set aside an amount each year to fund future pension payments. The Member States jointly guarantee the pension liability (45). They undertake to pay the amounts due for pensions each year. This amount is included in the EU budget.

RISKS AND CHALLENGES FOR THE FUTURE EU BUDGET

| 2.46. | Based on our analysis, we identified several risks and challenges with implications for future EU budgets. There remains a risk of an abnormal payments backlog until 2020. The issue of outstanding commitments from the current MFF needs to be tackled with adequate payment appropriations in the next MFF. Additional challenges for the EU budget arise from the announced withdrawal of the United Kingdom from the EU in 2019 and the need for improved accountability in light of the current reflection on the future of the EU budget. |
| --- | --- |

2.46.

Based on our analysis, we identified several risks and challenges with implications for future EU budgets. There remains a risk of an abnormal payments backlog until 2020. The issue of outstanding commitments from the current MFF needs to be tackled with adequate payment appropriations in the next MFF. Additional challenges for the EU budget arise from the announced withdrawal of the United Kingdom from the EU in 2019 and the need for improved accountability in light of the current reflection on the future of the EU budget.

| 2.46. | As regards the payment backlog and the adequacy of payment appropriations, the Commission considers that the adjusted payment ceiling will be sustainable until the end of MFF in 2020, taking into account the transfer of the Global Margin for Payments (GMP) of 2017 to the years 2019 and 2020.

  The Commission refers to its replies under paragraphs 2.8 and 2.12. |
| --- | --- |

2.46.

The Commission refers to its replies under paragraphs 2.8 and 2.12.

The possibility of an abnormal backlog of unpaid claims exists

| 2.47. | Payments should gradually increase between 2018 and 2020, as payment claims are likely to rise substantially. In our view, there remains a risk of an abnormal payments backlog developing, as happened in 2013-2015. One mitigating factor is the flexibility created by the GMP (see paragraphs 2.6-2.10). However, the risk will increase if special instruments are counted within the payment appropriations ceiling (see paragraph 2.12). |
| --- | --- |

2.47.

Payments should gradually increase between 2018 and 2020, as payment claims are likely to rise substantially. In our view, there remains a risk of an abnormal payments backlog developing, as happened in 2013-2015. One mitigating factor is the flexibility created by the GMP (see paragraphs 2.6-2.10). However, the risk will increase if special instruments are counted within the payment appropriations ceiling (see paragraph 2.12).

| 2.47. | The risk of abnormal backlog until 2020 is rather limited thanks to the functioning of the Global margin for payments which increases the ceilings up to the maximum level in 2019 and 2020. The risk could materialise if the budgetary authority did not adopt the annual budget at the required level. |
| --- | --- |

2.47.

Financing of outstanding commitments from the 2014-2020 MFF is an issue for the next MFF

| 2.48. | Payment appropriations in the next MFF will need to cover outstanding commitments from the 2014-2020 MFF and new programmes of the next MFF. Another possibility is to reduce commitment appropriations for programmes under the next MFF (46). The Council Decision on own resources requires the Commission and the budgetary authority to maintain an orderly balance between commitment and payment appropriations (47). |
| --- | --- |

2.48.

Payment appropriations in the next MFF will need to cover outstanding commitments from the 2014-2020 MFF and new programmes of the next MFF. Another possibility is to reduce commitment appropriations for programmes under the next MFF (46). The Council Decision on own resources requires the Commission and the budgetary authority to maintain an orderly balance between commitment and payment appropriations (47).

| 2.48. | The Commission proposal for the next MFF (COM(2018) 321) proposes EUR 1 246 billion in payments, corresponding to a payment ceiling of 1,08  % of the EU-27 gross national income for the period 2021-2027. The Commission believes this will be sufficient to cover the outstanding commitments (RAL) prior to 2021 and payments on the new 2021-2027 commitments.

  The Commission also proposes to increase the own resources ceilings in the Own Resources decision up to 1,29  % of EU27 GNI. This is necessary to accommodate the integration of European Development Fund and payments needs on new priorities. It will also provide for a sufficient margin between the payments and the own resources ceiling to ensure the Union is able to fulfil its financial obligations under any circumstances. |
| --- | --- |

2.48.

The Commission also proposes to increase the own resources ceilings in the Own Resources decision up to 1,29  % of EU27 GNI. This is necessary to accommodate the integration of European Development Fund and payments needs on new priorities. It will also provide for a sufficient margin between the payments and the own resources ceiling to ensure the Union is able to fulfil its financial obligations under any circumstances.

| 2.49. | By the end of 2017, the Commission had not yet produced a comprehensive, long-term projection that fully complies with the Interinstitutional Agreement (48). Although the Commission presented a forecast on 16 October 2017, its scope was limited to existing commitments as estimated until the end of 2020. A more comprehensive, longer-term projection would help to take better-informed decisions for the next MFF (49). |
| --- | --- |

2.49.

By the end of 2017, the Commission had not yet produced a comprehensive, long-term projection that fully complies with the Interinstitutional Agreement (48). Although the Commission presented a forecast on 16 October 2017, its scope was limited to existing commitments as estimated until the end of 2020. A more comprehensive, longer-term projection would help to take better-informed decisions for the next MFF (49).

| 2.49. | The Commission has presented an update of the medium term payments forecast in October 2017, estimating the evolution of the RAL at the end of the 2014-2020 MFF period, assessing the sustainability of the payment ceilings taking into account the new flexibility provisions agreed with the Mid-term revision.

  The Commission also presented a forecast of payment appropriations after 2020 in compliance with point 9 of the Interinstitutional Agreement of 2 December 2013.


  These reports were necessarily limited to commitments up to 2020 as the Commission could not forecast future commitments before it tabled its proposal on the next Multiannual Financial Framework, which was made in May 2018.


  For future years, Article 247(1) of the new Financial Regulation sets out an obligation for the Commission to communicate annually to the European Parliament and the Council an integrated set of financial and accountability reports, including a long term forecast of future inflows and outflows covering the next 5 years. This report will analyse the impact of commitments of a given Multiannual Financial Framework. |
| --- | --- |

2.49.

The Commission also presented a forecast of payment appropriations after 2020 in compliance with point 9 of the Interinstitutional Agreement of 2 December 2013.

These reports were necessarily limited to commitments up to 2020 as the Commission could not forecast future commitments before it tabled its proposal on the next Multiannual Financial Framework, which was made in May 2018.

For future years, Article 247(1) of the new Financial Regulation sets out an obligation for the Commission to communicate annually to the European Parliament and the Council an integrated set of financial and accountability reports, including a long term forecast of future inflows and outflows covering the next 5 years. This report will analyse the impact of commitments of a given Multiannual Financial Framework.

The United Kingdom is leaving the EU

| 2.50. | The provisions relating to the financial settlement have been stipulated in a draft agreement on the UK’s departure (50). Based on the draft agreement, the United Kingdom would honour its commitments until 2020 as if it were a Member State. After 2020, it would honour liabilities assumed until the end of 2020. For contingent liabilities related to financial operations, the UK’s responsibility would cover such operations decided or approved up to the withdrawal date. |
| --- | --- |

2.50.

The provisions relating to the financial settlement have been stipulated in a draft agreement on the UK’s departure (50). Based on the draft agreement, the United Kingdom would honour its commitments until 2020 as if it were a Member State. After 2020, it would honour liabilities assumed until the end of 2020. For contingent liabilities related to financial operations, the UK’s responsibility would cover such operations decided or approved up to the withdrawal date.

The accountability gap could be at risk of widening further

| 2.51. | We have previously noted accountability gaps in the management of and reporting on the EU budget (51). The Commission’s reflection paper on the future of EU finances proposed accountability as one of the four principles of reform (52), with a view to a better understanding of the budget, more democratic control, transparency and good management. Our briefing paper made two proposals (53): to develop principles of accountability and transparency and to establish audit mandates for all existing and future EU-related bodies (54). |
| --- | --- |

2.51.

We have previously noted accountability gaps in the management of and reporting on the EU budget (51). The Commission’s reflection paper on the future of EU finances proposed accountability as one of the four principles of reform (52), with a view to a better understanding of the budget, more democratic control, transparency and good management. Our briefing paper made two proposals (53): to develop principles of accountability and transparency and to establish audit mandates for all existing and future EU-related bodies (54).

| 2.51. | As regards the ECA’s proposal on developing principles of accountability and transparency, the Commission underlines that it proposes for the MFF 2021-2027 a more coherent, focused and transparent framework for the EU budget. The structure of the new budget will be clearer, aligned with political priorities and the number of programmes will be largely reduced.

  As an example, the new and fully integrated ‘InvestEU’ Fund will bring centrally managed financial instruments supporting strategic investment throughout the EU together under a single programme.


  Concerning the other proposal of ECA’s on establishing audit mandates for all existing and future EU-related bodies, the Commission does not wish to comment on issues concerning other Institutions and which are outside its remit. The Commission welcomes the ECA's contribution to the debate on EU accountability and public audit arrangements. |
| --- | --- |

2.51.

As an example, the new and fully integrated ‘InvestEU’ Fund will bring centrally managed financial instruments supporting strategic investment throughout the EU together under a single programme.

Concerning the other proposal of ECA’s on establishing audit mandates for all existing and future EU-related bodies, the Commission does not wish to comment on issues concerning other Institutions and which are outside its remit. The Commission welcomes the ECA's contribution to the debate on EU accountability and public audit arrangements.

CONCLUSIONS AND RECOMMENDATIONS

Conclusions

| 2.52. | Amounts committed (including special instruments) slightly exceeded the limit set in the MFF. For the second consecutive year, however, payments were far below the anticipated levels, which in turn reduced the contributions requested from Member States. The low level of payments was mainly due to delays in the implementation of the ESI funds (see paragraphs 2.3-2.5). |
| --- | --- |

2.52.

Amounts committed (including special instruments) slightly exceeded the limit set in the MFF. For the second consecutive year, however, payments were far below the anticipated levels, which in turn reduced the contributions requested from Member States. The low level of payments was mainly due to delays in the implementation of the ESI funds (see paragraphs 2.3-2.5).

| 2.53. | As a result outstanding budgetary commitments exceeded last year’s record and are likely to rise even higher by the end of the current MFF. This significantly increases the risk that insufficient payment appropriations will be available for the final years of the MFF (see paragraphs 2.6-2.8). |
| --- | --- |

2.53.

As a result outstanding budgetary commitments exceeded last year’s record and are likely to rise even higher by the end of the current MFF. This significantly increases the risk that insufficient payment appropriations will be available for the final years of the MFF (see paragraphs 2.6-2.8).

| 2.53. | The Commission considers that the adjusted payment ceiling will be sufficient; see Commission reply to paragraph 2.8. |
| --- | --- |

2.53.

| 2.54. | The EU budget was made more flexible by increasing the Global Margin for Payments (GMP) and the amounts available for two special instruments, and by enhancing transfer possibilities between special instruments. The issue of whether or not to include special instruments within the payment appropriations ceiling remains unresolved (see paragraphs 2.9-2.12). |
| --- | --- |

2.54.

The EU budget was made more flexible by increasing the Global Margin for Payments (GMP) and the amounts available for two special instruments, and by enhancing transfer possibilities between special instruments. The issue of whether or not to include special instruments within the payment appropriations ceiling remains unresolved (see paragraphs 2.9-2.12).

| 2.54. | The Commission has made a proposal to resolve the issue of special instruments in the MFF 2021-2027; see Commission reply to paragraph 2.12. |
| --- | --- |

2.54.

| 2.55. | By end of 2017, the overall average absorption rate for the 2014-2020 MFF was even lower than in the corresponding year of the previous MFF (2010: 22 %). This was mainly due to the later closure of the previous MFF, the late adoption of legal acts, difficulties in implementing the new requirements for the current MFF, the change in the de-commitment rules from N+2 to N+3, and the administrative burden linked to overlaps between MFF periods. We highlighted the possible impact on project quality and the importance of a sufficiently stable legal framework (see paragraphs 2.13-2.19). |
| --- | --- |

2.55.

By end of 2017, the overall average absorption rate for the 2014-2020 MFF was even lower than in the corresponding year of the previous MFF (2010: 22 %). This was mainly due to the later closure of the previous MFF, the late adoption of legal acts, difficulties in implementing the new requirements for the current MFF, the change in the de-commitment rules from N+2 to N+3, and the administrative burden linked to overlaps between MFF periods. We highlighted the possible impact on project quality and the importance of a sufficiently stable legal framework (see paragraphs 2.13-2.19).

| 2.55. | An overlap between two periods is considered necessary given that many projects take several years to be implemented and that there will always be a start-up phase and wrapping up phase for any programming period. Therefore, the closure will always overlap with the subsequent period.

  At the same time, the Commission has on several occasions stressed the importance of a timely adoption of the legal acts also by the co-legislators.


  The Commission refers to its replies under paragraphs 2.14 and 2.18. |
| --- | --- |

2.55.

At the same time, the Commission has on several occasions stressed the importance of a timely adoption of the legal acts also by the co-legislators.

The Commission refers to its replies under paragraphs 2.14 and 2.18.

| 2.56. | In 2017, structural funds under the 2007-2013 MFF were in the process of being closed. The majority of Member States have absorbed most of the resources allocated to them (see paragraphs 2.20-2.22). |
| --- | --- |

2.56.

In 2017, structural funds under the 2007-2013 MFF were in the process of being closed. The majority of Member States have absorbed most of the resources allocated to them (see paragraphs 2.20-2.22).

| 2.57. | Aid to non-EU countries makes increased use of alternative financing models which increase the complexity of existing financial structures (see paragraphs 2.23-2.27). |
| --- | --- |

2.57.

Aid to non-EU countries makes increased use of alternative financing models which increase the complexity of existing financial structures (see paragraphs 2.23-2.27).

| 2.57. | The Commission considers that the new financing models contribute to increasing the effectiveness of aid to non-EU countries. |
| --- | --- |

2.57.

| 2.58. | EU funding for financial instruments has increased substantially. The closure of FISMs for the 2007-2013 MFF revealed problems in the Member States' reporting. While reporting has been made more comprehensive under the 2014-2020 MFF requirements, the gap between the end of the reporting period and the corresponding report remains long (see paragraphs 2.28-2.39). |
| --- | --- |

2.58.

EU funding for financial instruments has increased substantially. The closure of FISMs for the 2007-2013 MFF revealed problems in the Member States' reporting. While reporting has been made more comprehensive under the 2014-2020 MFF requirements, the gap between the end of the reporting period and the corresponding report remains long (see paragraphs 2.28-2.39).

| 2.58. | Reporting requirements on financial instruments in 2007-2013 programmes were introduced mid-way of the programme implementation of 2007-2013. Member States and the Commission have made significant efforts over the last years to improve the reporting process and quality of the data provided, as acknowledged by the ECA in its 2016 Annual report.

  The timeframe of the reporting between managing authorities and the reporting of the Commission reflects the shared management context. |
| --- | --- |

2.58.

The timeframe of the reporting between managing authorities and the reporting of the Commission reflects the shared management context.

| 2.59. | The European Fund for Sustainable Development (EFSD) was created. Its governance model allows a broader range of partners to assume liabilities on behalf of the EU budget (see paragraphs 2.40-2.41). |
| --- | --- |

2.59.

The European Fund for Sustainable Development (EFSD) was created. Its governance model allows a broader range of partners to assume liabilities on behalf of the EU budget (see paragraphs 2.40-2.41).

| 2.59. | The key objective of the EFSD is to provide an integrated financial package to finance investments starting in regions of Africa and the Neighbourhood, thereby creating growth and employment opportunities, maximising additionality, delivering innovative products and crowding-in private sector funds.

  See Commission reply under paragraph 2.41. |
| --- | --- |

2.59.

See Commission reply under paragraph 2.41.

| 2.60. | The EU budget’s financial exposure continues to be significant, mainly in relation to outstanding commitments, the EU staff pension liability and other legal commitments as well as contingent liabilities in form of guarantees (see paragraphs 2.42-2.45). |
| --- | --- |

2.60.

The EU budget’s financial exposure continues to be significant, mainly in relation to outstanding commitments, the EU staff pension liability and other legal commitments as well as contingent liabilities in form of guarantees (see paragraphs 2.42-2.45).

| 2.61. | It remains unclear whether adequate payment appropriations will be available to cover all the claims submitted for payment. The Commission has not yet produced a comprehensive, long-term projection to aid decision-making for the next MFF (see paragraphs 2.47-2.49). |
| --- | --- |

2.61.

It remains unclear whether adequate payment appropriations will be available to cover all the claims submitted for payment. The Commission has not yet produced a comprehensive, long-term projection to aid decision-making for the next MFF (see paragraphs 2.47-2.49).

| 2.61. | The Commission has presented an update of the medium term payments forecast in October 2017, estimating the evolution of the RAL at the end of the MFF period, assessing the sustainability of the payment ceilings taking into account the new flexibility provisions agreed with the Mid-term revision. A forecast of payment appropriations after 2020 was presented in accordance with point 9 of the Interinstitutional Agreement of 2 December 2013. |
| --- | --- |

2.61.

Recommendations

| 2.62. | We recommend that the Commission: |
| --- | --- |

2.62.

We recommend that the Commission:

| — | Recommendation 1: provide accurate and complete information on the closure of FISMs for the 2007-2013 MFF, including the final amounts returned to the EU budget and amounts belonging to Member States.
  Target implementation date: by mid-2019. |
| --- | --- |

—

Recommendation 1: provide accurate and complete information on the closure of FISMs for the 2007-2013 MFF, including the final amounts returned to the EU budget and amounts belonging to Member States.

Target implementation date: by mid-2019.

The Commission partially accepts the recommendation.

The Commission will report on closure in line with the legislation in force. The current legislation does not require Member States to provide information on the amounts belonging to them. In line with the accepted recommendation 2 of the Special Report 04/2017 on protecting the EU budget, the Commission will report on the final outcome of closure for the programme period in the context of the annual activity report of the respective Directorates-General.

This report will include by operational programme the amount eligible at closure, including for financial instruments where available. It will also include information on recoveries by operational programme, if any.

| — | Recommendation 2: when presenting legislative proposals that include the creation or addition of sizeable contingent liabilities, accompany these with an overview of the total value of contingent liabilities supported by the budget, together with an analysis of stress test scenarios and their possible impact on the budget.
  Target implementation date: by mid-2019. |
| --- | --- |

—

Recommendation 2: when presenting legislative proposals that include the creation or addition of sizeable contingent liabilities, accompany these with an overview of the total value of contingent liabilities supported by the budget, together with an analysis of stress test scenarios and their possible impact on the budget.

Target implementation date: by mid-2019.

The Commission partially accepts this recommendation.

In line with the new Financial Regulation adopted by the co-legislator, the Commission will assess annually the sustainability of the contingent liabilities borne by the EU budget arising from financial operations. This information will accompany the draft budget as from 2021.

| — | Recommendation 3: invite the European Parliament and Council, in the context of the debate on the MFF post-2020, to provide for mechanisms to better manage the risk of payment backlogs, given the high level of outstanding commitments in the current and previous MFFs.
  Target implementation date: by the start of the post-2020 period. |
| --- | --- |

—

Recommendation 3: invite the European Parliament and Council, in the context of the debate on the MFF post-2020, to provide for mechanisms to better manage the risk of payment backlogs, given the high level of outstanding commitments in the current and previous MFFs.

Target implementation date: by the start of the post-2020 period.

The Commission accepts the recommendation.

The Commission has set out the proposals for the Multiannual Financial Framework 2021-2027 to the European Parliament and the Council. An important element of these proposals is the stability and predictability of the payment ceiling. The Commission believes that the payment ceiling proposed will be sufficient to cover the outstanding commitments (RAL) prior to 2021 and payments on the new 2021-2027 commitments within the limits set by the Own Resources ceiling according to the Own Resources Decision in force.

In addition, the Commission’s proposal for a Common Provisions Regulation for 2021-2027 includes two main mechanisms which favour more timely implementation: an ‘n+2’ decommitment rule coupled with a level of pre-financing which has been reduced to annual instalments of 0,5  % based on the total support from the Funds at programme level. Moreover, the Commission is proposing to the co-legislators to reduce the annual pre-financing levels for the 2014-2020 programmes.

---

(1)  This reflection paper drew on ‘Future financing of the EU’, Final report and recommendations of the High Level Group on Own Resources, January 2017.

(2)  ‘Future of EU finances: reforming how the EU budget operates’, Briefing Paper, February 2018 (hereinafter: ‘briefing paper on the future of EU finances’) and ‘The Commission’s proposal for the 2021-2027 Multiannual Financial Framework’, Briefing Paper, July 2018 .

(3)  This proposal had been due to be presented by the end of 2017 — see Article 25 of the ‘MFF Regulation’ (Council Regulation (EU, Euratom) No 1311/2013 of 2 December 2013 laying down the multiannual financial framework for the years 2014-2020 (OJ L 347, 20.12.2013, p. 884)).

(4)  We exclude carryovers and assigned revenue because they are not part of the adopted budget and follow different rules that distort the result. For further information, see part A4-A5 of the ‘Report on the budgetary and financial management of the European Commission — Financial year 2017’ (RBFM).

(5)  Excluding carryovers and assigned revenue. See footnote 4.

(6)  See Commission reply to paragraph 2.14 of our 2016 annual report.

(7)  See note 2.2 to the budgetary implementation report to the 2017 consolidated annual accounts of the EU — Financial year 2017 (the ‘2017 EU accounts’).

(8)  Based on existing results as at the end of 2017 and on the MFF, including the 2017 technical adjustment, we have made the conservative assumption that 98 % of commitments appropriations will be converted to commitments. We have taken the most recent available Commission estimate of de-commitments and assumed that 99 % of payment appropriations will become payments, excluding payments related to special instruments as per the Commission’s assumption. We have not factored in the use of the global margin for payments (GMP). However, the GMP can help to reduce outstanding commitments until 2020 (see paragraphs 2.9-2.10). Assigned revenue and carryovers have not been included in the 2018-2020 projections as they make little impact on the projections and are difficult to calculate.

(9)  COM(2016) 603 final — Communication from the Commission to the European Parliament and the Council –‘Mid-term review/revision of the multiannual financial framework 2014-2020 — An EU budget focused on results’. We responded to this Commission communication by publishing our briefing paper ‘EU budget: time to reform?’ in November 2016.

(10)  Council Regulation (EU, Euratom) 2017/1123 of 20 June 2017 amending Regulation (EU, Euratom) No 1311/2013 laying down the multiannual financial framework for the years 2014-2020 (OJ L 163, 24.6.2017, p. 1).

(11)  The GMP makes it possible to carry over unused payment appropriations to future years.

(12)  The Emergency Aid Reserve (EAR), the European Union Solidarity Fund (EUSF), the Flexibility Instrument (Flex) and the European Globalisation Adjustment Fund (EGF) — see Articles 9-12 of the MFF Regulation. See also paragraphs 2.8-2.10 of our 2016 annual report.

(13)  See Article 5 of the MFF Regulation.

(14)  Based on technical adjustments to the financial framework and ECA estimate for 2017.

(15)  Paragraph 2.8 of our 2014 annual report and paragraph 2.8(b) of our 2016 annual report.

(16)  Absorption is the amount paid by the Commission to a Member State as co-financing towards projects under operational programme(s) of ESI funds. The absorption rate shows the amounts paid relative to the corresponding planned EU spending.

(17)  The fourth year of the current MFF.

(18)  The corresponding year of the previous MFF.

(19)  The Commission explained what it considers to be the reasons in various documents: its analysis of the budgetary implementation of the European Structural and Investment Funds in 2016; its mid-term review/revision of the 2014-2020 Multiannual Financial Framework and the accompanying staff working document COM(2016) 603 final and SWD(2016) 299 final; and its replies to the written questions to Commissioners Oettinger, Creţu and Thyssen on the 2016 discharge procedure.

(20)  Croatia, Italy, Malta, Slovakia, Slovenia and Spain.

(21)  See special report 1/2018 ‘Joint Assistance to Support Projects in European Regions (JASPERS) — time for better targeting’.

(22)  Special report 36/2016 ‘An assessment of the arrangements for closure of the 2007-2013 cohesion and rural development programmes’ and special report 17/2018 ’Commission’s and Member States’ actions in the last years of the 2007-2013 programmes tackled low absorption but had insufficient focus on results’.

(23)  European Regional Development Fund, European Social Fund and the Cohesion Fund.

(24)  Except for Croatia, which had an extended deadline of 31 March 2018.

(25)  See paragraph 2.13 of our 2016 annual report.

(26)  The respective full name of these Trust Funds are: EU Trust Fund for the Central African Republic; EU Regional Trust Fund in response to the Syrian crisis; EU Emergency Trust Fund for stability and addressing root causes of irregular migration and displaced persons in Africa; EU Trust Fund for Colombia.

(27)  Special report 11/2017 ‘The Bêkou EU Trust Fund for the Central African Republic: a hopeful beginning despite some shortcomings’.

(28)  See Recommendation 4 of Chapter 2 of our 2016 annual report.

(29)  Summary of data on the progress made in financing and implementing financial engineering instruments reported by the managing authorities in accordance with Article 67(2)(j) of Council Regulation (EC) No 1083/2006 — Programming period 2007-2013 — Situation as at 31 March 2017 (at closure).

(30)  These amounts remain available for the Member States to use. See Article 78(7) of Council Regulation (EC) No 1083/2006.

(31)  See paragraph 6.25 of our 2016 annual report.

(32)  From loans disbursed and repaid, investments undertaken, or amounts left after all guarantees have been honoured.

(33)  Special report 19/2016 ‘Implementing the EU budget through financial instruments — lessons to be learnt from the 2007-2013 programme period’.

(34)  Regulation (EU) 2017/2396 of the European Parliament and of the Council of 13 December 2017 amending Regulations (EU) No 1316/2013 and (EU) 2015/1017 as regards the extension of the duration of the European Fund for Strategic Investments as well as the introduction of technical enhancements for that Fund and the European Investment Advisory Hub (OJ L 345, 27.12.2017, p. 34).

(35)  Recital 21 of Regulation (EU) 2017/2396 states that financing will come from the EU budget, with a transfer from the Connecting Europe Facility (CEF) as well as from the revenues and repayments from the CEF debt instrument and the Marguerite Fund.

(36)  See Note 4.1 of the 2017 EU accounts.

(37)  Including from reflows, either from the EFSI itself (525 million euros) or from other financial instruments (150 million euros from the CEF debt instrument and the Marguerite Fund).

(38)  See ‘European Fund for Strategic Investments — IIW and SMEW — Schedule II of the EFSI Agreement — Year-end Operational Report — Reporting date: 31 December 2017’.

(39)  Regulation (EU) 2017/1601 of the European Parliament and of the Council of 26 September 2017 establishing the European Fund for Sustainable Development (EFSD), the EFSD Guarantee and the EFSD Guarantee Fund (OJ L 249, 27.9.2017, p. 1).

(40)  Article 11(e) of Regulation (EU) 2017/1601 of 26 September 2017 establishing the European Fund for Sustainable Development (ESD), the EFSD Guarantee and the EFSD Guarantee Fund.

(41)  Contingent liabilities are possible liabilities that depend on future events occurring. Main contingent liabilities of the EU budget are: EIB external lending mandate guarantees; EFSI Guarantees; Financial assistance: Macro Financial Assistance (MFA), European Financial Stability Mechanism (EFSM), Balance of Payments (BOP), Euratom; guarantees given for EU financial instruments (mainly Horizon 2020, Risk Sharing Finance Facility, Connecting Europe Facility); EFSD Guarantee.

(42)  COM(2016) 605 ‘Proposal for a Regulation of the European Parliament and of the Council on the financial rules applicable to the general budget of the Union and amending Regulation (EC) No 2012/2002, Regulations (EU) No 1296/2013, (EU) 1301/2013, (EU) No 1303/2013, EU No 1304/2013, (EU) No 1305/2013, (EU) No 1306/2013, (EU) No 1307/2013, (EU) No 1308/2013, (EU) No 1309/2013, (EU) No 1316/2013, (EU) No 223/2014,(EU) No 283/2014, (EU) No 652/2014 of the European Parliament and of the Council and Decision No 541/2014/EU of the European Parliament and of the Council’.

(43)  The actuarial valuation of the pension liability represents the present value of expected future payments. It is calculated using the relevant discount rate in accordance with the methodology set out in IPSAS 25. For further details of the calculation see note 2.9 to the (‘2017 EU accounts’).

(44)  See the balance sheet page of the 2017 EU accounts.

(45)  See footnote on the balance sheet page of the 2017 EU accounts.

(46)  See paragraphs 2.36-2.38 of our 2016 annual report.

(47)  Article 3(2), second subparagraph of Council Decision 2014/335/EU, Euratom of 26 May 2014 on the system of own resources of the European Union (OJ L 168, 7.6.2014, p. 105).

(48)  Article 9 of the Interinstitutional Agreement of 2 December 2013, between the European Parliament, the Council and the Commission on budgetary discipline, on cooperation in budgetary matters and on sound financial management.

(49)  See Recommendation 2 in paragraph 2.47 of our 2015 annual report and our briefing paper on the future of EU finances.

(50)  Draft Agreement on the withdrawal of the United Kingdom of Great Britain and Northern Ireland from the European Union and the European Atomic Energy Community, 19 March 2018.

(51)  See our landscape review from 2014 ‘Gaps, overlaps and challenges: a landscape review of EU accountability and public audit arrangements’, paragraph 2.4 of our 2015 annual report and paragraphs 2.29-2.31, 2.43 and 2.46 and Box 2.8 of our 2016 annual report.

(52)  Box 4 from the Commission’s reflection paper on the future of EU finances.

(53)  See paragraphs 28, 29 and 39 to 44 of our briefing paper on the future of EU finances.

(54)  Such as the European Defence Agency (EDA), the proposed European Monetary Fund (EMF), the European Stability Mechanism (ESM) and EIB’s non-EU budget related operations.

(55)  This figure does not include 1,2 billion euros of blending instruments.

(56)  Based on Current Financial Envelope — COM(2018) 600.

ANNEX 2.1

MAIN POINTS OF INTEREST IN AMENDING BUDGETS

| Amending budget | Explanation | Value in billion euros | Effect on 2017 budget |
| --- | --- | --- | --- |
| 01/2017 | Three Member States received aid, due to major or regional disasters that occured, through the mobilisation of the European Union Solidarity Fund: (a) United Kingdom: 60,3  million euros, (b) Cyprus: 7,3  million euros and (c) Portugal: 3,9  million euros. | 0,07 | Increase of commitments |
| 02/2017 | The surplus of 2016 was returned to the Member States by reducing their annual contributions. | 6,40 | Reduction of revenue |
| 03/2017 | The Youth Employment Initiative (YEI), which was set up in 2013 as a response to the high youth unemployment levels across the EU, was reinforced. | 0,50 | Increase of commitments |
| 04/2017 | Assistance to Italy was provided, through the European Union Solidarity Fund (EUSF), further to a series of earthquakes that took place between August 2016 and January 2017. | 1,20 | Increase of commitments |
| 05/2017 | The Guarantee Fund for the European Fund for Sustainable Development (EFSD) was created. | 0,30 | Increase of commitments |
| 06/2017 | Payment appropriations of the initial budget were reduced. This, in parallel, reduced Member States’ contributions by the same amount. | 0,06 | Decrease of commitments |
| 7,70 | Decrease of payments |
| Source: Note A 2.1 to the 2017 Report on the budgetary and financial management of the Commission. |

Amending budget

Explanation

Value in billion euros

Effect on 2017 budget

01/2017

Three Member States received aid, due to major or regional disasters that occured, through the mobilisation of the European Union Solidarity Fund: (a) United Kingdom: 60,3  million euros, (b) Cyprus: 7,3  million euros and (c) Portugal: 3,9  million euros.

0,07

Increase of commitments

02/2017

The surplus of 2016 was returned to the Member States by reducing their annual contributions.

6,40

Reduction of revenue

03/2017

The Youth Employment Initiative (YEI), which was set up in 2013 as a response to the high youth unemployment levels across the EU, was reinforced.

0,50

Increase of commitments

04/2017

Assistance to Italy was provided, through the European Union Solidarity Fund (EUSF), further to a series of earthquakes that took place between August 2016 and January 2017.

1,20

Increase of commitments

05/2017

The Guarantee Fund for the European Fund for Sustainable Development (EFSD) was created.

0,30

Increase of commitments

06/2017

Payment appropriations of the initial budget were reduced. This, in parallel, reduced Member States’ contributions by the same amount.

0,06

Decrease of commitments

7,70

Decrease of payments

Source: Note A 2.1 to the 2017 Report on the budgetary and financial management of the Commission.

ANNEX 2.2

INCREASE IN SPECIAL INSTRUMENTS

Amounts available of special instruments before and after the increase

| (million euros) |
| --- |
| Before increase | | | | | | | |
| Year | | Flex | EAR | EGF | EUSF | | Total |
| 2017 | | 530 | 315 | 169 | 563 | | 1 577 |
| 2018 | | 541 | 322 | 172 | 574 | | 1 609 |
| 2019 | | 552 | 328 | 176 | 586 | | 1 642 |
| 2020 | | 563 | 335 | 179 | 598 | | 1 675 |
| Total | | 2 186 | 1 300 | 696 | 2 321 | | 6 503 |
| After increase | | | | | | | |
| Year | | Flex | EAR | EGF | EUSF | | Total |
| 2017 | | 676 | 338 | 169 | 563 | | 1 746 |
| 2018 | | 689 | 344 | 172 | 574 | | 1 779 |
| 2019 | | 703 | 351 | 176 | 586 | | 1 816 |
| 2020 | | 717 | 359 | 179 | 598 | | 1 853 |
| Total | | 2 785 | 1 392 | 696 | 2 321 | | 7 194 |
| | | | | | | | |
| Difference | | 599 | 92 | — | — | | 691 |
| Total amount available for use in 2018-2020 (*1) | | 5 997 |
| Note: Flex — Flexibility Instrument; EAR — Emergency Aid Reserve; EGF — European Globalisation Adjustment Fund; EUSF — European Union Solidarity Fund.

  Source: European Court of Auditors based on information from the Commission. |

(million euros)

Before increase

Year

Flex

EAR

EGF

EUSF

Total

2017

530

315

169

563

1 577

2018

541

322

172

574

1 609

2019

552

328

176

586

1 642

2020

563

335

179

598

1 675

Total

2 186

1 300

696

2 321

6 503

After increase

Year

Flex

EAR

EGF

EUSF

Total

2017

676

338

169

563

1 746

2018

689

344

172

574

1 779

2019

703

351

176

586

1 816

2020

717

359

179

598

1 853

Total

2 785

1 392

696

2 321

7 194

Difference

599

92

—

—

691

Total amount available for use in 2018-2020 (*1)

5 997

Note: Flex — Flexibility Instrument; EAR — Emergency Aid Reserve; EGF — European Globalisation Adjustment Fund; EUSF — European Union Solidarity Fund.

Source: European Court of Auditors based on information from the Commission.

---

(*1)  The difference between 7 194 million euros and 5 997 million euros are amounts used in 2017.

---

CHAPTER 3

Getting results from the EU budget

CONTENTS

| Introduction | 3.1 |
| --- | --- |

| Part 1 — Does the Commission make adequate use of performance information in decision-making? | 3.2-3.36 |
| --- | --- |

| Section A — There are certain limits to how much use the Commission can make of performance information | 3.6-3.13 |
| --- | --- |

| Section B — The Commission's performance measurement systems make vast quantities of data available but not always in a timely manner | 3.14-3.18 |
| --- | --- |

| Section C — The Commission uses performance information to manage programmes and policies although appropriate action is not always taken when targets are not met | 3.19-3.26 |
| --- | --- |

| Section D — The Commission does not generally explain the use of performance information in its performance reports | 3.27-3.31 |
| --- | --- |

| Section E — Further progress is expected from a continued development in performance culture | 3.32-3.36 |
| --- | --- |

| Part 2 — Results of the Court’s performance audits: conclusions and recommendations with the greatest impact | 3.37-3.67 |
| --- | --- |

| Introduction | 3.37 |
| --- | --- |

| Headings 1a ‘Competitiveness for growth and jobs’ and 1b ‘Economic, social and territorial cohesion’ | 3.38-3.44 |
| --- | --- |

| Heading 2 ‘Sustainable growth and natural resources’ | 3.45-3.48 |
| --- | --- |

| Headings 3 ‘Security and citizenship’ and 4 ‘Global Europe’ | 3.49-3.58 |
| --- | --- |

| Heading 5 ‘Administration’ and reports on the ‘Functioning Single Market and sustainable Monetary Union’ | 3.59-3.67 |
| --- | --- |

| Part 3 — Follow-up of recommendations | 3.68-3.78 |
| --- | --- |

| Conclusions and recommendations | 3.79-3.85 |
| --- | --- |

| Conclusions | 3.79-3.83 |
| --- | --- |

| Recommendations | 3.84-3.85 |
| --- | --- |

| Annex 3.1 — | Detailed status of recommendations by report |
| --- | --- |

Annex 3.1 —

| Annex 3.2 — | Key improvements and unresolved weaknesses by report |
| --- | --- |

Annex 3.2 —

| Annex 3.3 — | Recommendations to Member States |
| --- | --- |

Annex 3.3 —

| Annex 3.4 — | Follow-up of previous recommendations for performance issues |
| --- | --- |

Annex 3.4 —

| THE COURT’S OBSERVATIONS | THE COMMISSION’S REPLIES |
| --- | --- |
| INTRODUCTION |
| 3.1. | Each year, in this chapter, we analyse a number of aspects relating to performance: the results achieved by the EU budget, which is implemented by the Commission in cooperation with the Member States (1). This year we have looked specifically at:






  (i) | the use of performance information for decision-making by the Commission, |

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

INTRODUCTION

3.1.

Each year, in this chapter, we analyse a number of aspects relating to performance: the results achieved by the EU budget, which is implemented by the Commission in cooperation with the Member States (1). This year we have looked specifically at:

(i)

the use of performance information for decision-making by the Commission,

| (ii) | selected results from our 2017 special reports on performance, |
| --- | --- |

(ii)

selected results from our 2017 special reports on performance,

| (iii) | the Commission’s implementation of the recommendations we made in our special reports published in 2014. |
| --- | --- |

(iii)

the Commission’s implementation of the recommendations we made in our special reports published in 2014.

| 3.1. | The Commission notes that most key decisions in relation to the EU budget are taken by the budgetary and legislative authority, i.e. the European Parliament and the Council, on the basis of proposals from the Commission. This applies both to decisions on the annual budgetary procedure and in relation to the design and revision of the Multiannual Financial Framework and sectoral financial programmes. |
| --- | --- |

3.1.

PART 1 — DOES THE COMMISSION MAKE ADEQUATE USE OF PERFORMANCE INFORMATION IN DECISION-MAKING?

| 3.2. | Last year, we reviewed how the Commission’s approach to performance reporting compared with good practice. As it is important for an organisation to have good procedures for performance reporting and to improve them continuously, it is important to use the information generated from performance reporting to manage activities, optimise results and make adjustments to management systems and to strategic planning processes, etc. The way in which this information is used influences the organisation's long-term success in implementing performance management. |
| --- | --- |

3.2.

Last year, we reviewed how the Commission’s approach to performance reporting compared with good practice. As it is important for an organisation to have good procedures for performance reporting and to improve them continuously, it is important to use the information generated from performance reporting to manage activities, optimise results and make adjustments to management systems and to strategic planning processes, etc. The way in which this information is used influences the organisation's long-term success in implementing performance management.

| 3.3. | According to the Commission, performance management is an ongoing systematic approach to improving the effectiveness, efficiency and results of operations through better planning, regular monitoring and evidence-based decision-making (2). The Commission’s ‘EU Budget Focused on Results’ initiative, which was launched in 2015, includes different work streams and objectives, one of which is to support decision-making with meaningful performance information (3). The better regulation guidelines (4), which were launched in 2015 and updated in July 2017, stipulate that all available evidence should be used as a basis for designing EU policies and laws that achieve their objectives in an open, transparent and cost-efficient manner. |
| --- | --- |

3.3.

According to the Commission, performance management is an ongoing systematic approach to improving the effectiveness, efficiency and results of operations through better planning, regular monitoring and evidence-based decision-making (2). The Commission’s ‘EU Budget Focused on Results’ initiative, which was launched in 2015, includes different work streams and objectives, one of which is to support decision-making with meaningful performance information (3). The better regulation guidelines (4), which were launched in 2015 and updated in July 2017, stipulate that all available evidence should be used as a basis for designing EU policies and laws that achieve their objectives in an open, transparent and cost-efficient manner.

THE COURT’S OBSERVATIONS

| 3.4. | To assess if the Commission adequately uses performance information for decision-making, we took the following steps.






  (i) | We conducted a documentary review on the use of performance information for decision-making, including reports by supreme audit institutions (5), the OECD, governments, and academics from inside and outside the EU. |
| --- | --- | --- |

3.4.

To assess if the Commission adequately uses performance information for decision-making, we took the following steps.

(i)

We conducted a documentary review on the use of performance information for decision-making, including reports by supreme audit institutions (5), the OECD, governments, and academics from inside and outside the EU.

| (ii) | We reviewed the latest performance reports published by six Directorates-General (DGs) (6), including ten of their recently published impact assessments and evaluations. We selected these DGs because they were reasonably representative of the Commission as a whole. This was because of their varied characteristics (in terms of management mode, cooperation with agencies, type of activity, etc.). |
| --- | --- |

(ii)

We reviewed the latest performance reports published by six Directorates-General (DGs) (6), including ten of their recently published impact assessments and evaluations. We selected these DGs because they were reasonably representative of the Commission as a whole. This was because of their varied characteristics (in terms of management mode, cooperation with agencies, type of activity, etc.).

| (iii) | We interviewed thirty heads of unit and directors in these six DGs to gain additional information on the use of performance information in decision-making in the DG. |
| --- | --- |

(iii)

We interviewed thirty heads of unit and directors in these six DGs to gain additional information on the use of performance information in decision-making in the DG.

| (iv) | We carried out a survey on the use of performance information in decision-making in these six DGs. The survey was aimed at managers in these DGs who were involved in managing policies, programmes or projects: heads of unit, directors, deputy directors-general and directors-general. The final response rate was 57 %, from a target population of 240. |
| --- | --- |

(iv)

We carried out a survey on the use of performance information in decision-making in these six DGs. The survey was aimed at managers in these DGs who were involved in managing policies, programmes or projects: heads of unit, directors, deputy directors-general and directors-general. The final response rate was 57 %, from a target population of 240.

Scope

| 3.5. | Our review covered the use of performance information at the Commission in relation to spending programmes and the development, implementation and evaluation of policies. We excluded the following aspects from the scope of our audit. |
| --- | --- |

3.5.

Our review covered the use of performance information at the Commission in relation to spending programmes and the development, implementation and evaluation of policies. We excluded the following aspects from the scope of our audit.

| (i) | The use of performance information in relation to the Commission’s administrative management of staff and other resources, in order to focus on the delivery of results for policies and programmes. |
| --- | --- |

(i)

The use of performance information in relation to the Commission’s administrative management of staff and other resources, in order to focus on the delivery of results for policies and programmes.

| (ii) | The use of performance information by the budgetary authority
   (7); the OECD (8) and other researchers (9) had already carried out work in this area. |
| --- | --- |

(ii)

The use of performance information by the budgetary authority
   (7); the OECD (8) and other researchers (9) had already carried out work in this area.

Section A — There are certain limits to how much use the Commission can make of performance information

The EU’s multiannual financial framework lacks flexibility to use performance information

| 3.6. | In national budgeting, it is usual to reallocate resources each year, or even more frequently. In the EU context, though, the situation is different. In its mid-term review of the 2014-2020 multiannual financial framework (MFF) (10), the Commission noted that it was essential to strike a balance between medium-term predictability and the flexibility to respond to unforeseen circumstances. In the 2014-2020 multiannual financial framework, about 80 % of the EU budget is pre-allocated; this, according to the Commission, ‘limits the budget’s responsiveness to evolving needs’. |
| --- | --- |

3.6.

In national budgeting, it is usual to reallocate resources each year, or even more frequently. In the EU context, though, the situation is different. In its mid-term review of the 2014-2020 multiannual financial framework (MFF) (10), the Commission noted that it was essential to strike a balance between medium-term predictability and the flexibility to respond to unforeseen circumstances. In the 2014-2020 multiannual financial framework, about 80 % of the EU budget is pre-allocated; this, according to the Commission, ‘limits the budget’s responsiveness to evolving needs’.

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

| 3.7. | The EU budget is mainly an investment budget. Annual ceilings are set for the various budget headings included in the seven-year multiannual financial framework, and amounts are pre-allocated to Member States. While there already are some performance-linked flexibility mechanisms set out in the relevant sectorial legislation, such as the performance reserve and ex-ante conditionalities, these have limitations (11). Although non-performing activities can be replaced by better ones in the same area and Member State, there is only limited space for adjusting spending priorities between budget headings. The most important ‘window of opportunity’ for allocating funds by taking into account performance information is the drafting and negotiation of a new multiannual financial framework regulation and the accompanying sectoral programmes. |
| --- | --- |

3.7.

The EU budget is mainly an investment budget. Annual ceilings are set for the various budget headings included in the seven-year multiannual financial framework, and amounts are pre-allocated to Member States. While there already are some performance-linked flexibility mechanisms set out in the relevant sectorial legislation, such as the performance reserve and ex-ante conditionalities, these have limitations (11). Although non-performing activities can be replaced by better ones in the same area and Member State, there is only limited space for adjusting spending priorities between budget headings. The most important ‘window of opportunity’ for allocating funds by taking into account performance information is the drafting and negotiation of a new multiannual financial framework regulation and the accompanying sectoral programmes.

| 3.8. | Multiannual financial framework mid-term reviews present another opportunity for taking performance information into account. The last such review (12) resulted in a re-allocation of 12 798  million euros, representing 1,18  % of the total multiannual financial framework commitment appropriations for the 2014-2020 period: a relatively limited proportion. The main driver for these reallocations of funds was to address the refugee crisis and other security threats, as well as investment gaps resulting from the financial and economic crisis, rather than performance. |
| --- | --- |

3.8.

Multiannual financial framework mid-term reviews present another opportunity for taking performance information into account. The last such review (12) resulted in a re-allocation of 12 798  million euros, representing 1,18  % of the total multiannual financial framework commitment appropriations for the 2014-2020 period: a relatively limited proportion. The main driver for these reallocations of funds was to address the refugee crisis and other security threats, as well as investment gaps resulting from the financial and economic crisis, rather than performance.

| 3.8. | A number of factors are taken into account when deciding on budgetary allocations. For example, the reallocation of funds in response to the refugee crisis and security threats was a consequence of major unforeseen geopolitical and societal developments. Performance can only be taken into account insofar as there is reliable and timely information available, which will not always be the case in particular in a crisis situation. |
| --- | --- |

3.8.

There are parallel strategic frameworks

| 3.9. | Measuring the EU budget’s and the Commission’s contributions to high-level objectives is complex, because several political strategic frameworks apply in parallel (13) (see
  Box 3.1
  ): |
| --- | --- |

3.9.

Measuring the EU budget’s and the Commission’s contributions to high-level objectives is complex, because several political strategic frameworks apply in parallel (13) (see
  Box 3.1
  ):

| 3.9. | The Commission considers that the political priorities of the Juncker Commission are fully compatible and consistent both with the Strategic Agenda of the European Council and the Europe 2020 Strategy.

  The Multiannual Financial Framework is one of the tools for implementing the Union’s priorities. The current Multiannual Financial Framework was designed to contribute to the Europe 2020 strategy and provides strong support for other emerging priorities (14). |
| --- | --- |

3.9.

The Multiannual Financial Framework is one of the tools for implementing the Union’s priorities. The current Multiannual Financial Framework was designed to contribute to the Europe 2020 strategy and provides strong support for other emerging priorities (14).

Box 3.1 —   Four strategic frameworks for the European Union (applicable in parallel)

Image

Source: ECA.

THE COURT’S OBSERVATIONS

| 3.10. | In addition, other goals are defined in various sectoral policy documents in accordance with the EU’s competences stemming from the Treaty on the functioning of the EU. The EU is also committed to implementing the Sustainable Development Goals defined by the United Nations. The EU aims to report each year on the progress it has made towards achieving those goals. |
| --- | --- |

3.10.

In addition, other goals are defined in various sectoral policy documents in accordance with the EU’s competences stemming from the Treaty on the functioning of the EU. The EU is also committed to implementing the Sustainable Development Goals defined by the United Nations. The EU aims to report each year on the progress it has made towards achieving those goals.

| 3.11. | We examined how the DGs dealt with the co-existence of various strategies. Two approaches were prevalent.






  (i) | Some DGs had fulfilled their various strategic reporting commitments by developing IT tools that could store, monitor, consolidate and report data in various configurations (see also paragraph 3.16). |
| --- | --- | --- |

3.11.

We examined how the DGs dealt with the co-existence of various strategies. Two approaches were prevalent.

(i)

Some DGs had fulfilled their various strategic reporting commitments by developing IT tools that could store, monitor, consolidate and report data in various configurations (see also paragraph 3.16).

| (ii) | Some DGs had adjusted their performance frameworks to suit the variety of strategic needs. DG EAC, for example, sets its performance framework at three levels.






  (a) | At EU level, DG EAC monitors the relevant objectives and indicators of the Europe 2020 strategy and the Education & Training 2020 (ET2020) strategic framework based on data from Eurostat, the OECD and other sources, in cooperation with the Member States. It carries out an annual review to ensure progress is being made in the right direction (15). |
| --- | --- | --- |

(ii)

Some DGs had adjusted their performance frameworks to suit the variety of strategic needs. DG EAC, for example, sets its performance framework at three levels.

(a)

At EU level, DG EAC monitors the relevant objectives and indicators of the Europe 2020 strategy and the Education & Training 2020 (ET2020) strategic framework based on data from Eurostat, the OECD and other sources, in cooperation with the Member States. It carries out an annual review to ensure progress is being made in the right direction (15).

| (b) | At the level of the Commission, DG EAC contributes more directly through its programme and policy work to two of the ten objectives of the Investment Plan for Europe. Progress is monitored, the annual activity report and the programme statements. |
| --- | --- |

(b)

At the level of the Commission, DG EAC contributes more directly through its programme and policy work to two of the ten objectives of the Investment Plan for Europe. Progress is monitored, the annual activity report and the programme statements.

| (c) | At the level of DG EAC itself, reporting and decision-making is centred around seven policy domains, each of which has its own specific objectives. Legislative work in the different domains is monitored in the Commission’s work programme. |
| --- | --- |

(c)

At the level of DG EAC itself, reporting and decision-making is centred around seven policy domains, each of which has its own specific objectives. Legislative work in the different domains is monitored in the Commission’s work programme.

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

| 3.12. | The multiplicity of strategies leads stakeholders to consider them as separate approaches, as for instance shown by the Commission’s evaluation of the EU Youth Strategy (16). |
| --- | --- |

3.12.

The multiplicity of strategies leads stakeholders to consider them as separate approaches, as for instance shown by the Commission’s evaluation of the EU Youth Strategy (16).

| 3.12. | The evaluation of the EU Youth Strategy concluded that (section 3.2.1) ‘the EU Youth Strategy added a mainstreaming dimension in view of linking the EU youth policy to the European strategies for education, employment and social inclusion’ and that (section 3.2.2) ‘several of the EU Youth Strategy’s priority areas fit well into the Europe 2020 Strategy’s targets’. |
| --- | --- |

3.12.

| 3.13. | Our survey included questions on ‘goal clarity’. With these questions, we aimed to find out how well Commission managers understood the mission and goals of their DGs and of the Commission in general (see
  Box 3.2
  ). Overall, survey replies were positive and indicated a high level of understanding. However, managers in two of the six DGs we interviewed made reference to the complexity of interactions between the different EU strategic frameworks, and between the goals of these frameworks and those set at the level of the DGs. |
| --- | --- |

3.13.

Our survey included questions on ‘goal clarity’. With these questions, we aimed to find out how well Commission managers understood the mission and goals of their DGs and of the Commission in general (see
  Box 3.2
  ). Overall, survey replies were positive and indicated a high level of understanding. However, managers in two of the six DGs we interviewed made reference to the complexity of interactions between the different EU strategic frameworks, and between the goals of these frameworks and those set at the level of the DGs.

Box 3.2 —   Survey results — Goal clarity

Image

Source: ECA survey.

THE COURT’S OBSERVATIONS

Section B — The Commission’s performance measurement systems make vast quantities of data available but not always in a timely manner

Vast quantities of performance information are available to managers

| 3.14. | The Commission DGs collect performance information in various formats and from diverse sources, thereby generating a wealth of performance-relevant information. In addition to reporting, the Commission uses performance information to keep track of its ongoing activities, in particular to assess whether the targets of spending programmes have been reached, and as an input for the ‘Better Regulation’ process which supports the preparation of legislative proposals. |
| --- | --- |

3.14.

The Commission DGs collect performance information in various formats and from diverse sources, thereby generating a wealth of performance-relevant information. In addition to reporting, the Commission uses performance information to keep track of its ongoing activities, in particular to assess whether the targets of spending programmes have been reached, and as an input for the ‘Better Regulation’ process which supports the preparation of legislative proposals.

| 3.15. | The choice of what information to use depends on the type of decision to be made.
  Box 3.3
  below gives an overview of the main decision-making processes involving the use of performance information. |
| --- | --- |

3.15.

The choice of what information to use depends on the type of decision to be made.
  Box 3.3
  below gives an overview of the main decision-making processes involving the use of performance information.

Box 3.3 —   The Commission’s main decision-making processes

| | Decision type | Performance information used in the Commission’s decision-making process |
| --- | --- | --- |
| Spending programmes | Proposal for MFF budget for a 7-year period | — | Programme monitoring information (including output, result and impact indicators) |

Decision type

Performance information used in the Commission’s decision-making process

Spending programmes

Proposal for MFF budget for a 7-year period

—

Programme monitoring information (including output, result and impact indicators)

| — | Evaluations and impact assessments |
| --- | --- |

—

Evaluations and impact assessments

| — | Spending reviews |
| --- | --- |

—

Spending reviews

Proposal for legal basis for spending programmes during the MFF period

| — | Programme monitoring information (including output, result and impact indicators) |
| --- | --- |

—

Programme monitoring information (including output, result and impact indicators)

| — | Evaluations and impact assessments |
| --- | --- |

—

Evaluations and impact assessments

| — | Public consultations |
| --- | --- |

—

Public consultations

Proposal for the annual budget

| — | Programme monitoring information (including output, result and impact indicators) |
| --- | --- |

—

Programme monitoring information (including output, result and impact indicators)

| — | Evaluations and impact assessments |
| --- | --- |

—

Evaluations and impact assessments

Implementation of programme budget

| — | Project data on individual projects and consolidated into output, result and impact indicators |
| --- | --- |

—

Project data on individual projects and consolidated into output, result and impact indicators

| — | Annual monitoring reports |
| --- | --- |

—

Annual monitoring reports

| — | Studies, evaluations |
| --- | --- |

—

Studies, evaluations

| — | Member State reporting (shared) |
| --- | --- |

—

Member State reporting (shared)

| — | Reporting from partners (indirect) |
| --- | --- |

—

Reporting from partners (indirect)

Non-spending policy work

Proposal for EU legislation

(ordinary legislative procedure)

| — | Contextual information (Eurostat and other statistics, expert networks, stakeholder dialogue, country reviews etc.) |
| --- | --- |

—

Contextual information (Eurostat and other statistics, expert networks, stakeholder dialogue, country reviews etc.)

| — | Studies, evaluations, impact assessments |
| --- | --- |

—

Studies, evaluations, impact assessments

| — | Public consultation |
| --- | --- |

—

Public consultation

Policy implementation and monitoring

| — | Feedback received from policy experts, academia and other stakeholders |
| --- | --- |

—

Feedback received from policy experts, academia and other stakeholders

| — | Studies, evaluations, Eurobarometer surveys |
| --- | --- |

—

Studies, evaluations, Eurobarometer surveys

Source: ECA.

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

| 3.16. | Several Commission DGs have recently implemented new instruments and processes for using performance data. Often, they have introduced new IT applications which generate tailor-made and up-to-date reports to facilitate decision-making. The development of these new tools is evidence of the Commission’s commitment to progress in better managing performance data (17). The following examples illustrate the range of new developments. |
| --- | --- |

3.16.

Several Commission DGs have recently implemented new instruments and processes for using performance data. Often, they have introduced new IT applications which generate tailor-made and up-to-date reports to facilitate decision-making. The development of these new tools is evidence of the Commission’s commitment to progress in better managing performance data (17). The following examples illustrate the range of new developments.

3.16.

| (i) | DG AGRI’s new Rural Development Information System 2 is an IT system which assists in managing the workflow of programmes, including programme evaluation. Reports can be generated to compare the implementation of EU programmes in Member States with the EU average. |
| --- | --- |

(i)

DG AGRI’s new Rural Development Information System 2 is an IT system which assists in managing the workflow of programmes, including programme evaluation. Reports can be generated to compare the implementation of EU programmes in Member States with the EU average.

| (ii) | DG DEVCO is in the process of developing a new IT tool that will include modules for monitoring and reporting results and for supporting action appraisal and financing decision processes. The system should link projects to strategic planning. |
| --- | --- |

(ii)

DG DEVCO is in the process of developing a new IT tool that will include modules for monitoring and reporting results and for supporting action appraisal and financing decision processes. The system should link projects to strategic planning.

| (iii) | DG EAC’s Erasmus+ dashboard is an IT system used by all Erasmus+ national agencies across Europe. It provides real-time performance information from all 57 agencies, including feedback on the results of Erasmus+ via a survey tool which measures participant satisfaction. These features enable DG EAC to obtain rapid feedback on any programme developments and react to them quickly. |
| --- | --- |

(iii)

DG EAC’s Erasmus+ dashboard is an IT system used by all Erasmus+ national agencies across Europe. It provides real-time performance information from all 57 agencies, including feedback on the results of Erasmus+ via a survey tool which measures participant satisfaction. These features enable DG EAC to obtain rapid feedback on any programme developments and react to them quickly.

| (iii) | The dashboard also contains real-time performance data on indirectly managed grant procedures, in line with a grant performance management framework defined in 2017 across all EAC programmes. |
| --- | --- |

(iii)

The dashboard also contains real-time performance data on indirectly managed grant procedures, in line with a grant performance management framework defined in 2017 across all EAC programmes.

There is scope for further developing the performance measurement systems

| 3.17. | In last year's annual report (18), we identified areas of good practice in public performance reporting by governments and international organisations around the world. We suggested that the Commission should consider implementing these good practices itself. We recommended that the Commission should improve its performance reporting by making it more streamlined, balanced, user-friendly and accessible. We also recommended that the Commission should assess the quality of the presented information. The Commission reacted to these recommendations by reflecting them in the instructions for its 2017 AAR. |
| --- | --- |

3.17.

In last year's annual report (18), we identified areas of good practice in public performance reporting by governments and international organisations around the world. We suggested that the Commission should consider implementing these good practices itself. We recommended that the Commission should improve its performance reporting by making it more streamlined, balanced, user-friendly and accessible. We also recommended that the Commission should assess the quality of the presented information. The Commission reacted to these recommendations by reflecting them in the instructions for its 2017 AAR.

| 3.18. | Our survey this year focused on the performance information available to managers (see
  Box 3.4
  ). The survey results indicated that performance measurement systems needed further development. In particular, they confirmed that the timeliness of performance information was an issue (19). The Commission’s central departments have devised extensive instructions, templates, training and exchanges for preparing performance reports (for example, instructions were issued in November 2017 for the 2017 annual activity reports). Nevertheless, the survey results also showed that DGs wished to receive additional guidance on preparing reports. We also noted that the respondents who replied more negatively to these questions typically used performance information less frequently. |
| --- | --- |

3.18.

Our survey this year focused on the performance information available to managers (see
  Box 3.4
  ). The survey results indicated that performance measurement systems needed further development. In particular, they confirmed that the timeliness of performance information was an issue (19). The Commission’s central departments have devised extensive instructions, templates, training and exchanges for preparing performance reports (for example, instructions were issued in November 2017 for the 2017 annual activity reports). Nevertheless, the survey results also showed that DGs wished to receive additional guidance on preparing reports. We also noted that the respondents who replied more negatively to these questions typically used performance information less frequently.

| 3.18. | The Commission recognises that reliable and comprehensive information on the results and impacts of financial programmes and other policy activities only becomes available with significant time lags.

  To the extent possible, the Commission takes account of this in its planning. For example, all Commission Directorates-General plan their evaluation activities with a (minimum) five-year rolling programme, to provide timely performance information for their reporting. The plan needs to be annually updated.


  Regarding the guidance on preparing reports, the central services of the Commission provide extensive guidance on all the preparation of all major performance reports produced by the DGs, taking into account the progress made over the years. This includes the Annual Activity Reports for Commission services and the Programme Statements accompanying the draft budget. Guidance is also provided for evaluations in the Better Regulation Guidelines and toolbox. Other types of reviews are also described. Guidance is also provided centrally to design appropriate performance reporting systems, with the aim of collecting data efficiently for monitoring programme implementation and results, effectively, and in a timely manner. Formal guidance is complemented with training sessions and exchanges of best practices between services. |
| --- | --- |

3.18.

To the extent possible, the Commission takes account of this in its planning. For example, all Commission Directorates-General plan their evaluation activities with a (minimum) five-year rolling programme, to provide timely performance information for their reporting. The plan needs to be annually updated.

Regarding the guidance on preparing reports, the central services of the Commission provide extensive guidance on all the preparation of all major performance reports produced by the DGs, taking into account the progress made over the years. This includes the Annual Activity Reports for Commission services and the Programme Statements accompanying the draft budget. Guidance is also provided for evaluations in the Better Regulation Guidelines and toolbox. Other types of reviews are also described. Guidance is also provided centrally to design appropriate performance reporting systems, with the aim of collecting data efficiently for monitoring programme implementation and results, effectively, and in a timely manner. Formal guidance is complemented with training sessions and exchanges of best practices between services.

Box 3.4 —   Survey results — Performance information framework

Image

Source: ECA survey.

THE COURT’S OBSERVATIONS

Section C — The Commission uses performance information to manage programmes and policies although appropriate action is not always taken when targets are not met

The Commission uses performance information at its disposal to manage its activities

| 3.19. | 56 % of the respondents to our survey said that they used performance information for decision-making either often or very often. The four most frequent uses of performance information were for developing strategies, improving decisions, assessing whether targets were met, and taking corrective action where necessary (20). |
| --- | --- |

3.19.

56 % of the respondents to our survey said that they used performance information for decision-making either often or very often. The four most frequent uses of performance information were for developing strategies, improving decisions, assessing whether targets were met, and taking corrective action where necessary (20).

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

| 3.20. | It is difficult for managers to use performance information to assess how programmes and policies contribute to high-level objectives. Also, managers do not have sole responsibility for performance. This is because the co-legislators and other stakeholders, Member States in particular, play a major role in achieving results and making an impact. In previous years, we have observed (21) that many programme and policy objectives are taken directly from policy or legislative documents, and are thus set at too high a level to be useful as management instruments. We also issued recommendations (22) that the Commission should tackle this. The Commission acknowledged that it was difficult to create links between the abundant information available on projects at the operational level and the high-level policies and decision-making at political level. |
| --- | --- |

3.20.

It is difficult for managers to use performance information to assess how programmes and policies contribute to high-level objectives. Also, managers do not have sole responsibility for performance. This is because the co-legislators and other stakeholders, Member States in particular, play a major role in achieving results and making an impact. In previous years, we have observed (21) that many programme and policy objectives are taken directly from policy or legislative documents, and are thus set at too high a level to be useful as management instruments. We also issued recommendations (22) that the Commission should tackle this. The Commission acknowledged that it was difficult to create links between the abundant information available on projects at the operational level and the high-level policies and decision-making at political level.

| 3.20. | The Commission considers it important to draw a clear distinction between the internal performance framework for the Commission services, and the performance frameworks in financial programmes.

  Objectives and indicators contained in financial programmes are the product of the legislative process. They relate to the performance of programmes, not of the Commission services. The Commission has made proposals to strengthen the performance frameworks in financial programmes as part of the proposals for the future Multiannual Financial Framework.


  Concerning Horizon 2020, see the reply of the Commission to the Recommendation 1 in the 2015 ECA’s annual report.


  Concerning the Commission’s ability to monitor and report against Europe 2020, see the reply of the Commission to paragraph 3.97 in the 2014 ECA annual report.


  The link between objectives and related indicators in a wider policy perspective is presented in the Programme Statements. |
| --- | --- |

3.20.

Objectives and indicators contained in financial programmes are the product of the legislative process. They relate to the performance of programmes, not of the Commission services. The Commission has made proposals to strengthen the performance frameworks in financial programmes as part of the proposals for the future Multiannual Financial Framework.

Concerning Horizon 2020, see the reply of the Commission to the Recommendation 1 in the 2015 ECA’s annual report.

Concerning the Commission’s ability to monitor and report against Europe 2020, see the reply of the Commission to paragraph 3.97 in the 2014 ECA annual report.

The link between objectives and related indicators in a wider policy perspective is presented in the Programme Statements.

| 3.21. | Every year, the Commission uses three core reporting tools — the annual activity reports (AARs), programme statements (PSs), and the annual management and performance report (AMPR) — to give an account of its operational performance and the performance of EU programmes and policies. As illustrated in
  Box 3.5
  below, a number of planning documents are the basis for the reporting in these three core reports (23). |
| --- | --- |

3.21.

Every year, the Commission uses three core reporting tools — the annual activity reports (AARs), programme statements (PSs), and the annual management and performance report (AMPR) — to give an account of its operational performance and the performance of EU programmes and policies. As illustrated in
  Box 3.5
  below, a number of planning documents are the basis for the reporting in these three core reports (23).

| 3.21. | The Commission notes that the three reports mentioned here, which are produced in accordance with the relevant legal obligations, are only a subset of the Commission’s extensive reporting on the performance of EU policies and the delivery of the political priorities. The Annual Management and Performance Report and the Programme Statements relate primarily to the performance and management of the EU budget. |
| --- | --- |

3.21.

Box 3.5 –   Core performance reports produced by the Commission and its DGs
   (24)

Image

Source: ECA.

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

| 3.22. | The three reports cover the EU's entire budget, and all of its policy activities.
  Box 3.6
  gives a summary of the reports’ intended audience and use. |
| --- | --- |

3.22.

The three reports cover the EU's entire budget, and all of its policy activities.
  Box 3.6
  gives a summary of the reports’ intended audience and use.

| 3.22. | See the Commission reply to paragraph 3.23. |
| --- | --- |

3.22.

Box 3.6 —   Intended audience and use of the core performance reports

| | Who is the intended audience? | How is the report to be used? |
| --- | --- | --- |
| PS | The document is submitted to the Budgetary Authority (European Parliament and Council) as a supplement to the draft general budget | The role of the programme statements is to substantiate budget allocations requests for spending programmes by giving an account of the programmes' performance, EU added value and implementation rate (present and future). |
| AAR | College of Commissioners | The AAR is a management report of the Directors-General of the DGs to the College of Commissioners. It is ‘the main instrument of management accountability within the Commission’ (see 2017 AAR Instructions). |
| AMPR | The report is submitted to the European Parliament and to the Council, in accordance with Article 318 of the TFEU and Article 66(9) of the Financial Regulation | The AMPR (61) is an accountability tool in the discharge procedure with the Discharge Authority: by adopting it, the College of Commissioners takes overall political responsibility for the management of the EU budget. |
| Source: ECA. |

Who is the intended audience?

How is the report to be used?

PS

The document is submitted to the Budgetary Authority (European Parliament and Council) as a supplement to the draft general budget

The role of the programme statements is to substantiate budget allocations requests for spending programmes by giving an account of the programmes' performance, EU added value and implementation rate (present and future).

AAR

College of Commissioners

The AAR is a management report of the Directors-General of the DGs to the College of Commissioners. It is ‘the main instrument of management accountability within the Commission’ (see 2017 AAR Instructions).

AMPR

The report is submitted to the European Parliament and to the Council, in accordance with Article 318 of the TFEU and Article 66(9) of the Financial Regulation

The AMPR (61) is an accountability tool in the discharge procedure with the Discharge Authority: by adopting it, the College of Commissioners takes overall political responsibility for the management of the EU budget.

Source: ECA.

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

| 3.23. | Core performance reports are intended more as reporting tools than as instruments for Commission DGs to manage their own performance, or the performance of the Commission as a whole. This is because the reports are not detailed or comprehensive enough; they are only drawn up once a year; and they are mainly intended for readers external to the DG. |
| --- | --- |

3.23.

Core performance reports are intended more as reporting tools than as instruments for Commission DGs to manage their own performance, or the performance of the Commission as a whole. This is because the reports are not detailed or comprehensive enough; they are only drawn up once a year; and they are mainly intended for readers external to the DG.

| 3.23. | The Annual Management and Performance Report for the EU budget is part of the Commission’s contribution to the annual budgetary discharge process. It takes into account all relevant information and not only yearly results, for instance mid-term evaluations.

  The Annual Activity Report is a management report of the Directors-General and Heads of Services to the College of Commissioners. It is the main instrument of management accountability within the Commission and is detailed and comprehensive. It includes reporting on all indicators chosen by the Commission services in their strategic plans for the 2016-2020 period, as key for measuring the performance of the Commission services and their contribution to the political priorities of the Juncker Commission.


  The Annual Activity Report is therefore intended both for an external audience and as a source of management information for Commission managers. The Commission also notes that many key indicators are updated and reported more regularly, for example those relating to the Europe 2020 headline targets. Commission services are encouraged to monitor progress towards their objectives regularly, including for example in the context of mid-year reviews of their management plans. |
| --- | --- |

3.23.

The Annual Activity Report is a management report of the Directors-General and Heads of Services to the College of Commissioners. It is the main instrument of management accountability within the Commission and is detailed and comprehensive. It includes reporting on all indicators chosen by the Commission services in their strategic plans for the 2016-2020 period, as key for measuring the performance of the Commission services and their contribution to the political priorities of the Juncker Commission.

The Annual Activity Report is therefore intended both for an external audience and as a source of management information for Commission managers. The Commission also notes that many key indicators are updated and reported more regularly, for example those relating to the Europe 2020 headline targets. Commission services are encouraged to monitor progress towards their objectives regularly, including for example in the context of mid-year reviews of their management plans.

| 3.24. | There are, however, some instances where core performance reports (and particularly annual activity reports) have a use for managing performance.






  (i) | DG DEVCO takes advantage of the public nature of the annual activity report to bring about organisational changes. It reports comparative information on the performance of delegations in partner countries (25) to motivate those delegations to perform better. |
| --- | --- | --- |

3.24.

There are, however, some instances where core performance reports (and particularly annual activity reports) have a use for managing performance.

(i)

DG DEVCO takes advantage of the public nature of the annual activity report to bring about organisational changes. It reports comparative information on the performance of delegations in partner countries (25) to motivate those delegations to perform better.

| (ii) | Although the declared purpose of the annual activity report is to provide accountability, DG CNECT and DG EMPL have also used it as a tool allowing senior management to monitor work programme delivery (26). DG EMPL regards the preparation of the AAR as an opportunity to check whether everything has gone according to plan and if not, to identify reasons and discuss remedies. |
| --- | --- |

(ii)

Although the declared purpose of the annual activity report is to provide accountability, DG CNECT and DG EMPL have also used it as a tool allowing senior management to monitor work programme delivery (26). DG EMPL regards the preparation of the AAR as an opportunity to check whether everything has gone according to plan and if not, to identify reasons and discuss remedies.

| 3.24. | See the Commission reply to paragraph 3.23. |
| --- | --- |

3.24.

| 3.25. | The annual activity reports are publicly accessible documents, but the Commission has not assessed how successfully they target citizens. However, the number of individuals visiting the Europa website (27) suggests that citizen interest is low. |
| --- | --- |

3.25.

The annual activity reports are publicly accessible documents, but the Commission has not assessed how successfully they target citizens. However, the number of individuals visiting the Europa website (27) suggests that citizen interest is low.

| 3.25. | See the Commission reply to paragraph 3.23. |
| --- | --- |

3.25.

Corrective action is not always taken when targets are not met

| 3.26. | One of the main purposes of using performance information is to measure progress towards meeting targets in order to take corrective action and, ultimately, to achieve results. Knowing that poor performance will have consequences should be a motivation for managers to use performance information. Our survey of managers included a question about what happens, in the respondents' experience, if performance targets, in relation to spending programmes or policies, are met (see
  Box 3.7
  ) or not met (see
  Box 3.8
  ). The survey results indicate that poor performance does not lead to corrective action: in all cases: one fifth of respondents stated that no changes were made when targets were not met. The development of action plans is the most frequent type of decision taken. Next most frequent is further analysis, either in the form of enhanced monitoring or of an additional evaluation. However, such measures do not in themselves correct the identified issues. We observed that not meeting a target was more likely to have consequences in DGs where performance information was used frequently. |
| --- | --- |

3.26.

One of the main purposes of using performance information is to measure progress towards meeting targets in order to take corrective action and, ultimately, to achieve results. Knowing that poor performance will have consequences should be a motivation for managers to use performance information. Our survey of managers included a question about what happens, in the respondents' experience, if performance targets, in relation to spending programmes or policies, are met (see
  Box 3.7
  ) or not met (see
  Box 3.8
  ). The survey results indicate that poor performance does not lead to corrective action: in all cases: one fifth of respondents stated that no changes were made when targets were not met. The development of action plans is the most frequent type of decision taken. Next most frequent is further analysis, either in the form of enhanced monitoring or of an additional evaluation. However, such measures do not in themselves correct the identified issues. We observed that not meeting a target was more likely to have consequences in DGs where performance information was used frequently.

| 3.26. | The purpose of using performance information is to monitor performance and to measure the distance between the intended target and the reality and make the necessary adjustments. This would typically be based on a broader assessment of the underlying reasons for why performance has deviated from the target.

  As the ECA points out, more than 70 % of respondents indicated that if targets are not met, action plans are developed and more intense monitoring is carried out and more than 60 % of respondents replied that evaluation is carried out if targets are not met.


  The Commission also notes that in relation to the management of the EU budget, the Commission faces a number of constraints flowing from the Multiannual Financial Framework and the decisions taken by the budgetary authority on the annual budget. |
| --- | --- |

3.26.

As the ECA points out, more than 70 % of respondents indicated that if targets are not met, action plans are developed and more intense monitoring is carried out and more than 60 % of respondents replied that evaluation is carried out if targets are not met.

The Commission also notes that in relation to the management of the EU budget, the Commission faces a number of constraints flowing from the Multiannual Financial Framework and the decisions taken by the budgetary authority on the annual budget.

Box 3.7 —   What happens if targets are met or exceeded?

Image

Source: ECA survey.

Box 3.8 —   What happens if targets are not met?

Image

Source: ECA survey.

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

Section D — The Commission does not generally explain the use of performance information in its performance reports

| 3.27. | In the interests of transparency and accountability, stakeholders must be able to see in the core performance reports how the Commission uses the performance information available to it (28). In its performance reports, the Commission aims to present a coherent ‘performance story’ (29) on progress made towards achieving results. These stories are more credible if they are based on substantive evidence. They need to explain not only what decisions were made, but also how those decisions reflected available performance information. |
| --- | --- |

3.27.

In the interests of transparency and accountability, stakeholders must be able to see in the core performance reports how the Commission uses the performance information available to it (28). In its performance reports, the Commission aims to present a coherent ‘performance story’ (29) on progress made towards achieving results. These stories are more credible if they are based on substantive evidence. They need to explain not only what decisions were made, but also how those decisions reflected available performance information.

| 3.27. | The Commission agrees that reporting on performance must be based on substantive evidence and includes this evidence in its performance reports. |
| --- | --- |

3.27.

| 3.28. | The Commission’s central departments provide instructions to the DGs for preparing strategic plans, management plans and annual activity reports. While the instructions require the DGs to present performance information when reporting on their activities, DGs are not required to explain how the information was used to improve those activities. |
| --- | --- |

3.28.

The Commission’s central departments provide instructions to the DGs for preparing strategic plans, management plans and annual activity reports. While the instructions require the DGs to present performance information when reporting on their activities, DGs are not required to explain how the information was used to improve those activities.

| 3.28. | By contributing to multi-annual objectives with multi-annual targets set in the strategic plans, the information presented in the Annual Activity Reports represent a stage of monitoring, which is then used as a basis for presenting outputs for the year ahead in the management plans, contributing from that stage onwards to the achievement of the specific objectives. |
| --- | --- |

3.28.

| 3.29. | DGs mention that they use performance information in their reports but without providing further explanations. |
| --- | --- |

3.29.

DGs mention that they use performance information in their reports but without providing further explanations.

3.29.

| (i) | DG AGRI's performance reports (30) describe in general principles how performance information is used to support decision-making (31). Nonetheless, the reports give few specific examples to illustrate how this works in practice. |
| --- | --- |

(i)

DG AGRI's performance reports (30) describe in general principles how performance information is used to support decision-making (31). Nonetheless, the reports give few specific examples to illustrate how this works in practice.

| (i) | The 2016 Annual Activity Report of DG AGRI includes several concrete cases that illustrate how performance information is used to support decision making.

  In its 2016 AAR DG AGRI specifies that the first key performance indicator of the CAP is agriculture factor income (see page 15). It further spells out the price pressure in the dairy sector and the two assistance packages adopted in response (see pages 21-22).
  The same AAR displays on page 25-26 the broadband gap of rural areas and the response taken by setting up Broadband Competence Offices.
  With regard to the implementation of greening, DG AGRI carried out a review of how the system had been applied in its first year. This review identified weaknesses that held the system back from achieving its full potential. DG AGRI proposed improvements to the relevant regulation (see pages 32-33 of the 2016 AAR). |
| --- | --- |

(i)

The 2016 Annual Activity Report of DG AGRI includes several concrete cases that illustrate how performance information is used to support decision making.

| (ii) | In its 2016 annual activity report, DG CNECT stated that the preparation of the 2016-2020 eGovernment Action Plan ‘has greatly benefited from the evaluation results of the previous Action Plan 2011-15’ (32). No clear explanation is given of how these results affected the new action plan. |
| --- | --- |

(ii)

In its 2016 annual activity report, DG CNECT stated that the preparation of the 2016-2020 eGovernment Action Plan ‘has greatly benefited from the evaluation results of the previous Action Plan 2011-15’ (32). No clear explanation is given of how these results affected the new action plan.

| (ii) | The Annual Activity Report provides a summary of the year’s activities. It would not be appropriate to describe in detail how individual policy decisions have been developed in this report. Services are encouraged to provide links to where more detailed information can be found — in this case in the relevant evaluation. |
| --- | --- |

(ii)

The Annual Activity Report provides a summary of the year’s activities. It would not be appropriate to describe in detail how individual policy decisions have been developed in this report. Services are encouraged to provide links to where more detailed information can be found — in this case in the relevant evaluation.

| 3.30. | The Commission’s annual report on spending programmes (33) includes a section on ‘programme updates’, which has a sub-section on ‘forthcoming implementation’ (34). The plans contained in this section occasionally include general statements about performance as justification. But there is no explanation of how specific feedback on the existing situation was used in drawing up the plans. For example, the planning for the future implementation of Horizon 2020 is called an ‘evidence-based process
   (35)’ because it ‘included extensive consultation with stakeholders’. However, no details are given about any changes made as a result of the consultation. |
| --- | --- |

3.30.

The Commission’s annual report on spending programmes (33) includes a section on ‘programme updates’, which has a sub-section on ‘forthcoming implementation’ (34). The plans contained in this section occasionally include general statements about performance as justification. But there is no explanation of how specific feedback on the existing situation was used in drawing up the plans. For example, the planning for the future implementation of Horizon 2020 is called an ‘evidence-based process
   (35)’ because it ‘included extensive consultation with stakeholders’. However, no details are given about any changes made as a result of the consultation.

| 3.30. | The section on forthcoming implementation is intended to provide a view on future activities to be implemented and their expected outputs/results.

  It is meant to provide a picture on expected relevant developments and is not a planning instrument in itself. |
| --- | --- |

3.30.

It is meant to provide a picture on expected relevant developments and is not a planning instrument in itself.

| 3.31. | We however noted some good practices in our review of performance reports. For example, DG EAC has made it an explicit part of its strategy to use performance information for policy-making and for formulating investment strategies (36). In its 2016-2020 strategic plan, DG EAC highlights the link between indicators and evaluation results to back up its policy strategy and the amount of EU funding which it plans to deploy until 2020 (37). When describing the evaluations it plans to perform, DG EAC also outlines how those evaluations will be used for four out of eight planned evaluations in the 2016-2020 Strategic Plan. |
| --- | --- |

3.31.

We however noted some good practices in our review of performance reports. For example, DG EAC has made it an explicit part of its strategy to use performance information for policy-making and for formulating investment strategies (36). In its 2016-2020 strategic plan, DG EAC highlights the link between indicators and evaluation results to back up its policy strategy and the amount of EU funding which it plans to deploy until 2020 (37). When describing the evaluations it plans to perform, DG EAC also outlines how those evaluations will be used for four out of eight planned evaluations in the 2016-2020 Strategic Plan.

Section E — Further progress is expected from a continued development in performance culture

| 3.32. | The Commission is pursuing opportunities to become more performance-driven. |
| --- | --- |

3.32.

The Commission is pursuing opportunities to become more performance-driven.

3.32.

| (i) | It proposed a revised Financial Regulation setting the ground for further simplification, and allowing payments to depend more directly on results (38). |
| --- | --- |

(i)

It proposed a revised Financial Regulation setting the ground for further simplification, and allowing payments to depend more directly on results (38).

| (ii) | It carried out a comprehensive spending review for the first time, taking into account EU added value (39). |
| --- | --- |

(ii)

It carried out a comprehensive spending review for the first time, taking into account EU added value (39).

| (iii) | The Commission has recognised that there are too many performance indicators (40), and that some of them are not meaningful. It has therefore begun reviewing its performance indicators. Result indicators in particular are being reviewed to ensure that they measure results that are within DGs' control. |
| --- | --- |

(iii)

The Commission has recognised that there are too many performance indicators (40), and that some of them are not meaningful. It has therefore begun reviewing its performance indicators. Result indicators in particular are being reviewed to ensure that they measure results that are within DGs' control.

| (iii) | Please see the Commission reply to paragraph 3.20. The Commission conducted a comprehensive review of the objectives and indicators used by Commission services as part of the reform of the strategic and management plans. |
| --- | --- |

(iii)

Please see the Commission reply to paragraph 3.20. The Commission conducted a comprehensive review of the objectives and indicators used by Commission services as part of the reform of the strategic and management plans.

| (iv) | Some DGs, such as DEVCO, are attempting to move from result reporting for completed projects into such reporting for on-going projects. |
| --- | --- |

(iv)

Some DGs, such as DEVCO, are attempting to move from result reporting for completed projects into such reporting for on-going projects.

| (v) | The Commission and the budgetary authority will potentially benefit from the ‘Budget Focused On Results’ initiative. |
| --- | --- |

(v)

The Commission and the budgetary authority will potentially benefit from the ‘Budget Focused On Results’ initiative.

| 3.33. | In our meetings with DGs, our interviewees highlighted various challenges (
  Box 3.9
  ). A number of these challenges were were also mentioned in OECD and Commission reports (41)
   (42). |
| --- | --- |

3.33.

In our meetings with DGs, our interviewees highlighted various challenges (
  Box 3.9
  ). A number of these challenges were were also mentioned in OECD and Commission reports (41)
   (42).

Box 3.9 —   Challenges for using performance information referred to by the six DGs interviewed

Image

Source: ECA.

THE COURT’S OBSERVATIONS

| 3.34. | Our survey included questions on attitudes to performance (see
  Box 3.10
  ). Although the overall results were positive, respondents' opinions varied widely. The respondents giving negative replies generally used performance information less frequently. We also noted that senior managers used performance information no more frequently than heads of unit did. |
| --- | --- |

3.34.

Our survey included questions on attitudes to performance (see
  Box 3.10
  ). Although the overall results were positive, respondents' opinions varied widely. The respondents giving negative replies generally used performance information less frequently. We also noted that senior managers used performance information no more frequently than heads of unit did.

| 3.35. | Furthermore, the results of our survey suggested a strong need for more training on the use of performance information, and better sharing of knowledge about good practices. The DGs we interviewed told us about a number of good practices. In our opinion, these good practices could be shared with other DGs. We also noted some differences in perception. We asked our interviewees whether they agreed that managers, and staff, had a significant role to play in developing performance measures. Of the senior managers we interviewed, 80 % agreed that managers played such a role, and 84 % agreed that staff did. When we asked heads of unit the same question, only 52 % agreed that managers played an important role, and 53 % agreed that staff did. This suggests that the Commission’s senior managers have a more positive view of attitudes to performance at the Commission than middle managers do. |
| --- | --- |

3.35.

Furthermore, the results of our survey suggested a strong need for more training on the use of performance information, and better sharing of knowledge about good practices. The DGs we interviewed told us about a number of good practices. In our opinion, these good practices could be shared with other DGs. We also noted some differences in perception. We asked our interviewees whether they agreed that managers, and staff, had a significant role to play in developing performance measures. Of the senior managers we interviewed, 80 % agreed that managers played such a role, and 84 % agreed that staff did. When we asked heads of unit the same question, only 52 % agreed that managers played an important role, and 53 % agreed that staff did. This suggests that the Commission’s senior managers have a more positive view of attitudes to performance at the Commission than middle managers do.

Box 3.10 —   Survey results — Performance culture

Image

Source: ECA survey.

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

| 3.36. | The replies to our survey mentioned a number of opportunities for progress in terms of using performance information (see
  Box 3.11
  ). Respondents most frequently emphasised the Commission’s need to change its culture to become more performance-driven. They stated that the Commission should focus less on monitoring the absorption of funds and assessing the regularity of expenditure (since the overall error rate affecting the EU budget is declining each year). Instead, it should use performance management techniques more widely, with a focus on achieving planned results and impacts (43). |
| --- | --- |

3.36.

The replies to our survey mentioned a number of opportunities for progress in terms of using performance information (see
  Box 3.11
  ). Respondents most frequently emphasised the Commission’s need to change its culture to become more performance-driven. They stated that the Commission should focus less on monitoring the absorption of funds and assessing the regularity of expenditure (since the overall error rate affecting the EU budget is declining each year). Instead, it should use performance management techniques more widely, with a focus on achieving planned results and impacts (43).

| 3.36. | Concerning the issue of cultural change, the Commission considers that it already has a very well embedded performance culture in its services: in 2017, the OECD found that ‘The EU system of budgeting for performance and results is advanced and highly specified, scoring more highly than any OECD country in the standard index of performance budgeting frameworks. [...] EU budgetary practices include many effective and innovative aspects, which may hold lessons for national governments in reflecting on their own agendas of performance-focused budgetary reform.’ It also found that ‘More generally, the Commission has undertaken extensive streamlining of its reporting in recent years, yielding clearer insights on performance and results including via the new Annual Management and Performance Report (AMPR) ....’ (44).

  The Commission would also point to the examples highlighted in paragraph 3.32 above of the steps the Commission has taken to reinforce the performance culture. |
| --- | --- |

3.36.

The Commission would also point to the examples highlighted in paragraph 3.32 above of the steps the Commission has taken to reinforce the performance culture.

Box 3.11 —   Last survey question: ‘What would you change so that performance information is better used in your DG?’

Image

Source: ECA survey.

THE COURT’S OBSERVATIONS

PART 2 — RESULTS OF THE COURT’S PERFORMANCE AUDITS: CONCLUSIONS AND RECOMMENDATIONS WITH THE GREATEST IMPACT

Introduction

| 3.37. | Each year, we publish a number of special reports in which we examine how well the principles of sound financial management have been applied in implementing the EU budget. In 2017, we adopted 27 special reports (45) (see
  Box 3.12
  ). They covered all multiannual financial framework headings (46) and contained a total of 238 recommendations covering a wide range of topics (
  Box 3.13
  ). We also published four special reports in the area of ‘Functioning Single Market and Sustainable Monetary Union’. The published replies to our reports show that more than two thirds of our recommendations were fully accepted by the auditee, which was the Commission in most cases (
  Box 3.14
  ).
  Annex 3.3
  is a summary of the recommendations addressed to Member States in our 2017 special reports. |
| --- | --- |

3.37.

Each year, we publish a number of special reports in which we examine how well the principles of sound financial management have been applied in implementing the EU budget. In 2017, we adopted 27 special reports (45) (see
  Box 3.12
  ). They covered all multiannual financial framework headings (46) and contained a total of 238 recommendations covering a wide range of topics (
  Box 3.13
  ). We also published four special reports in the area of ‘Functioning Single Market and Sustainable Monetary Union’. The published replies to our reports show that more than two thirds of our recommendations were fully accepted by the auditee, which was the Commission in most cases (
  Box 3.14
  ).
  Annex 3.3
  is a summary of the recommendations addressed to Member States in our 2017 special reports.

Box 3.12 —   A significant number of special reports assessing the implementation of the principles of sound financial management

Image

Source: ECA.

Box 3.13 —   Recommendations cover a wide range of topics

Image

Source: ECA.

Box 3.14 —   Our auditees accept the vast majority of our recommendations

Image

Source: ECA.

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

Headings 1a ‘Competitiveness for growth and jobs’ and 1b ‘Economic, social and territorial cohesion’

| 3.38. | In 2017, we adopted seven special reports for these multiannual financial framework headings (47). We wish to draw attention to some key conclusions and recommendations for three of these reports. |
| --- | --- |

3.38.

In 2017, we adopted seven special reports for these multiannual financial framework headings (47). We wish to draw attention to some key conclusions and recommendations for three of these reports.

Special report No 2/2017 — The Commission’s negotiation of 2014-2020 Partnership Agreements and programmes in Cohesion

| 3.39. | We found that partnership agreements had been effective in focusing funding on the EU 2020 strategy, and that the operational programmes had a robust ‘intervention logic’. However, programme-specific and common indicators had been set for both output and results. This had created an excessive number of indicators, which risked an additional administrative burden and problems with aggregation at national and EU level. |
| --- | --- |

3.39.

We found that partnership agreements had been effective in focusing funding on the EU 2020 strategy, and that the operational programmes had a robust ‘intervention logic’. However, programme-specific and common indicators had been set for both output and results. This had created an excessive number of indicators, which risked an additional administrative burden and problems with aggregation at national and EU level.

| 3.39. | The Commission notes that programme specific performance indicators for results are not intended to be aggregated at EU level. Those specific indicators are suited for target setting and reporting on performance in relation to the targets, while common indicators allow reporting on achievements based on pre-defined categories that reflect frequently used investments across the EU. Programme-specific output indicators refer to the physical products that allow grasping the changes achieved by the EU-funded interventions in programmes. These interventions are tailor-made to resolve place-based development bottlenecks. By definition, these need to be specific to the region and action foreseen. |
| --- | --- |

3.39.

| 3.40. | We recommended that: |
| --- | --- |

3.40.

We recommended that:

3.40.

| — | Member States should discontinue the use of unnecessary programme specific indicators; and that |
| --- | --- |

—

Member States should discontinue the use of unnecessary programme specific indicators; and that

| — | the Commission should define a common terminology for ‘outputs’ and ‘results’ and propose it for inclusion in the Financial Regulation, determine the most relevant output and result indicators for performance measurement, and apply performance budgeting. |
| --- | --- |

—

the Commission should define a common terminology for ‘outputs’ and ‘results’ and propose it for inclusion in the Financial Regulation, determine the most relevant output and result indicators for performance measurement, and apply performance budgeting.

| — | A coherent performance terminology is included in the revised Financial Regulation. The definition of output and result indicators is now reflected in the Commission’s proposal for a Common Provisions Regulation for the post-2020 programming period (COM(2018) 375 final). The Commission’s proposal for a Regulation on the European Regional Development Fund and on the Cohesion Fund for the post-2020 programming period (COM(2018) 372 final) includes a list of common output and result indicators. This list of common indicators is more extensive than the one for the 2014-2020 period, which is expected to help reducing the number of the programme specific indicators.


  Regarding the concept of performance budget, the Commission notes that the EU Budget is already a performance budget which enables the budgetary authority to take performance information into account during the budgetary process by providing information on the objectives of the programmes and the progress in achieving them in the Programme Statements attached to the Draft Budget. |
| --- | --- |

—

A coherent performance terminology is included in the revised Financial Regulation. The definition of output and result indicators is now reflected in the Commission’s proposal for a Common Provisions Regulation for the post-2020 programming period (COM(2018) 375 final). The Commission’s proposal for a Regulation on the European Regional Development Fund and on the Cohesion Fund for the post-2020 programming period (COM(2018) 372 final) includes a list of common output and result indicators. This list of common indicators is more extensive than the one for the 2014-2020 period, which is expected to help reducing the number of the programme specific indicators.

Regarding the concept of performance budget, the Commission notes that the EU Budget is already a performance budget which enables the budgetary authority to take performance information into account during the budgetary process by providing information on the objectives of the programmes and the progress in achieving them in the Programme Statements attached to the Draft Budget.

Special report No 5/2017 — Youth unemployment

| 3.41. | We found that, while some progress had been made in implementing the Youth Guarantee, and while some results had been achieved, the situation fell short of the initial expectations raised at the launch of the Youth Guarantee, the aim of which was to provide all young people not in employment, education or training with a good-quality offer of employment, continued education, apprenticeship or traineeship within four months of leaving school or becoming unemployed. We found that the contribution of the Youth Employment Initiative to the achievement of the Youth Guarantee objectives was very limited at the time of the audit. |
| --- | --- |

3.41.

We found that, while some progress had been made in implementing the Youth Guarantee, and while some results had been achieved, the situation fell short of the initial expectations raised at the launch of the Youth Guarantee, the aim of which was to provide all young people not in employment, education or training with a good-quality offer of employment, continued education, apprenticeship or traineeship within four months of leaving school or becoming unemployed. We found that the contribution of the Youth Employment Initiative to the achievement of the Youth Guarantee objectives was very limited at the time of the audit.

| 3.41. | Since 2014, when implementation started on the ground, each year there were more than 5 million registrations in the Youth Guarantee and each year since 2014 there were more than 3,5  million exits to employment, education, traineeship or apprenticeship (source: DG EMPL Youth Guarantee database). There are now 2,2  million fewer unemployed young people and 1,4  million fewer young people not in employment, education or training (source: Eurostat). YEI-funded actions will continue to run at least until 2023 and support more young people NEET.

  To ensure that young people living in Member States struggling with youth unemployment may continue to receive support, the proposal of the Commission for the European Social Fund Plus (ESF+) for 2021-2027 requires that Member States facing high rates of young people not in employment, education and training (NEET) allocate at least 10 % of their ESF+ resources to youth employment actions. The proposal draws lessons from 2014-2020 and also simplifies some of the requirements with a view to facilitating the roll-out of measures which are key for the implementation of the Youth Guarantee. |
| --- | --- |

3.41.

To ensure that young people living in Member States struggling with youth unemployment may continue to receive support, the proposal of the Commission for the European Social Fund Plus (ESF+) for 2021-2027 requires that Member States facing high rates of young people not in employment, education and training (NEET) allocate at least 10 % of their ESF+ resources to youth employment actions. The proposal draws lessons from 2014-2020 and also simplifies some of the requirements with a view to facilitating the roll-out of measures which are key for the implementation of the Youth Guarantee.

| 3.42. | We recommended, in particular, that the Member States should: |
| --- | --- |

3.42.

We recommended, in particular, that the Member States should:

3.42.

| — | produce a complete overview of the cost of implementing the Youth Guarantee for the entire young people not in employment, education or training population, and prioritise measures to be implemented according to available financing; |
| --- | --- |

—

produce a complete overview of the cost of implementing the Youth Guarantee for the entire young people not in employment, education or training population, and prioritise measures to be implemented according to available financing;

| — | The Commission notes that the recommendation is primarily addressed to Member States.


  The Commission would indeed welcome a better overview of the estimated cost of all planned measures to implement the Youth Guarantee and will wherever possible and upon request of the Member States, support Member States in this process. |
| --- | --- |

—

The Commission notes that the recommendation is primarily addressed to Member States.

The Commission would indeed welcome a better overview of the estimated cost of all planned measures to implement the Youth Guarantee and will wherever possible and upon request of the Member States, support Member States in this process.

| — | ensure that offers are only considered to be of good quality if they match the participant’s profile and labour market demand and lead to sustainable integration in the labour market. |
| --- | --- |

—

ensure that offers are only considered to be of good quality if they match the participant’s profile and labour market demand and lead to sustainable integration in the labour market.

| — | The Commission notes that the recommendation is addressed to Member States.


  The Commission will explore the possibility of discussing standards for quality criteria in the context of the work on Youth Guarantee monitoring in EMCO. |
| --- | --- |

—

The Commission notes that the recommendation is addressed to Member States.

The Commission will explore the possibility of discussing standards for quality criteria in the context of the work on Youth Guarantee monitoring in EMCO.

Special report No 15/2017 — Ex ante conditionalities and performance reserve in Cohesion

| 3.43. | In this special report, we found that that ex-ante conditionalities provided a consistent framework for assessing the Member States’ readiness to implement EU funds at the start of the 2014-2020 programme period. However, the extent to which this had led to changes on the ground was unclear. We concluded that the performance framework and reserve was unlikely to trigger a significant reallocation of Cohesion spending during the 2014-2020 period to better-performing programmes. |
| --- | --- |

3.43.

In this special report, we found that that ex-ante conditionalities provided a consistent framework for assessing the Member States’ readiness to implement EU funds at the start of the 2014-2020 programme period. However, the extent to which this had led to changes on the ground was unclear. We concluded that the performance framework and reserve was unlikely to trigger a significant reallocation of Cohesion spending during the 2014-2020 period to better-performing programmes.

| 3.43. | The Commission considers that in relation to the changes on the ground caused by ex ante conditionalities, the mere fact of imposing minimum conditions which had not existed in any of the former cohesion policy frameworks, should improve effectiveness and efficiency of spending.

  The Commission will be able to assess the final impact of ex ante conditionalities after the projects programmes are implemented.


  Moreover, the performance framework is just one of several elements of the result orientation. The performance framework and performance reserve were established to support the focus on performance and the attainment of the objectives of the Union's strategy for smart, sustainable and inclusive growth. They were not designed to result in significant reallocation of Cohesion spending. Nonetheless, if programmes fail to achieve the milestones set in the performance framework, the performance reserve may be reallocated to other, better performing programmes. |
| --- | --- |

3.43.

The Commission will be able to assess the final impact of ex ante conditionalities after the projects programmes are implemented.

Moreover, the performance framework is just one of several elements of the result orientation. The performance framework and performance reserve were established to support the focus on performance and the attainment of the objectives of the Union's strategy for smart, sustainable and inclusive growth. They were not designed to result in significant reallocation of Cohesion spending. Nonetheless, if programmes fail to achieve the milestones set in the performance framework, the performance reserve may be reallocated to other, better performing programmes.

| 3.44. | We recommended that the Commission should: |
| --- | --- |

3.44.

We recommended that the Commission should:

3.44.

| — | further develop ex-ante conditionalities as an instrument to assess Member States’ readiness to implement EU funds; and |
| --- | --- |

—

further develop ex-ante conditionalities as an instrument to assess Member States’ readiness to implement EU funds; and

| — | The Commission accepted the recommendation under the condition that ex ante conditionalities are maintained for post-2020. |
| --- | --- |

—

The Commission accepted the recommendation under the condition that ex ante conditionalities are maintained for post-2020.

| — | turn the performance reserve for the post-2020 period into a more results-oriented instrument that allocates funds to those programmes that achieved good results. |
| --- | --- |

—

turn the performance reserve for the post-2020 period into a more results-oriented instrument that allocates funds to those programmes that achieved good results.

| — | The Commission accepted the recommendation under the condition that the performance framework and reserve are maintained for post-2020.


  The Commission’s proposal for a Common Provisions Regulation for the post-2020 programming period (COM(2018) 375 final) lays down the provisions for the performance framework which consists of both output and result indicators for which milestones and targets need to set. The performance review is replaced by the mid-term review which shall be based, among others, on the progress in achieving — by end 2024 — the milestones of the performance framework. |
| --- | --- |

—

The Commission accepted the recommendation under the condition that the performance framework and reserve are maintained for post-2020.

The Commission’s proposal for a Common Provisions Regulation for the post-2020 programming period (COM(2018) 375 final) lays down the provisions for the performance framework which consists of both output and result indicators for which milestones and targets need to set. The performance review is replaced by the mid-term review which shall be based, among others, on the progress in achieving — by end 2024 — the milestones of the performance framework.

Heading 2 ‘Sustainable growth and natural resources’

| 3.45. | In 2017, we adopted six special reports linked to multiannual financial framework heading 2 (48). Three of these reports examined aspects of the performance of the Common Agricultural Policy. Their conclusions are particularly relevant in the context of the ongoing Common Agricultural Policy reform and the new performance-based delivery model announced in the Commission’s ‘Communication on the Future of Food and Farming’. |
| --- | --- |

3.45.

In 2017, we adopted six special reports linked to multiannual financial framework heading 2 (48). Three of these reports examined aspects of the performance of the Common Agricultural Policy. Their conclusions are particularly relevant in the context of the ongoing Common Agricultural Policy reform and the new performance-based delivery model announced in the Commission’s ‘Communication on the Future of Food and Farming’.

Special report No 16/2017 — Rural development programming

| 3.46. | In this special report, we noted that, in the current period, rural development spending was to be focused more on results, but that this ambition had not been achieved due to a lack of relevant performance information. We recommended that a common set of result-oriented indicators be developed, and that these should be suitable for assessing the results and the impact of rural development interventions. |
| --- | --- |

3.46.

In this special report, we noted that, in the current period, rural development spending was to be focused more on results, but that this ambition had not been achieved due to a lack of relevant performance information. We recommended that a common set of result-oriented indicators be developed, and that these should be suitable for assessing the results and the impact of rural development interventions.

| 3.46. | In its reply to recommendation 4 of SR 16/2017, the Commission committed to analyse possible ways to improve the performance measurement of the CAP as a whole.

  On 1 June 2018, the Commission adopted a Proposal for a Regulation COM(2018) 392 final (CAP strategic plans): In the framework of the new delivery model common result-orientated indicators have been developed: Title VII of the Regulation introduces the performance monitoring and evaluation framework laying down rules on what and when Member States have to report progress on their CAP Strategic Plans and rules on how this progress will be monitored and evaluated. |
| --- | --- |

3.46.

On 1 June 2018, the Commission adopted a Proposal for a Regulation COM(2018) 392 final (CAP strategic plans): In the framework of the new delivery model common result-orientated indicators have been developed: Title VII of the Regulation introduces the performance monitoring and evaluation framework laying down rules on what and when Member States have to report progress on their CAP Strategic Plans and rules on how this progress will be monitored and evaluated.

Special report No 10/2017 — Generational renewal

| 3.47. | We concluded that the objectives and expected results of EU support to young farmers were not well defined. We recommended that the intervention logic should be improved. To this end, we recommended that the Commission should improve the needs-assessment procedure, select those forms of support which best match identified needs, and define specific and quantified results targets. |
| --- | --- |

3.47.

We concluded that the objectives and expected results of EU support to young farmers were not well defined. We recommended that the intervention logic should be improved. To this end, we recommended that the Commission should improve the needs-assessment procedure, select those forms of support which best match identified needs, and define specific and quantified results targets.

| 3.47. | In its reply to recommendation 1 of the SR 10/2017, the Commission committed to analyse and consider possible relevant policy instruments for the support to young farmers and their logic of intervention in the context of the preparation of future legislative proposals.

  On 1 June 2018, the Commission adopted a Proposal for a Regulation COM(2018) 392 final (CAP strategic plans): In the new delivery model of the proposal, Member States will design CAP Strategic Plans, including an ex-ante assessment of needs. On this basis, tailor-made interventions that address the identified needs and aim to implement the policy objectives will be described in the plans. Among others, the following specific objective is laid down in Article 6 (g) of the Regulation: Attract young farmers and facilitate business development in rural areas. In relation to this objective, a specific result indicator will be used to quantify both the ex-ante target value and the actually realised value.


  In terms of procedure, the Commission will assess and approve these CAP Strategic Plans. |
| --- | --- |

3.47.

On 1 June 2018, the Commission adopted a Proposal for a Regulation COM(2018) 392 final (CAP strategic plans): In the new delivery model of the proposal, Member States will design CAP Strategic Plans, including an ex-ante assessment of needs. On this basis, tailor-made interventions that address the identified needs and aim to implement the policy objectives will be described in the plans. Among others, the following specific objective is laid down in Article 6 (g) of the Regulation: Attract young farmers and facilitate business development in rural areas. In relation to this objective, a specific result indicator will be used to quantify both the ex-ante target value and the actually realised value.

In terms of procedure, the Commission will assess and approve these CAP Strategic Plans.

Special report No 21/2017 — Greening measures

| 3.48. | We concluded that the Commission had not specified what greening measures were expected to achieve. We also concluded that there was a significant amount of deadweight, and that requirements were low. For these reasons, we concluded that greening was unlikely to lead to significant improvements to the environment and the climate. We recommended that the Commission develop a complete intervention logic for the EU’s agriculture measures aimed at environmental and climate protection. We recommended that the intervention logic should be based on up-to-date scientific understanding, and should include specific targets. We further recommended that all existing environmental requirements should be combined to form a new environmental baseline applicable to all Common Agricultural Policy beneficiaries, and that programmed measures should go beyond this environmental baseline and focus on the attainment of performance targets. |
| --- | --- |

3.48.

We concluded that the Commission had not specified what greening measures were expected to achieve. We also concluded that there was a significant amount of deadweight, and that requirements were low. For these reasons, we concluded that greening was unlikely to lead to significant improvements to the environment and the climate. We recommended that the Commission develop a complete intervention logic for the EU’s agriculture measures aimed at environmental and climate protection. We recommended that the intervention logic should be based on up-to-date scientific understanding, and should include specific targets. We further recommended that all existing environmental requirements should be combined to form a new environmental baseline applicable to all Common Agricultural Policy beneficiaries, and that programmed measures should go beyond this environmental baseline and focus on the attainment of performance targets.

| 3.48. | The Commission accepted the recommendations of SR 21/2017 in substance.

  On 1 June 2018, the Commission adopted a Proposal for a Regulation COM(2018) 392 final (CAP strategic plans), which develops the intervention logic of a new set of environmental and climate-related instruments of the CAP. This new green architecture includes an enhanced conditionality that links full receipt of CAP support to the compliance by beneficiaries of basic standards concerning the environment, climate change, public health, animal health, plant health and animal welfare, including issues previously dealt with under greening. Conditionality applies to all CAP beneficiaries and forms the core of the environmental and climate baseline, beyond which voluntary schemes such as a new Pillar I eco-scheme and agri-environment-climate (AEC) commitments under Pillar II as part of a broader type of intervention offering support for various kinds of management commitment will be defined by Member States. All these measures will be part of a programmed approach focusing on the attainment of performance targets. |
| --- | --- |

3.48.

On 1 June 2018, the Commission adopted a Proposal for a Regulation COM(2018) 392 final (CAP strategic plans), which develops the intervention logic of a new set of environmental and climate-related instruments of the CAP. This new green architecture includes an enhanced conditionality that links full receipt of CAP support to the compliance by beneficiaries of basic standards concerning the environment, climate change, public health, animal health, plant health and animal welfare, including issues previously dealt with under greening. Conditionality applies to all CAP beneficiaries and forms the core of the environmental and climate baseline, beyond which voluntary schemes such as a new Pillar I eco-scheme and agri-environment-climate (AEC) commitments under Pillar II as part of a broader type of intervention offering support for various kinds of management commitment will be defined by Member States. All these measures will be part of a programmed approach focusing on the attainment of performance targets.

Headings 3 ‘Security and citizenship’ and 4 ‘Global Europe’

| 3.49. | We adopted five special reports (49) concerning these multiannual financial framework headings. We wish to draw attention to some key conclusions and recommendations for four of these reports. |
| --- | --- |

3.49.

We adopted five special reports (49) concerning these multiannual financial framework headings. We wish to draw attention to some key conclusions and recommendations for four of these reports.

Special report No 3/2017 — Tunisia

| 3.50. | We found that EU aid to Tunisia had generally been well spent. It had contributed significantly to the country’s democratic transition and economic stability after the revolution of 2010-2011. However, we found that the Commission had been too ambitious. It had tried to address too many priorities in a relatively short period. This had led to a number of shortcomings in the Commission’s management of aid. |
| --- | --- |

3.50.

We found that EU aid to Tunisia had generally been well spent. It had contributed significantly to the country’s democratic transition and economic stability after the revolution of 2010-2011. However, we found that the Commission had been too ambitious. It had tried to address too many priorities in a relatively short period. This had led to a number of shortcomings in the Commission’s management of aid.

| 3.50. | The report recognises that the EU aid to Tunisia has been generally well spent. In fact, EU assistance contributed significantly to the country's economic and political stability after the revolution, notably by accompanying major socio-economic and political reforms.

  On the ambition level of the Commission, the Commission notes that several areas had to be tackled because of the socioeconomic challenges Tunisia was confronted with following the revolution. Results obtained so far are good since EU assistance contributed significantly to improve socioeconomic and political stability in the country after the revolution. The Commission stresses that it has followed its own policy of concentrating its assistance. Indeed, in spite of the fact that a variety of activities have been undertaken over the period under review, these were in line with the three main sectors identified in the SSF 2014-16.


  Effectiveness and sustainability of the Commission’s assistance have been always some of the key elements considered, together with relevance, efficiency and impact. The Commission also has supported the setting up of internal and external monitoring mechanisms and the reinforcement of accountability of public bodies. |
| --- | --- |

3.50.

On the ambition level of the Commission, the Commission notes that several areas had to be tackled because of the socioeconomic challenges Tunisia was confronted with following the revolution. Results obtained so far are good since EU assistance contributed significantly to improve socioeconomic and political stability in the country after the revolution. The Commission stresses that it has followed its own policy of concentrating its assistance. Indeed, in spite of the fact that a variety of activities have been undertaken over the period under review, these were in line with the three main sectors identified in the SSF 2014-16.

Effectiveness and sustainability of the Commission’s assistance have been always some of the key elements considered, together with relevance, efficiency and impact. The Commission also has supported the setting up of internal and external monitoring mechanisms and the reinforcement of accountability of public bodies.

| 3.51. | We recommended that the Commission, and where applicable the European External Action Service, should: |
| --- | --- |

3.51.

We recommended that the Commission, and where applicable the European External Action Service, should:

3.51.

| — | improve the programming and focus of EU support, |
| --- | --- |

—

improve the programming and focus of EU support,

| — | The Commission accepted the recommendation and is already implementing it (adoption in August 2017 of the new SSF 2017-2020 which focuses on 3 sectors of intervention; continuous policy and political dialogue, coordination with regional programmes; joint programming process ongoing). |
| --- | --- |

—

The Commission accepted the recommendation and is already implementing it (adoption in August 2017 of the new SSF 2017-2020 which focuses on 3 sectors of intervention; continuous policy and political dialogue, coordination with regional programmes; joint programming process ongoing).

| — | improve the implementation of EU budget-support programmes, |
| --- | --- |

—

improve the implementation of EU budget-support programmes,

| — | The Commission accepted the recommendation.


  With today's more stable political context in Tunisia and in view of close coordination with other donors, the Commission agrees that the performance indicators can now be more focused for future operations. However, a dynamic approach will continue to apply to eligibility criteria, in line with budget support guidelines provisions. |
| --- | --- |

—

The Commission accepted the recommendation.

With today's more stable political context in Tunisia and in view of close coordination with other donors, the Commission agrees that the performance indicators can now be more focused for future operations. However, a dynamic approach will continue to apply to eligibility criteria, in line with budget support guidelines provisions.

| — | make proposals to speed up the macro-financial assistance approval process, |
| --- | --- |

—

make proposals to speed up the macro-financial assistance approval process,

| — | The Commission accepted the recommendation.


  The Commission notes that, even though significant progress has been achieved regarding the speed of the adoption by the Parliament and the Council of MFA decisions, there is still room for improvement. More speedy adoptions could be achieved for instance if the number of meetings of the Committee on International Trade of the European Parliament (INTA) before an INTA vote could be reduced, if the Parliament approval would systematically take place at the plenary (including mini-plenaries) immediately following the INTA vote, if mini-plenaries could be used for the signatures by the Presidents of the Parliament and the Council and if the Council would also make use of the written procedure for adoptions if necessary.


  The Commission also notes that, following previous recommendations by the European Court of Auditors and a Resolution on MFA of the Parliament in 2003, it had proposed in 2011 a Framework Regulation for MFA aimed, inter alia, at expediting decision-making by replacing the legislative decisions by implementing acts. However, as the co-legislators decided to retain legislative acts and the ordinary legislative procedure, the Commission withdrew this proposal in 2013. |
| --- | --- |

—

The Commission accepted the recommendation.

The Commission notes that, even though significant progress has been achieved regarding the speed of the adoption by the Parliament and the Council of MFA decisions, there is still room for improvement. More speedy adoptions could be achieved for instance if the number of meetings of the Committee on International Trade of the European Parliament (INTA) before an INTA vote could be reduced, if the Parliament approval would systematically take place at the plenary (including mini-plenaries) immediately following the INTA vote, if mini-plenaries could be used for the signatures by the Presidents of the Parliament and the Council and if the Council would also make use of the written procedure for adoptions if necessary.

The Commission also notes that, following previous recommendations by the European Court of Auditors and a Resolution on MFA of the Parliament in 2003, it had proposed in 2011 a Framework Regulation for MFA aimed, inter alia, at expediting decision-making by replacing the legislative decisions by implementing acts. However, as the co-legislators decided to retain legislative acts and the ordinary legislative procedure, the Commission withdrew this proposal in 2013.

| — | improve the planning of projects. |
| --- | --- |

—

improve the planning of projects.

| — | The Commission accepted the recommendation. |
| --- | --- |

—

The Commission accepted the recommendation.

Special report No 6/2017 — The ‘hotspot’ approach

| 3.52. | We concluded that, overall, the hotspot approach had helped improve migration management in the two frontline Member States, Greece and Italy, by increasing their reception capacities, improving registration procedures, and by improving the coordination of support. |
| --- | --- |

3.52.

We concluded that, overall, the hotspot approach had helped improve migration management in the two frontline Member States, Greece and Italy, by increasing their reception capacities, improving registration procedures, and by improving the coordination of support.

| 3.53. | We recommended that the Commission and the relevant agencies should: |
| --- | --- |

3.53.

We recommended that the Commission and the relevant agencies should:

3.53.

| — | assist the Member States in improving the hotspot approach, especially with regard to hotspot capacity, the treatment of unaccompanied minors, the deployment of experts, and roles and responsibilities in the hotspot approach; |
| --- | --- |

—

assist the Member States in improving the hotspot approach, especially with regard to hotspot capacity, the treatment of unaccompanied minors, the deployment of experts, and roles and responsibilities in the hotspot approach;

| — | The Commission agrees. |
| --- | --- |

—

The Commission agrees.

| — | evaluate and further develop the hotspot approach, with a view to optimising EU assistance for migration management. |
| --- | --- |

—

evaluate and further develop the hotspot approach, with a view to optimising EU assistance for migration management.

| — | The Commission agrees. |
| --- | --- |

—

The Commission agrees.

Special report No 11/2017 — The Bêkou Trust Fund

| 3.54. | In this special report we concluded that, despite some shortcomings, both the decision to set up the Bêkou trust fund and the design of the fund were appropriate, considering the circumstances. We found that the management of the fund had not yet reached its full potential in three respects: coordination amongst stakeholders; the transparency, speed and cost-effectiveness of procedures; and monitoring and evaluation mechanisms. |
| --- | --- |

3.54.

In this special report we concluded that, despite some shortcomings, both the decision to set up the Bêkou trust fund and the design of the fund were appropriate, considering the circumstances. We found that the management of the fund had not yet reached its full potential in three respects: coordination amongst stakeholders; the transparency, speed and cost-effectiveness of procedures; and monitoring and evaluation mechanisms.

| 3.54. | The Bêkou trust fund has opened a new way to coordinate actions conducted by the EU and its Member States which has not been fully taken advantage of at this stage.

  In the Commission’s view, when taking into account the full length of the project cycle, the overall speed of Bêkou is higher than that of other EU instruments under crisis situation. However, the Commission agrees that it will explore ways to increase further the speed of the selection procedures beyond what the internal rules currently allow whilst striking the right balance between speed and transparency.


  The monitoring and evaluation mechanisms are developed at project level and will be gradually upgraded at fund level. |
| --- | --- |

3.54.

In the Commission’s view, when taking into account the full length of the project cycle, the overall speed of Bêkou is higher than that of other EU instruments under crisis situation. However, the Commission agrees that it will explore ways to increase further the speed of the selection procedures beyond what the internal rules currently allow whilst striking the right balance between speed and transparency.

The monitoring and evaluation mechanisms are developed at project level and will be gradually upgraded at fund level.

| 3.55. | Overall, the Bêkou trust fund had made a positive contribution by the time of the audit. It had attracted aid, but few additional donors, and most of its projects had delivered their expected outputs. The fund had provided enhanced visibility to the EU. |
| --- | --- |

3.55.

Overall, the Bêkou trust fund had made a positive contribution by the time of the audit. It had attracted aid, but few additional donors, and most of its projects had delivered their expected outputs. The fund had provided enhanced visibility to the EU.

| 3.56. | We recommended that the Commission should: |
| --- | --- |

3.56.

We recommended that the Commission should:

3.56.

| — | develop further guidance on choosing instruments through which to provide aid, and on carrying out needs analyses with a view to deciding the scope of a trust fund’s interventions; and |
| --- | --- |

—

develop further guidance on choosing instruments through which to provide aid, and on carrying out needs analyses with a view to deciding the scope of a trust fund’s interventions; and

| — | The Commission accepted the recommendation which will be implemented as follows:


  The Commission has developed the trust fund guidelines which include a section on the conditions to establish a trust fund.


  The Commission is ready to revisit the scope of these guidelines to include a more detailed description of the criteria laid out in the Financial Regulation to evaluate the conditions to establish EU trust funds.


  In this regard the Commission considers that by assessing the conditions for the establishment of a EUTF, the question of the comparative advantages of other aid vehicles will be addressed.


  The Commission considers that the guidelines cannot be too prescriptive particularly in what concerns emergency trust funds. |
| --- | --- |

—

The Commission accepted the recommendation which will be implemented as follows:

The Commission has developed the trust fund guidelines which include a section on the conditions to establish a trust fund.

The Commission is ready to revisit the scope of these guidelines to include a more detailed description of the criteria laid out in the Financial Regulation to evaluate the conditions to establish EU trust funds.

In this regard the Commission considers that by assessing the conditions for the establishment of a EUTF, the question of the comparative advantages of other aid vehicles will be addressed.

The Commission considers that the guidelines cannot be too prescriptive particularly in what concerns emergency trust funds.

| — | improve donor coordination, selection procedures and performance measurement, and optimise administrative costs. |
| --- | --- |

—

improve donor coordination, selection procedures and performance measurement, and optimise administrative costs.

| — | The Commission accepted this recommendation but highlighted that other actors have a role to play in its follow-up.


  The Bêkou trust fund already coordinates its activities with other relevant donors and actors. The Commission nevertheless agrees that coordination could be better formalized and that coordination opportunities should be taken advantage of by all participants in the BTF.


  The Commission applies its standard rules and procedures as well as the internal rules that allow the EUTF Managers to derogate from these standard rules in certain conditions (the internal guidelines on crisis and the EUTF guidelines). For example the guidelines on crisis situations recognize constraints and limitations to contract and implement projects in a crisis situation, allowing the use of ‘flexible procedures’ when a crisis situation has been declared in the country. |
| --- | --- |

—

The Commission accepted this recommendation but highlighted that other actors have a role to play in its follow-up.

The Bêkou trust fund already coordinates its activities with other relevant donors and actors. The Commission nevertheless agrees that coordination could be better formalized and that coordination opportunities should be taken advantage of by all participants in the BTF.

The Commission applies its standard rules and procedures as well as the internal rules that allow the EUTF Managers to derogate from these standard rules in certain conditions (the internal guidelines on crisis and the EUTF guidelines). For example the guidelines on crisis situations recognize constraints and limitations to contract and implement projects in a crisis situation, allowing the use of ‘flexible procedures’ when a crisis situation has been declared in the country.

Special report No 22/2017 — Election Observation Missions

| 3.57. | In this special report, we found that the European External Action Service and the Commission had made reasonable efforts to support the implementation of the EU Election Observation Missions recommendations and had used the tools at their disposal to this end. We concluded that the presentation of EU Election Observation Missions recommendations had improved in recent years, but more consultation was needed on the ground. The European External Action Service and the Commission had engaged in political dialogue and provided electoral assistance to support the implementation of the recommendations, but electoral follow-up missions had not been conducted as often as they might have been. Lastly, there was no central overview of the recommendations, nor had a systematic assessment been made of their implementation status. |
| --- | --- |

3.57.

In this special report, we found that the European External Action Service and the Commission had made reasonable efforts to support the implementation of the EU Election Observation Missions recommendations and had used the tools at their disposal to this end. We concluded that the presentation of EU Election Observation Missions recommendations had improved in recent years, but more consultation was needed on the ground. The European External Action Service and the Commission had engaged in political dialogue and provided electoral assistance to support the implementation of the recommendations, but electoral follow-up missions had not been conducted as often as they might have been. Lastly, there was no central overview of the recommendations, nor had a systematic assessment been made of their implementation status.

| 3.58. | We recommended that the European External Action Service should: |
| --- | --- |

3.58.

We recommended that the European External Action Service should:

3.58.

| — | systematically consult stakeholders on EU Election Observation Missions recommendations before they are adopted; |
| --- | --- |

—

systematically consult stakeholders on EU Election Observation Missions recommendations before they are adopted;

| — | Stakeholders will be systematically consulted on the general content of the recommendations (not on the specific drafting of recommendations so as not to impinge on the independence of the report). |
| --- | --- |

—

Stakeholders will be systematically consulted on the general content of the recommendations (not on the specific drafting of recommendations so as not to impinge on the independence of the report).

| — | conduct follow-up missions more often; |
| --- | --- |

—

conduct follow-up missions more often;

| — | The EEAS and the Commission are committed to strengthen the follow-up to the EU EOMs’ recommendations through a combination of tools ranging from EFMs, to electoral assistance, political dialogue, among others. |
| --- | --- |

—

The EEAS and the Commission are committed to strengthen the follow-up to the EU EOMs’ recommendations through a combination of tools ranging from EFMs, to electoral assistance, political dialogue, among others.

| — | gain a central overview of the EU Election Observation Missions recommendations and systematically assess their implementation status. |
| --- | --- |

—

gain a central overview of the EU Election Observation Missions recommendations and systematically assess their implementation status.

| — | The Commission will seek to provide the financial means to set up a centralised depository for storing EU EOM recommendations. |
| --- | --- |

—

The Commission will seek to provide the financial means to set up a centralised depository for storing EU EOM recommendations.

Heading 5 ‘Administration’ and reports on the ‘Functioning Single Market and sustainable Monetary Union’

| 3.59. | In the priority area ‘Functioning Single Market and Sustainable Monetary Union’, we produced four special reports in 2017 (50). |
| --- | --- |

3.59.

In the priority area ‘Functioning Single Market and Sustainable Monetary Union’, we produced four special reports in 2017 (50).

| 3.60. | We wish to draw attention to a number of key conclusions and recommendations for two of these reports. |
| --- | --- |

3.60.

We wish to draw attention to a number of key conclusions and recommendations for two of these reports.

Special report No 17/2017 — ‘The Commission’s intervention in the Greek financial crisis’

| 3.61. | In this special report, we concluded that the economic adjustment programmes agreed for Greece in the wake of the financial crisis had provided short-term financial stability, and made some progress on reform possible. But the programmes had only helped Greece to recover to a limited extent. As of mid-2017, they had not succeeded in restoring the country’s ability to finance its needs on the markets. |
| --- | --- |

3.61.

In this special report, we concluded that the economic adjustment programmes agreed for Greece in the wake of the financial crisis had provided short-term financial stability, and made some progress on reform possible. But the programmes had only helped Greece to recover to a limited extent. As of mid-2017, they had not succeeded in restoring the country’s ability to finance its needs on the markets.

| 3.62. | We were unable to report on the European Central Bank’s role, as it questioned our mandate and failed to provide us with sufficient audit evidence. |
| --- | --- |

3.62.

We were unable to report on the European Central Bank’s role, as it questioned our mandate and failed to provide us with sufficient audit evidence.

| 3.63. | We recommended that the Commission should: |
| --- | --- |

3.63.

We recommended that the Commission should:

3.63.

| — | better prioritise the conditions and specify measures urgently needed to address imbalances; |
| --- | --- |

—

better prioritise the conditions and specify measures urgently needed to address imbalances;

| — | The Commission accepted the recommendation.


  Policy actions were duly prioritised, notably through the joint programme with the IMF. The Commission, inter alia, used the IMF's well known system of ‘prior actions’ and ‘structural benchmarks’, which are critical reforms needed to close a review and release a disbursement. These were gradually refined with some additional prior actions in the area of structural reforms, and through the use of milestones. The ESM stability support programme currently underway also introduced the concept of ‘key deliverables’. |
| --- | --- |

—

The Commission accepted the recommendation.

Policy actions were duly prioritised, notably through the joint programme with the IMF. The Commission, inter alia, used the IMF's well known system of ‘prior actions’ and ‘structural benchmarks’, which are critical reforms needed to close a review and release a disbursement. These were gradually refined with some additional prior actions in the area of structural reforms, and through the use of milestones. The ESM stability support programme currently underway also introduced the concept of ‘key deliverables’.

| — | ensure that programmes are embedded in an overall growth strategy for the country; |
| --- | --- |

—

ensure that programmes are embedded in an overall growth strategy for the country;

| — | The Commission accepted the recommendation.


  The Commission notes that the current ESM Treaty provides for more focused programmes, e.g. targeted at imbalances in specific sectors, in which case a comprehensive growth strategy may not be warranted. |
| --- | --- |

—

The Commission accepted the recommendation.

The Commission notes that the current ESM Treaty provides for more focused programmes, e.g. targeted at imbalances in specific sectors, in which case a comprehensive growth strategy may not be warranted.

| — | seek to reach an agreement with programme partners; |
| --- | --- |

—

seek to reach an agreement with programme partners;

| — | The Commission accepted the recommendation and recalled that it cannot commit other institutions to accept working modalities that, by definition, need to be jointly agreed both in principle and in substance. |
| --- | --- |

—

The Commission accepted the recommendation and recalled that it cannot commit other institutions to accept working modalities that, by definition, need to be jointly agreed both in principle and in substance.

| — | be more systematic in assessing the administrative capacity of the Member State to implement the reforms; |
| --- | --- |

—

be more systematic in assessing the administrative capacity of the Member State to implement the reforms;

| — | The Commission accepted the recommendation.


  Under the ESM stability support programme, particular attention is being paid to the implementation of reforms to increase the quality and efficiency of the public sector in the delivery of essential public goods and services (4th pillar). Technical support has been closely aligned with the provisions of the ESM stability programme, whereby support to a number of reforms under the programme has been explicitly included in the Memorandum of Understanding of August 2015 and the subsequent Supplemental MoUs. Within three months after the ESM programme was established, the Commission agreed with the Greek authorities a ‘Plan for technical cooperation in support of structural reforms’ that was also published on the Commission's website. The Structural Reform Support Service provides and coordinates support to the Greek authorities in almost all reform areas under the ESM programme. |
| --- | --- |

—

The Commission accepted the recommendation.

Under the ESM stability support programme, particular attention is being paid to the implementation of reforms to increase the quality and efficiency of the public sector in the delivery of essential public goods and services (4th pillar). Technical support has been closely aligned with the provisions of the ESM stability programme, whereby support to a number of reforms under the programme has been explicitly included in the Memorandum of Understanding of August 2015 and the subsequent Supplemental MoUs. Within three months after the ESM programme was established, the Commission agreed with the Greek authorities a ‘Plan for technical cooperation in support of structural reforms’ that was also published on the Commission's website. The Structural Reform Support Service provides and coordinates support to the Greek authorities in almost all reform areas under the ESM programme.

| — | carry out interim evaluations for successive programmes and use the results to assess their design and monitoring arrangements. |
| --- | --- |

—

carry out interim evaluations for successive programmes and use the results to assess their design and monitoring arrangements.

| — | The Commission accepted the recommendation. It has already carried out ex-post evaluations for other Euro area countries which had stability support programmes. |
| --- | --- |

—

The Commission accepted the recommendation. It has already carried out ex-post evaluations for other Euro area countries which had stability support programmes.

Special report No 23/2017 — Single Resolution Board

| 3.64. | Our overall conclusion in this special report was that, at the relatively early stage when we conducted the audit, there were shortcomings in the Single Resolution Board’s preparation for its tasks. We recognised that these shortcomings needed to be seen in context: the Single Resolution Board had been set up from scratch in a very short period of time. |
| --- | --- |

3.64.

Our overall conclusion in this special report was that, at the relatively early stage when we conducted the audit, there were shortcomings in the Single Resolution Board’s preparation for its tasks. We recognised that these shortcomings needed to be seen in context: the Single Resolution Board had been set up from scratch in a very short period of time.

THE COURT’S OBSERVATIONS

| 3.65. | The shortcomings included: |
| --- | --- |

3.65.

The shortcomings included:

| — | staffing delays; |
| --- | --- |

—

staffing delays;

| — | incomplete resolution planning for the banks within the Single Resolution Board’s remit, and an incomplete system of rules governing it; |
| --- | --- |

—

incomplete resolution planning for the banks within the Single Resolution Board’s remit, and an incomplete system of rules governing it;

| — | missing assessments of the feasibility and credibility of the selected resolution strategies in the resolution plans; |
| --- | --- |

—

missing assessments of the feasibility and credibility of the selected resolution strategies in the resolution plans;

| — | an unclear distribution of operational tasks between National Resolution Authorities and the Single Resolution Board; |
| --- | --- |

—

an unclear distribution of operational tasks between National Resolution Authorities and the Single Resolution Board;

| — | an imbalance between the mandates of the Single Resolution Board and the European Central Bank. |
| --- | --- |

—

an imbalance between the mandates of the Single Resolution Board and the European Central Bank.

| 3.66. | We concluded that a number of steps were needed to improve the system. We recommended that the Single Resolution Board should: |
| --- | --- |

3.66.

We concluded that a number of steps were needed to improve the system. We recommended that the Single Resolution Board should:

| — | complete its resolution planning for the banks and finalise its system of rules governing those plans; |
| --- | --- |

—

complete its resolution planning for the banks and finalise its system of rules governing those plans;

| — | accelerate its recruitment efforts, and staff its human resources department appropriately; |
| --- | --- |

—

accelerate its recruitment efforts, and staff its human resources department appropriately;

| — | clarify the operational distribution of tasks and responsibilities with National Resolution Authorities; and |
| --- | --- |

—

clarify the operational distribution of tasks and responsibilities with National Resolution Authorities; and

| — | engage with the European Central Bank to ensure it received all necessary information, and invite the legislator to take the necessary action to put the current framework into practice. |
| --- | --- |

—

engage with the European Central Bank to ensure it received all necessary information, and invite the legislator to take the necessary action to put the current framework into practice.

| 3.67. | We also published special report No 14/2017, a ‘Performance review of case management at the Court of Justice of the EU’. This special report included considerations for further improvement by the Court of Justice of case management. |
| --- | --- |

3.67.

We also published special report No 14/2017, a ‘Performance review of case management at the Court of Justice of the EU’. This special report included considerations for further improvement by the Court of Justice of case management.

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

PART 3 — FOLLOW-UP OF RECOMMENDATIONS

| 3.68. | This part contains the results of our yearly review of the extent to which the Commission has taken corrective action related to our recommendations. The follow-up of recommendations we make in our special reports is an important step in the performance audit cycle. As well as providing us and our stakeholders with feedback on the impact of our work, the follow-up of recommendations helps to encourage the Commission and Member States to implement our recommendations. |
| --- | --- |

3.68.

This part contains the results of our yearly review of the extent to which the Commission has taken corrective action related to our recommendations. The follow-up of recommendations we make in our special reports is an important step in the performance audit cycle. As well as providing us and our stakeholders with feedback on the impact of our work, the follow-up of recommendations helps to encourage the Commission and Member States to implement our recommendations.

A.   Scope and approach — a new method

| 3.69. | In previous years, we only analysed a selection of special reports. In line with our strategy for 2018-2020, we are now expanding this exercise. We will be following up all performance audit recommendations we addressed to the Commission three years previously. |
| --- | --- |

3.69.

In previous years, we only analysed a selection of special reports. In line with our strategy for 2018-2020, we are now expanding this exercise. We will be following up all performance audit recommendations we addressed to the Commission three years previously.

| 3.70. | We analysed 17 of the 24 special reports that we published in 2014 which are not analysed elsewhere (51). Altogether, these reports contained 135 recommendations. |
| --- | --- |

3.70.

We analysed 17 of the 24 special reports that we published in 2014 which are not analysed elsewhere (51). Altogether, these reports contained 135 recommendations.

| 3.71. | We carried out our follow-up on the basis of documentary reviews and interviews with Commission staff. To ensure a fair and balanced review, we then sent our findings to the Commission and took account of its replies in our final analysis. We drew conclusions on the implementation of 100 recommendations. We could not draw conclusions on the remaining 35 (which represent 26 % of the total, more than twice the average of the past 6 years (12 %), because they were addressed to Member States or other EU institutions (52). |
| --- | --- |

3.71.

We carried out our follow-up on the basis of documentary reviews and interviews with Commission staff. To ensure a fair and balanced review, we then sent our findings to the Commission and took account of its replies in our final analysis. We drew conclusions on the implementation of 100 recommendations. We could not draw conclusions on the remaining 35 (which represent 26 % of the total, more than twice the average of the past 6 years (12 %), because they were addressed to Member States or other EU institutions (52).

B.   How has the Commission addressed our recommendations?

| 3.72. | Of the 100 recommendations, we concluded that the Commission had fully implemented 58 (58 %). It had implemented 17 of the remaining recommendations (17 %) in most respects, 19 (19 %) in some respects, and 6 (6 %) not at all (see
  Box 3.15
  ). The implementation status of the recommendations is shown in detail in
  Annex 3.1
  . |
| --- | --- |

3.72.

Of the 100 recommendations, we concluded that the Commission had fully implemented 58 (58 %). It had implemented 17 of the remaining recommendations (17 %) in most respects, 19 (19 %) in some respects, and 6 (6 %) not at all (see
  Box 3.15
  ). The implementation status of the recommendations is shown in detail in
  Annex 3.1
  .

| 3.72. | The Commission notes that three quarters of the recommendations assessed, were considered by the ECA as implemented fully or in most respects.

  The 6 recommendations which are not implemented at all were not accepted by the Commission. |
| --- | --- |

3.72.

The 6 recommendations which are not implemented at all were not accepted by the Commission.

Box 3.15 —   Implementation of our 2014 performance audit recommendations

Image

Source: ECA.

THE COURT’S OBSERVATIONS

| 3.73. | The outcome for fully implemented recommendations is broadly in line with figures from previous years. However, the percentage of mostly implemented recommendations was 7 % below the average of 25 % recorded in the past six years. The proportion of recommendations implemented only in some respects was 7 % higher than the six-year average of 12 %. This is likely due to our modified analysis method (see paragraph 3.69). |
| --- | --- |

3.73.

The outcome for fully implemented recommendations is broadly in line with figures from previous years. However, the percentage of mostly implemented recommendations was 7 % below the average of 25 % recorded in the past six years. The proportion of recommendations implemented only in some respects was 7 % higher than the six-year average of 12 %. This is likely due to our modified analysis method (see paragraph 3.69).

| 3.74. | We found that our recommendations had frequently triggered specific corrective measures. A significant majority of the 58 fully implemented recommendations had been implemented within two years (45 % in 2014 and 43 % in 2015). |
| --- | --- |

3.74.

We found that our recommendations had frequently triggered specific corrective measures. A significant majority of the 58 fully implemented recommendations had been implemented within two years (45 % in 2014 and 43 % in 2015).

| 3.75. | We were unable to verify the implementation of most recommendations that were addressed solely to Member States (see paragraph 3.71). We were, however, able to analyse the implementation of six recommendations made to the Member States or jointly to the Commission and other audited entities in the context of shared management. All of them had been partially or fully implemented (53). |
| --- | --- |

3.75.

We were unable to verify the implementation of most recommendations that were addressed solely to Member States (see paragraph 3.71). We were, however, able to analyse the implementation of six recommendations made to the Member States or jointly to the Commission and other audited entities in the context of shared management. All of them had been partially or fully implemented (53).

| 3.76. | We noted areas where the Commission had been particularly efficient in implementing our recommendations. For one special report in the area of external action within the competency of DG DEVCO and NEAR (special report No 16/2014), all nine recommendations had been implemented in full. All corrective steps (except for one) had been taken within one year. The subject of this audit was the blending of regional investment facility grants with financial institution loans to support EU external policies. DG MARE had also implemented all recommendations we made to it following the aquaculture audit (special report No 10/2014). |
| --- | --- |

3.76.

We noted areas where the Commission had been particularly efficient in implementing our recommendations. For one special report in the area of external action within the competency of DG DEVCO and NEAR (special report No 16/2014), all nine recommendations had been implemented in full. All corrective steps (except for one) had been taken within one year. The subject of this audit was the blending of regional investment facility grants with financial institution loans to support EU external policies. DG MARE had also implemented all recommendations we made to it following the aquaculture audit (special report No 10/2014).

| 3.77. | The Commission had initially rejected nine recommendations. These recommendations concerned DG AGRI, DG REGIO, and DG DEVCO. Three of the recommendations had subsequently been implemented in some respects (54). The six recommendations that had not been implemented at the time of our follow-up review were from the special reports on the wine sector and on business incubators. All of these had been rejected at the time of our audits in 2014. In most cases, this was because the Commission considered that our recommendations should have been addressed to the Member States. In some cases, the Commission had agreed in principle with our findings, but had been unable to accept our recommendation in practice (55). The level of rejected or partially accepted recommendations was similar to that of previous years. |
| --- | --- |

3.77.

The Commission had initially rejected nine recommendations. These recommendations concerned DG AGRI, DG REGIO, and DG DEVCO. Three of the recommendations had subsequently been implemented in some respects (54). The six recommendations that had not been implemented at the time of our follow-up review were from the special reports on the wine sector and on business incubators. All of these had been rejected at the time of our audits in 2014. In most cases, this was because the Commission considered that our recommendations should have been addressed to the Member States. In some cases, the Commission had agreed in principle with our findings, but had been unable to accept our recommendation in practice (55). The level of rejected or partially accepted recommendations was similar to that of previous years.

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

| 3.78. | In conclusion, we observed that our performance audits had led to several key improvements, although some of the identified weaknesses remained. These are described in
  Annex 3.2
  . |
| --- | --- |

3.78.

In conclusion, we observed that our performance audits had led to several key improvements, although some of the identified weaknesses remained. These are described in
  Annex 3.2
  .

CONCLUSIONS AND RECOMMENDATIONS

Conclusions

| 3.79. | The aim of performance information is to provide an indication as to whether policies and programmes, and more generally the DGs, the Commission as an organisation and the EU budget, are achieving their objectives efficiently and effectively. If improvements are needed, performance information should be used to inform the process of designing necessary corrective measures, and to monitor their implementation. |
| --- | --- |

3.79.

The aim of performance information is to provide an indication as to whether policies and programmes, and more generally the DGs, the Commission as an organisation and the EU budget, are achieving their objectives efficiently and effectively. If improvements are needed, performance information should be used to inform the process of designing necessary corrective measures, and to monitor their implementation.

| 3.80. | The manner in which an organisation uses the performance information it generates and collects for decision-making influences its long-term success in implementing performance management and in achieving improved results. |
| --- | --- |

3.80.

The manner in which an organisation uses the performance information it generates and collects for decision-making influences its long-term success in implementing performance management and in achieving improved results.

| 3.81. | Our conclusions are as follows. |
| --- | --- |

3.81.

Our conclusions are as follows.

3.81.

| 1. | There are certain limits to how much use the Commission can make of performance information (paragraphs 3.6-3.13) |
| --- | --- |

1.

There are certain limits to how much use the Commission can make of performance information (paragraphs 3.6-3.13)

| — | The EU’s multiannual financial framework has limited flexibility for re-allocating funds. |
| --- | --- |

—

The EU’s multiannual financial framework has limited flexibility for re-allocating funds.

| — | The Commission has made proposals to increase budgetary flexibility under the future Multiannual Financial Framework. |
| --- | --- |

—

The Commission has made proposals to increase budgetary flexibility under the future Multiannual Financial Framework.

| — | While re-allocations, driven primarily by the urgent need to respond to the refugee crisis and security threats, did occur as a result of the last multiannual financial framework mid-term review, this was not the result of performance considerations. |
| --- | --- |

—

While re-allocations, driven primarily by the urgent need to respond to the refugee crisis and security threats, did occur as a result of the last multiannual financial framework mid-term review, this was not the result of performance considerations.

| — | Reallocation decisions are the result of a number of factors. The Commission notes that there are often significant time lags before detailed performance information becomes available. |
| --- | --- |

—

Reallocation decisions are the result of a number of factors. The Commission notes that there are often significant time lags before detailed performance information becomes available.

| — | The measurement of the EU budget’s contribution to high-level objectives is complex, because several strategic frameworks apply in parallel. |
| --- | --- |

—

The measurement of the EU budget’s contribution to high-level objectives is complex, because several strategic frameworks apply in parallel.

| — | The measurement of the contribution to high-level objectives is also difficult because it is difficult to establish clear causal, one-to-one links between an activity of the Commission services or a programme funded by the EU budget and progress towards high- level political objectives. Many other external factors influence the attainment of these objectives and many actors are involved at sub-national, national, European and international levels. This complexity is an inherent feature of the environment in which the Commission and the EU budget operates; it is not a weakness of the performance framework per se. |
| --- | --- |

—

The measurement of the contribution to high-level objectives is also difficult because it is difficult to establish clear causal, one-to-one links between an activity of the Commission services or a programme funded by the EU budget and progress towards high- level political objectives. Many other external factors influence the attainment of these objectives and many actors are involved at sub-national, national, European and international levels. This complexity is an inherent feature of the environment in which the Commission and the EU budget operates; it is not a weakness of the performance framework per se.

| 2. | The Commission’s performance measurement systems make vast quantities of data available but not always in a timely manner (paragraphs 3.14-3.18) |
| --- | --- |

2.

The Commission’s performance measurement systems make vast quantities of data available but not always in a timely manner (paragraphs 3.14-3.18)

| — | The Commission DGs collect performance information in various formats and from diverse sources, thereby generating a wealth of performance-relevant information. Several DGs have recently implemented new instruments and processes for exploiting performance data in order to improve their performance-information framework. |
| --- | --- |

—

The Commission DGs collect performance information in various formats and from diverse sources, thereby generating a wealth of performance-relevant information. Several DGs have recently implemented new instruments and processes for exploiting performance data in order to improve their performance-information framework.

| — | We previously identified good performance reporting practices for the Commission to implement. Survey respondents confirmed that further developments were needed, for instance in terms of performance-information timeliness or guidance for preparing performance reports. |
| --- | --- |

—

We previously identified good performance reporting practices for the Commission to implement. Survey respondents confirmed that further developments were needed, for instance in terms of performance-information timeliness or guidance for preparing performance reports.

| 3. | The Commission uses performance information to manage programmes and policies although corrective action is not always taken when targets are not met (paragraphs 3.19-3.26) |
| --- | --- |

3.

The Commission uses performance information to manage programmes and policies although corrective action is not always taken when targets are not met (paragraphs 3.19-3.26)

| — | Performance information is mainly used at DG level to manage programmes and policies. As the performance information that meets day-to-day management needs is not aligned with the DGs' and the Commission’s external reporting responsibilities, DGs do generally not use the Commission’s core performance reports to manage their performance of the EU budget. |
| --- | --- |

—

Performance information is mainly used at DG level to manage programmes and policies. As the performance information that meets day-to-day management needs is not aligned with the DGs' and the Commission’s external reporting responsibilities, DGs do generally not use the Commission’s core performance reports to manage their performance of the EU budget.

| — | The Commission reports on the performance of the EU budget through, inter alia, the annual core performance reports (including the Annual Management and Performance Report on the EU budget and Programme Statements), in accordance with the relevant legal obligations. |
| --- | --- |

—

The Commission reports on the performance of the EU budget through, inter alia, the annual core performance reports (including the Annual Management and Performance Report on the EU budget and Programme Statements), in accordance with the relevant legal obligations.

| — | The survey results also indicate that poor performance does not lead to corrective action in all cases. The results confirmed indicated that not meeting a target was more likely to have consequences in DGs where performance information was used frequently. |
| --- | --- |

—

The survey results also indicate that poor performance does not lead to corrective action in all cases. The results confirmed indicated that not meeting a target was more likely to have consequences in DGs where performance information was used frequently.

| — | As the ECA points out, more than 70 % of respondents indicated that if targets are not met, action plans are developed and more intense monitoring is carried out, and more than 60 % of respondents replied that evaluation is carried out if targets are not met.


  The results presented reflect the views of those surveyed. A case-by-case assessment would be required to ascertain whether appropriate follow-up action was taken, taking due account of the constraints of the budgetary framework. |
| --- | --- |

—

As the ECA points out, more than 70 % of respondents indicated that if targets are not met, action plans are developed and more intense monitoring is carried out, and more than 60 % of respondents replied that evaluation is carried out if targets are not met.

The results presented reflect the views of those surveyed. A case-by-case assessment would be required to ascertain whether appropriate follow-up action was taken, taking due account of the constraints of the budgetary framework.

| 4. | The Commission does not generally explain the use of performance information in its performance reports (paragraphs 3.27-3.31) |
| --- | --- |

4.

The Commission does not generally explain the use of performance information in its performance reports (paragraphs 3.27-3.31)

There is no requirement for DGs or the Commission to explain in their performance reports how performance information was used in decision-making. DGs’ performance reports, as well as the programme statements, nevertheless often include some limited information in this respect.

| 5. | Further progress is expected from a continued development in performance culture (paragraphs 3.32-3.36) |
| --- | --- |

5.

Further progress is expected from a continued development in performance culture (paragraphs 3.32-3.36)

The managers of the DGs we interviewed identified a number of perceived challenges preventing them from further using performance information to obtain better results. Our survey results confirmed that there was a real need for more training on the use of performance information, and for more effective dissemination of knowledge and good practices. Several of the actions the Commission is pursuing to become more performance-driven can be seen as first steps in a wider effort towards achieving significant cultural change. Over time, this cultural change should lead the Commission and the EU budget to become ever more focused on attaining results and having an impact.

The Commission considers that it already has a well developed performance culture and has taken a range of measures in recent years to strengthen this culture still further (56). See also the ECA’s examples in paragraph 3.32 of the steps the Commission has taken to reinforce the performance culture, and the Commission reply to paragraph 3.36.

| 3.82. | In paragraphs 3.37-3.67, we present key conclusions and recommendations from a selection of the special reports we published in 2017. |
| --- | --- |

3.82.

In paragraphs 3.37-3.67, we present key conclusions and recommendations from a selection of the special reports we published in 2017.

| 3.83. | This year’s follow-up of past recommendations (see paragraphs 3.68-3.78) confirms that three quarters of the recommendations we assessed had been implemented fully or in most respects. This means that corrective measures have been implemented in most cases. In 19 % of cases, recommendations had been implemented only in some respects, with significant weaknesses remaining detailed in
  Annex 3.2
  . This was 7 % higher than the average over the past six years, which is probably due to our modified analysis method. |
| --- | --- |

3.83.

This year’s follow-up of past recommendations (see paragraphs 3.68-3.78) confirms that three quarters of the recommendations we assessed had been implemented fully or in most respects. This means that corrective measures have been implemented in most cases. In 19 % of cases, recommendations had been implemented only in some respects, with significant weaknesses remaining detailed in
  Annex 3.2
  . This was 7 % higher than the average over the past six years, which is probably due to our modified analysis method.

Recommendations

| 3.84. | Annex 3.4
  shows the findings of our follow-up review of the three recommendations we made in our 2014 annual report. One had not been implemented and there was insufficient evidence to analyse the progress of two others. |
| --- | --- |

3.84.

Annex 3.4
  shows the findings of our follow-up review of the three recommendations we made in our 2014 annual report. One had not been implemented and there was insufficient evidence to analyse the progress of two others.

| 3.85. | Based on our conclusions for 2017, we recommend that the Commission should take the following action. |
| --- | --- |

3.85.

Based on our conclusions for 2017, we recommend that the Commission should take the following action.

| — | Recommendation 1: For the upcoming MFF period, the Commission should propose measures to streamline and simplify the strategic frameworks governing the implementation of the EU budget, thereby reinforcing accountability for results and increasing clarity and transparency for all stakeholders. |
| --- | --- |

—

Recommendation 1: For the upcoming MFF period, the Commission should propose measures to streamline and simplify the strategic frameworks governing the implementation of the EU budget, thereby reinforcing accountability for results and increasing clarity and transparency for all stakeholders.

The Commission accepts the recommendation.

The Commission agrees that the approach to the implementation of the EU budget should be as coherent and streamlined as possible and that clarity and transparency as regards the achievement of results is essential.

The Commission considers that its proposals for the future Multiannual Financial Framework and the associated sectoral programmes constitute a coherent framework for the future budget. These proposals are designed to contribute to the political priorities agreed by European Leaders in Bratislava and Rome. They draw on input from a wide range of stakeholders from across Europe. The final decision on this framework will be taken by the Council acting by unanimity with the consent of the European Parliament.

The ECA refers to other ‘strategic frameworks’ that may influence the implementation of the budget in the post-2020 period. These include the political priorities of the next Commission and the strategic agenda of the European Council. These frameworks are produced in accordance with the institutional prerogatives of the institutions as defined in the Treaty. The Commission will play its role — together with the other institutions — in ensuring a coherent approach to the implementation of the future Multiannual Financial Framework.

The Commission furthermore considers that the framework for the future budget should be sufficiently flexible to be able to respond effectively to unforeseen needs as they emerge. This is a natural and unavoidable consequence of the complex environment in which the EU budget is implemented

| | This should entail working with stakeholders in order to achieve a coherent set of high-level s measurable objectives, suitable for guiding the steps made towards achieving the results (57) set for the entire multiannual financial framework budget throughout its implementation period (58).

  Implementation date: the adoption of multiannual financial framework 2021-2027. |
| --- | --- |

This should entail working with stakeholders in order to achieve a coherent set of high-level s measurable objectives, suitable for guiding the steps made towards achieving the results (57) set for the entire multiannual financial framework budget throughout its implementation period (58).

Implementation date: the adoption of multiannual financial framework 2021-2027.

The proposals for the future financial programmes under the Multiannual Financial Framework contain detailed and measurable objectives and indicators that will be used to monitor and manage the performance of these programmes over the period. The final decision on the design of these programmes will be taken by the European Parliament and Council through the ordinary legislative procedure. The Commission will report on progress in the relevant performance reports. In addition, the Commission will explore with the other institutions and stakeholders the possibility of complementing these programme-level objectives and indicators with high-level measurable objectives linked to the political priorities.

| — | Recommendation 2: The Commission should include up-to-date performance information in performance reporting, including in the annual management and performance report, on progress made towards achieving targets and should always take, or make proposals for, action when these targets are not met.

  Implementation date: end 2019. |
| --- | --- |

—

Recommendation 2: The Commission should include up-to-date performance information in performance reporting, including in the annual management and performance report, on progress made towards achieving targets and should always take, or make proposals for, action when these targets are not met.

Implementation date: end 2019.

The Commission accepts the recommendation.

The Commission will continue to report on progress made and will make proposals where appropriate. The Annual Activity Reports and Programme Statements provide every year the latest available performance information for all performance indicators for the EU budget. The Annual Management and Performance Report for the EU budget is a summary report with references to other more detailed performance reports. It is not intended to provide detailed reporting on all performance indicators.

The Commission notes that the performance reports produced by the Commission rely in part on the quality, availability and timeliness of information provided by Member States and other actors.

As acknowledged by the ECA in paragraph 3.81 (1), there are constraints to the follow-up action that can be taken in the event that targets are not met. Responsibility for budgetary performance and follow-up action is shared between all actors involved in the implementation of the EU budget and is not therefore under the direct or exclusive control of the Commission.

| — | Recommendation 3: The Commission should streamline indicators on the performance of the EU budget and improve the alignment between high-level general objectives and specific programme and policy objectives. To this end, it should take the following steps. |
| --- | --- |

—

Recommendation 3: The Commission should streamline indicators on the performance of the EU budget and improve the alignment between high-level general objectives and specific programme and policy objectives. To this end, it should take the following steps.

The Commission accepts the recommendation.

| | (a) | It should establish a direct link between the specific objectives in the legal basis of each spending programme and the general objectives. |
| --- | --- | --- |

(a)

It should establish a direct link between the specific objectives in the legal basis of each spending programme and the general objectives.

| (a) | The Commission accepts the recommendation; it is being implemented through the Commission’s proposals for the financial programmes under the future Multiannual Financial Framework. These proposals establish a clear performance framework based on objectives and indicators. The final form of the performance frameworks will depend on the outcome of the legislative process. |
| --- | --- |

(a)

The Commission accepts the recommendation; it is being implemented through the Commission’s proposals for the financial programmes under the future Multiannual Financial Framework. These proposals establish a clear performance framework based on objectives and indicators. The final form of the performance frameworks will depend on the outcome of the legislative process.

| | (b) | It should review the performance indicators used for the EU budget at all levels, recording information such as the intended user of each indicator, and its intended purpose. If this information cannot be ascertained, then it should consider eliminating the indicator. |
| --- | --- | --- |

(b)

It should review the performance indicators used for the EU budget at all levels, recording information such as the intended user of each indicator, and its intended purpose. If this information cannot be ascertained, then it should consider eliminating the indicator.

| (b) | The Commission accepts the recommendation; it is being implemented through the proposals for the future Multiannual Financial Framework.

  All indicators established for financial programmes have been critically reviewed as part of the Spending Review leading up to the Commission’s proposals for the future Multiannual Financial Framework. This has resulted in proposals for a smaller number of higher quality indicators of programme performance.
  Different levels of indicator are used to serve different purposes, including performance management but also communication on the results achieved with the EU budget. |
| --- | --- |

(b)

The Commission accepts the recommendation; it is being implemented through the proposals for the future Multiannual Financial Framework.

| | (c) | It should ensure that the information used for the day-to-day management of programmes and policies in DGs is aligned with the aggregated performance information included in the core performance reports. |
| --- | --- | --- |

(c)

It should ensure that the information used for the day-to-day management of programmes and policies in DGs is aligned with the aggregated performance information included in the core performance reports.

Implementation date: the adoption of multiannual financial framework 2021-2027.

| (c) | The Commission accepts the recommendation, while noting that different types and levels of information are relevant for reporting on the performance of the budget at an aggregate level, and for the day-to-day management of the EU budget by the Commission, national authorities, financial institutions and other stakeholders. |
| --- | --- |

(c)

The Commission accepts the recommendation, while noting that different types and levels of information are relevant for reporting on the performance of the budget at an aggregate level, and for the day-to-day management of the EU budget by the Commission, national authorities, financial institutions and other stakeholders.

This recommendation will be implemented through instructions to the services on the preparation of the relevant performance reports.

| — | Recommendation 4: The Commission should provide information in the core performance reports about how it uses performance information. It should show, as systematically as possible, and taking into account the time needed to obtain such information, how performance information concerning the EU budget has been used in its decision-making.

  Implementation date: end 2019. |
| --- | --- |

—

Recommendation 4: The Commission should provide information in the core performance reports about how it uses performance information. It should show, as systematically as possible, and taking into account the time needed to obtain such information, how performance information concerning the EU budget has been used in its decision-making.

Implementation date: end 2019.

The Commission accepts this recommendation.

The Commission notes that due to the time lags associated with the collection of detailed performance information on financial programmes, the main opportunity to draw lessons from performance information is in the design of the legislative framework for future financial programmes.

The Spending Review accompanying the Commission’s proposal for the future Multiannual Financial Framework and the impact assessments published together with the proposals for the future financial programmes make extensive reference to evaluation results, audit conclusions and other sources of performance information and explain how these lessons have been reflected in the design of future programmes.

| — | Recommendation 5: The Commission should introduce or improve measures and incentives to foster a greater focus on performance in the Commission’s internal culture, building of the progress already made. To this end, it should: |
| --- | --- |

—

Recommendation 5: The Commission should introduce or improve measures and incentives to foster a greater focus on performance in the Commission’s internal culture, building of the progress already made. To this end, it should:

The Commission accepts the recommendation.

The Commission has a well-developed performance culture in its services. As acknowledged in this chapter, significant efforts have been made in recent years (for example, the reform of the Strategic Planning and Programming cycle, the mid-term evaluations of the 2014-2020 spending programmes, preparation of the 2021-2027 spending programmes) to strengthen the focus on performance at both the political and service level. The Commission is committed to continuing to promote a performance culture, with due regard to the Commission’s parallel responsibility for the sound financial management of the EU budget.

| | (a) | provide its managers with more knowledge and guidance about performance management, and about the use of performance information for decision-making; |
| --- | --- | --- |

(a)

provide its managers with more knowledge and guidance about performance management, and about the use of performance information for decision-making;

| (a) | The Commission accepts this recommendation.

  The Commission will assess how best to ensure that the extensive guidance that already exists within the Commission on performance management is available to all managers, including through awareness-raising and training activities as necessary. The Commission will also consider whether there are gaps in the current offer. |
| --- | --- |

(a)

The Commission accepts this recommendation.

| | (b) | exchange good practices in using performance information both within the Commission and with key stakeholders such as Member States; and |
| --- | --- | --- |

(b)

exchange good practices in using performance information both within the Commission and with key stakeholders such as Member States; and

| (b) | The Commission accepts this recommendation.

  The Commission will continue to hold regular discussions on performance related issues, both within the relevant internal networks and in cooperation with other institutions and stakeholders.
  For example, the Budget Focused on Results inter-service working group has played a key role gathering regularly senior managers, raising awareness and building a common understanding of performance. Furthermore, along with the preparation of the performance framework for the next generation of programmes, a sub-group at technical level on performance measures has been organised in order to gather knowledge on lessons learnt and best practices and to promote a coordinated approach.
  In 2017 the Commission organised two expert meetings with participants from the European Parliament, Member States and other stakeholders to discuss the use of performance information. |
| --- | --- |

(b)

The Commission accepts this recommendation.

| | (c) | further improve its internal culture to achieve a greater focus on performance, taking into account the challenges identified by DGs (59) as well as the possibilities for progress identified by survey respondents (60) and the opportunities offered by the revised Financial Regulation, the Budget Focused on Results initiative, performance reporting for on-going projects, and other sources. |
| --- | --- | --- |

(c)

further improve its internal culture to achieve a greater focus on performance, taking into account the challenges identified by DGs (59) as well as the possibilities for progress identified by survey respondents (60) and the opportunities offered by the revised Financial Regulation, the Budget Focused on Results initiative, performance reporting for on-going projects, and other sources.

Implementation date: end 2020.

| (c) | The Commission accepts the recommendation.

  The Commission considers that it already has a very well embedded performance culture in its services and will continue to examine how this can be strengthened further. |
| --- | --- |

(c)

The Commission accepts the recommendation.

---

(1)  Article 317 of the Treaty on the functioning of the EU.

(2)  Instructions for the Strategic Plan 2016-2020 and Management Plan 2016, 20 November 2015, Ares (2015)5332669: see section 1, paragraph 1.1.

(3)  http://ec.europa.eu/budget/budget4results/index_en.cfm.

(4)  https://ec.europa.eu/info/files/better-regulation-guidelines_en.

(5)  For example, the Auditor General of Canada, the Controller and Auditor-General of New Zealand, the US Government Accountability Office, and the UK National Audit Office.

(6)  DG AGRI, DG CONNECT, DG DEVCO, DG EAC, DG EMPL and the Secretariat-General.

(7)  The European Parliament and the Council.

(8)  See ‘Budgeting and Performance in the European Union — A review in the context of EU Budget Focused on Results’ by the OECD Public Governance Directorate, paragraph 3.2.4: http://www.oecd-ilibrary.org/governance/budgeting-and-performance-in-the-european-union_budget-17-5jfnx7fj38r2?crawler=true.

(9)  See for instance the University of St. Gallen Law School Law and Economics Research Paper Series Working Paper No 2015-04, September 2014, ‘What can performance information do to legislators? A budget decision experiment with legislators’: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2494772.

(10)  See COM(2016) 603 final, p. 14, ‘Mid-term review/revision of the multiannual financial framework — An EU budget focused on results’http://ec.europa.eu/transparency/regdoc/?fuseaction=list&n=10&adv=0&coteId=1&year=2016&number=603&language=en.

(11)  See for instance our special report No 15/2017 ‘Ex ante conditionalities and performance reserve in Cohesion: innovative but not yet effective instruments’ and our special report No 16/2017 ‘Rural development programming: less complexity and more focus on results needed’ (https://www.eca.europa.eu).

(12)  See COM(2016) 603 final.

(13)  This issue was previously discussed in paragraphs 3.18-3.19 of the 2016 annual report, paragraphs 3.18-3.21 of the 2015 annual report and paragraphs 3.7-3.12 of the 2014 annual report.

(14)  See also the Commission replies to paragraphs 3.18-3.19 of the 2016 ECA annual report, paragraphs 3.18-3.21 of the 2015 ECA annual report and paragraphs 3.7-3.12 of the 2014 ECA annual report.

(15)  As part of the European Semester, DG EAC also works with DG ECFIN and DG EMPL in the area of education to prepare annual country reports to identify challenges, conclusions and recommendations for each Member State.

(16)  See ‘Evaluation of the EU Youth Strategy and the Council Recommendation on the mobility of young volunteers across the EU, Final report’, executive summary, p. 4: ‘The objectives and priorities of the EU Youth Strategy were overall coherent to the objectives of the Europe 2020 Strategy. However, this is mainly due to the broad topical coverage of the youth cooperation framework rather than the efforts to align the two strategies. The two were often perceived by the stakeholders interviewed as separate approaches, each with their own objectives, rather than part of an integrated long-term plan of the EU’.

(17)  We have not, however, analysed the extent of their use or their usefulness.

(18)  2016 annual report, Chapter 3, ‘Getting results from the EU budget’, paragraphs 3.13 to 3.51.

(19)  With regard to the timeliness of information, we identified issues affecting Horizon 2020 in paragraphs 3.31 and 3.51 to 3.53 of the 2015 annual report.

(20)  Similarly, the United States Government Accountability Office noted in various reports that federal agencies can implement a number of practices that can enhance or facilitate the use of performance information (to identify problems and take corrective action; develop strategy and allocate resources; recognise and reward performance; and identify and share effective approaches) in order to reach improved results. See the following US Government Accountability Office reports: https://www.gao.gov/assets/250/247701.pdf; https://www.gao.gov/new.items/d081026t.pdf; https://www.gao.gov/assets/130/123413.pdf; https://www.gao.gov/assets/670/666187.pdf.

(21)  See paragraphs 3.62-3.63 of the 2015 annual report and paragraphs 3.71-3.73 of the 2014 annual report.

(22)  See Recommendation 1 in the 2015 annual report and Recommendation 2 in the 2014 annual report.

(23)  See also 2016 annual report, Chapter 3 ‘Getting results from the EU budget’, Part 1, Section 1 — The performance reporting framework.

(24)  Definitions of terms used in the chart: an indicator is a characteristic or attribute that is measured regularly in order to assess the extent to which an objective has been met; a result indicator measures the immediate changes that arise for direct addressees at the end of their participation in an intervention; and an impact indicator measures the longer-term effects that can be observed in a certain period after an intervention.

(25)  See Annex 10 (and especially pages 457-459) of DG DEVCO’s 2016 annual activity report.

(26)  Since the strategic planning and programming cycle was reformed in 2016, the annual activity reports include information on the Commission’s work programme delivery. They do so by including information on output indicators previously set in the DG’s annual management plan.

(27)  https://ec.europa.eu/info/publications/annual-activity-reports-2016_en. This joint webpage includes links pointing to the individual annual activity report website of each DG. The joint webpage had 2700 unique visitors between the publication of 2016 annual activity reports and 30 January 2018. The individual annual activity report websites received 7509 unique page views in 2017. However, in 2016, annual activity reports could also be published on other websites. No data is available on visitors and page views on those websites.

(28)  This view has also been expressed by the Office of the Auditor General of Canada: ‘Performance information must both be used and be seen by others to be used’, See Section 22. ‘Demonstrable use of performance information is essential’: ‘Implementing Results-Based Management: Lessons from the Literature’,

http://www.oag-bvg.gc.ca/internet/English/meth_gde_e_10225.html.

(29)  See p. 3 of the 2017 annual activity report instructions.

(30)  Strategic plan, management plan, and annual activity report.

(31)  One of the principles is that ‘The overall policy conception and formulation of the Common Agricultural Policy is based on policy and economic analysis, evaluation and impact assessments’, see p. 5 of DG AGRI’s 2016-2020 Strategic Plan.

(32)  See p. 26 of DG CNECT’s 2016 annual activity report, where it is stated that ‘the previous Action Plan had met most of its objectives and demonstrated the importance of having common European goals in eGovernment’.

(33)  http://ec.europa.eu/budget/library/biblio/documents/2017/DB2017_WD01_en.pdf.

(34)  In this part, the DGs discuss budget amendments, upcoming activities, outcomes to pursue and work programmes planned for the following two years.

(35)  See p. 44 of the 2017 programme statements.

(36)  See Specific objective 1.1 on p. 10 of DG EAC’s 2017 management plan.

(37)  See p. 10 of DG EAC’s 2016-2020 strategic plan.

(38)  See our Opinion No 1/2017 concerning the proposal for a revision of the Financial Regulation: https://www.eca.europa.eu/en/Pages/DocItem.aspx?did=40627 [and the text of the revised ‘Financial Regulation’ in particular Articles 124 et seq., and Articles 180 et seq.].

(39)  See SWD(2018) 171 final.

On the need for a universally agreed definition of EU value added, see our February 2018 Briefing Paper, ‘Future of EU finances: reforming how the EU budget operates’, paragraphs 7 and 8 (https://www.eca.europa.eu).

(40)  See conclusion 1 ‘Scope for improving the performance framework’ and recommendation 1 ‘Streamline performance reporting’ as well as the Commission replies in chapter 3 of the 2016 annual report.

(41)  See footnote 8 OECD report paragraph 1.2.4.

(42)  Report from the Commission to the European Parliament and the Council on the evaluation of the Union’s finances based on the results achieved, Brussels 26.6.2015 COM(2015) 313 final, pages 5 and 6. This type of report has since been consolidated with the requirement in Article 66(9) of the Financial Regulation for a summary of AARs to be incorporated into the AMPR.

(43)  Such a cultural change might include evolution over time in various areas, as part of a change management process. These may include changes in management and staff behaviours, incentives for using performance information better, data/evidence based decision-taking, internal communication, resources and tools, and values.

(44)  See executive summary of ‘Budgeting and Performance in the European Union: A review by the OECD in the context of the EU budget focused on results’, OECD Journal on Budgeting, Volume 2017/1.

(45)  https://www.eca.europa.eu.

(46)  1a (‘Competitiveness for growth and jobs’), 1b (‘Economic, social and territorial cohesion’), 2 (‘Sustainable growth: natural resources’), 3 (‘Security and citizenship’), 4 (‘Global Europe’), 5 (‘Administration’).

(47)  Special report No 2/2017 ‘The Commission’s negotiation of 2014-2020 Partnership Agreements (PAs) and programmes in Cohesion: spending more targeted on Europe 2020 priorities, but increasingly complex arrangements to measure performance’, special report No 4/2017 ‘Protecting the EU budget from irregular spending: The Commission made increasing use of preventive measures and financial corrections in Cohesion during the 2007-2013 period’ that contained no performance-related conclusions or recommendations. Special report No 5/2017 ‘Youth unemployment — have EU policies made a difference?’, special report No 12/2017 ‘Implementing the Drinking Water Directive: water quality and access to it improved in Bulgaria, Hungary and Romania, but investment needs remain substantial’, special report No 13/2017 ‘A single European rail traffic management system: will the political choice ever become reality?’, special report No 15/2017 ‘Ex ante conditionalities and performance reserve in Cohesion: innovative but not yet effective instruments’ and special report No 18/2017 ‘Single European Sky: a changed culture but not a single sky’.

(48)  Special report No 1/2017 ‘More efforts needed to implement the Natura 2000 network to its full potential’, special report No 7/2017 ‘The certification bodies’ new role on Common Agricultural Policy expenditure: a positive step towards a single audit model but with significant weaknesses to be addressed’, special report No 8/2017 ‘EU fisheries controls: more efforts needed’, special report No 10/2017 ‘EU support to young farmers should be better targeted to foster effective generational renewal’, special report No 16/2017 ‘Rural Development Programming: less complexity and more focus on results needed’, and special report No 21/2017 ‘Greening: a more complex income support scheme, not yet environmentally effective’.

(49)  Special report No 3/2017 ‘EU Assistance to Tunisia’, special report No 6/2017 ‘EU response to the refugee crisis: the “hotspot” approach’, special report No 9/2017 ‘EU support to fight human trafficking in South/South-East Asia’, special report No 11/2017 ‘The Bêkou EU trust fund for the Central African Republic: a hopeful beginning despite some shortcomings’ and special report No 22/2017 ‘Election Observation Missions — efforts made to follow up recommendations but better monitoring needed’.

(50)  Special report No 17/2017 ‘The Commission’s intervention in the Greek financial crisis’, special report No 19/2017 ‘Import procedures: shortcomings in the legal framework and an ineffective implementation impact the financial interests of the EU’, special report No 20/2017 ‘EU-funded loan guarantee instruments: positive results but better targeting and coordination with national schemes needed’, and special report No 23/2017 ‘Single Resolution Board (SRB): Work on a challenging Banking Union task started, but still a long way to go’.

(51)  The audit areas of seven special reports (special reports Nos 3/2014, 5/2014, 6/2014, 11/2014, 14/2014, 17/2014, and 19/2014) are subject to new audits, either ongoing or planned.

(52)  32 of these concerned the Member States, 2 concerned the Council or the Parliament, and in one case there was insufficient evidence.

(53)  We made one recommendation to the Member States (in special report No 9/2014); four recommendations to the Commission and the Member States (one in special report No 15/2014, two in special report No 22/2014, and one in special report No 23/2014); and one recommendation to the Commission and the European External Action Service (in special report No 13/2014).

(54)  Recommendation 3(a) of special report No 9/2014, to the effect that individual beneficiaries should be restricted from regularly presenting a promotion programme for the targeted countries, recommendation 1(c) of special report 12/2014, the effect that the actual implementation of operational programmes should be monitored with a view to identifying difficulties early and proactively, and recommendation 4.2 of special report No 18/2014, to the effect that the monitoring system should be modified.

(55)  For recommendation 3(b) of special report No 20/2014, the Commission replied that the results of e-commerce projects can be influenced by external factors that cannot be known in advance. Linking European Regional Development Fund payments for e-commerce with results would therefore be challenging.

(56)  See executive summary of ‘Budgeting and Performance in the European Union: A review by the OECD in the context of the EU budget focused on results’, OECD Journal on Budgeting, Volume 2017/1.

(57)  By the Commission and all EU stakeholders.

(58)  The MFF budgetary cycle currently covers a seven-year period. There is an ongoing debate regarding the most suitable duration of an MFF: see ‘The next Multiannual Financial Framework (MFF) and its Duration’, European Parliament Policy Department for Budgetary Affairs, Directorate General for Internal Policies of the Union, PE603.798 — October 2017.

(59)  See Box 3.11.

(60)  See Box 3.13.

(61)  The 2016 AMPR is available on EUR-Lex: http://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX%3A52017DC0351. The 2016 AMPR was downloaded from EUR-Lex 4 040 times in the period from 30 June 2017 to 29 January 2018.

ANNEX 3.1

STATUS OF RECOMMENDATIONS BY REPORT

| No | SR | Report title | No | SR paragraph | Fully implemented | Implemented in most respects | Implemented in some respects | Not implemented | Could not be verified |
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
| 1 | SR 04/2014 | Integration of EU water policy objectives with the CAP — a partial success | 1 | Par. 84 Rec 1 | | | x | | |
| 2 | Par. 85 Rec 2 first bullet | | | | | x |
| 3 | Par. 85 Rec 2 second bullet | | | | | x |
| 4 | Par. 85 Rec 2 third bullet | | | | | x |
| 5 | Par. 85 Rec 2 fourth bullet | | | | | x |
| 6 | Par. 85 Rec 2 fifth bullet | | | | | x |
| 7 | Par. 86 Rec 3 first part | | | x | | |
| 8 | Par. 86 Rec 3 second part | | | | | x |
| 9 | Par. 87 first part | | | x | | |
| 10 | Par. 87 second part | | | | | x |
| 2 | SR 08/2014 | Has the Commission effectively managed the integration of coupled support into the single payment scheme? | 1 | Par. 64 Rec 1 | x | | | | |
| 2 | Par. 66 Rec 2 | | x | | | |
| 3 | Par. 69 Rec 3 | | x | | | |
| 4 | Par. 71 Rec 4 | | x | | | |
| 3 | SR 09/2014 | Is the EU investment and promotion support to the wine sector well managed and are its results on the competitiveness of EU wines demonstrated? | 1 | Par. 84 Rec 1 | | | x | | |
| 2 | Par. 85 Rec 2 | x | | | | |
| 3 | Par. 86 Rec 3(a) | | | x | | |
| 4 | Par. 86 Rec 3(b) | | | | x | |
| 5 | Par. 87 Rec 4 | | x | | | |
| 6 | Par. 88 Rec 5(a) | x | | | | |
| 7 | Par. 88 Rec 5(b) | | | | | x |
| 8 | Par. 89 Rec 6 | x | | | | |
| 9 | Par. 90 Rec 7 | | | x | | |
| 4 | SR 10/2014 | The effectiveness of European Fisheries Fund support for aquaculture | 1 | Par. 78 Rec 1(a) | x | | | | |
| 2 | Par. 78 Rec 1(b) | x | | | | |
| 3 | Par. 78 Rec 1(c) | x | | | | |
| 4 | Par. 78 Rec 1(d) | x | | | | |
| 5 | Par. 78 Rec 1(e) | x | | | | |
| 6 | Par. 78 Rec 2(a) | | | | | x |
| 7 | Par. 78 Rec 2(b) | | | | | x |
| 8 | Par. 78 Rec 2(c) | | | | | x |
| 9 | Par. 78 Rec 2(d) | | | | | x |
| 5 | SR 22/2014 | Achieving economy — keeping the costs of EU-financed rural development project grants under control | 1 | Par. 110 | | x | | | |
| 2 | Par. 111 | x | | | | |
| 6 | SR 23/2014 | Errors in rural development spending — what are the causes, and how are they being addressed? | 1 | Par. 97 Rec 1 | x | | | | |
| 2 | Par. 98 Rec 2 | x | | | | |
| 3 | Par. 99 Rec 3 | | | x | | |
| 7 | SR 24/2014 | Is EU support for preventing and restoring damage to forests caused by fire and natural disasters well managed? | 1 | Par. 78 Rec 1 MS first bullet | | | | | x |
| 2 | Par. 78 Rec 1 MS second bullet | | | | | x |
| 3 | Par. 78 Rec 1 COM first bullet | x | | | | |
| 4 | Par. 78 Rec 1 COM second bullet | | | x | | |
| 5 | Par. 79 Rec2 MS first bullet | | | | | x |
| 6 | Par. 79 Rec 2 MS second bullet | | | | | x |
| 7 | Par. 79 Rec 2 MS third bullet | | | | | x |
| 8 | Par. 79 Rec 2 COM first bullet | | x | | | |
| 9 | Par. 79 Rec 2 COM second bullet | x | | | | |
| 10 | Par. 80 Rec 3 MS first bullet | | | | | x |
| 11 | Par. 80 Rec 3 MS second bullet | | | | | x |
| 12 | Par. 80 Rec 3 MS third bullet | | | | | x |
| 13 | Par. 81 Rec 4 MS | | | | | x |
| 14 | Par. 81 Rec 4 COM | | | x | | |
| 8 | SR 01/2014 | Effectiveness of EU-supported public urban transport projects | 1 | Par. 57 Rec 1 | | | x | | |
| 2 | Par. 57 Rec 2 | | | x | | |
| 3 | Par. 57 Rec 3 | x | | | | |
| 4 | Par. 57 Rec 4 | x | | | | |
| 5 | Par. 57 Rec 5 | | x | | | |
| 9 | SR 07/2014 | Has the ERDF successfully supported the development of business incubators? | 1 | Par. 82 Rec 1(a) | x | | | | |
| 2 | Par. 82 Rec 1(b) | x | | | | |
| 3 | Par. 82 Rec 1(c) | x | | | | |
| 4 | Par. 82 Rec 1(d) | | | x | | |
| 5 | Par. 82 Rec 1(e) | | | | | x |
| 6 | Par. 82 Rec 1(f) | | | x | | |
| 7 | Par. 84 Rec 2(a) | | | | x | |
| 8 | Par. 84 Rec 2(b) | | | | x | |
| 9 | Par. 84 Rec 2(c) | | | | x | |
| 10 | Par. 84 Rec 2(d) | | | | x | |
| 11 | Par. 85 Rec 3(a) | x | | | | |
| 12 | Par. 85 Rec 3(b) | x | | | | |
| 10 | SR 12/2014 | Is the ERDF effective in funding projects that directly promote biodiversity under the EU biodiversity strategy to 2020? | 1 | Par. 42 Rec 1(a) | x | | | | |
| 2 | Par. 42 Rec 1(b) | x | | | | |
| 3 | Par. 42 Rec 1(c) | | | x | | |
| 4 | Par. 45 Rec 2(a) | | | x | | |
| 5 | Par. 45 Rec 2(b) | x | | | | |
| 6 | Par. 45 Rec 2(c) | x | | | | |
| 7 | Par. 45 second part | | x | | | |
| 11 | SR 20/2014 | Has ERDF support to SMEs in the area of e commerce been effective? | 1 | Par. 68 Rec 1(a) | x | | | | |
| 2 | Par. 68 Rec 1(b) | | x | | | |
| 3 | Par. 68 Rec 1(c) | | | x | | |
| 4 | Par. 68 Rec 2 COM first part | x | | | | |
| 5 | Par. 68 Rec 2 (a) MS | | | | | x |
| 6 | Par. 68 Rec 2 (b) MS | | | | | x |
| 7 | Par. 68 Rec 2 (c) MS | | | | | x |
| 8 | Par. 68 Rec 2 (d) MS | | | | | x |
| 9 | Par. 68 Rec 3(a) | | x | | | |
| 10 | Par. 68 Rec 3(b) | | | | x | |
| 11 | Par. 68 Rec 3(c) | x | | | | |
| 12 | SR 21/2014 | EU-funded airport infrastructures — poor value for money | 1 | Par. 71 | | | x | | |
| 2 | Par. 72 | | | | | x |
| 13 | SR 13/2014 | EU support for rehabilitation following the earthquake in Haiti | 1 | Par. 68 Rec 1 | x | | | | |
| 2 | Par. 68 Rec 2 first bullet | x | | | | |
| 3 | Par. 68 Rec 2 second bullet | x | | | | |
| 4 | Par. 68 Rec 2 third bullet | | | x | | |
| 5 | Par. 68 Rec 3 first bullet | x | | | | |
| 6 | Par. 68 Rec 3 second bullet | x | | | | |
| 7 | Par. 68 Rec 3 third bullet | x | | | | |
| 8 | Par. 68 Rec 4 | x | | | | |
| 14 | SR 16/2014 | The effectiveness of blending regional investment facility grants with financial institution loans to support EU external policies | 1 | Par. 57(a) | x | | | | |
| 2 | Par. 57(b) | x | | | | |
| 3 | Par. 57(c) | x | | | | |
| 4 | Par. 57(d) | x | | | | |
| 5 | Par. 58 | x | | | | |
| 6 | Par. 59(a) | x | | | | |
| 7 | Par. 59(b) | x | | | | |
| 8 | Par. 59(c) | x | | | | |
| 9 | Par. 60 | x | | | | |
| 15 | SR 18/2014 | EuropeAid’s evaluation and results oriented monitoring systems | 1 | Par. 70 Rec 1 | | x | | | |
| 2 | Par. 70 Rec 2 first bullet | | x | | | |
| 3 | Par. 70 Rec 2 second bullet | | x | | | |
| 4 | Par. 70 Rec 2 third bullet | x | | | | |
| 5 | Par. 70 Rec 3 first bullet | x | | | | |
| 6 | Par. 70 Rec 3 second bullet | x | | | | |
| 7 | Par. 70 Rec 4 first bullet | x | | | | |
| 8 | Par. 70 Rec 4 second bullet | | | x | | |
| 9 | Par. 70 Rec 4 third bullet | | x | | | |
| 10 | Par. 70 Rec 5 first bullet | | x | | | |
| 11 | Par. 70 Rec 5 second bullet | x | | | | |
| 16 | SR 02/2014 | Are preferential trade arrangements appropriately managed? | 1 | Par. 110(1) | x | | | | |
| 2 | Par. 110(2) | x | | | | |
| 3 | Par. 110(3) | x | | | | |
| 4 | Par. 110(4) | | x | | | |
| 17 | SR 15/2014 | The External Borders Fund has fostered financial solidarity but requires better measurement of results and needs to provide further EU added value | 1 | Par. 78 Rec 1 first bullet | x | | | | |
| 2 | Par. 78 Rec 1 second bullet | x | | | | |
| 3 | Par. 78 Rec 1 third bullet | x | | | | |
| 4 | Par. 78 Rec 1 fourth bullet | | x | | | |
| 5 | Par. 78 Rec 2 first bullet | | | | | x |
| 6 | Par. 78 Rec 2 second bullet | | | | | x |
| 7 | Par. 78 Rec 2 third bullet | | | | | x |
| 8 | Par. 78 Rec 2 fourth bullet | | | | | x |
| 9 | Par. 80 Rec 3 | x | | | | |
| 10 | Par. 80 Rec 4 first bullet | | | | | x |
| 11 | Par. 80 Rec 4 second bullet | x | | | | |
| 12 | Par. 81 Rec 5 | | | | | x |
| 13 | Par. 81 Rec 6 | | | | | x |
| 14 | Par. 83 Rec 7 | x | | | | |
| 15 | Par. 83 Rec 8 | | | | | x |
| Total 2017 | | 135 | 58 | 17 | 19 | 6 | 35 |
| Total Assessed 2017 | | 100 | 58 % | 17 % | 19 % | 6 % | |

No

SR

Report title

No

SR paragraph

Fully implemented

Implemented in most respects

Implemented in some respects

Not implemented

Could not be verified

1

SR 04/2014

Integration of EU water policy objectives with the CAP — a partial success

1

Par. 84 Rec 1

x

2

Par. 85 Rec 2 first bullet

x

3

Par. 85 Rec 2 second bullet

x

4

Par. 85 Rec 2 third bullet

x

5

Par. 85 Rec 2 fourth bullet

x

6

Par. 85 Rec 2 fifth bullet

x

7

Par. 86 Rec 3 first part

x

8

Par. 86 Rec 3 second part

x

9

Par. 87 first part

x

10

Par. 87 second part

x

2

SR 08/2014

Has the Commission effectively managed the integration of coupled support into the single payment scheme?

1

Par. 64 Rec 1

x

2

Par. 66 Rec 2

x

3

Par. 69 Rec 3

x

4

Par. 71 Rec 4

x

3

SR 09/2014

Is the EU investment and promotion support to the wine sector well managed and are its results on the competitiveness of EU wines demonstrated?

1

Par. 84 Rec 1

x

2

Par. 85 Rec 2

x

3

Par. 86 Rec 3(a)

x

4

Par. 86 Rec 3(b)

x

5

Par. 87 Rec 4

x

6

Par. 88 Rec 5(a)

x

7

Par. 88 Rec 5(b)

x

8

Par. 89 Rec 6

x

9

Par. 90 Rec 7

x

4

SR 10/2014

The effectiveness of European Fisheries Fund support for aquaculture

1

Par. 78 Rec 1(a)

x

2

Par. 78 Rec 1(b)

x

3

Par. 78 Rec 1(c)

x

4

Par. 78 Rec 1(d)

x

5

Par. 78 Rec 1(e)

x

6

Par. 78 Rec 2(a)

x

7

Par. 78 Rec 2(b)

x

8

Par. 78 Rec 2(c)

x

9

Par. 78 Rec 2(d)

x

5

SR 22/2014

Achieving economy — keeping the costs of EU-financed rural development project grants under control

1

Par. 110

x

2

Par. 111

x

6

SR 23/2014

Errors in rural development spending — what are the causes, and how are they being addressed?

1

Par. 97 Rec 1

x

2

Par. 98 Rec 2

x

3

Par. 99 Rec 3

x

7

SR 24/2014

Is EU support for preventing and restoring damage to forests caused by fire and natural disasters well managed?

1

Par. 78 Rec 1 MS first bullet

x

2

Par. 78 Rec 1 MS second bullet

x

3

Par. 78 Rec 1 COM first bullet

x

4

Par. 78 Rec 1 COM second bullet

x

5

Par. 79 Rec2 MS first bullet

x

6

Par. 79 Rec 2 MS second bullet

x

7

Par. 79 Rec 2 MS third bullet

x

8

Par. 79 Rec 2 COM first bullet

x

9

Par. 79 Rec 2 COM second bullet

x

10

Par. 80 Rec 3 MS first bullet

x

11

Par. 80 Rec 3 MS second bullet

x

12

Par. 80 Rec 3 MS third bullet

x

13

Par. 81 Rec 4 MS

x

14

Par. 81 Rec 4 COM

x

8

SR 01/2014

Effectiveness of EU-supported public urban transport projects

1

Par. 57 Rec 1

x

2

Par. 57 Rec 2

x

3

Par. 57 Rec 3

x

4

Par. 57 Rec 4

x

5

Par. 57 Rec 5

x

9

SR 07/2014

Has the ERDF successfully supported the development of business incubators?

1

Par. 82 Rec 1(a)

x

2

Par. 82 Rec 1(b)

x

3

Par. 82 Rec 1(c)

x

4

Par. 82 Rec 1(d)

x

5

Par. 82 Rec 1(e)

x

6

Par. 82 Rec 1(f)

x

7

Par. 84 Rec 2(a)

x

8

Par. 84 Rec 2(b)

x

9

Par. 84 Rec 2(c)

x

10

Par. 84 Rec 2(d)

x

11

Par. 85 Rec 3(a)

x

12

Par. 85 Rec 3(b)

x

10

SR 12/2014

Is the ERDF effective in funding projects that directly promote biodiversity under the EU biodiversity strategy to 2020?

1

Par. 42 Rec 1(a)

x

2

Par. 42 Rec 1(b)

x

3

Par. 42 Rec 1(c)

x

4

Par. 45 Rec 2(a)

x

5

Par. 45 Rec 2(b)

x

6

Par. 45 Rec 2(c)

x

7

Par. 45 second part

x

11

SR 20/2014

Has ERDF support to SMEs in the area of e commerce been effective?

1

Par. 68 Rec 1(a)

x

2

Par. 68 Rec 1(b)

x

3

Par. 68 Rec 1(c)

x

4

Par. 68 Rec 2 COM first part

x

5

Par. 68 Rec 2 (a) MS

x

6

Par. 68 Rec 2 (b) MS

x

7

Par. 68 Rec 2 (c) MS

x

8

Par. 68 Rec 2 (d) MS

x

9

Par. 68 Rec 3(a)

x

10

Par. 68 Rec 3(b)

x

11

Par. 68 Rec 3(c)

x

12

SR 21/2014

EU-funded airport infrastructures — poor value for money

1

Par. 71

x

2

Par. 72

x

13

SR 13/2014

EU support for rehabilitation following the earthquake in Haiti

1

Par. 68 Rec 1

x

2

Par. 68 Rec 2 first bullet

x

3

Par. 68 Rec 2 second bullet

x

4

Par. 68 Rec 2 third bullet

x

5

Par. 68 Rec 3 first bullet

x

6

Par. 68 Rec 3 second bullet

x

7

Par. 68 Rec 3 third bullet

x

8

Par. 68 Rec 4

x

14

SR 16/2014

The effectiveness of blending regional investment facility grants with financial institution loans to support EU external policies

1

Par. 57(a)

x

2

Par. 57(b)

x

3

Par. 57(c)

x

4

Par. 57(d)

x

5

Par. 58

x

6

Par. 59(a)

x

7

Par. 59(b)

x

8

Par. 59(c)

x

9

Par. 60

x

15

SR 18/2014

EuropeAid’s evaluation and results oriented monitoring systems

1

Par. 70 Rec 1

x

2

Par. 70 Rec 2 first bullet

x

3

Par. 70 Rec 2 second bullet

x

4

Par. 70 Rec 2 third bullet

x

5

Par. 70 Rec 3 first bullet

x

6

Par. 70 Rec 3 second bullet

x

7

Par. 70 Rec 4 first bullet

x

8

Par. 70 Rec 4 second bullet

x

9

Par. 70 Rec 4 third bullet

x

10

Par. 70 Rec 5 first bullet

x

11

Par. 70 Rec 5 second bullet

x

16

SR 02/2014

Are preferential trade arrangements appropriately managed?

1

Par. 110(1)

x

2

Par. 110(2)

x

3

Par. 110(3)

x

4

Par. 110(4)

x

17

SR 15/2014

The External Borders Fund has fostered financial solidarity but requires better measurement of results and needs to provide further EU added value

1

Par. 78 Rec 1 first bullet

x

2

Par. 78 Rec 1 second bullet

x

3

Par. 78 Rec 1 third bullet

x

4

Par. 78 Rec 1 fourth bullet

x

5

Par. 78 Rec 2 first bullet

x

6

Par. 78 Rec 2 second bullet

x

7

Par. 78 Rec 2 third bullet

x

8

Par. 78 Rec 2 fourth bullet

x

9

Par. 80 Rec 3

x

10

Par. 80 Rec 4 first bullet

x

11

Par. 80 Rec 4 second bullet

x

12

Par. 81 Rec 5

x

13

Par. 81 Rec 6

x

14

Par. 83 Rec 7

x

15

Par. 83 Rec 8

x

Total 2017

135

58

17

19

6

35

Total Assessed 2017

100

58 %

17 %

19 %

6 %

THE COMMISSION'S REPLIES

SR 04/2014: Integration of EU water policy objectives with the CAP — a partial success

Reply to paragraph 86, recommendation 3, first part: The Commission agrees that the assessment of the 2nd River Basin Management Plans (RBMPs) is still outstanding but still intends to advance the respective Commission report well before the legal deadline of December 2018. However, based on an ad-hoc assessment of the relevant parts, the information provided in those RBMPs has effectively been used to ensure compliance with the ex-ante conditionalities on water in the rural development programmes. Therefore the Commission considers that minimum conditions as regards the implementation of the WFD have been ensured before committing rural development funds, i.e. water pricing, as well as a set of eligibility criteria for investments in irrigation. Thus the Commission considers the recommendation implemented with respect to rural development policy.

Reply to paragraph 87, first part: The Commission confirms that work on the guidelines on assessing impacts of RDPs through the evaluations to be submitted in the 2019 annual reports is ongoing.

This includes two impact indicators to assess pressures placed on water by agricultural practices.

The same indicators will be assessed in the 2014-2020 RDPs’ ex-post evaluations, for which guidelines will be provided.

SR 08/2014: Has the Commission effectively managed the integration of coupled support into the single payment scheme?

Reply to paragraph 66, recommendation 2: About the Commission conformity clearance: as a result of the finding, the Commission changed its approach to ensure more focus on the audit and validation of the central calculations and the internal controls applied. All audits launched/to be launched starting second half of 2017 are affected with this change. Already 3 audits have been finalised (SE, IT and UK –Scotland). The audit report NAC /2017/002/SE was just sent to ECA, on 20 April 2018. The audit report for IT should be sent still this month.

Reply to paragraph 69, recommendation 3: In accordance with EU law, it is for the Member States to carry out recoveries from beneficiaries. Moreover, Member States report on these recoveries per beneficiary and without specifying the reasons for establishing the irregularity, leading to launching the recovery. (It is possible that the same beneficiary has several non-compliances under different support measures.) The Commission applies financial corrections for lack of due diligence in pursuing recoveries. These corrections are based on the analysis of the Member States' management of the recovery procedures, recorded in accordance with legal requirements, i.e. per beneficiary, without a break down into different reasons for the undue payment. The ECA is requested to take into account the framework set out in the applicable legislation.

Reply to paragraph 71, recommendation 4: The accreditation criteria for Paying Agencies are drafted without providing for an enumerative list of all types of checks that must be executed. The accreditation criteria are drafted in a general way, there is no reference to any support measure. At the same time, it is clearly provided in EU legislation that Paying Agencies must ensure that ‘the amount to be paid to a beneficiary is in conformity with Union rules’ (Point 1(A)(i) of Annex I to Regulation (EU) No 907/2014). The Commission considers that the existing system is solid and yields good results, also taking into account very low error rate for direct payments (below materiality in the ECA Annual Report 2016). Concerning the work of the Certification Bodies the Commission also considers that the current guidelines for Certification Bodies' obligations are clear and comprehensive, so the framework provided is sufficient. The Commission guidelines cannot be too prescriptive, as the Certification Bodies are qualified auditors and in accordance with internationally accepted audit standards, they should use their professional judgement in carrying out the certification work.

SR 09/2014: Is the EU investment and promotion support to the wine sector well managed and are its results on the competitiveness of EU wines demonstrated?

Reply to paragraph 86, recommendation 3 (a): The Commission considers that once an operator has benefitted from support for a promotion operation in a third country market for a 3- possibly 5-year period, the operator is no more eligible for support for the same operation in the same market, not even in a subsequent programming period. This concept has been clearly explained in a letter sent to one Member State in January and it has been discussed in the Wine Committee in March this year.

SR 22/2014: Achieving economy — keeping the costs of EU-financed rural development project grants under control

Reply to paragraph 110: The Commission considers this recommendation as implemented. The Commission has outlined the different occasions on which the topics in question are discussed with the Member States as well as recent amendments of the Implementation Regulation 809/2014. On request of the Member States the Guidance Document on Controls and Penalties will be updated in the course of 2018.

SR 23/2014: Errors in rural development spending — what are the causes, and how are they being addressed?

Reply to paragraph 99, recommendation 3: The Commission committed to analyse possible ways to improve the performance of the rural development policy as a whole. Reflections in this respect have been already initiated in the context of the preparation of the Commission Communication on CAP Modernisation and Simplification.

SR 24/2014: Is EU support for preventing and restoring damage to forests caused by fire and natural disasters well managed?

Reply to paragraph 78, recommendation 1, Commission, second bullet: The Commission agrees that the implementation of the recommendation is ongoing. The Commission started the consultation with the Commission expert group on forest fires to set up common criteria. As forest types, fire vulnerability, geographical and climatic conditions and fire danger levels are very different within the EU, it is a joint exercise with different Commission services and the Member States involved. It seems that the results can be expected by the end of 2018. DG ENV together with JRC is responsible for this question, since they are the lead in the forest fire expert group.

Reply to paragraph 79, recommendation 2, Commission, first bullet: The Commission considered this recommendation as implemented. The actions undertaken by the Commission including i.a. ongoing conformity audits on the Member States' control systems as well as the monitoring of action plans on identified weaknesses, are considered effective. These actions aim to address any known challenges with the implementation of the measures and are ongoing until the end of the current programming period. A final assessment of the effectiveness of these actions is therefore not yet possible.

Reply to paragraph 81, recommendation 4, Commission: The enhanced annual implementation report (AIR) for the rural development programmes to be introduced in 2019 will include further information as to the implementation of the measure in line with the specific objectives.

Furthermore, the Communication ‘The Future of Food and Farming’ [COM(2017) 713 final] sets out the next steps as regards the common monitoring and evaluation framework of the CAP.

ANNEX 3.2

KEY IMPROVEMENTS AND UNRESOLVED WEAKNESSES BY REPORT

| No | SR | Report title | Improvements | Weaknesses |
| --- | --- | --- | --- | --- |
| 1 | SR 04/2014 | Integration of EU water policy objectives with the CAP — a partial success
  (natural resources) | Following an inter-institutional-agreement the Commission has undertaken first steps to integrate provisions from the Directives into the existing instrument CC. The Commission included certain measures concerning water policy objectives in the current RD programmes. | At present the actual integration of provisions of the two directives remains at a planning stage. The existing Rural Development measures address only a part of water policy goals. No new instruments — as proposed by the auditors in the SR — have been introduced by the Commission. |
| Ex-ante conditionality and several pre-conditions for the eligibility to support have been introduced to the Rural Development Plans. | Approved final versions of the 2nd River Basin Management Plans are delayed and still outstanding. Further integration of mechanisms into Rural Development is still outstanding. |
| Improved CMEF have been introduced which aims/intends to provide for better data for assessment of pressures on water by agricultural practices. | Actual improvements in the evaluation of pressures placed on water by agricultural practices are still outstanding and gaps in the actual reporting practices by MSs have already been identified. |
| 2 | SR 08/2014 | Has the Commission effectively managed the integration of coupled support into the single payment scheme
  (natural resources) | The Commission issued a high number of guidance notes, intensified bilateral contacts with the Member States and regularly monitored and followed-up the implementation of the direct payment schemes at Member States level. | The current legal framework for direct payments became more complex than the preceding one. Resulting from this, Member States faced problems concerning its correct application for claim year 2015. |
| The Commission increased its monitoring and supervision and accelerated the conformity clearance procedures. | Certain Member States did not communicate basic information of the new direct payments schemes in time to the Commission weakening its monitoring capacity. Its own audits on payment entitlements show room for improvement. |
| The Commission strengthened its monitoring and audit efforts. | No data is available on Commission level on recoveries to be made at MS level in relation to the correction of wrongly allocated SPS/BPS payment entitlements and wrongly calculated payments. |
| The Commission strengthened its monitoring and audit efforts as well as its follow-up on the work of the certification bodies. | The accreditation criteria for paying agencies do not make any reference as to the accuracy and validity of payment entitlements. Furthermore, the Commission’s methodology and guidelines determining the work of certification bodies on payment entitlements are incomplete. |
| 3 | SR 09/2014 | Is the EU investment and promotion support to the wine sector well managed and are its results on the competitiveness of EU wines demonstrated
  (natural resources) | The Commission reconfirmed during the follow-up audit its regular monitoring of support absorption, as stated in its replies to the Court’s SR 9/2014. Carrying out regular monitoring is, however, only a preparatory first step towards fulfilling the Court’s recommendation. | An impact assessment and assessment of coherence of CAP instruments is still outstanding. The first results are expected before 31.12.2018. An assessment of the potential need for an additional investment aid scheme especially for wine is still outstanding. |
| The Commission established provisions and procedures to check and document reasonableness of costs and financial viability of projects.
  The Commission audits compliance with management and control systems and their effectiveness. | NONE |
| Clarification of certain requirements (such as duration, extension, success criteria) and priority for new beneficiaries and new markets. | The Commission’s introduction of clarifications and priorities may only partly improve the situation as they do not prevent longer term support (up to five years) for the same beneficiaries in the same target markets in third countries.
  Having rejected the recommendation, the Commission does not intend to implement this recommendation to its full extent. Hence the risks identified by ECA in SR 9/2014 still prevail. |
| NONE | The Court’s SR 9/2014 found that the promotion measure is not appropriately designed and efficiently implemented. Promotion actions are often used for consolidating markets rather than winning new markets or recovering old markets.
  The need to consolidate a market is constant for a wine producer intending to maintain its market share. This raises the question as to whether such promotion actions can have a sustainable effect without undue reliance on continuous EU support. Furthermore, the support for established commercial brand advertising does not correspond to the measure’s original purpose to support the wine market rather than established brands.
  Since the Commission did not act to implement the recommendation to limit the scope of the measure concerning eligibility of brand advertising, the risks identified in SR 9/2014 that EU funding replaces operational expenditure of the beneficiary still prevail. |
| The Commission has introduced provisions and procedures to clarify requirements for eligibility. | The general possibility to support brand advertising through EU funding remains which according to the Court’s SR 9/2014 may not correspond to the measure’s original purpose. |
| The Commission has introduced clarifying provisions and procedures to ensure that ancillary costs are justified and limited, as recommended by the Court in its SR 9/2014. | NONE |
| The Commission has introduced improved monitoring requirements for Member States as recommended by the Court. | NONE |
| Member States have provided implementation reports on the status of their programmes. | An overall evaluation and resulting adjustments to the policy are still outstanding. |
| 4 | SR 10/2014 | The effectiveness of European Fisheries Fund support for aquaculture
  (natural resources) | The inclusion of realistic and appropriate objectives in the MNSPs and OPs was checked by the Commission prior to the approval of the OPs. | NONE |
| The guidance document produced by the Commission contributes to a better understanding of environmental requirements and good practices by the aquaculture stakeholders. | NONE |
| For the new programming period, the Commission ensured that all Member States prepared appropriate multiannual strategic plans for aquaculture prior to the operational programmes. | NONE |
| The Commission carries out various actions in order to encourage the simplification of administrative procedures and the implementation of relevant spatial planning. In particular, the seminars allow discussions and exchange good practices on those topics. | NONE |
| The comparability of the data collected by Eurostat and those collected through the DCF has improved. However, no progress has been made on the accuracy and completeness of the data compiled by the Commission. | NONE |
| 5 | SR 22/2014 | Achieving economy — keeping the costs of EU-financed rural development project grants under control
  (natural resources) | The Commission prepared in cooperation with Member States ‘Guidance Document on Control and Penalty rules in Rural Development’, Annex 1 of which contains the good practice checklist targeting the main risk areas as recommended by the Court. It was available to Member States three months earlier than initially indicated (in December 2014 instead of March 2015).
  ENRD organises training courses on related issues and all related documents from those sessions as well as good practices are published on the ERND website. | As the guidance is not a binding and obligatory document to be followed, the Commission cannot know how many Member States/regions actually used them in order to improve their control systems.
  In total, between February 2015 and January 2016, there were only three training sessions organised by the ENRD in relation to reasonableness of costs and SCO. With118 RDPs, there is a risk that the Commission may need to do more to assure that every Member State/region had a chance to participate or participated in such training sessions.
  The ENRD good practice sharing platform could be developed by adding examples of good administrative procedures such as those on reasonableness of costs. |
| Control systems are checked by the Commission against the known list of risks and if necessary the Commission demands corrective actions from Member States.
  Checks are conducted on reasonableness of costs in the framework of the compliance audit for each file in H4’s (DG AGRI) sample and as a key control 7 during key and ancillary controls concerning Rural Development Measures 2014-2020.
  The Commission checks reasonableness of costs as part of the file checks carried out on individual files in the compliance audits (checklist for compliance testing). | |
| 6 | SR 23/2014 | Errors in rural development spending — what are the causes, and how are they being addressed
  (natural resources) | The Commission has put in place a variety of instruments in order to address the root causes of error: action plans in the Member States, guidance documents, seminars with representatives of Managing Authorities and Paying Agencies from all Member States, training disseminated through ENRD. | NONE |
| The Commission uses a variety of actions to reduce the risk of repeating the previous weaknesses and errors, such as: monitoring, training, disseminating information, and carrying out its audit activity in the MSs. | The implementation reports to be sent by Member States by 30 June 2017[1] will provide the Commission with the opportunity to obtain an updated and more in-depth view on the implementation of the RDPs. |
| The Commission has already required that Member States increase the scope of their administrative controls, to include commitments which can be checked based on documentary evidence. | The Commission is committed to assess the policy conception and the continued need for each support measure on the basis of the results of the implementation of the 2014 — 2020 programming period, before making proposals for the next programming period. |
| 7 | SR 24/2014 | Is EU support for preventing and restoring damage to forests caused by fire and natural disasters well managed
  (natural resources) | The Commission introduced appropriate tools within the approval process of RDPs (namely improved strategy, Commission’s measure fiches (sheets), checklists and communication processes). These tools allow for timely actions by the Commission and the required adjustments by the Member States to address weaknesses concerning the description and justification of needs for preventive actions. | NONE |
| While a complete set of criteria applicable to all Member States is still under development, the Commission requires Member States to base their support measures on national risk assessments and forestry / disaster management plans which are adapted to the specific situations of each participating Member State.
  The Commission has committed itself in RAD to implement the recommendation by end of 2018. | The completion of an EU wide set of basic criteria, as recommended by the Court, is still outstanding/ under development. |
| Member States’ control systems were assessed by the Commission during the approval of the Member States’ RDPs for 2014-20, and compliance audits are conducted by the Commission. | An evaluation of the effectiveness of the actions is still outstanding due to the fact that most projects financed under the new programming period have not yet been finalised or audited. |
| The Commission has communicated guidelines and instructions that ensure that Member States link their interventions to strategic objectives as prevention of fires and natural disasters as defined in their national forest protection plans. | NONE |
| Adaptation of the ‘area supported’ indicator for preventive actions. | The Commission has confirmed in RAD that its implementation ‘can only be completed in 2019’.
  Hence, there is a risk that the weaknesses identified in SR 24/2014 as regards monitoring, may persist in the period 2014–20 if the new proposed monitoring tools have not yet improved the monitoring framework for this specific support, as feared by the Court in the conclusions (paragraph 81) of SR 24/2014. |
| 8 | SR 01/2014 | Effectiveness of EU-supported public urban transport projects
  (cohesion) | Obligation to have output and result indicators per specific objectives / investment priority / priority axis which implies that management tools are in place to monitor the impact of the projects, globally, under the specific objective / priority axis in question. | The Commission might have asked for result indicators for urban transport projects in the negotiation process but as there are no compulsory predefined result indicators under the ERDF, not all the OPs that have urban transport projects have defined such indicators.There are no indicators at the level of the projects themselves and no indicators related to the quality of the services and the level of user satisfaction, the use of user satisfaction surveys is not systematic and is not compulsory. |
| A significant improvement is that, for the first time, in 2014-2020 period, the main principles for the establishment of a CBA are also transposed in a legal act[1] and not just in guidance (CBA guide) and thus, their implementation becomes compulsory.
  Another improvement could be the evaluations carried out for the transport sector for the 2014-2020 period indeed, provided that they also cover the benefits mentioned in our recommendation. | In any case, neither the utilisation rate nor the benefits are included in the grant agreements and measured per project.
  Given the lack of pre-defined result indicators in the ERDF regulation, per sector, there are still no unified standards to measure urban transport performance for the 2014-2020 programming period. |
| The provision of an estimate of the number of expected users is now a legal requirement. An assessment of these estimates is consistently done by the IQR / JASPERS experts. | NONE |
| The new legislation, including the ex-ante conditionalities that entered into force covers the essential elements, and this is being taken into account and analysed by the experts assessing the applications. | NONE |
| A significant improvement is that, for the first time, in 2014-2020 period, the main principles of CBA are in legal acts (Delegated Act 480/2014 and COM Implementing Regulation 207/2015) and not just in guidance (CBA guide).
  In this programming period, there is a more systematic approach regarding the measurement of performance, at OP level with the obligation to set output and result indicators for priority investments and specific objectives. | There is still no measurement at individual project level, which is what the recommendations are requesting.
  Given the lack of pre-defined result indicators in the ERDF regulation, per sector, there are still no unified standards to measure urban transport performance for the 2014-2020 programming period. |
| 9 | SR 07/2014 | Has the ERDF successfully supported the development of business incubators
  (cohesion) | EU co-funded business incubators will now be established on the basis of detailed and realistic business plans, paying particular attention to the sustainability of their non-profit incubation activity. | NONE |
| Appropriate qualifications of business incubators’ staff were introduced as a condition for EU co-funding. | NONE |
| Business incubators can only get EU co-funding support if their clients have innovative business ideas with high growth potential. | NONE |
| The Commission informed at least some Member States of ECA’s SR 7/2017 and of the recommendations contained therein.
  Some OPs contain provisions about the need to pay attention to incubation programmes, the need to accompany the SMEs in their early years and the requirement to give start-ups feasibility support, mentoring programmes and learning. | There is no evidence that the incubation process always starts with a detailed, tailor-made incubation programme whose implementation is followed-up and that the achievement of the business objectives is always assessed.
  There are still no comprehensive guidelines addressed to the Member States explicitly requiring all the conditions for the EU co-funding of business incubators, as recommended by the ECA, to be put in all national OPs which envisage the use of such incubators. |
| Incubators may offer their services also to non-resident companies but only in in the Member State mentioned by the Commission as an example, thereby allowing incubation support to have a larger impact on the local business community and improving possibilities for networking. | Offering incubating services also to non-resident companies is still not a condition for business incubators’ EU co-funding in all Member States.
  There are still no comprehensive guidelines addressed to the Member States explicitly requiring all the conditions for the EU co-funding of business incubators, as recommended by the ECA, to be put in all national OPs which envisage the use of such incubators. |
| The Commission is recommending that a monitoring system based also on business data produced by supported clients is set-up by business incubators receiving EU co-funding. | The set-up of such monitoring systems is not a condition for co-funding but is asked on a voluntary basis. |
| Commission’s knowledge is kept up-to-date. | NONE |
| Business incubators knowledge and experience is shared by the Commission with the Member States. | NONE |
| 10 | SR 12/2014 | Is the ERDF effective in funding projects that directly promote biodiversity under the EU biodiversity strategy to 2020
  (cohesion) | The methodological framework for the mapping and assessment of ecosystems and their services has been finalised by the Commission and the EEA. The Commission also published guidance, reports and studies to support MS. | NONE |
| The Commission assessed the complementarity of actions to promote biodiversity in the process of adoption of Partnership Agreements and different DGs gave their contribution. | NONE |
| Overall, the monitoring is improved given the better intervention logic in place and more consistent use of indicators. | The Commission does not monitor OPs in detail. Given the management mode, this remains a responsibility at MS level. |
| MS were informed by the Commission at working group’s meetings about ECA recommendation to follow up the preparatory projects with a view to an active protection policy, especially regarding the effective implementation of specific protection and management plans for habitats and species. | The Commission discusses the issues with the preparatory projects with the MS but this is not enough considered in the guidance documents. |
| Provisions in operational programmes for procedures to evaluate the environmental changes in habitats and species following the interventions are in place. | NONE |
| The Commission advised the MS to apply ERDF rules in interaction with other EU funds through guidance and discussions about the implementation of biodiversity projects, in the context of working groups on biodiversity. | NONE |
| A tracking mechanism for EU spending on biodiversity based on the relevant codes of expenditure is in place. | It is still early to assess the entirety of the process and therefore the accuracy of the mechanism. |
| 11 | SR 20/2014 | Has ERDF support to SMEs in the area of e commerce been effective
  (cohesion) | More robust intervention logic in place in the OPs including the use of output and result indicators, some of them common and pre-defined at EU level. | NONE |
| The obligation to have monitoring systems in place, including information system to collect and aggregate the data related to the indicators. Provided that they function properly, they should allow the Commission to obtain consistent and reliable information from the Member States on the OPs’ progress not only in financial but also in performance terms. Progress towards target values is now more likely to be measured in a timely manner and allowing for comparison over time. | Further guidance and checks need to be carried out at MS level to make sure the monitoring and information systems in place provide reliable and timely data on OP’s progress and performance. |
| Programme specific indicators under TO2 may capture the outputs and results of e-commerce development interventions of the programmes, where relevant. | The Commission, as announced, did not propose standard indicators relevant to EU strategic objectives on e-commerce. |
| The Commission has provided advice to MAs on designing selection criteria in ICT projects.The whole set-up of OPs is more result-oriented.
  Also, the Commission took actions that might result in the reduction of barriers to cross-border e-commerce activity aimed at making it possible for e-commerce enterprises to exploit the opportunities of the single market. | NONE |
| In the area of impact monitoring, evaluation plans have been requested from the MAs. | The Commission did not require that a minimum set of robust indicators with related targets be defined in the grant agreements. |
| In the programme period 2014 — 2020, the Commission has required the setting-up of monitoring as well as control systems at OP level at MSs level. The objective is that the Commission itself can rely on these different layers, completed with its own set of controls, to have sufficient assurance that the data entered into this monitoring system is reliable and consistent. | NONE |
| NONE | No mechanism was introduced (1) to ensure that payments are linked to performance and (2) to allow for their adjustment in the event of serious underperformance. |
| 12 | SR 21/2014 | EU-funded airport infrastructures — poor value for money
  (cohesion) | The existence of ex-ante conditionalities since the programming period 2014-2020 and the reinforcement of the CBA as its main principles are now in legal acts. | There is an increased risk that, with the revision of the GBER, Member States take the opportunity to use public funding for smaller, financially non viable airports. |
| 13 | SR 13/2014 | EU support for rehabilitation following the earthquake in Haiti
  (external actions) | Appropriate implementation of Budget Support guidelines disclosed in September 2012 introducing the RMF with mitigating measures progress and Early Warning System. | NONE |
| Adoption and implementation of Action Plan for Resilience in Crisis Prone Countries 2013-2020 underlining the importance of LRRD and definition of objectives and mandates of DG ECHO and DG DEVCO. | NONE |
| The Joint Humanitarian and Development Framework integrates the concept of resilience and the LRRD approach into programming, identification and execution of cooperation activities of EU actors. As an example, transition strategies and parallel linkages between humanitarian aid and development cooperation have been properly designed for Haiti. | NONE |
| DG ECHO and EuropeAid adapted their Humanitarian tools by including a chapter on exit strategies and LRRD. | In practise, exit and transition strategies are neither formalised nor documented. For instance exit criteria are not determined, minimum staff to ensure the transition is not designated, communication process is not foreseen, and indicators triggering the exit are not mentioned. |
| New BS guidelines disclosed in September 2012 (no change in 2017) provide for State Building Contracts with opportunities for countries to obtain support for capacity-building with a focus on key PFM functions. | NONE |
| The Public Finance Management Reform Action Plan requested in the SBC requirements. is the basis for PFM reform monitoring, based on time-bound benchmarks, which is reported regularly in each eligibility assessment of the disbursement dossiers. | NONE |
| Shorter-term PFM reform expectations to safeguard EU funds against waste, leakage and inefficiency have been included in PFM Monitoring table in the BS guidelines.
  For Haiti, a declaration of the Tripartite Dialogue (Parliament — Government — Civil Society) has been issued to engage with partners for setting up short-term reforms to safeguard EU Funds. | NONE |
| The template for BCP has been updated including provisions for emergency personal redeployment. | NONE |
| 14 | SR 16/2014 | The effectiveness of blending regional investment facility grants with financial institution loans to support EU external policies
  (external actions) | New Guidelines for blending operations were adopted and the respective Application Form was developed. The staff is regularly trained on their application. | NONE |
| The role of the Commission services and EU Delegations in particular are clearly specified in the Guidelines. | NONE |
| The completeness of the information, maturity and the value added of the blending projects is ensured with the new application procedure. | NONE |
| The step for provisional approval of projects was eliminated and thus the duration of the approval process was shortened. | NONE |
| In the new template for Delegation and PA Grant Agreement (PAGODA) the payment schedule is adapted in a way that the released pre-financing takes into account the commitments of the previous period. | NONE |
| With PAGODA the Commission implements a result-measurement framework with indicators for following up the EU grant. | NONE |
| The EU Delegation role is clearly described in the Guidelines. | NONE |
| The ROM methodology is drafted and applied on a pilot basis. | NONE |
| With the new AP and PAGODA the visibility is made part of the AF and the subsequent contract. | NONE |
| 15 | SR 18/2014 | EuropeAid’s evaluation and results oriented monitoring systems
  (external actions) | The EVAL IT module provides instant information on the financial resources necessary for evaluations.The ROM module provides information on which projects can be monitored within the budgets allocated to contractors.Staff allocation exercises such as WLAD, WLAHQ and OPTIMUS regularly assess the human resources requirements and propose adjustments accordingly. | It has not been clearly demonstrated how the human resource allocation particularly between ROM and evaluations has been ensured within WLAD, WLAHQ or OPTIMUS. There is no information on the related staff, as specified in the Court’s report. |
| Clear selection criteria for evaluations were defined trying to ensure adequate coverage of relevant projects.
  The complementarity between ROM and evaluations is taken into account at planning stage and within the design of IT modules EVAL and ROM. | There is a lack of documentation on how the selection criteria were applied in establishing individual evaluation plans (examples) by delegations and at headquarters level. |
| Important steps have been taken by DEVCO to improve its system of evaluations supervision and reporting: an analysis of project evaluations of 2015, the deployment of the IT module EVAL and the ESS contract signature. | The ESS contract, being awarded only in December 2016, is still in an inception phase. Therefore, further efforts are necessary to implement the Court’s recommendation to its full extent, especially regarding the analysis of the reasons for evaluations delays and the measures adopted to address them.
  Lack of effectiveness in the delivery of MEPs by the delegations. |
| The supervision of evaluation activities is in process of being significantly improved through the implementation of the ESS contract, signed in December 2016.
  The IT module EVAL has been deployed in September 2016 and its use has been made mandatory by DG DEVCO. | NONE |
| Updated thorough guidelines are available concerning quality assurance for ROM and evaluations.
  The IT modules EVAL and ROM embed functionalities that facilitate a thorough quality assurance process.
  There are well documented examples of a thorough work done by DEVCO and its external contractors in ensuring the quality of ROM reports.
  The implementation of the ESS contract which includes the improvement of the Quality Assessment Grid has started; the related documentation is provided in the inception report. | NONE |
| There are examples of thorough quality assurance applied by DEVCO to ROM and evaluation reports. The quality assurance system improved, although the involvement of the ESS in it is yet to be clearly established.
  For ROM reports there is a systematic check performed by an external contractor and approved by DEVCO.
  For evaluations, the new IT tool EVAL has embedded a mandatory quality assurance check of reports. | NONE |
| The Better Regulation package and action document instructions enhance the necessity of SMART objectives and RACER indicators, with baseline values and targets.
  In practice, DEVCO demonstrated efforts of reviewing the action documents of programmes in order to ensure compliance with the above-mentioned guidelines and the Court’s recommendation. | NONE |
| DEVCO improved its evaluations system by clearly defining selection criteria and ensuring a reasonable coverage of projects and programmes (see recommendation 4.3).
  The new action documents make a link between overall objectives and expected impacts and there are examples in which clear indicators are designed.
  The framework for assessing impact has been defined with the adoption of the EU International Cooperation and Development Results Framework in March 2015, in line with the Agenda for Change. | A systematic mechanism of collecting data on programmes’ results for at least three years after their completion is still not in place to clearly demonstrate impact and sustainability of results achieved.
  An increase in the proportion of ex-post evaluations, necessary to demonstrate longer term results such as impacts, is yet to be demonstrated.
  Weaknesses in the data on development results and in the lessons learnt mechanisms were reported to DEVCO in October 2016 (‘Review of the strategic evaluations’). |
| KPI 19 demonstrated in 2014 a significant increase over the previous year and an increasing trend in 2016, too. Also, improved selection criteria for project evaluations are conducive to better representativeness in the population and to achieving more value added with limited resources.
  The Commission made an analysis and concluded that an increase in the number of ex-post evaluations would not necessarily lead to better information on results and it would be made at a cost while resources for evaluation are limited.
  DG DEVCO improved its selection criteria for project evaluations and, the proportion of all evaluations (interim, final and ex-post) increased. | An increase of ex-post evaluations was not demonstrated by DEVCO although improvements were achieved via alternative ways. |
| A review of the strategic evaluations of DEVCO covering the period 2006-2016 was prepared in order to contribute to the update of the EU development co-operation policy (final report in October 2016).
  There are instances in which a one-year follow up period seems sufficient for positive implementation results.
  There are some cases in which specific follow-up strategic evaluations are planned or recommendations are followed-up after more than one year.
  The creation of a Task Force and a new dynamic put in place in relation with DEVCO Knowledge Management unit, which resulted in ongoing improvements expected to materialise in the coming years. | There is no systematic mechanism of following-up action plans of strategic evaluations recommendations for more than one year in what the fiche contradictoire is concerned.
  The IT module EVAL does not include strategic evaluations yet. |
| An IT module (EVAL) functioning as data base and management tool has been developed by DG DEVCO following the requirements of the Court’s recommendation. | NONE |
| 16 | SR 02/2014 | Are preferential trade arrangements appropriately managed?
  (own resources) | DG TRADE has produced a revised version of the SIA handbook. As per DG TRADE policy, Impact Assessments and Sustainability Impact Assessments have been carried out for all major trade agreements. | NONE |
| DG TRADE has an updated MOU with Eurostat and an Administrative Arrangement with JRC for EU-GTAP. Eurostat actively participates in the inter-service steering groups for SIAs. | NONE |
| DG TRADE has updated evaluation plans and carries out ex post evaluations on a more systematic basis including estimates of revenue foregone. | NONE |
| DG TRADE has provided two reports on the effects of the scheme. | The mid-term review of the GSP to the legislative authorities as required by the legal base (Article 40 of Regulation No 978/2012), is only estimated to be ready by the end of June 2018. |
| 17 | SR 15/2014 | The External Borders Fund has fostered financial solidarity but requires better measurement of results and needs to provide further EU added value
  (smart and inclusive growth) | Legal Acts including relevant and measurable indicators have been adopted. Rules and Guidelines for a uniform use and approach have been set up. | Some reports and documents still need to be finalised and adopted. |
| Workshops for MS and other forms of consular cooperation have been organised. | The Commission should continue to work with Member States to achieve the implementation of common application centres. |
| A platform for a regular and timely exchange of documents and information was set up. The cooperation and consultation have been improved and refined. | NONE |
| Various activities were organised in view to strengthen the administrative capacity. | Sharing best practices between Member States would improve implementation of the AMIF and ISF. |

No

SR

Report title

Improvements

Weaknesses

1

SR 04/2014

Integration of EU water policy objectives with the CAP — a partial success

(natural resources)

Following an inter-institutional-agreement the Commission has undertaken first steps to integrate provisions from the Directives into the existing instrument CC. The Commission included certain measures concerning water policy objectives in the current RD programmes.

At present the actual integration of provisions of the two directives remains at a planning stage. The existing Rural Development measures address only a part of water policy goals. No new instruments — as proposed by the auditors in the SR — have been introduced by the Commission.

Ex-ante conditionality and several pre-conditions for the eligibility to support have been introduced to the Rural Development Plans.

Approved final versions of the 2nd River Basin Management Plans are delayed and still outstanding. Further integration of mechanisms into Rural Development is still outstanding.

Improved CMEF have been introduced which aims/intends to provide for better data for assessment of pressures on water by agricultural practices.

Actual improvements in the evaluation of pressures placed on water by agricultural practices are still outstanding and gaps in the actual reporting practices by MSs have already been identified.

2

SR 08/2014

Has the Commission effectively managed the integration of coupled support into the single payment scheme

(natural resources)

The Commission issued a high number of guidance notes, intensified bilateral contacts with the Member States and regularly monitored and followed-up the implementation of the direct payment schemes at Member States level.

The current legal framework for direct payments became more complex than the preceding one. Resulting from this, Member States faced problems concerning its correct application for claim year 2015.

The Commission increased its monitoring and supervision and accelerated the conformity clearance procedures.

Certain Member States did not communicate basic information of the new direct payments schemes in time to the Commission weakening its monitoring capacity. Its own audits on payment entitlements show room for improvement.

The Commission strengthened its monitoring and audit efforts.

No data is available on Commission level on recoveries to be made at MS level in relation to the correction of wrongly allocated SPS/BPS payment entitlements and wrongly calculated payments.

The Commission strengthened its monitoring and audit efforts as well as its follow-up on the work of the certification bodies.

The accreditation criteria for paying agencies do not make any reference as to the accuracy and validity of payment entitlements. Furthermore, the Commission’s methodology and guidelines determining the work of certification bodies on payment entitlements are incomplete.

3

SR 09/2014

Is the EU investment and promotion support to the wine sector well managed and are its results on the competitiveness of EU wines demonstrated

(natural resources)

The Commission reconfirmed during the follow-up audit its regular monitoring of support absorption, as stated in its replies to the Court’s SR 9/2014. Carrying out regular monitoring is, however, only a preparatory first step towards fulfilling the Court’s recommendation.

An impact assessment and assessment of coherence of CAP instruments is still outstanding. The first results are expected before 31.12.2018. An assessment of the potential need for an additional investment aid scheme especially for wine is still outstanding.

The Commission established provisions and procedures to check and document reasonableness of costs and financial viability of projects.

The Commission audits compliance with management and control systems and their effectiveness.

NONE

Clarification of certain requirements (such as duration, extension, success criteria) and priority for new beneficiaries and new markets.

The Commission’s introduction of clarifications and priorities may only partly improve the situation as they do not prevent longer term support (up to five years) for the same beneficiaries in the same target markets in third countries.

Having rejected the recommendation, the Commission does not intend to implement this recommendation to its full extent. Hence the risks identified by ECA in SR 9/2014 still prevail.

NONE

The Court’s SR 9/2014 found that the promotion measure is not appropriately designed and efficiently implemented. Promotion actions are often used for consolidating markets rather than winning new markets or recovering old markets.

The need to consolidate a market is constant for a wine producer intending to maintain its market share. This raises the question as to whether such promotion actions can have a sustainable effect without undue reliance on continuous EU support. Furthermore, the support for established commercial brand advertising does not correspond to the measure’s original purpose to support the wine market rather than established brands.

Since the Commission did not act to implement the recommendation to limit the scope of the measure concerning eligibility of brand advertising, the risks identified in SR 9/2014 that EU funding replaces operational expenditure of the beneficiary still prevail.

The Commission has introduced provisions and procedures to clarify requirements for eligibility.

The general possibility to support brand advertising through EU funding remains which according to the Court’s SR 9/2014 may not correspond to the measure’s original purpose.

The Commission has introduced clarifying provisions and procedures to ensure that ancillary costs are justified and limited, as recommended by the Court in its SR 9/2014.

NONE

The Commission has introduced improved monitoring requirements for Member States as recommended by the Court.

NONE

Member States have provided implementation reports on the status of their programmes.

An overall evaluation and resulting adjustments to the policy are still outstanding.

4

SR 10/2014

The effectiveness of European Fisheries Fund support for aquaculture

(natural resources)

The inclusion of realistic and appropriate objectives in the MNSPs and OPs was checked by the Commission prior to the approval of the OPs.

NONE

The guidance document produced by the Commission contributes to a better understanding of environmental requirements and good practices by the aquaculture stakeholders.

NONE

For the new programming period, the Commission ensured that all Member States prepared appropriate multiannual strategic plans for aquaculture prior to the operational programmes.

NONE

The Commission carries out various actions in order to encourage the simplification of administrative procedures and the implementation of relevant spatial planning. In particular, the seminars allow discussions and exchange good practices on those topics.

NONE

The comparability of the data collected by Eurostat and those collected through the DCF has improved. However, no progress has been made on the accuracy and completeness of the data compiled by the Commission.

NONE

5

SR 22/2014

Achieving economy — keeping the costs of EU-financed rural development project grants under control

(natural resources)

The Commission prepared in cooperation with Member States ‘Guidance Document on Control and Penalty rules in Rural Development’, Annex 1 of which contains the good practice checklist targeting the main risk areas as recommended by the Court. It was available to Member States three months earlier than initially indicated (in December 2014 instead of March 2015).

ENRD organises training courses on related issues and all related documents from those sessions as well as good practices are published on the ERND website.

As the guidance is not a binding and obligatory document to be followed, the Commission cannot know how many Member States/regions actually used them in order to improve their control systems.

In total, between February 2015 and January 2016, there were only three training sessions organised by the ENRD in relation to reasonableness of costs and SCO. With118 RDPs, there is a risk that the Commission may need to do more to assure that every Member State/region had a chance to participate or participated in such training sessions.

The ENRD good practice sharing platform could be developed by adding examples of good administrative procedures such as those on reasonableness of costs.

Control systems are checked by the Commission against the known list of risks and if necessary the Commission demands corrective actions from Member States.

Checks are conducted on reasonableness of costs in the framework of the compliance audit for each file in H4’s (DG AGRI) sample and as a key control 7 during key and ancillary controls concerning Rural Development Measures 2014-2020.

The Commission checks reasonableness of costs as part of the file checks carried out on individual files in the compliance audits (checklist for compliance testing).

6

SR 23/2014

Errors in rural development spending — what are the causes, and how are they being addressed

(natural resources)

The Commission has put in place a variety of instruments in order to address the root causes of error: action plans in the Member States, guidance documents, seminars with representatives of Managing Authorities and Paying Agencies from all Member States, training disseminated through ENRD.

NONE

The Commission uses a variety of actions to reduce the risk of repeating the previous weaknesses and errors, such as: monitoring, training, disseminating information, and carrying out its audit activity in the MSs.

The implementation reports to be sent by Member States by 30 June 2017[1] will provide the Commission with the opportunity to obtain an updated and more in-depth view on the implementation of the RDPs.

The Commission has already required that Member States increase the scope of their administrative controls, to include commitments which can be checked based on documentary evidence.

The Commission is committed to assess the policy conception and the continued need for each support measure on the basis of the results of the implementation of the 2014 — 2020 programming period, before making proposals for the next programming period.

7

SR 24/2014

Is EU support for preventing and restoring damage to forests caused by fire and natural disasters well managed

(natural resources)

The Commission introduced appropriate tools within the approval process of RDPs (namely improved strategy, Commission’s measure fiches (sheets), checklists and communication processes). These tools allow for timely actions by the Commission and the required adjustments by the Member States to address weaknesses concerning the description and justification of needs for preventive actions.

NONE

While a complete set of criteria applicable to all Member States is still under development, the Commission requires Member States to base their support measures on national risk assessments and forestry / disaster management plans which are adapted to the specific situations of each participating Member State.

The Commission has committed itself in RAD to implement the recommendation by end of 2018.

The completion of an EU wide set of basic criteria, as recommended by the Court, is still outstanding/ under development.

Member States’ control systems were assessed by the Commission during the approval of the Member States’ RDPs for 2014-20, and compliance audits are conducted by the Commission.

An evaluation of the effectiveness of the actions is still outstanding due to the fact that most projects financed under the new programming period have not yet been finalised or audited.

The Commission has communicated guidelines and instructions that ensure that Member States link their interventions to strategic objectives as prevention of fires and natural disasters as defined in their national forest protection plans.

NONE

Adaptation of the ‘area supported’ indicator for preventive actions.

The Commission has confirmed in RAD that its implementation ‘can only be completed in 2019’.

Hence, there is a risk that the weaknesses identified in SR 24/2014 as regards monitoring, may persist in the period 2014–20 if the new proposed monitoring tools have not yet improved the monitoring framework for this specific support, as feared by the Court in the conclusions (paragraph 81) of SR 24/2014.

8

SR 01/2014

Effectiveness of EU-supported public urban transport projects

(cohesion)

Obligation to have output and result indicators per specific objectives / investment priority / priority axis which implies that management tools are in place to monitor the impact of the projects, globally, under the specific objective / priority axis in question.

The Commission might have asked for result indicators for urban transport projects in the negotiation process but as there are no compulsory predefined result indicators under the ERDF, not all the OPs that have urban transport projects have defined such indicators.There are no indicators at the level of the projects themselves and no indicators related to the quality of the services and the level of user satisfaction, the use of user satisfaction surveys is not systematic and is not compulsory.

A significant improvement is that, for the first time, in 2014-2020 period, the main principles for the establishment of a CBA are also transposed in a legal act[1] and not just in guidance (CBA guide) and thus, their implementation becomes compulsory.

Another improvement could be the evaluations carried out for the transport sector for the 2014-2020 period indeed, provided that they also cover the benefits mentioned in our recommendation.

In any case, neither the utilisation rate nor the benefits are included in the grant agreements and measured per project.

Given the lack of pre-defined result indicators in the ERDF regulation, per sector, there are still no unified standards to measure urban transport performance for the 2014-2020 programming period.

The provision of an estimate of the number of expected users is now a legal requirement. An assessment of these estimates is consistently done by the IQR / JASPERS experts.

NONE

The new legislation, including the ex-ante conditionalities that entered into force covers the essential elements, and this is being taken into account and analysed by the experts assessing the applications.

NONE

A significant improvement is that, for the first time, in 2014-2020 period, the main principles of CBA are in legal acts (Delegated Act 480/2014 and COM Implementing Regulation 207/2015) and not just in guidance (CBA guide).

In this programming period, there is a more systematic approach regarding the measurement of performance, at OP level with the obligation to set output and result indicators for priority investments and specific objectives.

There is still no measurement at individual project level, which is what the recommendations are requesting.

Given the lack of pre-defined result indicators in the ERDF regulation, per sector, there are still no unified standards to measure urban transport performance for the 2014-2020 programming period.

9

SR 07/2014

Has the ERDF successfully supported the development of business incubators

(cohesion)

EU co-funded business incubators will now be established on the basis of detailed and realistic business plans, paying particular attention to the sustainability of their non-profit incubation activity.

NONE

Appropriate qualifications of business incubators’ staff were introduced as a condition for EU co-funding.

NONE

Business incubators can only get EU co-funding support if their clients have innovative business ideas with high growth potential.

NONE

The Commission informed at least some Member States of ECA’s SR 7/2017 and of the recommendations contained therein.

Some OPs contain provisions about the need to pay attention to incubation programmes, the need to accompany the SMEs in their early years and the requirement to give start-ups feasibility support, mentoring programmes and learning.

There is no evidence that the incubation process always starts with a detailed, tailor-made incubation programme whose implementation is followed-up and that the achievement of the business objectives is always assessed.

There are still no comprehensive guidelines addressed to the Member States explicitly requiring all the conditions for the EU co-funding of business incubators, as recommended by the ECA, to be put in all national OPs which envisage the use of such incubators.

Incubators may offer their services also to non-resident companies but only in in the Member State mentioned by the Commission as an example, thereby allowing incubation support to have a larger impact on the local business community and improving possibilities for networking.

Offering incubating services also to non-resident companies is still not a condition for business incubators’ EU co-funding in all Member States.

There are still no comprehensive guidelines addressed to the Member States explicitly requiring all the conditions for the EU co-funding of business incubators, as recommended by the ECA, to be put in all national OPs which envisage the use of such incubators.

The Commission is recommending that a monitoring system based also on business data produced by supported clients is set-up by business incubators receiving EU co-funding.

The set-up of such monitoring systems is not a condition for co-funding but is asked on a voluntary basis.

Commission’s knowledge is kept up-to-date.

NONE

Business incubators knowledge and experience is shared by the Commission with the Member States.

NONE

10

SR 12/2014

Is the ERDF effective in funding projects that directly promote biodiversity under the EU biodiversity strategy to 2020

(cohesion)

The methodological framework for the mapping and assessment of ecosystems and their services has been finalised by the Commission and the EEA. The Commission also published guidance, reports and studies to support MS.

NONE

The Commission assessed the complementarity of actions to promote biodiversity in the process of adoption of Partnership Agreements and different DGs gave their contribution.

NONE

Overall, the monitoring is improved given the better intervention logic in place and more consistent use of indicators.

The Commission does not monitor OPs in detail. Given the management mode, this remains a responsibility at MS level.

MS were informed by the Commission at working group’s meetings about ECA recommendation to follow up the preparatory projects with a view to an active protection policy, especially regarding the effective implementation of specific protection and management plans for habitats and species.

The Commission discusses the issues with the preparatory projects with the MS but this is not enough considered in the guidance documents.

Provisions in operational programmes for procedures to evaluate the environmental changes in habitats and species following the interventions are in place.

NONE

The Commission advised the MS to apply ERDF rules in interaction with other EU funds through guidance and discussions about the implementation of biodiversity projects, in the context of working groups on biodiversity.

NONE

A tracking mechanism for EU spending on biodiversity based on the relevant codes of expenditure is in place.

It is still early to assess the entirety of the process and therefore the accuracy of the mechanism.

11

SR 20/2014

Has ERDF support to SMEs in the area of e commerce been effective

(cohesion)

More robust intervention logic in place in the OPs including the use of output and result indicators, some of them common and pre-defined at EU level.

NONE

The obligation to have monitoring systems in place, including information system to collect and aggregate the data related to the indicators. Provided that they function properly, they should allow the Commission to obtain consistent and reliable information from the Member States on the OPs’ progress not only in financial but also in performance terms. Progress towards target values is now more likely to be measured in a timely manner and allowing for comparison over time.

Further guidance and checks need to be carried out at MS level to make sure the monitoring and information systems in place provide reliable and timely data on OP’s progress and performance.

Programme specific indicators under TO2 may capture the outputs and results of e-commerce development interventions of the programmes, where relevant.

The Commission, as announced, did not propose standard indicators relevant to EU strategic objectives on e-commerce.

The Commission has provided advice to MAs on designing selection criteria in ICT projects.The whole set-up of OPs is more result-oriented.

Also, the Commission took actions that might result in the reduction of barriers to cross-border e-commerce activity aimed at making it possible for e-commerce enterprises to exploit the opportunities of the single market.

NONE

In the area of impact monitoring, evaluation plans have been requested from the MAs.

The Commission did not require that a minimum set of robust indicators with related targets be defined in the grant agreements.

In the programme period 2014 — 2020, the Commission has required the setting-up of monitoring as well as control systems at OP level at MSs level. The objective is that the Commission itself can rely on these different layers, completed with its own set of controls, to have sufficient assurance that the data entered into this monitoring system is reliable and consistent.

NONE

NONE

No mechanism was introduced (1) to ensure that payments are linked to performance and (2) to allow for their adjustment in the event of serious underperformance.

12

SR 21/2014

EU-funded airport infrastructures — poor value for money

(cohesion)

The existence of ex-ante conditionalities since the programming period 2014-2020 and the reinforcement of the CBA as its main principles are now in legal acts.

There is an increased risk that, with the revision of the GBER, Member States take the opportunity to use public funding for smaller, financially non viable airports.

13

SR 13/2014

EU support for rehabilitation following the earthquake in Haiti

(external actions)

Appropriate implementation of Budget Support guidelines disclosed in September 2012 introducing the RMF with mitigating measures progress and Early Warning System.

NONE

Adoption and implementation of Action Plan for Resilience in Crisis Prone Countries 2013-2020 underlining the importance of LRRD and definition of objectives and mandates of DG ECHO and DG DEVCO.

NONE

The Joint Humanitarian and Development Framework integrates the concept of resilience and the LRRD approach into programming, identification and execution of cooperation activities of EU actors. As an example, transition strategies and parallel linkages between humanitarian aid and development cooperation have been properly designed for Haiti.

NONE

DG ECHO and EuropeAid adapted their Humanitarian tools by including a chapter on exit strategies and LRRD.

In practise, exit and transition strategies are neither formalised nor documented. For instance exit criteria are not determined, minimum staff to ensure the transition is not designated, communication process is not foreseen, and indicators triggering the exit are not mentioned.

New BS guidelines disclosed in September 2012 (no change in 2017) provide for State Building Contracts with opportunities for countries to obtain support for capacity-building with a focus on key PFM functions.

NONE

The Public Finance Management Reform Action Plan requested in the SBC requirements. is the basis for PFM reform monitoring, based on time-bound benchmarks, which is reported regularly in each eligibility assessment of the disbursement dossiers.

NONE

Shorter-term PFM reform expectations to safeguard EU funds against waste, leakage and inefficiency have been included in PFM Monitoring table in the BS guidelines.

For Haiti, a declaration of the Tripartite Dialogue (Parliament — Government — Civil Society) has been issued to engage with partners for setting up short-term reforms to safeguard EU Funds.

NONE

The template for BCP has been updated including provisions for emergency personal redeployment.

NONE

14

SR 16/2014

The effectiveness of blending regional investment facility grants with financial institution loans to support EU external policies

(external actions)

New Guidelines for blending operations were adopted and the respective Application Form was developed. The staff is regularly trained on their application.

NONE

The role of the Commission services and EU Delegations in particular are clearly specified in the Guidelines.

NONE

The completeness of the information, maturity and the value added of the blending projects is ensured with the new application procedure.

NONE

The step for provisional approval of projects was eliminated and thus the duration of the approval process was shortened.

NONE

In the new template for Delegation and PA Grant Agreement (PAGODA) the payment schedule is adapted in a way that the released pre-financing takes into account the commitments of the previous period.

NONE

With PAGODA the Commission implements a result-measurement framework with indicators for following up the EU grant.

NONE

The EU Delegation role is clearly described in the Guidelines.

NONE

The ROM methodology is drafted and applied on a pilot basis.

NONE

With the new AP and PAGODA the visibility is made part of the AF and the subsequent contract.

NONE

15

SR 18/2014

EuropeAid’s evaluation and results oriented monitoring systems

(external actions)

The EVAL IT module provides instant information on the financial resources necessary for evaluations.The ROM module provides information on which projects can be monitored within the budgets allocated to contractors.Staff allocation exercises such as WLAD, WLAHQ and OPTIMUS regularly assess the human resources requirements and propose adjustments accordingly.

It has not been clearly demonstrated how the human resource allocation particularly between ROM and evaluations has been ensured within WLAD, WLAHQ or OPTIMUS. There is no information on the related staff, as specified in the Court’s report.

Clear selection criteria for evaluations were defined trying to ensure adequate coverage of relevant projects.

The complementarity between ROM and evaluations is taken into account at planning stage and within the design of IT modules EVAL and ROM.

There is a lack of documentation on how the selection criteria were applied in establishing individual evaluation plans (examples) by delegations and at headquarters level.

Important steps have been taken by DEVCO to improve its system of evaluations supervision and reporting: an analysis of project evaluations of 2015, the deployment of the IT module EVAL and the ESS contract signature.

The ESS contract, being awarded only in December 2016, is still in an inception phase. Therefore, further efforts are necessary to implement the Court’s recommendation to its full extent, especially regarding the analysis of the reasons for evaluations delays and the measures adopted to address them.

Lack of effectiveness in the delivery of MEPs by the delegations.

The supervision of evaluation activities is in process of being significantly improved through the implementation of the ESS contract, signed in December 2016.

The IT module EVAL has been deployed in September 2016 and its use has been made mandatory by DG DEVCO.

NONE

Updated thorough guidelines are available concerning quality assurance for ROM and evaluations.

The IT modules EVAL and ROM embed functionalities that facilitate a thorough quality assurance process.

There are well documented examples of a thorough work done by DEVCO and its external contractors in ensuring the quality of ROM reports.

The implementation of the ESS contract which includes the improvement of the Quality Assessment Grid has started; the related documentation is provided in the inception report.

NONE

There are examples of thorough quality assurance applied by DEVCO to ROM and evaluation reports. The quality assurance system improved, although the involvement of the ESS in it is yet to be clearly established.

For ROM reports there is a systematic check performed by an external contractor and approved by DEVCO.

For evaluations, the new IT tool EVAL has embedded a mandatory quality assurance check of reports.

NONE

The Better Regulation package and action document instructions enhance the necessity of SMART objectives and RACER indicators, with baseline values and targets.

In practice, DEVCO demonstrated efforts of reviewing the action documents of programmes in order to ensure compliance with the above-mentioned guidelines and the Court’s recommendation.

NONE

DEVCO improved its evaluations system by clearly defining selection criteria and ensuring a reasonable coverage of projects and programmes (see recommendation 4.3).

The new action documents make a link between overall objectives and expected impacts and there are examples in which clear indicators are designed.

The framework for assessing impact has been defined with the adoption of the EU International Cooperation and Development Results Framework in March 2015, in line with the Agenda for Change.

A systematic mechanism of collecting data on programmes’ results for at least three years after their completion is still not in place to clearly demonstrate impact and sustainability of results achieved.

An increase in the proportion of ex-post evaluations, necessary to demonstrate longer term results such as impacts, is yet to be demonstrated.

Weaknesses in the data on development results and in the lessons learnt mechanisms were reported to DEVCO in October 2016 (‘Review of the strategic evaluations’).

KPI 19 demonstrated in 2014 a significant increase over the previous year and an increasing trend in 2016, too. Also, improved selection criteria for project evaluations are conducive to better representativeness in the population and to achieving more value added with limited resources.

The Commission made an analysis and concluded that an increase in the number of ex-post evaluations would not necessarily lead to better information on results and it would be made at a cost while resources for evaluation are limited.

DG DEVCO improved its selection criteria for project evaluations and, the proportion of all evaluations (interim, final and ex-post) increased.

An increase of ex-post evaluations was not demonstrated by DEVCO although improvements were achieved via alternative ways.

A review of the strategic evaluations of DEVCO covering the period 2006-2016 was prepared in order to contribute to the update of the EU development co-operation policy (final report in October 2016).

There are instances in which a one-year follow up period seems sufficient for positive implementation results.

There are some cases in which specific follow-up strategic evaluations are planned or recommendations are followed-up after more than one year.

The creation of a Task Force and a new dynamic put in place in relation with DEVCO Knowledge Management unit, which resulted in ongoing improvements expected to materialise in the coming years.

There is no systematic mechanism of following-up action plans of strategic evaluations recommendations for more than one year in what the fiche contradictoire is concerned.

The IT module EVAL does not include strategic evaluations yet.

An IT module (EVAL) functioning as data base and management tool has been developed by DG DEVCO following the requirements of the Court’s recommendation.

NONE

16

SR 02/2014

Are preferential trade arrangements appropriately managed?

(own resources)

DG TRADE has produced a revised version of the SIA handbook. As per DG TRADE policy, Impact Assessments and Sustainability Impact Assessments have been carried out for all major trade agreements.

NONE

DG TRADE has an updated MOU with Eurostat and an Administrative Arrangement with JRC for EU-GTAP. Eurostat actively participates in the inter-service steering groups for SIAs.

NONE

DG TRADE has updated evaluation plans and carries out ex post evaluations on a more systematic basis including estimates of revenue foregone.

NONE

DG TRADE has provided two reports on the effects of the scheme.

The mid-term review of the GSP to the legislative authorities as required by the legal base (Article 40 of Regulation No 978/2012), is only estimated to be ready by the end of June 2018.

17

SR 15/2014

The External Borders Fund has fostered financial solidarity but requires better measurement of results and needs to provide further EU added value

(smart and inclusive growth)

Legal Acts including relevant and measurable indicators have been adopted. Rules and Guidelines for a uniform use and approach have been set up.

Some reports and documents still need to be finalised and adopted.

Workshops for MS and other forms of consular cooperation have been organised.

The Commission should continue to work with Member States to achieve the implementation of common application centres.

A platform for a regular and timely exchange of documents and information was set up. The cooperation and consultation have been improved and refined.

NONE

Various activities were organised in view to strengthen the administrative capacity.

Sharing best practices between Member States would improve implementation of the AMIF and ISF.

THE COMMISSION'S REPLIES

SR 04/2014: Integration of EU water policy objectives with the CAP — a partial success

Approved final versions of the 2nd River Basin Management Plans are delayed and still outstanding. Further integration of mechanisms into Rural Development is still outstanding.

Reply: The Commission agrees that the assessment of the 2nd River Basin Management Plans (RBMPs) is still outstanding but still intends to advance the respective Commission report well before the legal deadline of December 2018. However, based on an ad-hoc assessment of the relevant parts, the information provided in those RBMPs has effectively been used to ensure compliance with the ex-ante conditionalities on water in the rural development programmes. Therefore the Commission considers that minimum conditions as regards the implementation of the WFD have been ensured before committing rural development funds, i.e. water pricing, as well as a set of eligibility criteria for investments in irrigation. Thus the Commission considers the recommendation implemented with respect to rural development policy.

Actual improvements in the evaluation of pressures placed on water by agricultural practices are still outstanding and gaps in the actual reporting practices by MSs have already been identified.

Reply: The Commission confirms that work on the guidelines on assessing impacts of RDPs through the evaluations to be submitted in the 2019 annual reports is ongoing.

This includes two impact indicators to assess pressures placed on water by agricultural practices.

The same indicators will be assessed in the 2014-2020 RDPs’ ex-post evaluations, for which guidelines will be provided.

SR 08/2014: Has the Commission effectively managed the integration of coupled support into the single payment scheme?

Certain Member States did not communicate basic information of the new direct payments schemes in time to the Commission weakening its monitoring capacity. Its own audits on payment entitlements show room for improvement.

Reply: As a result of the finding, the Commission changed its approach to ensure more focus on the audit and validation of the central calculations and the internal controls applied. All audits launched/to be launched starting second half of 2017 are affected with this change. Already 3 audits have been finalised (SE, IT and UK –Scotland). The audit report NAC /2017/002/SE was just sent to ECA, on 20 April 2018. The audit report for IT should be sent still this month.

No data is available on Commission level on recoveries to be made at MS level in relation to the correction of wrongly allocated SPS/BPS payment entitlements and wrongly calculated payments.

Reply: In accordance with EU law, it is for the Member States to carry out recoveries from beneficiaries. Moreover, Member States report on these recoveries per beneficiary and without specifying the reasons for establishing the irregularity, leading to launching the recovery. (It is possible that the same beneficiary has several non-compliances under different support measures.) The Commission applies financial corrections for lack of due diligence in pursuing recoveries. These corrections are based on the analysis of the Member States' management of the recovery procedures, recorded in accordance with legal requirements, i.e. per beneficiary, without a break down into different reasons for the undue payment. The ECA is requested to take into account the framework set out in the applicable legislation.

The accreditation criteria for paying agencies do not make any reference as to the accuracy and validity of payment entitlements. Furthermore, the Commission’s methodology and guidelines determining the work of certification bodies on payment entitlements are incomplete.

Reply: The accreditation criteria for Paying Agencies are drafted without providing for an enumerative list of all types of checks that must be executed. The accreditation criteria are drafted in a general way, there is no reference to any support measure. At the same time, it is clearly provided in EU legislation that Paying Agencies must ensure that ‘the amount to be paid to a beneficiary is in conformity with Union rules’ (Point 1(A)(i) of Annex I to Regulation (EU) No 907/2014). The Commission considers that the existing system is solid and yields good results, also taking into account very low error rate for direct payments (below materiality in the ECA Annual Report 2016). Concerning the work of the Certification Bodies the Commission also considers that the current guidelines for Certification Bodies' obligations are clear and comprehensive, so the framework provided is sufficient.

The Commission guidelines cannot be too prescriptive, as the Certification Bodies are qualified auditors and in accordance with internationally accepted audit standards, they should use their professional judgement in carrying out the certification work.

SR 09/2014: Is the EU investment and promotion support to the wine sector well managed and are its results on the competitiveness of EU wines demonstrated

The Commission’s introduction of clarifications and priorities may only partly improve the situation as they do not prevent longer term support (up to five years) for the same beneficiaries in the same target markets in third countries.

Having rejected the recommendation, the Commission does not intend to implement this recommendation to its full extent. Hence the risks identified by ECA in SR 9/2014 still prevail.

Reply: The Commission considers that once an operator has benefitted from support for a promotion operation in a third country market for a 3- possibly 5-year period, the operator is no more eligible for support for the same operation in the same market, not even in a subsequent programming period. This concept has been clearly explained in a letter sent to one MS in January and it has been discussed in the Wine Committee in March this year.

SR 22/2014: Achieving economy — keeping the costs of EU-financed rural development project grants under control

As the guidance is not a binding and obligatory document to be followed, the Commission cannot know how many Member States/regions actually used them in order to improve their control systems.

In total, between February 2015 and January 2016, there were only three training sessions organised by the ENRD in relation to reasonableness of costs and SCO. With118 RDPs, there is a risk that the Commission may need to do more to assure that every Member State/region had a chance to participate or participated in such training sessions.

The ENRD good practice sharing platform could be developed by adding examples of good administrative procedures such as those on reasonableness of costs.

Reply: The Commission considers this recommendation as implemented. The Commission has outlined the different occasions on which the topics in question are discussed with the Member States as well as recent amendments of the Implementation Regulation 809/2014. On request of the Member States the Guidance Document on Controls and Penalties will be updated in the course of 2018.

SR 23/2014: Errors in rural development spending — what are the causes, and how are they being addressed

The implementation reports to be sent by Member States by 30 June 2017 will provide the Commission with the opportunity to obtain an updated and more in-depth view on the implementation of the RDPs.

Reply: The enhanced annual implementation report (AIR) for the rural development programmes to be introduced in 2019 will include further information as to the implementation of the RDPs.

The Commission is committed to assess the policy conception and the continued need for each support measure on the basis of the results of the implementation of the 2014 — 2020 programming period, before making proposals for the next programming period.

Reply: The Commission committed to analyse possible ways to improve the performance of the rural development policy as a whole. Reflections in this respect have been already initiated in the context of the preparation of the Commission Communication on CAP Modernisation and Simplification.

SR 24/2014: Is EU support for preventing and restoring damage to forests caused by fire and natural disasters well managed

The completion of an EU wide set of basic criteria, as recommended by the Court, is still outstanding/ under development.

Reply: The Commission agrees that the implementation of the recommendation is ongoing. The Commission started the consultation with the Commission expert group on forest fires to set up common criteria. As forest types, fire vulnerability, geographical and climatic conditions and fire danger levels are very different within the EU, it is a joint exercise with different Commission services and the Member States involved. It seems that the results can be expected by the end of 2018. DG ENV together with JRC is responsible for this question, since they are the lead in the forest fire expert group.

An evaluation of the effectiveness of the actions is still outstanding due to the fact that most projects financed under the new programming period have not yet been finalised or audited.

Reply: The Commission considered this recommendation as implemented. The actions undertaken by the Commission including i.a. ongoing conformity audits on the Member States' control systems as well as the monitoring of action plans on identified weaknesses, are considered effective. These actions aim to address any known challenges with the implementation of the measures and are ongoing until the end of the current programming period. A final assessment of the effectiveness of these actions is therefore not yet possible.

The Commission has confirmed in RAD that its implementation ‘can only be completed in 2019’.

Hence, there is a risk that the weaknesses identified in SR 24/2014 as regards monitoring, may persist in the period 2014–20 if the new proposed monitoring tools have not yet improved the monitoring framework for this specific support, as feared by the Court in the conclusions (paragraph 81) of SR 24/2014.

Reply: The enhanced annual implementation report (AIR) for the rural development programmes to be introduced in 2019 will include further information as to the implementation of the measure in line with the specific objectives.

SR 01/2014: Effectiveness of EU-supported public urban transport projects

The Commission might have asked for result indicators for urban transport projects in the negotiation process but as there are no compulsory predefined result indicators under the ERDF, not all the OPs that have urban transport projects have defined such indicators.

There are no indicators at the level of the projects themselves and no indicators related to the quality of the services and the level of user satisfaction, the use of user satisfaction surveys is not systematic and is not compulsory.

Reply: The result indicators included in the 2014-2020 programmes were selected taking into account the problems to be addressed by the programme, the direction of the desired change and situation to be arrived at (target). It is therefore possible that, where overall objective of complex interventions, including limited investments in urban transport, was energy efficiency or decrease in Particulate Matter (PM) emissions, the managing authorities did not select result indicator referring directly to the usage of public transport, as it was not relevant to programme objectives. This is also helped to limit the administrative burden related to seeking co-funding.

All projects when applying for EU financing have their project-specific indicators. The modalities for their inclusion are left to the discretion of the Member States and depend on national approaches. The project applications reveal a lot of information on the expected outputs of the projects (reductions in greenhouse and local air quality emissions, reduction in congestion, reduction in travel time and accidents, and other externalities of the transport sector).

The Commission considers that actions at EU level are proportional. Therefore, ‘user satisfaction survey’ is recommended for projects where on the basis of the demand forecasts and cost-benefit analysis, there is a genuine need to monitor such aspects to ensure optimal use of infrastructure, and economic viability of the project. For projects that relate to e.g. modernisation of existing tram services on existing routes and where there is already sufficient demand in place; existence of user-satisfaction survey could be perceived as excessive.

In any case, neither the utilisation rate nor the benefits are included in the grant agreements and measured per project.

Given the lack of pre-defined result indicators in the ERDF regulation, per sector, there are still no unified standards to measure urban transport performance for the 2014-2020 programming period.

Reply: Monitoring obligations of the Member States refer to priority axis level. Modalities of such monitoring are left to the discretion of the Member States as the information may be gathered either from the beneficiaries or from impact evaluations, procured by the Managing Authorities. Especially for public transport projects, the second option can be more efficient, in particular if there are more than one EU funded projects realised in the same city.

There is still no measurement at individual project level, which is what the recommendations are requesting.

Given the lack of pre-defined result indicators in the ERDF regulation, per sector, there are still no unified standards to measure urban transport performance for the 2014-2020 programming period.

Reply: The monitoring system was designed to allow for measurement at programmes level. A set of pre-defined indicators were included in the legal-base to measure progress at output level, but no such proposal at the level of result indicators was decided by the legislative bodies. However, such result indicators could have been proposed as programme specific result indicators, but they were not aggregable at EU level due to differences in the definitions of indicators. This approach is proportionate in light of the fact that measuring results of urban transport projects can vary from one city to another even within a Member State.

SR 07/2014: Has the ERDF successfully supported the development of business incubators

There is no evidence that the incubation process always starts with a detailed, tailor-made incubation programme whose implementation is followed-up and that the achievement of the business objectives is always assessed.

There are still no comprehensive guidelines addressed to the Member States explicitly requiring all the conditions for the EU co-funding of business incubators, as recommended by the ECA, to be put in all national OPs which envisage the use of such incubators.

Reply: The Member States are informed of the Special Report 7/2014 and of the recommendations contained therein. The Commission advised that some operational programmes should include provisions about the need to pay attention to incubation programmes, the need to accompany the SMEs in their early years and the requirement to give start-ups feasibility support, mentoring programmes and learning.

Under shared management the Commission monitors the implementation of the programmes but not that of the individual projects. It is the responsibility of the national authorities to select those projects for support that best contribute to the objectives of the programme concerned and request from the potential beneficiary the preparation of a detailed, tailor-made incubation programme for each client company. Therefore they should introduce appropriate contractual obligations for the beneficiaries in the grant agreements that provide assurance for them that the desired outputs and results will be attained by the selected operations.

The Commission produced a comprehensive set of thematic guides related to implementation of thematic objective 1 on strengthening research and innovation including: service innovation, creative industries, connecting universities to regional growth, innovation-based incubators, Connecting Smart and Sustainable Growth through Smart Specialisation. They have been broadly promoted by the Commission and are available at: http://s3platform.jrc.ec.europa.eu/s3pguide

These thematic guides were also suggested as further reading in the Guidance on Ex ante Conditionalities for the European Structural and Investment Funds Part II and advised to be followed in the advisory role of the Commission in monitoring committees of the relevant operational programmes.

Offering incubating services also to non-resident companies is still not a condition for business incubators’ EU co-funding in all Member States.

There are still no comprehensive guidelines addressed to the Member States explicitly requiring all the conditions for the EU co-funding of business incubators, as recommended by the ECA, to be put in all national OPs which envisage the use of such incubators.

Reply: The Commission considers that incubators may offer their services also to non-resident companies but only in the Member States mentioned by the Commission as an example, thereby allowing incubation support to have a larger impact on the local business community and improving possibilities for networking.

The set-up of such monitoring systems is not a condition for co-funding but is asked on a voluntary basis.

Reply: Under shared management of Structural Funds there is no legal basis for the Commission to explicitly require the incorporation of this element in to the design procedure. The Commission is recommending that a monitoring system based also on business data produced by supported clients is set-up by business incubators receiving EU co-funding.

SR 12/2014: Is the ERDF effective in funding projects that directly promote biodiversity under the EU biodiversity strategy to 2020

The Commission does not monitor OPs in detail. Given the management mode, this remains a responsibility at MS level.

Reply: The Commission monitors the implementation of the operational programmes through the means provided to it by the underlying Regulations: Monitoring Committee, Annual and Final Implementation Report, Annual Review Meeting.

The Commission discusses the issues with the preparatory projects with the MS but this is not enough considered in the guidance documents.

Reply: The Commission highlights that the relevant guidance documents were published before the special report, ahead of the preparation of operational programmes in Member States. The Commission will ensure the issue is properly considered in guidance documents for the post-2020 Multiannual Financial Framework.

It is still early to assess the entirety of the process and therefore the accuracy of the mechanism.

Reply: Financial data according to spending categories, including with the biodiversity weighting, are publicly available in the catalogue of the European Structural Investment Fund (ESIF) Open Data Portal. It is not possible to conduct an ex post analysis, and thus assess the accuracy of the biodiversity tracking methodology, before a major part of the budget is executed.

SR 20/2014: Has ERDF support to SMEs in the area of e commerce been effective

Further guidance and checks need to be carried out at MS level to make sure the monitoring and information systems in place provide reliable and timely data on OP’s progress and performance.

Reply: For the programming period 2014-2020 under Article 50 of the Common Provision Regulations (CPR), Members States have to submit an annual report on the implementation of all programmes respectively. These reports include information among others on common and programme specific indicators and quantified target values. The Commission undertakes a thorough assessment of the information provided in these reports, and in case of concerns about the reliability and timeliness of the data provided the reports are returned to the Member States for modification.

Furthermore, the Commission and the Member States are performing audits on the reliability of performance data. Unreliable data will be considered as a weakness in the management and control system and may lead to financial corrections. In 2017 the Commission performed 9 audits on the reliability of data. As implementation is just starting the Commission's audits concentrated on the build-up of the systems for capturing and reporting performance data. As a result, those audits can be considered as preventive and capacity building efforts by the Commission. The audit authorities will also report weaknesses in the performance data reliability as part of their work and annual assurance provided, once implementation advances.

The Commission, as announced, did not propose standard indicators relevant to EU strategic objectives on e-commerce.

Reply: In the 2014-2020 period the use of ‘common indicators’ became obligatory where it was relevant. E-commerce development in SMEs is only one possible type of intervention under Information and Communication Technology (ICT) developments. The limited support allocated by the Member States to this type of intervention in the previous programming period did not justify the establishment of a ‘common indicator’ in this field. For the post 2020 period the Commission will examine possible ways to improve the set of programmes’ indicators, in particular the development of ‘common indicators’. However those operational programmes that finance e-commerce development in SMEs were free to set specific indicators that are relevant to the intervention. The indicators, as part of the operational programmes, were negotiated and in the end adopted by the Commission.

The Commission did not require that a minimum set of robust indicators with related targets be defined in the grant agreements.

Reply: Under shared management the Commission monitors the implementation of the programmes but not that of the individual projects. It is the responsibility of the national authorities to select those projects for support that best contribute to the objectives of the programme concerned. Therefore they should introduce appropriate contractual obligations for the beneficiaries in the grant agreements that provide assurance for them that the desired outputs and results will be attained by the selected operations, so as to reach the target indicators at priority/operational programme level.

SR 21/2014: EU-funded airport infrastructures — poor value for money

There is an increased risk that, with the revision of the GBER, Member States take the opportunity to use public funding for smaller, financially non viable airports.

Reply: The Commission considers that the changes in the state aids legislation have no direct effect of how EU co-financing is allocated under cohesion policy.

SR 18/2014: EuropeAid’s evaluation and results oriented monitoring systems

There is a lack of documentation on how the selection criteria were applied in establishing individual evaluation plans (examples) by delegations and at headquarters level.

Reply: The Commission agrees with this assessment and is currently taking action in order to improve this aspect of evaluation planning.

The ESS contract, being awarded only in December 2016, is still in an inception phase. Therefore, further efforts are necessary to implement the Court’s recommendation to its full extent, especially regarding the analysis of the reasons for evaluations delays and the measures adopted to address them.

Lack of effectiveness in the delivery of MEPs by the delegations.

Reply: Indeed, the work of the ESS is still at its initial phase. Further analysis and corrective measures are already being taken, as already demonstrated: the successful collaboration with EUDs and HQ Units has allowed gathering 85 OEPs (which replaces the MEP) for 2018, with a reply rate of 91 % from the 93 EUDs contacted. The functionality for encoding the OEP is already available in EVAL since the end of March 2018. All 2018 OEPs will be encoded by the ESS in EVAL and the 2019 OEP will be encoded directly by the delegations and Units themselves. This new functionality will facilitate the analysis and monitoring of the evaluations carried out by the delegations and the units at the headquarters.

A systematic mechanism of collecting data on programmes’ results for at least three years after their completion is still not in place to clearly demonstrate impact and sustainability of results achieved.

An increase in the proportion of ex-post evaluations, necessary to demonstrate longer term results such as impacts, is yet to be demonstrated.

Weaknesses in the data on development results and in the lessons learnt mechanisms were reported to DEVCO in October 2016 (‘Review of the strategic evaluations’).

Reply: The Commission did not initially accept this recommendation and continues to disagree with it.

As for the increase in the proportion of ex post evaluation, the Commission considers that the systematic ex post evaluation of programmes is not cost-effective in terms of usefulness of the information provided. The information on long-term results from interventions is integrated into the strategic evaluations carried out by the Commission, which provide a better view of the impacts of the interventions in a given geographical or thematic area.

The evaluations follow the requirements of the new 2013 Communication Strengthening the foundations of Smart Regulation — improving evaluation (COM(2013) 686 final) and the Better Regulation guidelines released on 19 May 2015 the aims of which are, inter alia, to promote the ‘evaluation culture’ in the Commission, to apply the ‘Evaluation first principle’ as stated in DEVCO/EEAS common Evaluation Policy, to increase transparency of the evaluations process and use of their results. In 2016 the Commission has continued to put an emphasis on improving the planning and implementation of evaluation of projects: two main tools have been put in production (Monitoring and Evaluation Plans and Evaluation Module) and an External Support Service Team has been contracted.

An increase of ex-post evaluations was not demonstrated by DEVCO although improvements were achieved via alternative ways.

Reply: In its initial reply, the Commission accepted this recommendation provided that further analysis showed an increase in ex post evaluations was efficient and useful. The analysis carried-out lead to the conclusion that an increase in the proportion of ex post evaluations would not necessarily lead to better information on results, since this information may not arrive at the most appropriate moment for decision-making, while it would certainly be made at a cost.

In the line of the ECA's recommendation, and following this analysis, the Commission agreed that an improvement of the rationale of projects and programmes evaluations was necessary: selection at each phase — mid-term, final, ex post -within the whole framework of a country programme, taking also into account the other reporting instruments (RFW) and the objectives of evaluations (balance between accountability and learning). Measures have been taken in this regard.

The information on long-term results from interventions is integrated into the strategic evaluations carried out by DEVCO, which provide a better view of the impacts of the interventions in a given geographical or thematic area.

There is no systematic mechanism of following-up action plans of strategic evaluations recommendations for more than one year in what the fiche contradictoire is concerned.

The IT module EVAL does not include strategic evaluations yet.

Reply: While the fiche contradictoire is — with exceptions — followed up only after one year, the Commission would like to stress that the follow-up and the uptake of the results of an evaluation is a long-term process which goes beyond the formal instrument of the fiche contradictoire. This includes participation into the programming and decision-making processes where evaluation-related information should be incorporated.

ANNEX 3.3

RECOMMENDATIONS TO MEMBER STATES

| Special report Number | Special report Title | Recommendation to Member States number and area / summary |
| --- | --- | --- |
| 1/2017 | More efforts needed to implement the Natura 2000 network to its full potential | 1. | (a) & (b) Achieving full implementation of the Natura Directives |

Special report Number

Special report Title

Recommendation to Member States number and area / summary

1/2017

More efforts needed to implement the Natura 2000 network to its full potential

1.

(a) & (b) Achieving full implementation of the Natura Directives

| 2. | (a), (b) & (c) Financing and accounting for the costs of Natura 2000 |
| --- | --- |

2.

(a), (b) & (c) Financing and accounting for the costs of Natura 2000

| 3. | (a) & (c) Measuring the results achieved by Natura 2000 |
| --- | --- |

3.

(a) & (c) Measuring the results achieved by Natura 2000

2/2017

The Commission’s negotiation of 2014-2020 Partnership Agreements and programmes in Cohesion: spending more targeted on Europe 2020 priorities but increasingly complex arrangements to measure performance

| 2. | (a) Provide financial information for monitoring |
| --- | --- |

2.

(a) Provide financial information for monitoring

| 4. | Discontinue the use of unnecessary programme-specific indicators |
| --- | --- |

4.

Discontinue the use of unnecessary programme-specific indicators

| 5. | Ensure that the data relevant to establish the effects of the ERDF interventions is collected |
| --- | --- |

5.

Ensure that the data relevant to establish the effects of the ERDF interventions is collected

3/2017

Youth unemployment — have EU policies made a difference?

| 1. | Manage expectations by setting realistic and achievable objectives and targets and perform gap assessments and market analyses prior to setting up the schemes |
| --- | --- |

1.

Manage expectations by setting realistic and achievable objectives and targets and perform gap assessments and market analyses prior to setting up the schemes

| 2. | Establish appropriate outreach strategies to set out concrete and measurable annual objectives and identify the main challenges and action plans to overcome them. |
| --- | --- |

2.

Establish appropriate outreach strategies to set out concrete and measurable annual objectives and identify the main challenges and action plans to overcome them.

| 3. | Establish a complete overview of the cost of implementing the Youth Guarantee to prioritise the related measures to be implemented |
| --- | --- |

3.

Establish a complete overview of the cost of implementing the Youth Guarantee to prioritise the related measures to be implemented

| 4. | Ensure that offers are only considered to be of good quality if they match the participant’s profile and labour market demand and lead to sustainable integration in the labour market |
| --- | --- |

4.

Ensure that offers are only considered to be of good quality if they match the participant’s profile and labour market demand and lead to sustainable integration in the labour market

| 5. | Improve monitoring and reporting systems in order to regularly provide quality data to facilitate the development of more evidence-based youth policies |
| --- | --- |

5.

Improve monitoring and reporting systems in order to regularly provide quality data to facilitate the development of more evidence-based youth policies

6/2017

EU response to the refugee crisis: the ‘hotspot’ approach

| 3. | Expert deployments |
| --- | --- |

3.

Expert deployments

8/2017

EU fisheries control: more efforts needed

| 1. | (a) Improving the reliability of information on fishing fleets |
| --- | --- |

1.

(a) Improving the reliability of information on fishing fleets

| 2. | (c) Improving the monitoring of fisheries management measures |
| --- | --- |

2.

(c) Improving the monitoring of fisheries management measures

| 3. | (a), (b) & (c) Improving the reliability of fisheries data |
| --- | --- |

3.

(a), (b) & (c) Improving the reliability of fisheries data

| 4. | (a), (c) and (d) Improving inspections and sanctions |
| --- | --- |

4.

(a), (c) and (d) Improving inspections and sanctions

10/2017

EU support to young farmers should be better targeted to foster effective generational renewal

| 1. | Improve the intervention logic by reinforcing needs assessment and defining SMART objectives |
| --- | --- |

1.

Improve the intervention logic by reinforcing needs assessment and defining SMART objectives

| 2. | Improve the targeting of the measures |
| --- | --- |

2.

Improve the targeting of the measures

| 3. | 2nd and 3rd indent Improve the monitoring and evaluation system |
| --- | --- |

3.

2nd and 3rd indent Improve the monitoring and evaluation system

12/2017

Implementing the Drinking Water Directive: water quality and access to it improved in Bulgaria, Hungary and Romania, but investment needs remain substantial

| 3. | Require that plans to reach a certain level of reduction of water losses are included as selection criteria for all water facility projects that allow meeting national targets |
| --- | --- |

3.

Require that plans to reach a certain level of reduction of water losses are included as selection criteria for all water facility projects that allow meeting national targets

| 5. | (a) & (b) Ensure that water tariffs provide for the sustainability of water infrastructure and consider, if necessary, granting financial or other forms of support to households for which the cost of water services is above the affordability rate |
| --- | --- |

5.

(a) & (b) Ensure that water tariffs provide for the sustainability of water infrastructure and consider, if necessary, granting financial or other forms of support to households for which the cost of water services is above the affordability rate

13/2017

A single European rail traffic management system: will the political choice ever become reality?

| 1. | Assessment of European Rail Traffic Management System deployment costs |
| --- | --- |

1.

Assessment of European Rail Traffic Management System deployment costs

| 2. | Decommissioning of national signalling systems |
| --- | --- |

2.

Decommissioning of national signalling systems

| 3. | Individual business case for infrastructure managers and railway undertakings |
| --- | --- |

3.

Individual business case for infrastructure managers and railway undertakings

| 6. | (a) Alignment of national deployment plans, monitoring and enforcement |
| --- | --- |

6.

(a) Alignment of national deployment plans, monitoring and enforcement

| 8. | (a) & (b) Better targeting EU funding |
| --- | --- |

8.

(a) & (b) Better targeting EU funding

16/2017

Rural Development Programming: less complexity and more focus on results needed

| 1. | (b) The Member States should specify how coordination, complementarity and synergy mechanisms between Rural Development Programmes and other programmes will be implemented, followed up and reported on in the context of EU rules |
| --- | --- |

1.

(b) The Member States should specify how coordination, complementarity and synergy mechanisms between Rural Development Programmes and other programmes will be implemented, followed up and reported on in the context of EU rules

18/2017

Single European Sky: a changed culture but not a single sky

| 3. | Ensure full independence and capacity of National Supervisory Authorities |
| --- | --- |

3.

Ensure full independence and capacity of National Supervisory Authorities

19/2017

Import procedures: shortcomings in the legal framework and an ineffective implementation impact the financial interests of the EU

| 6. | (a), (b), (c) & (d) Member States should make overrides of controls suggested conditional on prior or immediate hierarchical approval, introduce checks in their customs electronic release systems, verify ex-post traders’ compliance with customs duty relief for low-value consignments and set-up investigation plans to tackle abuse of these relief |
| --- | --- |

6.

(a), (b), (c) & (d) Member States should make overrides of controls suggested conditional on prior or immediate hierarchical approval, introduce checks in their customs electronic release systems, verify ex-post traders’ compliance with customs duty relief for low-value consignments and set-up investigation plans to tackle abuse of these relief

ANNEX 3.4

FOLLOW-UP OF PREVIOUS RECOMMENDATIONS FOR PERFORMANCE ISSUES

| Year | Court recommendation | Court's analysis of the progress made | Commission reply |
| --- | --- | --- | --- |
| Fully implemented | Being implemented | Not implemented | Not applicable | Insufficient evidence |
| In most respects | In some respects |
| 2014 | Recommendation 1:

  the EU strategy and the MFF need to be better aligned, in particular concerning the time period and priorities. This would help to ensure that adequate monitoring and reporting arrangements are in place, and so make it easier for the Commission to report effectively on the contribution of the EU budget to the EU strategy. The Commission should make appropriate proposals to the legislator to address this issue. | | | | X | | | |
| Recommendation 2:

  the high-level political aims of the EU strategy need to be translated into useful operational targets for managers. For the successor of Europe 2020, the Commission should propose to the legislator that:






  (a) | the high-level political aims are reflected in EU level objectives; |

Year

Court recommendation

Court's analysis of the progress made

Commission reply

Fully implemented

Being implemented

Not implemented

Not applicable

Insufficient evidence

In most respects

In some respects

2014

Recommendation 1:

the EU strategy and the MFF need to be better aligned, in particular concerning the time period and priorities. This would help to ensure that adequate monitoring and reporting arrangements are in place, and so make it easier for the Commission to report effectively on the contribution of the EU budget to the EU strategy. The Commission should make appropriate proposals to the legislator to address this issue.

X

Recommendation 2:

the high-level political aims of the EU strategy need to be translated into useful operational targets for managers. For the successor of Europe 2020, the Commission should propose to the legislator that:

(a)

the high-level political aims are reflected in EU level objectives;

| (b) | partnership agreements and programmes in turn translate these EU-level objectives into operational objectives at the level of Member States; such a link is also required for programmes directly managed by the Commission; |
| --- | --- |

(b)

partnership agreements and programmes in turn translate these EU-level objectives into operational objectives at the level of Member States; such a link is also required for programmes directly managed by the Commission;

X

Recommendation 3:

the focus on results should be reinforced as soon as possible. The Commission should propose to the legislator that:

| (a) | Member States must include in their partnership agreements and programmes the quantified results that the funding is intended to achieve. |
| --- | --- |

(a)

Member States must include in their partnership agreements and programmes the quantified results that the funding is intended to achieve.

| (b) | All partnership agreements and programmes should include common result indicators, where possible shared by the different funds, designed to monitor progress at local, Member State and EU level. |
| --- | --- |

(b)

All partnership agreements and programmes should include common result indicators, where possible shared by the different funds, designed to monitor progress at local, Member State and EU level.

| (c) | The performance framework (including any performance reserve) should be based, as far as possible, on these common result indicators. |
| --- | --- |

(c)

The performance framework (including any performance reserve) should be based, as far as possible, on these common result indicators.

X

---

CHAPTER 4

Revenue

TABLE OF CONTENTS

| Introduction | 4.1-4.4 |
| --- | --- |

| Brief description of revenue | 4.2-4.3 |
| --- | --- |

| Audit scope and approach | 4.4 |
| --- | --- |

| Regularity of transactions | 4.5 |
| --- | --- |

| Examination of annual activity reports and other elements of internal control systems | 4.6-4.20 |
| --- | --- |

| The numbers of GNI and VAT reservations and TOR open points remain unchanged overall | 4.7-4.8 |
| --- | --- |

| The Commission continued to implement its multi-annual GNI verification plan and made progress in assessing the impact of globalisation on national accounts | 4.9-4.11 |
| --- | --- |

| There are weaknesses in Member States’ management of TOR | 4.12-4.16 |
| --- | --- |

| Insufficient monitoring of import flows contributed to a lengthy process to effectively safeguard EU revenue | 4.17 |
| --- | --- |

| There are weaknesses in the verifications on the VAT-based own resource | 4.18-4.19 |
| --- | --- |

| Annual activity reports and other governance arrangements | 4.20 |
| --- | --- |

| Conclusion and recommendations | 4.21-4.23 |
| --- | --- |

| Conclusion | 4.21 |
| --- | --- |

| Recommendations | 4.22-4.23 |
| --- | --- |

| Annex 4.1 — | Results of transaction testing for revenue |
| --- | --- |

Annex 4.1 —

| Annex 4.2 — | Numbers of outstanding GNI reservations, VAT reservations and TOR open points by Member State at 31.12.2017 |
| --- | --- |

Annex 4.2 —

| Annex 4.3 — | Follow-up of previous recommendations for revenue |
| --- | --- |

Annex 4.3 —

| THE COURT’S OBSERVATIONS | |
| --- | --- |
| INTRODUCTION |
| 4.1. | This chapter presents our findings for revenue, which comprises own resources and other revenue.
  Box 4.1
  gives a breakdown of revenue in 2017. |

THE COURT’S OBSERVATIONS

INTRODUCTION

4.1.

This chapter presents our findings for revenue, which comprises own resources and other revenue.
  Box 4.1
  gives a breakdown of revenue in 2017.

Box 4.1 —   Revenue — 2017 Breakdown

(billion euros)

| (billion euros) |
| --- |
| |
| Total revenue 2017
   (1) | 139,7 |
| Source: 2017 consolidated accounts of the European Union. |

Image

Total revenue 2017
   (1)

139,7

Source: 2017 consolidated accounts of the European Union.

THE COURT’S OBSERVATIONS

Brief description of revenue

| 4.2. | Most revenue (83 %) comes from the three categories of own resources: |
| --- | --- |

4.2.

Most revenue (83 %) comes from the three categories of own resources:

| (a) | The
  gross national income-based (GNI-based) own resource provides 56 % of the EU’s revenue, and balances the EU budget after revenue from all other sources has been calculated. Each Member State contributes proportionally based on its GNI (1). |
| --- | --- |

(a)

The
  gross national income-based (GNI-based) own resource provides 56 % of the EU’s revenue, and balances the EU budget after revenue from all other sources has been calculated. Each Member State contributes proportionally based on its GNI (1).

| (b) | Traditional own resources (TOR) provide 15 % of the EU’s revenue. They comprise customs duties on imports (20,3  billion euros) and sugar-production levies (0,1  billion euros). Both of these are collected by the Member States. The EU budget receives 80 % of the total amount; Member States retain the remaining 20 % to cover collection costs. |
| --- | --- |

(b)

Traditional own resources (TOR) provide 15 % of the EU’s revenue. They comprise customs duties on imports (20,3  billion euros) and sugar-production levies (0,1  billion euros). Both of these are collected by the Member States. The EU budget receives 80 % of the total amount; Member States retain the remaining 20 % to cover collection costs.

| (c) | The value added tax-based (VAT-based) own resource provides 12 % of the EU’s revenue. Contributions under this own resource are calculated based on a uniform rate (2) applied to Member States’ harmonised VAT assessment bases. |
| --- | --- |

(c)

The value added tax-based (VAT-based) own resource provides 12 % of the EU’s revenue. Contributions under this own resource are calculated based on a uniform rate (2) applied to Member States’ harmonised VAT assessment bases.

| 4.3. | Revenue also includes amounts received from other sources. The most significant of these sources are contributions and refunds arising from Union agreements and programmes (3) (9 % of EU revenue), the surplus from the 2016 financial year (5 % of EU revenue), and fines and default interest (2 % of EU revenue). |
| --- | --- |

4.3.

Revenue also includes amounts received from other sources. The most significant of these sources are contributions and refunds arising from Union agreements and programmes (3) (9 % of EU revenue), the surplus from the 2016 financial year (5 % of EU revenue), and fines and default interest (2 % of EU revenue).

Audit scope and approach

| 4.4. | Applying the audit approach and methods set out in
  Annex 1.1
  , we examined the following for revenue in 2017:






  (a) | a sample of 55 Commission recovery orders (4) designed to be representative of all sources of revenue; |
| --- | --- | --- |

4.4.

Applying the audit approach and methods set out in
  Annex 1.1
  , we examined the following for revenue in 2017:

(a)

a sample of 55 Commission recovery orders (4) designed to be representative of all sources of revenue;

| (b) | whether the annual activity reports of Directorate-General for Budget (DG Budget) and Eurostat presented information on regularity of revenue that was broadly consistent with our results; |
| --- | --- |

(b)

whether the annual activity reports of Directorate-General for Budget (DG Budget) and Eurostat presented information on regularity of revenue that was broadly consistent with our results;

| (c) | the Commission’s systems for:






  (i) | ensuring that the Member States’ GNI and VAT data is an appropriate basis for calculating own-resources contributions, and calculating and collecting these contributions (5); |
| --- | --- | --- |

(c)

the Commission’s systems for:

(i)

ensuring that the Member States’ GNI and VAT data is an appropriate basis for calculating own-resources contributions, and calculating and collecting these contributions (5);

| (ii) | managing TOR, and ensuring that Member States have efficient systems to collect and make available the correct amounts of TOR; |
| --- | --- |

(ii)

managing TOR, and ensuring that Member States have efficient systems to collect and make available the correct amounts of TOR;

| (iii) | managing fines and penalties; |
| --- | --- |

(iii)

managing fines and penalties;

| (iv) | calculating the amounts resulting from correction mechanisms. |
| --- | --- |

(iv)

calculating the amounts resulting from correction mechanisms.

| (d) | the systems for TOR accounting (6) in three selected Member States (the Czech Republic, Germany and the Netherlands) (7). |
| --- | --- |

(d)

the systems for TOR accounting (6) in three selected Member States (the Czech Republic, Germany and the Netherlands) (7).

REGULARITY OF TRANSACTIONS

| 4.5. | Annex 4.1
  provides an overview of the results of transaction testing. Of the 55 transactions examined, none were affected by errors. |
| --- | --- |

4.5.

Annex 4.1
  provides an overview of the results of transaction testing. Of the 55 transactions examined, none were affected by errors.

EXAMINATION OF ANNUAL ACTIVITY REPORTS AND OTHER ELEMENTS OF INTERNAL CONTROL SYSTEMS

| 4.6. | As explained in paragraph 4.4, we selected and examined a number of systems. The comments which follow do not affect our overall opinion on the regularity of EU revenue (see chapter 1), but they highlight areas in which the calculation and collection of revenue could be improved. |
| --- | --- |

4.6.

As explained in paragraph 4.4, we selected and examined a number of systems. The comments which follow do not affect our overall opinion on the regularity of EU revenue (see chapter 1), but they highlight areas in which the calculation and collection of revenue could be improved.

The numbers of GNI and VAT reservations and TOR open points remain unchanged overall

| 4.7. | When the Commission identifies cases of potential non-compliance with the own-resources regulations (8), it marks the data as open and subject to amendments. For cases concerning GNI or VAT, this procedure is called setting a reservation; for TOR cases, the corresponding procedure is called creating an open point. |
| --- | --- |

4.7.

When the Commission identifies cases of potential non-compliance with the own-resources regulations (8), it marks the data as open and subject to amendments. For cases concerning GNI or VAT, this procedure is called setting a reservation; for TOR cases, the corresponding procedure is called creating an open point.

| 4.8. | Overall, the numbers of GNI and VAT reservations and TOR open points remain unchanged (see
  Annex 4.2
  ). The impact on the EU budget of these reservations and open points is still to be determined by the Commission, taking into account the information to be provided by the Member States. |
| --- | --- |

4.8.

Overall, the numbers of GNI and VAT reservations and TOR open points remain unchanged (see
  Annex 4.2
  ). The impact on the EU budget of these reservations and open points is still to be determined by the Commission, taking into account the information to be provided by the Member States.

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

The Commission continued to implement its multi-annual GNI verification plan and made progress in assessing the impact of globalisation on national accounts

| 4.9. | The Commission continued to implement its multi-annual GNI verification plan in the Member States. These verifications examine whether the compilation procedures Member States use for their national accounts comply with ESA 2010 (9), and whether GNI data is reliable, exhaustive and comparable (10). |
| --- | --- |

4.9.

The Commission continued to implement its multi-annual GNI verification plan in the Member States. These verifications examine whether the compilation procedures Member States use for their national accounts comply with ESA 2010 (9), and whether GNI data is reliable, exhaustive and comparable (10).

| 4.10. | The Commission placed process-specific reservations (11) on all Member States, in order to ensure that they take the results of its work into account when calculating their GNI own resources for 2010 onwards. The Commission expects to complete its verification cycle in 2019. |
| --- | --- |

4.10.

The Commission placed process-specific reservations (11) on all Member States, in order to ensure that they take the results of its work into account when calculating their GNI own resources for 2010 onwards. The Commission expects to complete its verification cycle in 2019.

| 4.11. | Last year, we reported that the Commission would need to carry out additional work to assess the potential impact of globalisation on national accounts (12). In 2017, the Commission made progress in this area. It set up a number of task forces and working groups involving national experts, introduced an early warning system to identify the cases of R&D assets’ relocation, asked Member States to complete questionnaires on multinational activities and planned to create a database of case studies on multinational enterprises. |
| --- | --- |

4.11.

Last year, we reported that the Commission would need to carry out additional work to assess the potential impact of globalisation on national accounts (12). In 2017, the Commission made progress in this area. It set up a number of task forces and working groups involving national experts, introduced an early warning system to identify the cases of R&D assets’ relocation, asked Member States to complete questionnaires on multinational activities and planned to create a database of case studies on multinational enterprises.

| 4.11. | The Commission continued to work intensively in 2018 in cooperation with the Member States. In particular, a Multi-National Enterprise (MNE) Group Pilot exercise was launched aiming at achieving by the end of the current GNI verification cycle a reasonable understanding of the reliability of the recording of globalisation issues in GNI data. |
| --- | --- |

4.11.

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

There are weaknesses in Member States’ management of TOR

| 4.12. | Each Member State sends the Commission a monthly statement of customs duties and sugar-production levies it has collected (the A accounts) and a quarterly statement of established duties not yet collected (the B accounts). |
| --- | --- |

4.12.

Each Member State sends the Commission a monthly statement of customs duties and sugar-production levies it has collected (the A accounts) and a quarterly statement of established duties not yet collected (the B accounts).

| 4.13. | We examined the collection of TOR in the Czech Republic, Germany and the Netherlands. We focused our analysis on: the compilation of the A accounts; the procedures for collecting the amounts registered in the B accounts; and the follow-up of OLAF requests. |
| --- | --- |

4.13.

We examined the collection of TOR in the Czech Republic, Germany and the Netherlands. We focused our analysis on: the compilation of the A accounts; the procedures for collecting the amounts registered in the B accounts; and the follow-up of OLAF requests.

| 4.14. | We did not identify any significant problems in the compilation of the A accounts in the Czech Republic and in Germany. However, in the Netherlands, we could not properly assess the reliability of the A and B account statements because the customs IT systems did not allow us to establish the audit trail for the underlying transactions. |
| --- | --- |

4.14.

We did not identify any significant problems in the compilation of the A accounts in the Czech Republic and in Germany. However, in the Netherlands, we could not properly assess the reliability of the A and B account statements because the customs IT systems did not allow us to establish the audit trail for the underlying transactions.

| 4.14. | The absence of an audit trail in the Netherlands has repeatedly been raised in the Commission's inspections and is currently being followed up. The Dutch authorities are in the process of setting up an IT system that will establish an audit trail for the underlying transactions. |
| --- | --- |

4.14.

| 4.15. | In the three Member States we visited, we noted weaknesses in the management of the B accounts. These weaknesses mainly concern the enforced recovery of customs debts. This is a recurrent issue, which the Commission also reported in its inspection reports. We found similar weaknesses in other Member States in previous years (13) (see
  Annex 4.3
  ). |
| --- | --- |

4.15.

In the three Member States we visited, we noted weaknesses in the management of the B accounts. These weaknesses mainly concern the enforced recovery of customs debts. This is a recurrent issue, which the Commission also reported in its inspection reports. We found similar weaknesses in other Member States in previous years (13) (see
  Annex 4.3
  ).

| 4.15. | The Commission examines the B account in each TOR inspection it carries out. In an account of this nature (a collection of unguaranteed and/or contested cases) there will inevitably be shortcomings. For that reason the Commission will continue to examine the B account in each of their inspections. |
| --- | --- |

4.15.

| 4.16. | In special report 19/2017, we reported serious weaknesses and loopholes which indicate that Member States are not applying these customs controls effectively (14). This report also highlights significant risks resulting from the under-valuation of goods in e-commerce with non-EU countries. These risks may reduce the value of TOR made available to the EU budget (15). |
| --- | --- |

4.16.

In special report 19/2017, we reported serious weaknesses and loopholes which indicate that Member States are not applying these customs controls effectively (14). This report also highlights significant risks resulting from the under-valuation of goods in e-commerce with non-EU countries. These risks may reduce the value of TOR made available to the EU budget (15).

| 4.16. | Please see Commission replies provided in special report 19/2017.

  Furthermore, on 31 May 2018, the Commission has adopted the Commission implementing decision on financial risk criteria (FRC) and standards for goods released for free circulation. In the FRC decision, the Commission and the Member States agreed on a common EU-wide approach and a set of rules to address financial risks in the same manner. |
| --- | --- |

4.16.

Furthermore, on 31 May 2018, the Commission has adopted the Commission implementing decision on financial risk criteria (FRC) and standards for goods released for free circulation. In the FRC decision, the Commission and the Member States agreed on a common EU-wide approach and a set of rules to address financial risks in the same manner.

Insufficient monitoring of import flows contributed to a lengthy process to effectively safeguard EU revenue

| 4.17. | After asking the United Kingdom (UK) in 2011 to set risk profiles for under-valued textiles and footwear imports from China, it took the Commission more than seven years to launch an infringement procedure
   (16). This is partly because the Commission does not sufficiently monitor import data or analyse unusual patterns, such as diversions between Member States, or their underlying reasons (see
  Box 4.2
  ). |
| --- | --- |

4.17.

After asking the United Kingdom (UK) in 2011 to set risk profiles for under-valued textiles and footwear imports from China, it took the Commission more than seven years to launch an infringement procedure
   (16). This is partly because the Commission does not sufficiently monitor import data or analyse unusual patterns, such as diversions between Member States, or their underlying reasons (see
  Box 4.2
  ).

| 4.17. | In the field of traditional own resources, the Commission only initiates an infringement procedure when it has established conclusive evidence that a constant practice or failure of a given Member State leads to a loss of traditional own resources. Once the Commission had established, in March 2017, conclusive evidence indicating that traditional own resources were lost because of a lack of action by the UK, it took firm and immediate action which resulted in the commencement of infringement proceedings. The UK had established additional duties in November 2014 going back to 2011 when Member States were requested to set up specific risk profiles for undervaluation. Only when the UK cancelled and withdrew these amounts from the B account in 2015 did the Commission have legitimate reasons to investigate this matter further and therefore included it in its next TOR inspection in November 2016. In the course of dealing with this matter prior to March 2017, OLAF engaged with and formally alerted the UK authorities on 11 separate occasions on the need to take action in relation to undervaluation.

  The Commission, under the Union Customs Code (UCC), expects to obtain by the end of 2020 more detailed data on imports. This will also allow a wider use of data mining techniques in order to support Member States to enhance their control activities. |
| --- | --- |

4.17.

The Commission, under the Union Customs Code (UCC), expects to obtain by the end of 2020 more detailed data on imports. This will also allow a wider use of data mining techniques in order to support Member States to enhance their control activities.

Box 4.2 — Under-valuation of textile and footwear imports from China: UK’s failure to introduce the requested risk profiles led to significant estimated losses of TOR

Box 4.2 — Under-valuation of textile and footwear imports from China: UK’s failure to introduce the requested risk profiles led to significant estimated losses of TOR

The Commission informed the Member States as far back as 2007 of the risk of fraud relating to the import of textiles and footwear originating from China. In 2011, the Commission asked the Member States to introduce risk profiles for such imports. Other Member States eventually complied with this request. As a result, a significant volume of these irregular imports was diverted to the UK.

On receipt of the OLAF report which was published in March 2017 the Commission took firm and immediate action to determine the magnitude of the TOR losses incurred and urged the UK to take immediate action to prevent further losses and to make available the estimated amount of TOR underpaid resulting from its failure. In addition to the two TOR inspections carried out in May and November 2017, DG BUDGET sent two warning letters to the UK on 24 March 2017 and 28 July 2017. Following these repeated warnings, the Commission instigated an infringement procedure against the UK in March 2018.

OLAF carried out an investigation on UK’s valuation of textile and footwear imports from China between 2015 and 2017. This investigation concluded that the under-valuation of these imports had led to possible TOR losses of 1,6  billion euros for the period 2013-2016.

In 2017, DG Budget carried out two inspections in the UK, reporting that the country had taken insufficient action to mitigate the risk of such imports being under-valued.

Finally, in March 2018, the Commission launched an infringement procedure against the UK by sending a letter of formal notice. This action was taken because the UK had failed to implement adequate measures to mitigate the risk of customs fraud by under-valuation and refused to make available to the EU budget the evaded customs duties.

The estimated amount of TOR evaded is 2,2  billion euros for the period 2013-2017, on which late payment interest may be applied. The under-valuation of such imports may also affect the calculation of VAT and GNI own resources, as well as of the individual contributions of the remaining Member States.

There are weaknesses in the verifications on the VAT-based own resource

| 4.18. | To calculate its harmonised VAT assessment base, each Member State divides its total net VAT revenue by its Weighted Average Rate (WAR) (17). The Member States determine their WARs using data from their national accounts. Because the WAR is the denominator in a fraction, it has a significant impact on the calculation of the harmonised VAT assessment bases and, hence, of Member States’ contributions. |
| --- | --- |

4.18.

To calculate its harmonised VAT assessment base, each Member State divides its total net VAT revenue by its Weighted Average Rate (WAR) (17). The Member States determine their WARs using data from their national accounts. Because the WAR is the denominator in a fraction, it has a significant impact on the calculation of the harmonised VAT assessment bases and, hence, of Member States’ contributions.

| 4.19. | The Commission verifies the WARs presented by the Member States in their VAT statements. We assessed the performance of these verifications and found scope to further formalise the risk assessment underpinning its control approach. Moreover, there was no standardised documentation substantiating the work done, and limited evidence of the national accounts data used for the calculations having been reconciled with data obtained from other (national or EU) sources. Nor was there any procedure for setting VAT reservations on WARs in cases where the Commission identifies significant weaknesses in the Member States’ compilation of national accounts data. |
| --- | --- |

4.19.

The Commission verifies the WARs presented by the Member States in their VAT statements. We assessed the performance of these verifications and found scope to further formalise the risk assessment underpinning its control approach. Moreover, there was no standardised documentation substantiating the work done, and limited evidence of the national accounts data used for the calculations having been reconciled with data obtained from other (national or EU) sources. Nor was there any procedure for setting VAT reservations on WARs in cases where the Commission identifies significant weaknesses in the Member States’ compilation of national accounts data.

| 4.19. | The Commission carries out a risk analysis and documents its work for each inspection taking account of the countries specific different legislative and administrative situations. The Commission’s experience shows no significant difference between national accounts data used in the Weighted Average Rate (WAR) calculation and data of national publications on the one side and data included in the Eurostat database on the other side.

  With respect to the reservations on the national accounts, at present it is not expressly foreseen to make a reservation on the ‘WAR calculation’ in case national accounts were considered as unreliable. Notwithstanding the current procedure does not prevent such a reservation either. In general, the possible implications of any pending GNI reservations have to be assessed on a case-by-case basis at each VAT inspection. |
| --- | --- |

4.19.

With respect to the reservations on the national accounts, at present it is not expressly foreseen to make a reservation on the ‘WAR calculation’ in case national accounts were considered as unreliable. Notwithstanding the current procedure does not prevent such a reservation either. In general, the possible implications of any pending GNI reservations have to be assessed on a case-by-case basis at each VAT inspection.

Annual activity reports and other governance arrangements

| 4.20. | The information provided in the 2017 annual activity reports published by DG Budget and Eurostat corroborates our observations and conclusions. For the second year in a row, DG Budget set a reservation on the value of TOR collected by the UK, due to the country’s failure to make available to the EU budget evaded customs duties on textiles and footwear imports (see 
  paragraph 4.17
  and
  Box 4.2
  ) (18). |
| --- | --- |

4.20.

The information provided in the 2017 annual activity reports published by DG Budget and Eurostat corroborates our observations and conclusions. For the second year in a row, DG Budget set a reservation on the value of TOR collected by the UK, due to the country’s failure to make available to the EU budget evaded customs duties on textiles and footwear imports (see 
  paragraph 4.17
  and
  Box 4.2
  ) (18).

CONCLUSION AND RECOMMENDATIONS

Conclusion

| 4.21. | The overall audit evidence indicates that the level of error in revenue was not material. The revenue-related systems which we examined were, overall, effective. The key internal TOR controls we assessed in the Commission and in certain Member States were partially effective (see
  paragraphs 4.12 to 4.17
  ). |
| --- | --- |

4.21.

The overall audit evidence indicates that the level of error in revenue was not material. The revenue-related systems which we examined were, overall, effective. The key internal TOR controls we assessed in the Commission and in certain Member States were partially effective (see
  paragraphs 4.12 to 4.17
  ).

Recommendations

| 4.22. | Annex 4.3
  shows the findings of our follow-up review of the four recommendations we made in our 2014 annual report. The Commission had implemented the four recommendations in most respects. |
| --- | --- |

4.22.

Annex 4.3
  shows the findings of our follow-up review of the four recommendations we made in our 2014 annual report. The Commission had implemented the four recommendations in most respects.

| 4.23. | Based on this review and our findings and conclusions for 2017, we recommend that the Commission: |
| --- | --- |

4.23.

Based on this review and our findings and conclusions for 2017, we recommend that the Commission:

TOR

| — | Recommendation 1: by the end of 2020, improve its monitoring of import flows, including making wider use of data mining techniques to analyse unusual patterns and their underlying reasons, and act promptly to ensure that due amounts of TOR are made available. |
| --- | --- |

—

Recommendation 1: by the end of 2020, improve its monitoring of import flows, including making wider use of data mining techniques to analyse unusual patterns and their underlying reasons, and act promptly to ensure that due amounts of TOR are made available.

The Commission accepts the recommendation.

The Commission, under the Union Customs Code (UCC), expects to obtain, by the end of 2020, more detailed data on imports. This will also allow a wider use of data mining techniques in order to support Member States to enhance their control activities. Moreover, OLAF has taken further investigative actions in this regard, which are still on-going in a number of Member States. Concerning closed investigations in addition to the UK undervaluation case and actions taken in undervaluation matters in 2017 in general, further details are outlined in the 2017 OLAF Report.

VAT own resource

| — | Recommendation 2: by the end of 2019, review the existing control framework and better document its application in verifying Member States’ calculations of the WARs used to obtain the harmonised VAT bases. |
| --- | --- |

—

Recommendation 2: by the end of 2019, review the existing control framework and better document its application in verifying Member States’ calculations of the WARs used to obtain the harmonised VAT bases.

The Commission accepts the recommendation.

It agrees to review the existing control framework related to the Weighted Average Rate (WAR) calculation. For that purpose, the Commission will further harmonise its work documentation and implement a harmonised VAT WAR verification checklist.

The Commission accepts also to review on a case by case basis the impact of a GNI reservation to the VAT base and update the VAT reservations according to the result of this review.

---

(1)  The initial contribution is calculated based on forecast GNI. Differences between the forecast and final GNI are adjusted in subsequent years, and affect the distribution of own resources between Member States rather than the total amount collected.

(2)  A reduced VAT call rate of 0,15 % applies to Germany, the Netherlands, and Sweden, while the call rate for the other Member States is 0,3 %.

(3)  This mainly consists of repayments of unused amounts from various funds in the areas of cohesion and natural resources (6,6 billion euros), and the clearance of European Agricultural Guarantee Fund accounts (1,3 billion euros).

(4)  A recovery order is a document in which the Commission records amounts that are due to it.

(5)  Our starting point was the agreed GNI data and the harmonised VAT base prepared by the Member States. We did not directly test the statistics and data produced by the Commission and the Member States.

(6)  Our audit used data from the visited Member States’ TOR accounting systems. We could not audit undeclared imports or those that had escaped customs surveillance.

(7)  These three Member States were selected taking into consideration the size of their contribution.

(8)  Council Regulation (EU, Euratom) No 609/2014 of 26 May 2014 on the methods and procedure for making available the traditional, VAT and GNI-based own resources and on the measures to meet cash requirements (OJ L 168, 7.6.2014, p. 39) and Council Regulation (EU, Euratom) No 608/2014 of 26 May 2014 laying down implementing measures for the system of own resources of the European Union (OJ L 168, 7.6.2014, p. 29).

(9)  ESA (European system of national and regional accounts) 2010 is the EU’s internationally compatible accounting framework. It is used to create a systematic and detailed description of an economy. See Regulation (EU) No 549/2013 of the European Parliament and of the Council of 21 May 2013 on the European system of national and regional accounts in the European Union (OJ L 174, 26.6.2013, p. 1).

(10)  See Article 5 of Council Regulation (EC, Euratom) No 1287/2003 of 15 July 2003 on the harmonisation of gross national income at market prices (GNI Regulation) (OJ L 181, 19.7.2003, p. 1).

(11)  Used when a particular stage in a process is concerned. The Commission set these so that it could conclude the ongoing verification while keeping the Member States’ GNI data open for revision.

(12)  See paragraphs 4.10 to 4.13, and 4.23 of our 2016 annual report.

(13)  See paragraph 4.15 of our 2016 annual report, paragraph 4.18 of our 2015 annual report, paragraph 4.22 of our 2014 annual report, paragraph 2.16 of our 2013 annual report, and paragraphs 2.32 and 2.33 of our 2012 annual report.

(14)  See in particular paragraphs VI to IX of special report 19/2017 ‘Import procedures: shortcomings in the legal framework and an ineffective implementation impact the financial interests of the EU’.

(15)  In March 2018, we started an audit on whether the EU is addressing the challenges posed by e-commerce in terms of VAT and customs duties.

(16)  This is the main enforcement action that the Commission can take when Member States do not apply EU law.

(17)  Council Regulation (EEC, Euratom) No 1553/89 of 29 May 1989 on the definitive uniform arrangements for the collection of own resources accruing from value added tax (OJ L 155, 7.6.1989, p. 9).

(18)  The accounting treatment of this issue has been in line with EU accounting rules. Therefore, the amount of TOR has not been recognised as receivable in the financial statements for 2017 (see note 2.6.1.1 to the consolidated accounts of the European Union).

(1)  This amount represents the EU’s actual budget revenue. The amount of 136,2 billion euros shown in the statement of financial performance is calculated using the accrual-based system.

ANNEX 4.1

RESULTS OF TRANSACTION TESTING FOR REVENUE

| | 2017 | 2016 |
| --- | --- | --- |
| |
| SIZE AND STRUCTURE OF THE SAMPLE |
| |
| Total transactions | 55 | 55 |
| |
| ESTIMATED IMPACT OF QUANTIFIABLE ERRORS |
| | | |
| Estimated level of error | 0,0  % | 0,0  % |
| | | |
| | Upper Error Limit (UEL) | 0,0  % | |
| | Lower Error Limit (LEL) | 0,0  % | |

2017

2016

SIZE AND STRUCTURE OF THE SAMPLE

Total transactions

55

55

ESTIMATED IMPACT OF QUANTIFIABLE ERRORS

Estimated level of error

0,0  %

0,0  %

Upper Error Limit (UEL)

0,0  %

Lower Error Limit (LEL)

0,0  %

ANNEX 4.2

NUMBERS OF OUTSTANDING GNI RESERVATIONS (1), VAT RESERVATIONS AND TOR OPEN POINTS BY MEMBER STATE AT 31.12.2017

| Member State | GNI reservations (situation at 31.12.2017) | VAT reservations (situation at 31.12.2017) | TOR ‘open points’ (situation at 31.12.2017) |
| --- | --- | --- | --- |
| Belgium | 0 | 3 | 30 |
| Bulgaria | 0 | 4 | 4 |
| Czech Republic | 0 | 0 | 3 |
| Denmark | 0 | 6 | 17 |
| Germany | 0 | 7 | 13 |
| Estonia | 0 | 1 | 0 |
| Ireland | 0 | 12 | 11 |
| Greece | 5 | 9 | 25 |
| Spain | 0 | 6 | 30 |
| France | 0 | 5 | 20 |
| Croatia | 2 | 1 | 2 |
| Italy | 0 | 5 | 20 |
| Cyprus | 0 | 1 | 3 |
| Latvia | 0 | 1 | 1 |
| Lithuania | 0 | 0 | 5 |
| Luxembourg | 0 | 4 | 2 |
| Hungary | 0 | 0 | 12 |
| Malta | 0 | 0 | 2 |
| Netherlands | 0 | 5 | 53 |
| Austria | 0 | 4 | 5 |
| Poland | 0 | 1 | 12 |
| Portugal | 0 | 0 | 16 |
| Romania | 0 | 2 | 20 |
| Slovenia | 0 | 0 | 4 |
| Slovakia | 0 | 0 | 6 |
| Finland | 0 | 4 | 9 |
| Sweden | 0 | 4 | 2 |
| United Kingdom | 0 | 7 | 27 |
| TOTAL 31.12.2017 | 7 | 92 | 354 |
| TOTAL 31.12.2016 | 2 | 95 | 335 |
| Source: European Court of Auditors. |

Member State

GNI reservations (situation at 31.12.2017)

VAT reservations (situation at 31.12.2017)

TOR ‘open points’ (situation at 31.12.2017)

Belgium

0

3

30

Bulgaria

0

4

4

Czech Republic

0

0

3

Denmark

0

6

17

Germany

0

7

13

Estonia

0

1

0

Ireland

0

12

11

Greece

5

9

25

Spain

0

6

30

France

0

5

20

Croatia

2

1

2

Italy

0

5

20

Cyprus

0

1

3

Latvia

0

1

1

Lithuania

0

0

5

Luxembourg

0

4

2

Hungary

0

0

12

Malta

0

0

2

Netherlands

0

5

53

Austria

0

4

5

Poland

0

1

12

Portugal

0

0

16

Romania

0

2

20

Slovenia

0

0

4

Slovakia

0

0

6

Finland

0

4

9

Sweden

0

4

2

United Kingdom

0

7

27

TOTAL 31.12.2017

7

92

354

TOTAL 31.12.2016

2

95

335

Source: European Court of Auditors.

---

(1)  This table only includes the GNI transaction-specific reservations (covering the compilation of specific national accounts’ components in a Member State). There are also GNI process-specific reservations (see paragraph 4.10) outstanding in all Member States, covering the data compilation from 2010 onwards (except for Croatia, where they cover the period from 2013 onwards).

ANNEX 4.3

FOLLOW-UP OF PREVIOUS RECOMMENDATIONS FOR REVENUE

| Year | Court recommendation | Court's analysis of the progress made | Commission reply |
| --- | --- | --- | --- |
| Fully implemented | Being implemented | Not implemented | Not applicable | Insufficient evidence |
| In most respects | In some respects |
| 2014 | Recommendation 1: take measures during the next verification cycle in order to reduce the number of years that will be covered by reservations at the end of the cycle; | | X | | | | | The Commission acknowledges that the number of years covered by reservations at the end of the verification cycle may be significant. Further to placing reservations, the Commission started during this cycle to place action points on GNI data quality improvements at an early stage. This should contribute to reducing the impact of forthcoming reservations on the amount of contributions to the EU budget to be paid by them. |
| Recommendation 2: take measures to reduce the impact of the revisions presented by Member States. | | X | | | | | The National Statistical Authorities voluntarily agree to a common revision policy and commit to gradually implement it with the aim of delivering more consistent statistics to users. The agreed guidelines specify that Member States should disseminate the results of the next benchmark revisions in 2019 and 2024 respectively.


  Regarding GNI for own resource purposes, the Commission is requesting Member States to provide the most up-to-date quality data. |
| Recommendation 3: improve the existing guidance on post clearance audits and encourage its implementation by Member States; | | X | | | | | The Commission has established a project group of Member States which will continue to identify the actions needed to achieve a common approach and make available additional guidance. Nevertheless, the group concluded that the scope of this matter is considered to go beyond the Customs Audit Guide particularly in terms of legal ramifications. |
| Recommendation 4: ensure that Member States have adequate accounting systems for recording items in B accounts and encourage Member States to improve their management of the items in these accounts. For example, by reviewing them on a regular basis to ensure that older items are updated or written-off as appropriate. | | X | | | | | The Commission will continue to examine the B account in every inspection of TOR they carry out and they ensure that the Member States have adequate accounting systems in place and that older items are written off or their continued inclusion in the B account is justified. |

Year

Court recommendation

Court's analysis of the progress made

Commission reply

Fully implemented

Being implemented

Not implemented

Not applicable

Insufficient evidence

In most respects

In some respects

2014

Recommendation 1: take measures during the next verification cycle in order to reduce the number of years that will be covered by reservations at the end of the cycle;

X

The Commission acknowledges that the number of years covered by reservations at the end of the verification cycle may be significant. Further to placing reservations, the Commission started during this cycle to place action points on GNI data quality improvements at an early stage. This should contribute to reducing the impact of forthcoming reservations on the amount of contributions to the EU budget to be paid by them.

Recommendation 2: take measures to reduce the impact of the revisions presented by Member States.

X

The National Statistical Authorities voluntarily agree to a common revision policy and commit to gradually implement it with the aim of delivering more consistent statistics to users. The agreed guidelines specify that Member States should disseminate the results of the next benchmark revisions in 2019 and 2024 respectively.

Regarding GNI for own resource purposes, the Commission is requesting Member States to provide the most up-to-date quality data.

Recommendation 3: improve the existing guidance on post clearance audits and encourage its implementation by Member States;

X

The Commission has established a project group of Member States which will continue to identify the actions needed to achieve a common approach and make available additional guidance. Nevertheless, the group concluded that the scope of this matter is considered to go beyond the Customs Audit Guide particularly in terms of legal ramifications.

Recommendation 4: ensure that Member States have adequate accounting systems for recording items in B accounts and encourage Member States to improve their management of the items in these accounts. For example, by reviewing them on a regular basis to ensure that older items are updated or written-off as appropriate.

X

The Commission will continue to examine the B account in every inspection of TOR they carry out and they ensure that the Member States have adequate accounting systems in place and that older items are written off or their continued inclusion in the B account is justified.

---

CHAPTER 5

‘Competitiveness for growth and jobs’

TABLE OF CONTENTS

| Introduction | 5.1-5.6 |
| --- | --- |

| Brief description of ‘Competitiveness for growth and jobs’ | 5.2-5.5 |
| --- | --- |

| Audit scope and approach | 5.6 |
| --- | --- |

| Part 1 — Regularity of transactions | 5.7-5.30 |
| --- | --- |

| Over-declaration of costs, in particular by new entrants and SMEs | 5.12 |
| --- | --- |

| Most non-quantifiable errors concerned time recording and delays in distributing funds | 5.13 |
| --- | --- |

| Horizon 2020: the rules to declare personnel costs remain prone to error | 5.14-5.16 |
| --- | --- |

| Connecting Europe Facility: definitions of subcontracting and related incurred costs open to interpretation | 5.17 |
| --- | --- |

| Research: Better coordination of audit follow-up but further progress in project monitoring needed | 5.18-5.19 |
| --- | --- |

| Erasmus+: an adequate control strategy but further efforts needed to improve grant management at the EACEA | 5.20-5.22 |
| --- | --- |

| Annual activity reports give a fair assessment of financial management with an improved approach for calculating amounts at risk | 5.23-5.25 |
| --- | --- |

| Review of the regularity information provided by the auditee | 5.26-5.30 |
| --- | --- |

| Conclusion and recommendations | 5.31-5.34 |
| --- | --- |

| Conclusion | 5.31-5.32 |
| --- | --- |

| Recommendations | 5.33-5.34 |
| --- | --- |

| Part 2 — Performance issues in research and innovation | 5.35-5.37 |
| --- | --- |

| Most projects achieved their expected outputs and results | 5.37 |
| --- | --- |

| Annex 5.1 — | Results of transaction testing for ‘Competitiveness for growth and jobs’ |
| --- | --- |

Annex 5.1 —

| Annex 5.2 — | Overview of errors with an impact exceeding 20 % for ‘Competitiveness for growth and jobs’ |
| --- | --- |

Annex 5.2 —

| Annex 5.3 — | Follow-up of previous recommendations for ‘Competitiveness for growth and jobs’ |
| --- | --- |

Annex 5.3 —

| THE COURT’S OBSERVATIONS | |
| --- | --- |
| INTRODUCTION |
| 5.1. | This chapter presents our findings for the MFF 1a sub-heading ‘Competitiveness for growth and jobs’.
  Box 5.1
  gives an overview of the main activities and spending under this sub-heading in 2017. |

THE COURT’S OBSERVATIONS

INTRODUCTION

5.1.

This chapter presents our findings for the MFF 1a sub-heading ‘Competitiveness for growth and jobs’.
  Box 5.1
  gives an overview of the main activities and spending under this sub-heading in 2017.

Box 5.1 —   MFF sub-heading ‘Competitiveness for growth and jobs’ — 2017 Breakdown

Image

| Total payments for the year | 21,4 |
| --- | --- |
| - advances
   (19) | -14,4 |
| + clearings of advances
   (19) | 7,9 |
| Audited population, total | 14,9 |
| Source: 2017 consolidated accounts of the European Union. |

Total payments for the year

21,4

- advances
   (19)

-14,4

- clearings of advances
   (19)

7,9

Audited population, total

14,9

Source: 2017 consolidated accounts of the European Union.

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

Brief description of ‘Competitiveness for growth and jobs’

| 5.2. | As a challenge for the European Union, boosting jobs, growth and investment is a major priority for the Commission. The expenditure allocated to the budget sub-heading ‘Competitiveness for growth and jobs’ lies at the heart of the European project and plays an increasingly important role in fostering an inclusive society, stimulating growth and creating employment in the EU. |
| --- | --- |

5.2.

As a challenge for the European Union, boosting jobs, growth and investment is a major priority for the Commission. The expenditure allocated to the budget sub-heading ‘Competitiveness for growth and jobs’ lies at the heart of the European project and plays an increasingly important role in fostering an inclusive society, stimulating growth and creating employment in the EU.

| 5.3. | This policy area includes spending on research and innovation, education and training, trans-European networks in energy, transport and telecommunications, space programmes and business development. The main programmes financed under this sub-heading are the Seventh Research Framework Programme (FP7) (1) and Horizon 2020 (2) in research and innovation, and Erasmus+ for education, training, young people and sport. It also encompasses large infrastructure projects, such as: Galileo, the global satellite navigation system; EGNOS, the European geostationary navigation overlay service; ITER — fusion for energy; the Connecting Europe Facility (CEF) — transport, energy and telecommunications; and COSME — Competitiveness of enterprises and small and medium-sized enterprises. |
| --- | --- |

5.3.

This policy area includes spending on research and innovation, education and training, trans-European networks in energy, transport and telecommunications, space programmes and business development. The main programmes financed under this sub-heading are the Seventh Research Framework Programme (FP7) (1) and Horizon 2020 (2) in research and innovation, and Erasmus+ for education, training, young people and sport. It also encompasses large infrastructure projects, such as: Galileo, the global satellite navigation system; EGNOS, the European geostationary navigation overlay service; ITER — fusion for energy; the Connecting Europe Facility (CEF) — transport, energy and telecommunications; and COSME — Competitiveness of enterprises and small and medium-sized enterprises.

| 5.4. | Most spending is directly managed by the Commission and takes the form of grants to public or private beneficiaries participating in projects. The Commission provides advances to beneficiaries upon signature of a grant agreement or financing decision. The Commission reimburses the EU-funded costs reported by beneficiaries, deducting any advances paid. As regards Erasmus+, national agencies manage approximately 80 % of the grants on behalf of the Commission, with the Education, Audiovisual and Culture Executive Agency (EACEA) handling the remaining 20 %. |
| --- | --- |

5.4.

Most spending is directly managed by the Commission and takes the form of grants to public or private beneficiaries participating in projects. The Commission provides advances to beneficiaries upon signature of a grant agreement or financing decision. The Commission reimburses the EU-funded costs reported by beneficiaries, deducting any advances paid. As regards Erasmus+, national agencies manage approximately 80 % of the grants on behalf of the Commission, with the Education, Audiovisual and Culture Executive Agency (EACEA) handling the remaining 20 %.

| 5.5. | The principal risk to the regularity of transactions is that beneficiaries declare ineligible costs, which are neither detected nor corrected before the Commission reimburses them. This risk is particularly high for programmes with complex rules concerning the reimbursement of eligible expenditure, such as the Research Programmes. These rules are often misinterpreted by beneficiaries, especially those less familiar with the rules, such as small — and medium-sized enterprises (SMEs), first-time and non-member country participants. |
| --- | --- |

5.5.

The principal risk to the regularity of transactions is that beneficiaries declare ineligible costs, which are neither detected nor corrected before the Commission reimburses them. This risk is particularly high for programmes with complex rules concerning the reimbursement of eligible expenditure, such as the Research Programmes. These rules are often misinterpreted by beneficiaries, especially those less familiar with the rules, such as small — and medium-sized enterprises (SMEs), first-time and non-member country participants.

| 5.5. | The eligibility rules under Horizon 2020 have been significantly simplified by comparison with FP7, for example with the new flat-rate reimbursement scheme for indirect costs. |
| --- | --- |

5.5.

THE COURT’S OBSERVATIONS

Audit scope and approach

| 5.6. | Applying the audit approach and methods set out in
  Annex 1.1
  , we examined the following for ‘Competitiveness for growth and jobs’ in 2017 with a view to providing a specific assessment: |
| --- | --- |

5.6.

Applying the audit approach and methods set out in
  Annex 1.1
  , we examined the following for ‘Competitiveness for growth and jobs’ in 2017 with a view to providing a specific assessment:

| (a) | a sample of 130 transactions. The sample was designed to be representative of the full range of spending under this MFF sub-heading. It consisted of 91 transactions in research and innovation (53 under the FP7 and 38 under Horizon 2020) and 39 transactions under other programmes and activities, in 18 Member States and 5 non-member countries. |
| --- | --- |

(a)

a sample of 130 transactions. The sample was designed to be representative of the full range of spending under this MFF sub-heading. It consisted of 91 transactions in research and innovation (53 under the FP7 and 38 under Horizon 2020) and 39 transactions under other programmes and activities, in 18 Member States and 5 non-member countries.

| (b) | the audits that the Commission’s Internal Audit Service (IAS) had performed in 2017 of the services of which we also reviewed the annual activity reports. |
| --- | --- |

(b)

the audits that the Commission’s Internal Audit Service (IAS) had performed in 2017 of the services of which we also reviewed the annual activity reports.

| (c) | the information on regularity of spending presented in the annual activity reports of the Directorate-General for Research and Innovation (DG RTD), the Directorate-General for Education, Youth, Sport and Culture (DG EAC), the EACEA and the Research Executive Agency (REA), and whether this information is broadly consistent with our results. |
| --- | --- |

(c)

the information on regularity of spending presented in the annual activity reports of the Directorate-General for Research and Innovation (DG RTD), the Directorate-General for Education, Youth, Sport and Culture (DG EAC), the EACEA and the Research Executive Agency (REA), and whether this information is broadly consistent with our results.

| (d) | the legality and regularity information provided by the Commission for spending in ‘research and innovation’ and in ‘education and training’. This work was performed in line with the new strategy of the Court aimed at applying an attestation approach in the future. |
| --- | --- |

(d)

the legality and regularity information provided by the Commission for spending in ‘research and innovation’ and in ‘education and training’. This work was performed in line with the new strategy of the Court aimed at applying an attestation approach in the future.

| (e) | the Commission’s reporting on the performance of research and innovation projects. |
| --- | --- |

(e)

the Commission’s reporting on the performance of research and innovation projects.

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

PART 1 — REGULARITY OF TRANSACTIONS

| 5.7. | Annex 5.1
  provides an overview of the results of transaction testing. Of the 130 transactions examined, 66 (51 %) contained errors. On the basis of the 41 errors we have quantified, we estimate the level of error to be 4,2  % (3). |
| --- | --- |

5.7.

Annex 5.1
  provides an overview of the results of transaction testing. Of the 130 transactions examined, 66 (51 %) contained errors. On the basis of the 41 errors we have quantified, we estimate the level of error to be 4,2  % (3).

| 5.7. | The estimated level of error reported by the ECA is one indicator of the effectiveness of the implementation of EU expenditure. However, the Commission has a multiannual control strategy. On this basis its services estimate a residual error rate, which takes account of recoveries, corrections and the effects of all their controls and audits over the period of implementation of the programme. |
| --- | --- |

5.7.

| 5.8. | Box 5.2
  gives a breakdown of our estimated level of error for 2017. We detected quantifiable errors relating to ineligible costs in 35 of the 91 sampled research and innovation transactions (20 under FP7 and 15 for under H2020), accounting for almost 79 % of our estimated level of error for ‘Competitiveness for growth and jobs’ in 2017. |
| --- | --- |

5.8.

Box 5.2
  gives a breakdown of our estimated level of error for 2017. We detected quantifiable errors relating to ineligible costs in 35 of the 91 sampled research and innovation transactions (20 under FP7 and 15 for under H2020), accounting for almost 79 % of our estimated level of error for ‘Competitiveness for growth and jobs’ in 2017.

Box 5.2 —   Most errors concerned ineligible direct personnel costs

Image

Source: European Court of Auditors.

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

| 5.9. | Eight of the errors quantified exceeded 20 % of the corresponding transaction value (see
  Annex 5.2
  ). These all arose due to beneficiaries declaring ineligible costs under the FP7 and Horizon 2020 programmes. |
| --- | --- |

5.9.

Eight of the errors quantified exceeded 20 % of the corresponding transaction value (see
  Annex 5.2
  ). These all arose due to beneficiaries declaring ineligible costs under the FP7 and Horizon 2020 programmes.

| 5.10. | We detected quantifiable errors in 5 of the 39 transactions sampled for other programmes and activities. The errors arose due to beneficiaries breaching eligibility rules by for example, incorrectly calculating personnel costs or declaring costs either without supporting evidence or incurred outside the period of the cost statement (4). |
| --- | --- |

5.10.

We detected quantifiable errors in 5 of the 39 transactions sampled for other programmes and activities. The errors arose due to beneficiaries breaching eligibility rules by for example, incorrectly calculating personnel costs or declaring costs either without supporting evidence or incurred outside the period of the cost statement (4).

| 5.11. | The Commission had applied corrective measures that directly affected 5 of the transactions we sampled. These measures had little impact on our calculations, as they reduced our estimated level of error for this chapter by only 0,3 percentage points. In 17 cases of quantifiable error made by the beneficiaries, the Commission or the independent auditor had sufficient information presented in the reimbursement claim (e.g. incorrect exchange rate or cost incurred outside the reporting period) to prevent, or to detect and correct, the error before accepting the expenditure. Had the Commission made proper use of all information at its disposal, the estimated level of error for this chapter would have been 1,5 percentage points lower. |
| --- | --- |

5.11.

The Commission had applied corrective measures that directly affected 5 of the transactions we sampled. These measures had little impact on our calculations, as they reduced our estimated level of error for this chapter by only 0,3 percentage points. In 17 cases of quantifiable error made by the beneficiaries, the Commission or the independent auditor had sufficient information presented in the reimbursement claim (e.g. incorrect exchange rate or cost incurred outside the reporting period) to prevent, or to detect and correct, the error before accepting the expenditure. Had the Commission made proper use of all information at its disposal, the estimated level of error for this chapter would have been 1,5 percentage points lower.

| 5.11. | The Commission has a sound system of ex ante controls in place including detailed automated checklists, written guidance and continuous training. The improvement of this system without imposing additional administrative burdens on beneficiaries, so that they can focus on the achievement of their research and innovation objectives, and whilst ensuring that payments to researchers are made promptly, is a constant challenge.

  As regards independent auditors certifying cost claims, which account for 14 of the 17 cases mentioned by the ECA, this is a well-known issue, addressed in previous reports. The Commission has organised a series of meetings targeting beneficiaries and independent certifying auditors to raise awareness of the most common errors. In addition, feedback has been provided to certifying auditors who have made errors, and a more didactic template for audit certificates has been provided in Horizon 2020. For FP7, audit certificates are estimated to reduce the error rate by 50 % compared to uncertified claims. So while it is recognised that they do not identify every error, they are an important tool to reduce the overall error rate. |
| --- | --- |

5.11.

As regards independent auditors certifying cost claims, which account for 14 of the 17 cases mentioned by the ECA, this is a well-known issue, addressed in previous reports. The Commission has organised a series of meetings targeting beneficiaries and independent certifying auditors to raise awareness of the most common errors. In addition, feedback has been provided to certifying auditors who have made errors, and a more didactic template for audit certificates has been provided in Horizon 2020. For FP7, audit certificates are estimated to reduce the error rate by 50 % compared to uncertified claims. So while it is recognised that they do not identify every error, they are an important tool to reduce the overall error rate.

Over-declaration of costs, in particular by new entrants and SMEs

| 5.12. | Quantifiable errors occurring in research and innovation projects mainly affected personnel costs and were mostly committed by new entrants and SMEs (see example in
  Box 5.3
  ). We also noted ineligible costs resulting from consultants or service providers being incorrectly classified as employees or third parties being omitted from the grant agreement. |
| --- | --- |

5.12.

Quantifiable errors occurring in research and innovation projects mainly affected personnel costs and were mostly committed by new entrants and SMEs (see example in
  Box 5.3
  ). We also noted ineligible costs resulting from consultants or service providers being incorrectly classified as employees or third parties being omitted from the grant agreement.

| 5.12. | An important objective of Horizon 2020 was to increase the involvement in the Framework Programme of new entrants and of small and medium-sized enterprises (SMEs). At the end of 2017, 57 % of participants were newcomers to the research and innovation Framework Programmes, while 23,9  % of the budget for ‘Leadership in Enabling and Industrial Technologies’ and ‘Societal Challenges’ goes to SMEs, exceeding the target of 20 %. So, while the Commission is aware that new entrants and SMEs represent a particular risk of error, this risk has to be mitigated, not avoided.

  The Commission has made special attempts to address newcomers and SMEs in its communication campaigns and, for Horizon 2020, has introduced simplifications aimed directly at this sort of beneficiary, including lump-sum payments for the SME stage one scheme. |
| --- | --- |

5.12.

The Commission has made special attempts to address newcomers and SMEs in its communication campaigns and, for Horizon 2020, has introduced simplifications aimed directly at this sort of beneficiary, including lump-sum payments for the SME stage one scheme.

Box 5.3 —   SME declaring incorrect personnel costs and costs incurred by a third party

We audited an SME active in the dairy sector. The SME had recently become a participant in four FP7 projects. The beneficiary had used an incorrect methodology to calculate the hourly rates. It estimated the 2016 costs based on 2014 data. The hourly rates for the SME owners were overstated. Additionally, discrepancies between the absence records and time-sheets were noted for three of the six employees audited leading to an over-declaration of hours.

Finally, the employees who had worked on the project were not employed by the company which was a party to the grant agreement but by its sister company. This sister company had not been added to the grant agreement as a third-party.

Therefore, all costs had to be declared ineligible.

Most non-quantifiable errors concerned time recording and delays in distributing funds

| 5.13. | Within the 130 transactions sampled, we also found 42 non-quantifiable errors relating to cases of non-compliance with funding rules (5). These cases arose more frequently in research and innovation projects and concerned weaknesses in beneficiaries’ time-recording systems and delays in the project coordinator’s distribution of the EU funds to the other project participants. Although some of these delays were understandable, we note that any delays in transferring EU funds can have serious financial consequences for project participants, especially SMEs (6). |
| --- | --- |

5.13.

Within the 130 transactions sampled, we also found 42 non-quantifiable errors relating to cases of non-compliance with funding rules (5). These cases arose more frequently in research and innovation projects and concerned weaknesses in beneficiaries’ time-recording systems and delays in the project coordinator’s distribution of the EU funds to the other project participants. Although some of these delays were understandable, we note that any delays in transferring EU funds can have serious financial consequences for project participants, especially SMEs (6).

| 5.13. | The Commission considers it best that the transfer of funds between consortium members is managed within the consortium. The Commission has reminded coordinators of their obligation to promptly transfer funds and when a case of delayed distribution of funds is detected, or there is a complaint on this issue the Commission's standard practice is to follow up with the project coordinator on the reasons of this delay. |
| --- | --- |

5.13.

Horizon 2020: the rules to declare personnel cost remain prone to error

| 5.14. | We have previously reported (7) that Horizon 2020 has simpler funding rules than the FP7. However, with a funding model based on the reimbursement of eligible costs, the rules for declaring actual personnel costs are complex, making them difficult to understand and apply. This is confirmed by our audits and the Commission’s audits, which show a persistently high level of error in personnel costs. |
| --- | --- |

5.14.

We have previously reported (7) that Horizon 2020 has simpler funding rules than the FP7. However, with a funding model based on the reimbursement of eligible costs, the rules for declaring actual personnel costs are complex, making them difficult to understand and apply. This is confirmed by our audits and the Commission’s audits, which show a persistently high level of error in personnel costs.

| 5.14 and 5.15. | The particular situation described by the ECA in paragraph 5.15 arises from a simplification introduced to allow for increased acceptance of usual costs accounting practices of beneficiaries. The Commission will examine how further simplifications can be made, in particular for the future Framework Programme, based on the results of the ECA and of its own audits, while ensuring that the policy objectives can be achieved and that EU funds can be allocated properly.

  The Commission is also carrying out pilots of lump-sum funding, with an objective to use this sort of funding model more widely in Horizon Europe. This would be a way of avoiding all these errors. |
| --- | --- |

5.14 and 5.15.

The Commission is also carrying out pilots of lump-sum funding, with an objective to use this sort of funding model more widely in Horizon Europe. This would be a way of avoiding all these errors.

THE COURT’S OBSERVATIONS

| 5.15. | In July 2016, more than two years after the start of Horizon 2020, the Commission introduced an additional option for declaring personnel costs: the monthly hourly rate methodology. Our audits confirm that the current conditions for applying this methodology can lead the beneficiary to claim substantially higher personnel costs than reflected by actual efforts. This occurs where the staff concerned worked on other tasks aside from the EU-funded task and the total number of productive hours worked is higher than at standard number. The Commission’s guidelines require beneficiaries to use the standard number of productive hours, and not the higher total number when calculating the hourly rate underlying the calculation of the eligible costs. We have already reported (8) that the double ceilings (9) introduced by the Commission do not remedy the above situation as they are only applicable to EU and Euratom grant elements and exclude other, non EU-funded, tasks (see example in
  Box 5.4
  ). |
| --- | --- |

5.15.

In July 2016, more than two years after the start of Horizon 2020, the Commission introduced an additional option for declaring personnel costs: the monthly hourly rate methodology. Our audits confirm that the current conditions for applying this methodology can lead the beneficiary to claim substantially higher personnel costs than reflected by actual efforts. This occurs where the staff concerned worked on other tasks aside from the EU-funded task and the total number of productive hours worked is higher than at standard number. The Commission’s guidelines require beneficiaries to use the standard number of productive hours, and not the higher total number when calculating the hourly rate underlying the calculation of the eligible costs. We have already reported (8) that the double ceilings (9) introduced by the Commission do not remedy the above situation as they are only applicable to EU and Euratom grant elements and exclude other, non EU-funded, tasks (see example in
  Box 5.4
  ).

Box 5.4 —   The monthly hourly rate methodology leading to overstatements of costs

We audited a beneficiary applying the monthly hourly rate methodology and noted that this methodology led it to systematically overstate its personnel costs and allowed it to claim the full-time salary of an employee who was only partially devoted to the EU project.

The employee concerned had a total annual salary of 162 500 euros and he worked 2 400 productive hours per year, of which 1 788 hours were spent on the EU project. Using the monthly hourly rate methodology the beneficiary was entitled to charge the full 162 500 euros salary for the employee to the EU project, despite him only devoting 75 % of his productive time to the EU project.

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

| 5.16. | In 2015, the Commission published a guidance paper (10) with a list of issues applicable to particular countries. This guidance paper was supposed to provide beneficiaries with guidance on eligibility issues relating to the particular situations/legal frameworks in individual countries. We noted that this list was incomplete and that similar situations in different countries were not addressed (11). |
| --- | --- |

5.16.

In 2015, the Commission published a guidance paper (10) with a list of issues applicable to particular countries. This guidance paper was supposed to provide beneficiaries with guidance on eligibility issues relating to the particular situations/legal frameworks in individual countries. We noted that this list was incomplete and that similar situations in different countries were not addressed (11).

| 5.16. | The list accompanying the guidance paper summarises all national issues on which the Commission has been consulted and has made a legal assessment. Such assessments are generally triggered at the request of the National Contact Points (NCPs). |
| --- | --- |

5.16.

Connecting Europe Facility: definitions of subcontracting and related incurred costs open to interpretation

| 5.17. | In other programmes too, we noted that rules were open to interpretation. Under the CEF, the difference between an ‘implementation contract’ and a ‘subcontract’ is unclear, although their eligibility conditions are different (12). This creates doubts among beneficiaries. Moreover, one of the conditions for a cost to be eligible is that it has been incurred. According to the Commission’s definition for the CEF programme, existence of an invoice is not required as evidence of this. It considers the costs of contracts for goods, works or services or of subcontracts as incurred once the contract or subcontract (or a part of it) has been executed, i.e. once the goods, works or services (including studies) have been supplied, delivered or provided. However, the Commission has not given guidance as to the evidence to demonstrate that a cost has been incurred. |
| --- | --- |

5.17.

In other programmes too, we noted that rules were open to interpretation. Under the CEF, the difference between an ‘implementation contract’ and a ‘subcontract’ is unclear, although their eligibility conditions are different (12). This creates doubts among beneficiaries. Moreover, one of the conditions for a cost to be eligible is that it has been incurred. According to the Commission’s definition for the CEF programme, existence of an invoice is not required as evidence of this. It considers the costs of contracts for goods, works or services or of subcontracts as incurred once the contract or subcontract (or a part of it) has been executed, i.e. once the goods, works or services (including studies) have been supplied, delivered or provided. However, the Commission has not given guidance as to the evidence to demonstrate that a cost has been incurred.

| 5.17. | The practice to contract external assistance is normal practice for large infrastructure projects financed under CEF.

  The Commission is aware that the notions of ‘implementation contract’ under Article 9 and sub-contracts under Article 10 could create doubts among beneficiaries, most of them Member States or Public Bodies responsible for the implementation of transport/energy infrastructures in the Member States, depending on their experience and knowledge with respect to the management of EU funded projects.


  The issue was discussed with the members of the CEF Committee and an explanatory note was sent to the CEF Coordination Committee on 21/10/2015. At the same time INEA published a list of FAQs regarding the model Grant Agreement.


  Since then, this interpretation was consistently applied internally and provided to beneficiaries when the need arose. The Commission acknowledges that the situation could be further improved. |
| --- | --- |

5.17.

The Commission is aware that the notions of ‘implementation contract’ under Article 9 and sub-contracts under Article 10 could create doubts among beneficiaries, most of them Member States or Public Bodies responsible for the implementation of transport/energy infrastructures in the Member States, depending on their experience and knowledge with respect to the management of EU funded projects.

The issue was discussed with the members of the CEF Committee and an explanatory note was sent to the CEF Coordination Committee on 21/10/2015. At the same time INEA published a list of FAQs regarding the model Grant Agreement.

Since then, this interpretation was consistently applied internally and provided to beneficiaries when the need arose. The Commission acknowledges that the situation could be further improved.

Research: Better coordination of audit follow-up but further progress in project monitoring needed

| 5.18. | We have previously reported (13) that the different implementing bodies had struggled to find a common position on how to follow up audit findings. In order to ensure consistency, DG RTD prepared a number of guidance documents and templates. The Commission has now assigned DG RTD the task of coordinating the follow-up of audit findings. A dedicated service is being set up within the DG’s Common Audit Service to this end. |
| --- | --- |

5.18.

We have previously reported (13) that the different implementing bodies had struggled to find a common position on how to follow up audit findings. In order to ensure consistency, DG RTD prepared a number of guidance documents and templates. The Commission has now assigned DG RTD the task of coordinating the follow-up of audit findings. A dedicated service is being set up within the DG’s Common Audit Service to this end.

| 5.19. | For the year 2017 the Commission’s IAS concluded that the audited internal control systems for DG RTD were partially effective since a number of very important recommendations had still to be addressed. We noted that DG RTD still had eight overdue audit recommendations outstanding. One of them concerned the fact that the Horizon 2020 implementing bodies had not reached a consensus on how to monitor projects. The existing guidance developed by DG RTD recommends determining the level of required monitoring based on the project's risk profile. Risk based monitoring of projects and beneficiaries is crucial not only to verify that beneficiaries have complied with the rules but also to ensure successful completion of a project. New entrants, SMEs and non-member country beneficiaries often require closer monitoring. However, implementing bodies do not systematically apply the guidance since it is presented as simply illustrating good practice. |
| --- | --- |

5.19.

For the year 2017 the Commission’s IAS concluded that the audited internal control systems for DG RTD were partially effective since a number of very important recommendations had still to be addressed. We noted that DG RTD still had eight overdue audit recommendations outstanding. One of them concerned the fact that the Horizon 2020 implementing bodies had not reached a consensus on how to monitor projects. The existing guidance developed by DG RTD recommends determining the level of required monitoring based on the project's risk profile. Risk based monitoring of projects and beneficiaries is crucial not only to verify that beneficiaries have complied with the rules but also to ensure successful completion of a project. New entrants, SMEs and non-member country beneficiaries often require closer monitoring. However, implementing bodies do not systematically apply the guidance since it is presented as simply illustrating good practice.

| 5.19. | The Commission is following up the eight recommendations and their implementation is foreseen by end of 2018. |
| --- | --- |

5.19.

Erasmus+: an adequate control strategy but further efforts needed to improve grant management at the EACEA

| 5.20. | In 2017, the IAS followed-up the observations from its audit on the effectiveness and efficiency of the Erasmus+ control strategy in the EACEA. The audit concluded that the EACEA had implemented an effective internal control system providing reasonable assurance. The follow-up concluded that all previously outstanding recommendations had been satisfactorily implemented. |
| --- | --- |

5.20.

In 2017, the IAS followed-up the observations from its audit on the effectiveness and efficiency of the Erasmus+ control strategy in the EACEA. The audit concluded that the EACEA had implemented an effective internal control system providing reasonable assurance. The follow-up concluded that all previously outstanding recommendations had been satisfactorily implemented.

| 5.21. | In 2017 the IAS also audited the effectiveness of the EACEA’s internal control systems of Erasmus+ as regards the grant management phase. The IAS acknowledged the efforts that the EACEA had made to perform a timely selection of grant proposals. It concluded however, that serious shortcomings still hampered the design and implementation of the procedures in the first phase of the Erasmus+ grant management process, in particular the evaluation of proposals, which is a key management issue for the Agency. |
| --- | --- |

5.21.

In 2017 the IAS also audited the effectiveness of the EACEA’s internal control systems of Erasmus+ as regards the grant management phase. The IAS acknowledged the efforts that the EACEA had made to perform a timely selection of grant proposals. It concluded however, that serious shortcomings still hampered the design and implementation of the procedures in the first phase of the Erasmus+ grant management process, in particular the evaluation of proposals, which is a key management issue for the Agency.

| 5.21. | The Internal Audit Service is an important part of the Commission's overall control system and provides assurance to the institution about the operation of its internal systems. It has a multi-annual risk-based audit plan. The Commission (IAS) has identified the issues described by the ECA, and the EACEA accepted the IAS' audit recommendations, and has implemented them from the first call for proposals 2018. Moreover, the EACEA also decided to apply similar measures stemming from the recommendations made by the IAS to other delegated programmes in its portfolio. |
| --- | --- |

5.21.

| 5.22. | For the year 2017, the IAS concluded that the internal control systems were overall not effective concerning the process for evaluating grant applications. We note that the EACEA rapidly undertook actions to improve the design and implementation of its control system to ensure appropriate project selection and award. Actual implementation of the changes to the design of the internal control systems has started. The effectiveness of the implemented action will be assessed at a later stage. |
| --- | --- |

5.22.

For the year 2017, the IAS concluded that the internal control systems were overall not effective concerning the process for evaluating grant applications. We note that the EACEA rapidly undertook actions to improve the design and implementation of its control system to ensure appropriate project selection and award. Actual implementation of the changes to the design of the internal control systems has started. The effectiveness of the implemented action will be assessed at a later stage.

| 5.22. | At the beginning of 2018 the IAS performed a first follow up audit and concluded that the design of the revised procedures and the accompanying guidelines and instructions are adequate and in line with the Financial Regulation.

  The EACEA put in place a number of actions to strengthen the evaluation of applications and the award of grants, which will be implemented in the course of 2018. |
| --- | --- |

5.22.

The EACEA put in place a number of actions to strengthen the evaluation of applications and the award of grants, which will be implemented in the course of 2018.

THE COURT’S OBSERVATIONS

Annual activity reports give a fair assessment of financial management with an improved approach for calculating amounts at risk

| 5.23. | The annual activity reports we examined (14) gave a fair assessment of the DGs’ and agencies’ financial management in relation to the regularity of underlying transactions. Overall the information provided corroborated our findings and conclusions. |
| --- | --- |

5.23.

The annual activity reports we examined (14) gave a fair assessment of the DGs’ and agencies’ financial management in relation to the regularity of underlying transactions. Overall the information provided corroborated our findings and conclusions.

| 5.24. | As in previous years, the reports of all DGs implementing research and innovation spending include a reservation for payments in reimbursement of cost claims under FP7 because the residual error rate is above 2 % (15). This year, the Commission published its first estimated Horizon 2020 error rates. Based on its own audits the Commission reported an expected representative error rate of 2,8  % and a residual error rate of 2,2  % (16). |
| --- | --- |

5.24.

As in previous years, the reports of all DGs implementing research and innovation spending include a reservation for payments in reimbursement of cost claims under FP7 because the residual error rate is above 2 % (15). This year, the Commission published its first estimated Horizon 2020 error rates. Based on its own audits the Commission reported an expected representative error rate of 2,8  % and a residual error rate of 2,2  % (16).

| 5.25. | We noted that the Commission had further harmonised its approach for determining the estimated amounts at risk within the Commission services implementing research and innovation programmes. |
| --- | --- |

5.25.

We noted that the Commission had further harmonised its approach for determining the estimated amounts at risk within the Commission services implementing research and innovation programmes.

Review of the regularity information provided by the auditee

| 5.26. | For research and innovation, we reviewed the Commission’s sampling and audit methodology underlying the legality and regularity information in the annual activity reports. We also reviewed audit files held at the Commission and at one of the private audit firms conducting audits for the Commission on FP7. |
| --- | --- |

5.26.

For research and innovation, we reviewed the Commission’s sampling and audit methodology underlying the legality and regularity information in the annual activity reports. We also reviewed audit files held at the Commission and at one of the private audit firms conducting audits for the Commission on FP7.

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

| 5.27. | In relation to FP7, the audit programmes and the documentation retention rules were not harmonised, and in 2017 the Commission discontinued performing randomly selected ex post audits for projects under FP7. |
| --- | --- |

5.27.

In relation to FP7, the audit programmes and the documentation retention rules were not harmonised, and in 2017 the Commission discontinued performing randomly selected ex post audits for projects under FP7.

| 5.28. | For Horizon 2020, the Commission has put in place adequate procedures and a control strategy based on harmonised audit programmes. However, our work to date does not allow us to conclude on the quality of the related ex post audits, as the documentation available in the audit files was insufficient to allow for a full review. Our assessment has not yet covered the private audit firms conducting audits on behalf of the Commission. As a result, in 2018 we will implement a further cycle of reviews, including the re-performance of Commission audits. |
| --- | --- |

5.28.

For Horizon 2020, the Commission has put in place adequate procedures and a control strategy based on harmonised audit programmes. However, our work to date does not allow us to conclude on the quality of the related ex post audits, as the documentation available in the audit files was insufficient to allow for a full review. Our assessment has not yet covered the private audit firms conducting audits on behalf of the Commission. As a result, in 2018 we will implement a further cycle of reviews, including the re-performance of Commission audits.

| 5.29. | For Erasmus+ we assessed the overall Commission’s and national agencies’ ex post audit strategy and methodology. Our review covered three countries and their national agencies: the Czech Republic, France (Agence Erasmus+ France) and Italy (Agenzia Nazionale Erasmus+) (17). We also examined national authorities’ monitoring and supervision and the independent audit body’s audits. Concerning the part of the programme managed by the EACEA we reviewed the ex-post audits for the Erasmus+ programme, two of which were performed directly by the Commission and eight outsourced to the private audit firm conducting audits on behalf of the Commission. |
| --- | --- |

5.29.

For Erasmus+ we assessed the overall Commission’s and national agencies’ ex post audit strategy and methodology. Our review covered three countries and their national agencies: the Czech Republic, France (Agence Erasmus+ France) and Italy (Agenzia Nazionale Erasmus+) (17). We also examined national authorities’ monitoring and supervision and the independent audit body’s audits. Concerning the part of the programme managed by the EACEA we reviewed the ex-post audits for the Erasmus+ programme, two of which were performed directly by the Commission and eight outsourced to the private audit firm conducting audits on behalf of the Commission.

| 5.30. | We found that the three national agencies and authorities implementing Erasmus+ had put adequate supervisory and control systems in place. Moreover, the national authorities monitored and supervised the national agencies adequately. However, the national authorities did not adequately supervise the independent audit bodies they had selected. Weaknesses were identified in the depth and documentation of the checks performed by two of the three independent audit bodies. As regards the EACEA, we found that the audits performed directly by the Commission were satisfactory. Following our review of the audit files held at the private audit firm conducting audits on behalf the Commission, we found weaknesses in documentation, sampling consistency and reporting, as well as in some audit procedures. |
| --- | --- |

5.30.

We found that the three national agencies and authorities implementing Erasmus+ had put adequate supervisory and control systems in place. Moreover, the national authorities monitored and supervised the national agencies adequately. However, the national authorities did not adequately supervise the independent audit bodies they had selected. Weaknesses were identified in the depth and documentation of the checks performed by two of the three independent audit bodies. As regards the EACEA, we found that the audits performed directly by the Commission were satisfactory. Following our review of the audit files held at the private audit firm conducting audits on behalf the Commission, we found weaknesses in documentation, sampling consistency and reporting, as well as in some audit procedures.

| 5.30. | The Commission takes note of the ECA's finding regarding the independent audit bodies (IABs) and will update its instructions to national authorities regarding the quality of checks by the IABs accordingly.

  The Commission notes that the audits sampled belong to the first audits performed by the external contractor after the launch of the new audit framework contract. The ECA's observations have been addressed in the meantime under the EACEA's quality control strategy established since the start of the current framework contract for audit. They are similar to what EACEA had identified. |
| --- | --- |

5.30.

The Commission notes that the audits sampled belong to the first audits performed by the external contractor after the launch of the new audit framework contract. The ECA's observations have been addressed in the meantime under the EACEA's quality control strategy established since the start of the current framework contract for audit. They are similar to what EACEA had identified.

CONCLUSION AND RECOMMENDATIONS

Conclusion

| 5.31. | The overall audit evidence indicates that the level of error in spending on ‘Competitiveness for growth and jobs’ was material. |
| --- | --- |

5.31.

The overall audit evidence indicates that the level of error in spending on ‘Competitiveness for growth and jobs’ was material.

| 5.32. | For this MFF sub-heading, our testing of transactions produced an estimated overall level of error of 4,2  % (see
  Annex 5.1
  ). |
| --- | --- |

5.32.

For this MFF sub-heading, our testing of transactions produced an estimated overall level of error of 4,2  % (see
  Annex 5.1
  ).

Recommendations

| 5.33. | Annex 5.3
  shows the findings of our follow-up review of the three recommendations we made in our 2014 annual report. The Commission had implemented two of these recommendations in most respects while one had been implemented in some respects. |
| --- | --- |

5.33.

Annex 5.3
  shows the findings of our follow-up review of the three recommendations we made in our 2014 annual report. The Commission had implemented two of these recommendations in most respects while one had been implemented in some respects.

| 5.34. | Based on this review and our findings and conclusions for 2017, we recommend that the Commission, by the end of year 2018: |
| --- | --- |

5.34.

Based on this review and our findings and conclusions for 2017, we recommend that the Commission, by the end of year 2018:

| — | Recommendation 1: as regards Horizon 2020, further clarify the rules on personnel costs, review the personnel costs methodology, and complete the list of issues in certain countries. |
| --- | --- |

—

Recommendation 1: as regards Horizon 2020, further clarify the rules on personnel costs, review the personnel costs methodology, and complete the list of issues in certain countries.

The Commission accepts the recommendation.

The Commission will consider how it can clarify the guidelines (Annotated Model Grant Agreement) in the light of audit findings and will continue updating the list of issues in certain countries.

| — | Recommendation 2: as regards the CEF, improve the level of awareness among beneficiaries of the eligibility rules, in particular by drawing a clear distinction between an implementation contract and subcontract. |
| --- | --- |

—

Recommendation 2: as regards the CEF, improve the level of awareness among beneficiaries of the eligibility rules, in particular by drawing a clear distinction between an implementation contract and subcontract.

The Commission accepts the recommendation.

It will reinforce the communication with the beneficiaries and improve the information that is put at their disposal.

| — | Recommendation 3: promptly address the weaknesses identified by the IAS:






  — | in the EACEA’s Erasmus+ grant management process; |
| --- | --- | --- |

—

Recommendation 3: promptly address the weaknesses identified by the IAS:

—

in the EACEA’s Erasmus+ grant management process;

| — | in the monitoring of research and innovation projects. |
| --- | --- |

—

in the monitoring of research and innovation projects.

The Commission accepts this recommendation.

PART 2 — PERFORMANCE ISSUES IN RESEARCH AND INNOVATION

| 5.35. | We assessed the Commission’s reporting on the performance of 59 of the sampled research and innovation projects (18). Twenty-three of these projects had already been completed. We did not directly assess the quality of the research undertaken or the projects’ impact in terms of achieving the policy objective of improving research and innovation. |
| --- | --- |

5.35.

We assessed the Commission’s reporting on the performance of 59 of the sampled research and innovation projects (18). Twenty-three of these projects had already been completed. We did not directly assess the quality of the research undertaken or the projects’ impact in terms of achieving the policy objective of improving research and innovation.

| 5.36. | For each project, we reviewed the assessment report, which the Commission Project Officer completes as part of the checks before reimbursement of the declared costs. We noted the Project Officers’ conclusion on whether:






  — | reported progress on outputs and results was in line with the objectives set out in the grant agreement; |
| --- | --- | --- |

5.36.

For each project, we reviewed the assessment report, which the Commission Project Officer completes as part of the checks before reimbursement of the declared costs. We noted the Project Officers’ conclusion on whether:

—

reported progress on outputs and results was in line with the objectives set out in the grant agreement;

| — | costs charged to the project were reasonable in view of the reported progress; |
| --- | --- |

—

costs charged to the project were reasonable in view of the reported progress;

| — | the project’s outputs and results of the project had been disseminated in accordance with the requirements of the grant agreement. |
| --- | --- |

—

the project’s outputs and results of the project had been disseminated in accordance with the requirements of the grant agreement.

Most projects achieved their expected outputs and results

| 5.37. | According to the Commission’s reports, most projects had achieved their expected output and results. However, the Commission’s reports also revealed that several projects had been affected by issues that detracted from their performance:






  — | in seven cases, reported progress was only partly in line with the objectives agreed with the Commission; |
| --- | --- | --- |

5.37.

According to the Commission’s reports, most projects had achieved their expected output and results. However, the Commission’s reports also revealed that several projects had been affected by issues that detracted from their performance:

—

in seven cases, reported progress was only partly in line with the objectives agreed with the Commission;

| — | in six cases, the Commission considered that the reported costs were not reasonable in view of the progress achieved; |
| --- | --- |

—

in six cases, the Commission considered that the reported costs were not reasonable in view of the progress achieved;

| — | in two cases, the project outputs and results had only been partly disseminated. In one case, no dissemination activities had taken place. |
| --- | --- |

—

in two cases, the project outputs and results had only been partly disseminated. In one case, no dissemination activities had taken place.

| 5.37. | Research and Innovation projects are, by definition, risky and uncertain. It is not possible to guarantee in advance that scientific and technological objectives can be achieved. This is why there is a project monitoring process, which aims to identify where projects are not fully successful, and to take appropriate action to resolve the problem. |
| --- | --- |

5.37.

---

(1)  The Seventh Framework Programme for Research and Technological development 2007-2013.

(2)  The Framework Programme for Research and Innovation 2014-2020 (Horizon 2020).

(3)  We base our calculation of error on a representative statistical sample. The figure quoted is the best estimate. We have 95 % confidence that the estimated level of error in the population lies between 2,2 % and 6,2 % (the lower and upper error limits respectively).

(4)  The errors ranged from 4,9 % to 16,9 % of the value examined and concerned projects under the following programmes: the Research Fund for Coal and Steel (2 cases), the Competitiveness and Innovation Programme (1 case), Erasmus+ (1 case), and 1 TEN-T programme.

(5)  13 transactions contained both quantifiable and non-quantifiable errors.

(6)  See also the 2012 annual report, paragraphs 8.18 and 8.42 (recommendation 2); and the 2013 annual report, paragraph 8.12.

(7)  2016 annual report, paragraph 5.13, 2014 annual report paragraph 5.12. and the Court’s briefing paper ‘A contribution to simplification of EU research programme beyond Horizon 2020’ published in March 2018.

(8)  Paragraph 5.16 of 2016 annual report.

(9)  Beneficiaries must ensure that:

| — | the total number of hours worked declared in EU and Euratom grants for a person for a year is NOT higher than the number of annual productive hours used for the calculation of the hourly rate; |
| --- | --- |

—

the total number of hours worked declared in EU and Euratom grants for a person for a year is NOT higher than the number of annual productive hours used for the calculation of the hourly rate;

| — | the total amount of personnel costs declared (for reimbursement as actual costs) in EU and Euratom grants for a person for a year is NOT higher than the total personnel costs recorded in the beneficiary’s accounts (for that person for that year). |
| --- | --- |

—

the total amount of personnel costs declared (for reimbursement as actual costs) in EU and Euratom grants for a person for a year is NOT higher than the total personnel costs recorded in the beneficiary’s accounts (for that person for that year).

(10)  H2020 Programme — ‘Guidance on List of issues applicable to particular countries’.

(11)  Several bonuses existing both in France and Spain have only been addressed in the guidance for France.

(12)  A subcontract is a procurement contract covering the implementation by a third party of tasks forming part of the action. It requires approval by the Commission. Other contracts do not need approval by the Commission.

(13)  2016 annual report, paragraph 5.27.

(14)  Directorate General for Research and Innovation (DG RTD), Directorate General Education, Youth, Sport and Culture (DG EAC), the Education and Culture Executive Agency (EACEA) and the Research Executive Agency (REA).

(15)  The Commission reports a multi-annual representative error rate for FP7 expenditure of 4,95 %. It reports residual error rates only at the level of each DG involved which vary between 2,79 % and 3,55 %.

(16)  These are multi-annual rates covering expenditure prior to October 2016 (i.e. prior to the period covered by our audit).

(17)  There are more than 50 national agencies involved in implementing Erasmus+. Our selection was geared to have a mix of smaller and bigger agencies covering EU-15 and new Member States.

(18)  We assessed performance of collaborative projects involving multiple participants and excluded transactions such as mobility payments to individual researchers.

(19)  In line with the harmonised definition of underlying transactions (for details see
  Annex 1.1
  , paragraph 15).

ANNEX 5.1

RESULTS OF TRANSACTION TESTING FOR ‘COMPETITIVENESS FOR GROWTH AND JOBS’

| | 2017 | 2016 |
| --- | --- | --- |
| |
| SIZE AND STRUCTURE OF THE SAMPLE |
| |
| Total transactions | 130 | 150 |
| |
| ESTIMATED IMPACT OF QUANTIFIABLE ERRORS |
| | | |
| Estimated level of error | 4,2  % | 4,1  % |
| | | |
| | Upper Error Limit (UEL) | 6,2  % | |
| | Lower Error Limit (LEL) | 2,2  % | |

2017

2016

SIZE AND STRUCTURE OF THE SAMPLE

Total transactions

130

150

ESTIMATED IMPACT OF QUANTIFIABLE ERRORS

Estimated level of error

4,2  %

4,1  %

Upper Error Limit (UEL)

6,2  %

Lower Error Limit (LEL)

2,2  %

ANNEX 5.2

OVERVIEW OF ERRORS WITH AN IMPACT EXCEEDING 20 % FOR ‘COMPETITIVENESS FOR GROWTH AND JOBS’

Applying the general audit methodology set out in
  Annex 1.1
  , we tested a representative statistical sample of transactions to estimate the level of irregularity within the population for this MFF sub-heading. The errors we detected do not constitute an exhaustive list — either of individual errors or of error types which are presented in
  Box 5.2
  . The errors with an impact exceeding 20 % of the transaction value examined are described below, in addition to the one described in
  Box 5.3
  . These 8 errors account for more than 61 % of the overall estimated level of error for ‘Competitiveness for growth and jobs’.

Seventh Research Framework Programme projects

Example 1 — ineligible personnel costs and personnel costs not supported by the required evidence

The beneficiary (a non-EU higher education institute) participating in a project designed to bring about groundbreaking change in the construction, management, and maintenance of tunnels declared personnel costs for a period during which the employee concerned was not actually employed by the beneficiary and personnel costs that were not supported by valid time-sheets. The ineligible costs amounted to 85,4 % of the total costs examined.

Example 2 — ineligible personnel costs declared and incorrect calculation of hourly rates

The personnel costs that the beneficiary (an EU SME providing engineering services) declared for reimbursement included costs for a person who was not an employee of the beneficiary but the owner of a company providing services to the beneficiary. For another employee personnel costs were reimbursed for a period prior to their recruitment. We also found that the hourly rate used to calculate salary costs had been incorrectly calculated. The ineligible costs amounted to 35,9 % of the total costs examined.

Example 3 — ineligible personnel and subcontracting costs

The beneficiary (a non-EU non-profit organisation participating in a research project in information and communication technology for active and healthy ageing) claimed personnel costs for several people who either had never been employed by the beneficiary or were not employed during the periods concerned. In addition, the beneficiary declared costs that a subcontractor had invoiced to a daughter company of the beneficiary. The ineligible costs amounted to 84,2 % of the total costs examined.

Example 4 — incorrectly calculated personnel costs and other non-project related costs

The beneficiary (an EU public body participating in a research project in the field of emerging diseases transmitted by ticks) declared ineligible rental and travel costs which did not relate to the project. Furthermore, the ineligible travel costs were claimed and refunded twice, as travel and personnel costs. The ineligible costs amounted to 20,3 % of the total costs examined.

Horizon 2020 projects

Example 5 — unpaid invoice and incorrect reimbursement rate

The beneficiary (an EU public entity active in the energy sector) declared costs relating to an invoice that had not been paid at the time of the audit, 1,5 years after its issue. Moreover, the Commission classified this entity as a non-profit organisation entitled to a 100 % reimbursement rate, even though it was business-oriented according to its status. The ineligible contribution amounted to 30,0 % of the total costs examined.

Example 6 — ineligible costs, lack of audit trail and incorrect exchange rate

The beneficiary (a university located in a non-member country) did not record any costs, except personnel costs, in its accounting system. Among these unrecorded costs, we found instances of the following: costs declared without proof of payment, costs with an unclear link to the project, double claimed cost items, indirect costs declared as direct costs, and costs based on estimates instead of actual costs. Additionally, all costs were declared using an incorrect exchange rate. The ineligible costs amounted to 64,7 % of the total costs examined.

Example 7 — ineligible personnel costs and incorrect exchange rate

When declaring its costs for the first reporting period, the beneficiary (a research institute that was part of a world-renowned hospital in a non-member country) used an hourly rate methodology which did not comply with the Horizon 2020 rules. The beneficiary had no records of the time that two employees had spent on the project audited. Time records did exist for a third employee and confirmed a 10 % allocation to the project; yet the beneficiary had accidentally calculated personnel costs based on a 20 % allocation. Additionally, all costs were declared using an incorrect exchange rate. Of the 130 000 euros, which the beneficiary declared, 45 500 euros were ineligible leading to an error of 35,2 %.

ANNEX 5.3

FOLLOW-UP OF PREVIOUS RECOMMENDATIONS FOR ‘COMPETITIVENESS FOR GROWTH AND JOBS’

| Year | Court recommendation | Court's analysis of the progress made | Commission reply |
| --- | --- | --- | --- |
| Fully implemented | Being implemented | Not implemented | Not applicable | Insufficient evidence |
| In most respects | In some respects |
| 2014 | Following this review and the findings and conclusions for 2014, we recommend that: | | | | | | | |
| Recommendation 1:

  the Commission, national authorities and independent auditors use all the relevant information available to prevent, or detect and correct errors before reimbursement; | | | X | | | | The Commission takes regular actions to review its internal control system. The Commission has provided guidance related to all material aspects of grant management for beneficiaries and their auditors. |
| Recommendation 2:

  based on its experience under the Seventh Research Framework Programme, the Commission develop an appropriate risk management and control strategy for Horizon 2020, including adequate checks of high-risk beneficiaries such as SMEs and new entrants and of costs declared under specific eligibility criteria; | | X | | | | | The control strategy is based on risk management, and this has been translated into operational procedures. The Commission accepts that this process can still be perfected. |
| Recommendation 3:

  the Commission ensure that its services take a consistent approach to the calculation of weighted average error rates and the resulting assessment of amounts at risk. | | X | | | | | The Commission has further clarified the key concepts and definitions for determining error rates, amounts at risk and corrections in the AAR Instructions, template and guidance note. The various concepts and indicators have been defined in a sufficiently flexible manner to enable taking account of the specific circumstances of the various DGs and yet, ensure a sufficient degree of consistency to consolidate data and avoid confusion. |

Year

Court recommendation

Court's analysis of the progress made

Commission reply

Fully implemented

Being implemented

Not implemented

Not applicable

Insufficient evidence

In most respects

In some respects

2014

Following this review and the findings and conclusions for 2014, we recommend that:

Recommendation 1:

the Commission, national authorities and independent auditors use all the relevant information available to prevent, or detect and correct errors before reimbursement;

X

The Commission takes regular actions to review its internal control system. The Commission has provided guidance related to all material aspects of grant management for beneficiaries and their auditors.

Recommendation 2:

based on its experience under the Seventh Research Framework Programme, the Commission develop an appropriate risk management and control strategy for Horizon 2020, including adequate checks of high-risk beneficiaries such as SMEs and new entrants and of costs declared under specific eligibility criteria;

X

The control strategy is based on risk management, and this has been translated into operational procedures. The Commission accepts that this process can still be perfected.

Recommendation 3:

the Commission ensure that its services take a consistent approach to the calculation of weighted average error rates and the resulting assessment of amounts at risk.

X

The Commission has further clarified the key concepts and definitions for determining error rates, amounts at risk and corrections in the AAR Instructions, template and guidance note. The various concepts and indicators have been defined in a sufficiently flexible manner to enable taking account of the specific circumstances of the various DGs and yet, ensure a sufficient degree of consistency to consolidate data and avoid confusion.

---

CHAPTER 6

‘Economic, social and territorial cohesion’

TABLE OF CONTENTS

| Introduction | 6.1-6.24 |
| --- | --- |

| Brief description of ‘Economic, social and territorial cohesion’ | 6.3-6.15 |
| --- | --- |

| Audit scope and approach | 6.16-6.24 |
| --- | --- |

| Part 1 — Regularity of transactions | 6.25-6.78 |
| --- | --- |

| Results of our review of transactions and re-performance of audit work | 6.26-6.43 |
| --- | --- |

| Our assessment of the work of audit authorities | 6.44-6.50 |
| --- | --- |

| The Commission’s work and its reporting of the residual error rate in its annual activity reports | 6.51-6.72 |
| --- | --- |

| Conclusion and recommendations | 6.73-6.78 |
| --- | --- |

| Conclusion | 6.73-6.76 |
| --- | --- |

| Recommendations | 6.77-6.78 |
| --- | --- |

| Part 2 — Assessment of project performance | 6.79-6.92 |
| --- | --- |

| Assessment of performance system design | 6.82-6.86 |
| --- | --- |

| Many projects do not fully achieve performance objectives | 6.87-6.90 |
| --- | --- |

| Most Member States were unable to use their FISM contributions in full | 6.91 |
| --- | --- |

| Conclusion | 6.92 |
| --- | --- |

| Annex 6.1 — | Results of transaction testing for economic, social and territorial cohesion |
| --- | --- |

Annex 6.1 —

| Annex 6.2 — | Follow-up of previous recommendations for economic, social and territorial cohesion |
| --- | --- |

Annex 6.2 —

| THE COURT’S OBSERVATIONS | |
| --- | --- |
| INTRODUCTION |
| 6.1. | This chapter presents our findings for MFF sub-heading 1b ‘Economic, social and territorial cohesion’. In 2017, for the first time, payments subject to our audit relate to the closure of the 2007-2013 and the implementation of the 2014-2020 programming periods under the new control and assurance framework. |

THE COURT’S OBSERVATIONS

INTRODUCTION

6.1.

This chapter presents our findings for MFF sub-heading 1b ‘Economic, social and territorial cohesion’. In 2017, for the first time, payments subject to our audit relate to the closure of the 2007-2013 and the implementation of the 2014-2020 programming periods under the new control and assurance framework.

| 6.2. | Box 6.1
  gives an overview of the main activities and spending under this heading in 2017. For further explanation on the 2017 audit population see paragraphs 6.16 to 6.19. |
| --- | --- |

6.2.

Box 6.1
  gives an overview of the main activities and spending under this heading in 2017. For further explanation on the 2017 audit population see paragraphs 6.16 to 6.19.

Box 6.1   — MFF sub-heading 1b ‘Economic, social and territorial cohesion’ — 2017 breakdown

Image

| Total payments for the year | 35,7 |
| --- | --- |
| - | advances
   (68) |

Total payments for the year

35,7

-

-9,0

| + | clearings
   (68)
   (69) |
| --- | --- |

+

0,5

| + | annual closure decisions for 2014-2020 pp
   (70) |
| --- | --- |

+

2,5

| - | payments for the 2014-2020 MFF period |
| --- | --- |

-

-20,8

| - | interim payments for non-closed OPs for the 2007-2013 pp |
| --- | --- |

-

-0,9

Audited population, total
   (71)

8,0

Source: 2017 consolidated accounts of the European Union, Commission closure information and data from Commission systems.

THE COURT’S OBSERVATIONS

Brief description of ‘Economic, social and territorial cohesion’

Policy objectives and spending instruments

| 6.3. | Spending under MFF sub-heading 1b ‘Economic, social and territorial cohesion’ focuses on reducing development disparities between the different Member States and regions of the EU and strengthening all regions’ competitiveness (1). These objectives are implemented through the following funds/instruments: |
| --- | --- |

6.3.

Spending under MFF sub-heading 1b ‘Economic, social and territorial cohesion’ focuses on reducing development disparities between the different Member States and regions of the EU and strengthening all regions’ competitiveness (1). These objectives are implemented through the following funds/instruments:

| — | the European Regional Development Fund (ERDF), which aims to redress the main regional imbalances through financial support for the creation of infrastructure and productive job-creating investment, mainly for businesses; |
| --- | --- |

—

the European Regional Development Fund (ERDF), which aims to redress the main regional imbalances through financial support for the creation of infrastructure and productive job-creating investment, mainly for businesses;

| — | the Cohesion Fund (CF), which, in the interests of promoting sustainable development, finances environment and transport projects in Member States with a per capita GNI of less than 90 % of the EU average (2); |
| --- | --- |

—

the Cohesion Fund (CF), which, in the interests of promoting sustainable development, finances environment and transport projects in Member States with a per capita GNI of less than 90 % of the EU average (2);

| — | the European Social Fund (ESF), which aims to encourage a high level of employment and the creation of more and better jobs, including measures through the Youth Employment Initiative (YEI) (3) targeting regions with a high youth unemployment rate; |
| --- | --- |

—

the European Social Fund (ESF), which aims to encourage a high level of employment and the creation of more and better jobs, including measures through the Youth Employment Initiative (YEI) (3) targeting regions with a high youth unemployment rate;

| — | other smaller instruments/funds, such as the European Neighbourhood Instrument (support for cross-border cooperation and political initiatives to strengthen ties between the EU and its neighbours) and the Fund for European Aid to the Most Deprived (FEAD — material assistance to help people out of poverty). |
| --- | --- |

—

other smaller instruments/funds, such as the European Neighbourhood Instrument (support for cross-border cooperation and political initiatives to strengthen ties between the EU and its neighbours) and the Fund for European Aid to the Most Deprived (FEAD — material assistance to help people out of poverty).

Implementation

| 6.4. | Member States generally submit multiannual operational programmes (OPs) at the beginning of each programming period for the entire duration of an MFF (4). After the Commission has given approval, responsibility for implementing an OP is shared between the Commission (5) and the Member State. Beneficiaries receive reimbursement through Member States’ authorities, in line with the terms of OPs, with the EU budget co-financing the costs incurred and paid of eligible operations. |
| --- | --- |

6.4.

Member States generally submit multiannual operational programmes (OPs) at the beginning of each programming period for the entire duration of an MFF (4). After the Commission has given approval, responsibility for implementing an OP is shared between the Commission (5) and the Member State. Beneficiaries receive reimbursement through Member States’ authorities, in line with the terms of OPs, with the EU budget co-financing the costs incurred and paid of eligible operations.

Control and assurance framework

2014-2020 programming period (annual acceptance of accounts)

| 6.5. | An important element of the new control and assurance framework for the 2014-2020 programming period (6) is that, for each OP (or group of OPs), the Member State’s programme authorities (7) must submit an annual ‘assurance package’ (8) covering expenditure certified to the Commission in the accounting year (9). Using this package, the authorities confirm that the accounts are complete, accurate and true, as well as the effectiveness of their management systems and internal controls for the OP (or group of OPs) and the legality and regularity of the certified expenditure. |
| --- | --- |

6.5.

An important element of the new control and assurance framework for the 2014-2020 programming period (6) is that, for each OP (or group of OPs), the Member State’s programme authorities (7) must submit an annual ‘assurance package’ (8) covering expenditure certified to the Commission in the accounting year (9). Using this package, the authorities confirm that the accounts are complete, accurate and true, as well as the effectiveness of their management systems and internal controls for the OP (or group of OPs) and the legality and regularity of the certified expenditure.

| 6.6. | A key element of the assurance package is an annual control report prepared by the audit authority. This report discloses the residual error rate
   (10) for the OP (or group of OPs). The audit authority issues an audit opinion on the regularity of expenditure (11). This opinion can only be unqualified if the residual error rate remains below the 2 % materiality level set in the regulation (12). To determine this rate, the audit authority takes account of any irregularities it has identified by examining a representative sample of operations, which is obtained, as a general rule, by applying statistical sampling methods (13). The rate also reflects any financial corrections applied and registered in the accounts to compensate for those irregularities. |
| --- | --- |

6.6.

A key element of the assurance package is an annual control report prepared by the audit authority. This report discloses the residual error rate
   (10) for the OP (or group of OPs). The audit authority issues an audit opinion on the regularity of expenditure (11). This opinion can only be unqualified if the residual error rate remains below the 2 % materiality level set in the regulation (12). To determine this rate, the audit authority takes account of any irregularities it has identified by examining a representative sample of operations, which is obtained, as a general rule, by applying statistical sampling methods (13). The rate also reflects any financial corrections applied and registered in the accounts to compensate for those irregularities.

| 6.7. | The Commission can accept accounts which are part of the assurance package and settle the outstanding EU contribution (14) only if it is able to conclude, taking into account the audit authority’s audit opinion, that the accounts are complete, accurate and true (15). Before accepting the accounts, the Commission performs mainly administrative checks of completeness and accuracy of the information included in the assurance packages received. This means that the Commission may accept the accounts even if the residual error rate is above the materiality threshold and therefore the audit authority’s opinion on regularity is qualified or adverse. However, in that situation the Commission may also interrupt payment of the balance (which includes the release of the 10 % retention (16)) and launch the necessary financial corrections. |
| --- | --- |

6.7.

The Commission can accept accounts which are part of the assurance package and settle the outstanding EU contribution (14) only if it is able to conclude, taking into account the audit authority’s audit opinion, that the accounts are complete, accurate and true (15). Before accepting the accounts, the Commission performs mainly administrative checks of completeness and accuracy of the information included in the assurance packages received. This means that the Commission may accept the accounts even if the residual error rate is above the materiality threshold and therefore the audit authority’s opinion on regularity is qualified or adverse. However, in that situation the Commission may also interrupt payment of the balance (which includes the release of the 10 % retention (16)) and launch the necessary financial corrections.

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

| 6.8. | After accepting the accounts, the Commission may also perform regularity audits to review an audit authority’s work. If these audits reveal any irregularities or serious deficiencies, the Commission may then impose further (net) financial corrections (17). The audit scope can also be expanded to expenditure included in previous accounts with regard to the risks identified, if necessary, within the regulatory limits of the period for keeping documents available (18). |
| --- | --- |

6.8.

After accepting the accounts, the Commission may also perform regularity audits to review an audit authority’s work. If these audits reveal any irregularities or serious deficiencies, the Commission may then impose further (net) financial corrections (17). The audit scope can also be expanded to expenditure included in previous accounts with regard to the risks identified, if necessary, within the regulatory limits of the period for keeping documents available (18).

| 6.8. | Before accepting the accounts, the Commission performs checks of their completeness, accuracy and veracity based on the information included in the assurance packages. Subsequently, it also assesses the information including the audit opinions contained in the assurance packages in relation to legality and regularity and the functioning of systems, in view of the validation of the reported error rates and as a basis for its risk assessment for regularity audits. |
| --- | --- |

6.8.

| 6.9. | Following its regularity audits and checks, the Commission (DG REGIO and DG EMPL) validates and concludes on the residual error rates and publishes the results in its annual activity reports (AARs) for the following year. In their 2016 annual activity reports, DGs REGIO and EMPL stated that they would finalise this process for the 2015/2016 accounts by the end of 2017 (19) and publish the results in the 2017 AARs. |
| --- | --- |

6.9.

Following its regularity audits and checks, the Commission (DG REGIO and DG EMPL) validates and concludes on the residual error rates and publishes the results in its annual activity reports (AARs) for the following year. In their 2016 annual activity reports, DGs REGIO and EMPL stated that they would finalise this process for the 2015/2016 accounts by the end of 2017 (19) and publish the results in the 2017 AARs.

| 6.9. | DG REGIO and DG EMPL indeed intend to validate and conclude on the residual error rates and report on these in their next annual activity reports (AARs) as a general rule. However, this is not a legal obligation and, as mentioned in the Single audit strategy of the Directorates-General, regularity audits may still occur afterwards. Audits consequently may lead to further assessment of the residual error rates and additional financial corrections, where relevant, including after the year following reception of assurance packages. |
| --- | --- |

6.9.

2007-2013 programming period (closure of OPs)

| 6.10. | The controls envisaged prior to the closure of OPs in the 2007-2013 programming period are comparable to those for acceptance of an annual assurance package in the 2014-2020 programming period, with the main difference being the timeframe. When expressing its opinion on the regularity of the expenditure declared for the entire programming period, the audit authority calculates a residual error rate. To do this, it takes account of its annual reported error rates and all financial corrections made during the programming period. This year we report for the first time in our annual report on the implementation of these measures (20). |
| --- | --- |

6.10.

The controls envisaged prior to the closure of OPs in the 2007-2013 programming period are comparable to those for acceptance of an annual assurance package in the 2014-2020 programming period, with the main difference being the timeframe. When expressing its opinion on the regularity of the expenditure declared for the entire programming period, the audit authority calculates a residual error rate. To do this, it takes account of its annual reported error rates and all financial corrections made during the programming period. This year we report for the first time in our annual report on the implementation of these measures (20).

Risks to regularity

| 6.11. | Due to the changes in the control and assurance framework, we assess the risks to regularity at the level of each operation (see paragraph 6.12) and at the level of the systems designed to produce a reliable residual error rate (see paragraphs 6.13 to 6.15). |
| --- | --- |

6.11.

Due to the changes in the control and assurance framework, we assess the risks to regularity at the level of each operation (see paragraph 6.12) and at the level of the systems designed to produce a reliable residual error rate (see paragraphs 6.13 to 6.15).

| 6.12. | Expenditure under ‘Economic, social and territorial cohesion’ has a high level of inherent risk. In particular, beneficiaries may declare costs that are not eligible under the EU and national rules, or aid may be granted to beneficiaries or operations that do not meet the OP eligibility requirements. |
| --- | --- |

6.12.

Expenditure under ‘Economic, social and territorial cohesion’ has a high level of inherent risk. In particular, beneficiaries may declare costs that are not eligible under the EU and national rules, or aid may be granted to beneficiaries or operations that do not meet the OP eligibility requirements.

| 6.13. | The new control and assurance framework aims to ensure that the residual error rate for expenditure reimbursed from the EU budget remains below the materiality threshold (2 %). The related main risks concern both the audit authorities and the Commission. |
| --- | --- |

6.13.

The new control and assurance framework aims to ensure that the residual error rate for expenditure reimbursed from the EU budget remains below the materiality threshold (2 %). The related main risks concern both the audit authorities and the Commission.

| 6.13. | The 2014-2020 control and assurance framework aims to ensure that the residual error rate for expenditure reimbursed from the EU budget remains below the materiality threshold (2 %) for each operational programme. |
| --- | --- |

6.13.

| 6.14. | The audit authorities may underestimate the residual error rate for an OP (or group of OPs). This might occur because they base their audit work on an unrepresentative sample of operations, they do not adhere to international audit standards or they fail to detect errors. They may also incorrectly calculate the residual error rate or propose corrections that are insufficient to address the errors they have identified. |
| --- | --- |

6.14.

The audit authorities may underestimate the residual error rate for an OP (or group of OPs). This might occur because they base their audit work on an unrepresentative sample of operations, they do not adhere to international audit standards or they fail to detect errors. They may also incorrectly calculate the residual error rate or propose corrections that are insufficient to address the errors they have identified.

| 6.15. | If the Commission did not detect one or more of these problems through its regularity audits and checks, it may have settled balances even though the actual residual error rates were above the 2 % materiality threshold and thus irregular. |
| --- | --- |

6.15.

If the Commission did not detect one or more of these problems through its regularity audits and checks, it may have settled balances even though the actual residual error rates were above the 2 % materiality threshold and thus irregular.

| 6.15. | As a result of regularity audits and checks, if the Commission concludes that the residual error rate, taking into account all recorded financial corrections, remains above the 2 % materiality level, it may launch the necessary financial correction procedure, including net financial corrections in the event of remaining serious deficiencies. |
| --- | --- |

6.15.

THE COURT’S OBSERVATIONS

Audit scope and approach

| 6.16. | Taking account of the revised control and assurance framework (see paragraphs 6.5 to 6.9), this year we changed our audit approach for this spending area. Our objective was to contribute to the overall statement of assurance as described in
  Annex 1.1
  and to assess the new control and assurance framework and the extent to which it can be relied upon. This was carried out with a view to possibly making increased use of it in the future and, in that context, identifying where further improvements are needed. |
| --- | --- |

6.16.

Taking account of the revised control and assurance framework (see paragraphs 6.5 to 6.9), this year we changed our audit approach for this spending area. Our objective was to contribute to the overall statement of assurance as described in
  Annex 1.1
  and to assess the new control and assurance framework and the extent to which it can be relied upon. This was carried out with a view to possibly making increased use of it in the future and, in that context, identifying where further improvements are needed.

| 6.17. | In 2017, therefore, we audited the certified expenditure included in the 2014-2020 assurance packages and, for 2007-2013, the expenditure underlying audit authorities’ final control reports. In the past, we have sampled from interim and final payments or clearings from the EU budget to OPs. |
| --- | --- |

6.17.

In 2017, therefore, we audited the certified expenditure included in the 2014-2020 assurance packages and, for 2007-2013, the expenditure underlying audit authorities’ final control reports. In the past, we have sampled from interim and final payments or clearings from the EU budget to OPs.

| 6.18. | This was the first year Member State programme authorities submitted assurance packages with expenditure for the 2014-2020 programming period and the Commission applied its procedures for reviewing and accepting the accounts, and for concluding on reported error rates. By March 2017 the Commission had received 50 assurance packages covering accounts with expenditure for 71 out of 419 OPs. In May 2017 it accepted accounts with expenditure from 17 Member States (21), covering 70 OPs and expenditure of only 2,5  billion euros (22). This explains why we covered less expenditure than last year. Furthermore, around 48 % of this amount concerned operations co-financed by the ESF/YEI. This compares to an overall ESF/YEI allocation to OPs approved for 2014-2020 of 26 %. |
| --- | --- |

6.18.

This was the first year Member State programme authorities submitted assurance packages with expenditure for the 2014-2020 programming period and the Commission applied its procedures for reviewing and accepting the accounts, and for concluding on reported error rates. By March 2017 the Commission had received 50 assurance packages covering accounts with expenditure for 71 out of 419 OPs. In May 2017 it accepted accounts with expenditure from 17 Member States (21), covering 70 OPs and expenditure of only 2,5  billion euros (22). This explains why we covered less expenditure than last year. Furthermore, around 48 % of this amount concerned operations co-financed by the ESF/YEI. This compares to an overall ESF/YEI allocation to OPs approved for 2014-2020 of 26 %.

| 6.19. | This was also the first year the Commission settled the balance for OPs from the 2007-2013 programming period. In 2017, the Commission closed 141 (those it considered to be lower-risk) of the 440 OPs concerned, from 18 Member States (23). |
| --- | --- |

6.19.

This was also the first year the Commission settled the balance for OPs from the 2007-2013 programming period. In 2017, the Commission closed 141 (those it considered to be lower-risk) of the 440 OPs concerned, from 18 Member States (23).

| 6.20. | For
  Part 1
  of this chapter, which focuses on regularity, we examined: |
| --- | --- |

6.20.

For
  Part 1
  of this chapter, which focuses on regularity, we examined:

| (i) | a sample of 217 transactions, designed to be statistically representative of the full range of spending under this MFF heading. We took the sample in two stages. First, we selected 22 assurance/closure packages (24) covering 51 of the 211 OPs for which there was a Commission settlement from the EU budget (25) in 2017. Within those OPs, we then selected 217 transactions for which the audit authorities had carried out audits of operations. This work contributed to the overall statement of assurance in line with
  Annex 1.1
  ; |
| --- | --- |

(i)

a sample of 217 transactions, designed to be statistically representative of the full range of spending under this MFF heading. We took the sample in two stages. First, we selected 22 assurance/closure packages (24) covering 51 of the 211 OPs for which there was a Commission settlement from the EU budget (25) in 2017. Within those OPs, we then selected 217 transactions for which the audit authorities had carried out audits of operations. This work contributed to the overall statement of assurance in line with
  Annex 1.1
  ;

| (ii) | the work done by audit authorities to validate the information contained in the 22 assurance/closure packages, also using the sample of 217 transactions referred to above; |
| --- | --- |

(ii)

the work done by audit authorities to validate the information contained in the 22 assurance/closure packages, also using the sample of 217 transactions referred to above;

| (iii) | the Commission’s work when reviewing and validating the 2017 assurance/closure packages. We also looked at the relevant information in the AARs of DG REGIO and DG EMPL. |
| --- | --- |

(iii)

the Commission’s work when reviewing and validating the 2017 assurance/closure packages. We also looked at the relevant information in the AARs of DG REGIO and DG EMPL.

Box 6.2
  contains a breakdown of the audited sample by Member State, while paragraphs 6.21 to 6.23 provide more detail on how we designed our approach.

Box 6.2 —   ‘Economic, social and territorial cohesion’ — Breakdown of audited sample

Image

Source: European Court of Auditors.

THE COURT’S OBSERVATIONS

| 6.21. | Our transaction testing consisted of a review for 217 transactions of the audit authorities’ checklists and the evidence they had to substantiate the results of their audit work and their audit opinions. Where necessary, we re-performed (26) the audit work (see paragraph 6.50). |
| --- | --- |

6.21.

Our transaction testing consisted of a review for 217 transactions of the audit authorities’ checklists and the evidence they had to substantiate the results of their audit work and their audit opinions. Where necessary, we re-performed (26) the audit work (see paragraph 6.50).

| 6.22. | As the audit authorities’ work is a critical part of the assurance and control framework, this year we placed greater emphasis on examining the key elements of their checks. We did this in order to obtain assurance regarding the effectiveness of controls. For each of the 22 assurance/closure packages in our sample, we examined the audit authority’s audit strategy, sampling approach, how it identified, quantified and extrapolated errors, and its work on the accuracy and reliability of financial corrections implemented at Member State level. |
| --- | --- |

6.22.

As the audit authorities’ work is a critical part of the assurance and control framework, this year we placed greater emphasis on examining the key elements of their checks. We did this in order to obtain assurance regarding the effectiveness of controls. For each of the 22 assurance/closure packages in our sample, we examined the audit authority’s audit strategy, sampling approach, how it identified, quantified and extrapolated errors, and its work on the accuracy and reliability of financial corrections implemented at Member State level.

| 6.23. | We also looked at the work done by the two responsible DGs to review and validate the annual accounts and closure decisions, and how they used the results of this work in their AARs. This helped us to evaluate the extent to which the Commission is able to rely on the regularity information produced by the Member States. |
| --- | --- |

6.23.

We also looked at the work done by the two responsible DGs to review and validate the annual accounts and closure decisions, and how they used the results of this work in their AARs. This helped us to evaluate the extent to which the Commission is able to rely on the regularity information produced by the Member States.

| 6.24. | Part 2
  of this chapter focuses on performance. We assessed the Member States’ systems for measuring the performance of the 113 physically completed projects for both programming periods included in our sample. We also assessed the extent to which those projects achieved their targets. |
| --- | --- |

6.24.

Part 2
  of this chapter focuses on performance. We assessed the Member States’ systems for measuring the performance of the 113 physically completed projects for both programming periods included in our sample. We also assessed the extent to which those projects achieved their targets.

PART 1 — REGULARITY OF TRANSACTIONS

| 6.25. | This part of the chapter consists of three sub-sections. The first concerns our testing of this year’s sample of 217 transactions with a view to obtaining insight on the main sources of errors and providing material for the overall statement of assurance. The second sub-section concerns our assessment of audit authorities’ work, and the third relates to the Commission’s work, including the AARs of the two responsible DGs. The results for all sub-sections provide a basis for us to conclude on the regularity information contained in the AARs (see also
  Box 6.3
  ). |
| --- | --- |

6.25.

This part of the chapter consists of three sub-sections. The first concerns our testing of this year’s sample of 217 transactions with a view to obtaining insight on the main sources of errors and providing material for the overall statement of assurance. The second sub-section concerns our assessment of audit authorities’ work, and the third relates to the Commission’s work, including the AARs of the two responsible DGs. The results for all sub-sections provide a basis for us to conclude on the regularity information contained in the AARs (see also
  Box 6.3
  ).

Box 6.3 —   The building blocks of our approach

Image

Source: European Court of Auditors.

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

Results of our review of transactions and re-performance of audit work

| 6.26. | Annex 6.1
  provides an overview of the results of our transaction testing. We identified and quantified 36 errors which had not been detected by the audit authorities. Taking account of the 50 errors previously found by the audit authorities and corrections applied by programme authorities worth a total of 101 million euros covering both programming periods, we estimate the level of error to be 3,0  % (27). This applies to 2014-2020 payments and to closures from 2007-2013, and is lower than in previous years. |
| --- | --- |

6.26.

Annex 6.1
  provides an overview of the results of our transaction testing. We identified and quantified 36 errors which had not been detected by the audit authorities. Taking account of the 50 errors previously found by the audit authorities and corrections applied by programme authorities worth a total of 101 million euros covering both programming periods, we estimate the level of error to be 3,0  % (27). This applies to 2014-2020 payments and to closures from 2007-2013, and is lower than in previous years.

| 6.26. | The Commission notes with satisfaction that the ECA’s estimate of the level of error this year for Cohesion policy represents a significant improvement compared to previous years. In particular, the Commission notes that the single SME Initiative programme present in the 2015-2016 accounts, with a specific regulatory framework compared to mainstream programmes due to its innovative nature, contributes 1 percentage point to this estimate. Based on all information it has obtained, the Commission concludes that, for the vast majority of programmes, there is no remaining material level of error in the 2015/2016 accounts.

  The Commission will follow up the individual additional errors identified by the ECA and will request additional financial corrections from the concerned programme authorities, where necessary.


  The Commission further notes that its estimated amount at risk at payment for the policy, as disclosed in the annual activity reports of DGs EMPL and REGIO, is within the range calculated by the ECA for the error rate (see footnote 27). |
| --- | --- |

6.26.

The Commission will follow up the individual additional errors identified by the ECA and will request additional financial corrections from the concerned programme authorities, where necessary.

The Commission further notes that its estimated amount at risk at payment for the policy, as disclosed in the annual activity reports of DGs EMPL and REGIO, is within the range calculated by the ECA for the error rate (see footnote 27).

| 6.27. | The number and impact of detected errors indicate persisting weaknesses with the regularity of the expenditure declared by managing authorities (28). |
| --- | --- |

6.27.

The number and impact of detected errors indicate persisting weaknesses with the regularity of the expenditure declared by managing authorities (28).

| 6.27. | As mentioned in its reply to paragraph 6.19 of the 2016 annual report, the Commission addressed updated guidance to Member States for the 2014-2020 programming period which, combined with the required use of simplified costs options, should contribute to improving further the quality of management verifications in the future. |
| --- | --- |

6.27.

| 6.28. | Audit authorities detected a number of these errors. They reported 50 quantifiable errors in the assurance/closure packages for the 217 transactions we sampled. These errors concerned ineligible costs (30), public procurement (12) and ineligible participants (eight). The Member State authorities applied corrections with a view to bringing the residual error rates below the materiality threshold of 2 %. |
| --- | --- |

6.28.

Audit authorities detected a number of these errors. They reported 50 quantifiable errors in the assurance/closure packages for the 217 transactions we sampled. These errors concerned ineligible costs (30), public procurement (12) and ineligible participants (eight). The Member State authorities applied corrections with a view to bringing the residual error rates below the materiality threshold of 2 %.

| 6.29. | This was the first year which covered both 2014-2020 payments and closures relating to 2007-2013. The number and impact of the errors we found for transactions in the 2014-2020 period were higher than for transactions relating to closure in the 2007-2013 period. Financial instruments, followed by ineligible costs, contributed most to our estimated level of error. |
| --- | --- |

6.29.

This was the first year which covered both 2014-2020 payments and closures relating to 2007-2013. The number and impact of the errors we found for transactions in the 2014-2020 period were higher than for transactions relating to closure in the 2007-2013 period. Financial instruments, followed by ineligible costs, contributed most to our estimated level of error.

| 6.29. | The Commission underlines that the financial instrument (SME Initiative) with amounts certified in the 2015-2016 accounts constituted an important part of the 2014-20 expenditure declared in these accounts. This instrument, which contributed to one third of the estimated error rate, is governed by specific rules compared to other mainstream programmes under Regulation (EU) No 1303/2013, due to its innovative nature (see in particular paragraphs 6.37 and 6.47).

  Under Article 42 of Regulation (EU) No 1303/2013, the eligibility of such expenditure is to be finally assessed at closure of the concerned programme and by then the fund manager should correct irregular transactions and replace them with eligible ones. |
| --- | --- |

6.29.

Under Article 42 of Regulation (EU) No 1303/2013, the eligibility of such expenditure is to be finally assessed at closure of the concerned programme and by then the fund manager should correct irregular transactions and replace them with eligible ones.

| 6.30. | Box 6.4
  shows how the errors we found break down by category (before taking account of financial corrections), and paragraphs 6.31 to 6.43 provide more information on these errors. |
| --- | --- |

6.30.

Box 6.4
  shows how the errors we found break down by category (before taking account of financial corrections), and paragraphs 6.31 to 6.43 provide more information on these errors.

Box 6.4 —   ‘Economic, social and territorial cohesion’ — Breakdown of the errors we found

Image

Source: European Court of Auditors.

THE COURT’S OBSERVATIONS

Financial instruments contributed most to the estimated level of error for 2017

| 6.31. | Financial instruments under shared management (FISMs) take the form of equity or quasi-equity investments, loans or guarantees. They are different in nature to traditional grants, which involve reimbursement of a beneficiary’s spending on eligible projects. |
| --- | --- |

6.31.

Financial instruments under shared management (FISMs) take the form of equity or quasi-equity investments, loans or guarantees. They are different in nature to traditional grants, which involve reimbursement of a beneficiary’s spending on eligible projects.

| 6.32. | Member States can contribute to the set-up of financial instruments: |
| --- | --- |

6.32.

Member States can contribute to the set-up of financial instruments:

| (a) | under the responsibility of a managing authority at Member State level (in both MFF periods) (29); |
| --- | --- |

(a)

under the responsibility of a managing authority at Member State level (in both MFF periods) (29);

| (b) | at EU level (2014-2020 period only). This category includes the SME Initiative (30), which is implemented as a separate, individual OP (31). |
| --- | --- |

(b)

at EU level (2014-2020 period only). This category includes the SME Initiative (30), which is implemented as a separate, individual OP (31).

| 6.33. | Where financial instruments are used for funding, only disbursements made to final recipients and fund managers’ costs and fees are eligible at programme closure, and unused contributions must be returned to the EU budget (32). The following paragraphs describe some of the difficulties caused by this approach. |
| --- | --- |

6.33.

Where financial instruments are used for funding, only disbursements made to final recipients and fund managers’ costs and fees are eligible at programme closure, and unused contributions must be returned to the EU budget (32). The following paragraphs describe some of the difficulties caused by this approach.

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

Two of the four thematic audits we examined for 2007-2013 OPs did not detect significant errors at closure

| 6.34. | The Commission only requires audit authorities to provide assurance at closure that the amounts paid to final recipients have been used as intended (33). To achieve this, it has recommended that audit authorities carry out ‘thematic’ audits (34) for financial instruments. |
| --- | --- |

6.34.

The Commission only requires audit authorities to provide assurance at closure that the amounts paid to final recipients have been used as intended (33). To achieve this, it has recommended that audit authorities carry out ‘thematic’ audits (34) for financial instruments.

| 6.34 and 6.35. | In 2011, the Commission coordinated with the audit authorities a methodology for auditing financial instruments under shared management for the programming period 2007-2013 (‘Common Audit Framework — Financial Engineering Instruments in the Context of Structural Funds’). Since then the Commission called for audits by audit authorities on the implementation of such instruments. The Commission also verified, when assessing closure declarations, that audit authorities had audited the implementation of financial instruments. Where this was not the case, the Commission interrupted the closure process and requested additional audit work.

  The Commission will follow up the two cases referred to by the ECA. For the case where the ECA estimates a material financial impact of the error on the residual error rate validated by the Commission, the Commission refers to its reply to box 6.5 below. |
| --- | --- |

6.34 and 6.35.

The Commission will follow up the two cases referred to by the ECA. For the case where the ECA estimates a material financial impact of the error on the residual error rate validated by the Commission, the Commission refers to its reply to box 6.5 below.

| 6.35. | We found that not all audit authorities systematically performed these audits. Where they did, the work done was not always sufficient to identify material irregularities. We detected quantifiable errors in two of the four financial instruments in our sample of closures. In one of these two cases, the financial impact of the error materially affected the reported residual error rate validated by the Commission (i.e. the rate exceeded 2 %). |
| --- | --- |

6.35.

We found that not all audit authorities systematically performed these audits. Where they did, the work done was not always sufficient to identify material irregularities. We detected quantifiable errors in two of the four financial instruments in our sample of closures. In one of these two cases, the financial impact of the error materially affected the reported residual error rate validated by the Commission (i.e. the rate exceeded 2 %).

Box 6.5 —   Example of ineligible loans approved for a FISM

ERDF co-financing for loans must primarily (i.e. above 50 % of the total value of loans) be used to support SMEs (Regulation (EC) No 1083/2006). The financial instrument we audited in Spain had invested almost 80 % of the approved total value of loans in companies that were not SMEs. Neither the audit authority nor the Commission detected this breach of the basic eligibility requirement set by the legislator.

Box 6.5 —
     
  Example of ineligible loans approved for a FISM

Article 44 of Regulation (EC) No 1083/2006 does not preclude loans to be given also to large enterprises if all other conditions are fulfilled.

Since no minimum level of funding to SMEs is mentioned in this provision, this article could also refer to the number of individual loans (and not necessarily to amounts).

Serious shortcomings in the implementation of one 2014-2020 OP under the SME Initiative

| 6.36. | For our audit, we examined 30 transactions from the sole OP under the SME Initiative in the annual accounts submitted in 2017. |
| --- | --- |

6.36.

For our audit, we examined 30 transactions from the sole OP under the SME Initiative in the annual accounts submitted in 2017.

| 6.37. | The EIF is the fund manager for the SME Initiative at EU level. Audit authorities are obliged to give an opinion on the legality and regularity of the expenditure included in the accounts of OPs under the SME Initiative. However, they have no legal right to carry out on-the-spot verifications to obtain assurance on regularity at financial intermediary level (35). To allow for an opinion on the accounts, the EIF signed an ‘agreed-upon procedure’ (36) contract with an external auditor. We found, however, that the contract for the OP we examined did not provide for any work at financial intermediary level, and the external auditor’s report included a disclaimer to the effect that it could not express any assurance. Despite this, the audit authority issued a positive opinion on the regularity of the accounts submitted to the Commission (37). |
| --- | --- |

6.37.

The EIF is the fund manager for the SME Initiative at EU level. Audit authorities are obliged to give an opinion on the legality and regularity of the expenditure included in the accounts of OPs under the SME Initiative. However, they have no legal right to carry out on-the-spot verifications to obtain assurance on regularity at financial intermediary level (35). To allow for an opinion on the accounts, the EIF signed an ‘agreed-upon procedure’ (36) contract with an external auditor. We found, however, that the contract for the OP we examined did not provide for any work at financial intermediary level, and the external auditor’s report included a disclaimer to the effect that it could not express any assurance. Despite this, the audit authority issued a positive opinion on the regularity of the accounts submitted to the Commission (37).

| 6.37. | In an Agreed Upon Procedure, the external auditor does not issue an opinion but the audit findings and conclusions are to be used by the audit authority to issue its own audit opinion. For this purpose, the audit authority also carried out a system audit, at the level of both the managing and certifying authorities.

  The annual control report describes clearly how the audit authority reached its opinion.


  The Omnibus proposal, in its drafting resulting from the political agreement between the Council and Parliament, addresses this assurance gap. |
| --- | --- |

6.37.

The annual control report describes clearly how the audit authority reached its opinion.

The Omnibus proposal, in its drafting resulting from the political agreement between the Council and Parliament, addresses this assurance gap.

| 6.38. | We also detected deficiencies that seriously affected the eligibility of a number of investments made by financial intermediaries (38). Only companies meeting the EU definition of SME status (39) are eligible for the SME Initiative. However, financial intermediaries either did not always check this or did not check it correctly. In the 30 investments we examined, financial intermediaries had approved loans to five recipients without confirming their SME status; we therefore deem these investments to be ineligible. Another four loans were used, in part or in full, for ineligible activities (e.g. for refinancing other loans). These irregularities accounted for 1,0  percentage points of our estimated level of error for this chapter (40). |
| --- | --- |

6.38.

We also detected deficiencies that seriously affected the eligibility of a number of investments made by financial intermediaries (38). Only companies meeting the EU definition of SME status (39) are eligible for the SME Initiative. However, financial intermediaries either did not always check this or did not check it correctly. In the 30 investments we examined, financial intermediaries had approved loans to five recipients without confirming their SME status; we therefore deem these investments to be ineligible. Another four loans were used, in part or in full, for ineligible activities (e.g. for refinancing other loans). These irregularities accounted for 1,0  percentage points of our estimated level of error for this chapter (40).

| 6.39. | The situation was caused by procedural inadequacies at the financial intermediaries, which did not respect the legally binding eligibility criteria set out in the contracts signed with the EIF. This represents a serious regularity risk for other OPs approved under the SME Initiative and managed in similar circumstances. It also shows that the EIF’s ongoing monitoring requires further improvement. To that end, the EIF has undertaken to implement an action plan in order to raise awareness among financial intermediaries about the need to comply with the eligibility criteria, and to further develop its own internal mechanisms for detecting ineligible loans. The action plan aims to address the irregularities we found and mitigate the residual regularity risks for SME Initiative OPs. |
| --- | --- |

6.39.

The situation was caused by procedural inadequacies at the financial intermediaries, which did not respect the legally binding eligibility criteria set out in the contracts signed with the EIF. This represents a serious regularity risk for other OPs approved under the SME Initiative and managed in similar circumstances. It also shows that the EIF’s ongoing monitoring requires further improvement. To that end, the EIF has undertaken to implement an action plan in order to raise awareness among financial intermediaries about the need to comply with the eligibility criteria, and to further develop its own internal mechanisms for detecting ineligible loans. The action plan aims to address the irregularities we found and mitigate the residual regularity risks for SME Initiative OPs.

| 6.39. | In financial instruments, the controls to be carried out by the financial intermediaries constitute an essential element in the assurance process.

  The Commission takes note of the comprehensive set of measures proposed by the EIF to address these issues. It will closely monitor their implementation in cooperation with the national authorities so that expenditure eligible in line with Article 39(8) CPR is declared and accepted at closure of the SME Initiative programme. |
| --- | --- |

6.39.

The Commission takes note of the comprehensive set of measures proposed by the EIF to address these issues. It will closely monitor their implementation in cooperation with the national authorities so that expenditure eligible in line with Article 39(8) CPR is declared and accepted at closure of the SME Initiative programme.

Recoverable VAT incorrectly certified as eligible expenditure

| 6.40. | Value-added tax (VAT) is an indirect tax levied on the consumption of goods and services. A taxable person, generally a business, sole trader or other professional, is obliged to charge VAT on its sales and forward it to the national tax authority. The taxable person can request a refund of VAT already paid on its own purchases. This is the concept of ‘recoverability’. A non-taxable person is not obliged to charge VAT and cannot recover VAT on purchases. |
| --- | --- |

6.40.

Value-added tax (VAT) is an indirect tax levied on the consumption of goods and services. A taxable person, generally a business, sole trader or other professional, is obliged to charge VAT on its sales and forward it to the national tax authority. The taxable person can request a refund of VAT already paid on its own purchases. This is the concept of ‘recoverability’. A non-taxable person is not obliged to charge VAT and cannot recover VAT on purchases.

| 6.40 and 6.41. | The concept of VAT recoverability needs to be assessed on a case-by-case basis. The Commission has prepared guidance for the use of programme authorities and has made proposals to simplify eligibility of VAT for the 2021-2027 programming period. |
| --- | --- |

6.40 and 6.41.

| 6.41. | According to the EU rules, VAT expenditure is eligible for co-financing only if it is not recoverable under national VAT legislation. It is irrelevant whether or not VAT expenditure is actually recovered. In the case of public bodies, VAT is recoverable whenever an operator charges fees with VAT to the ultimate users of infrastructure (41). |
| --- | --- |

6.41.

According to the EU rules, VAT expenditure is eligible for co-financing only if it is not recoverable under national VAT legislation. It is irrelevant whether or not VAT expenditure is actually recovered. In the case of public bodies, VAT is recoverable whenever an operator charges fees with VAT to the ultimate users of infrastructure (41).

| 6.42. | We found 10 projects in five OPs in which the Member State authorities had declared recoverable VAT as eligible expenditure. In those cases the audit authorities interpreted the eligibility rules incorrectly and did not report the situation as an irregularity. This contributed 0,3  percentage points to the estimated level of error. For three of these five OPs, the financial impact of the errors materially affected the reported residual error rate validated by the Commission (i.e. the rate exceeded 2 %). In our 2015 annual report we highlighted the controversy of including recoverable VAT in declarations of expenditure, especially in the case of public bodies (42). In this case, EU funds reimburse VAT as an eligible cost to Member State authorities and at the same time, the Member State collects this VAT via its normal taxation system. In some cases, the EU reimbursement may even exceed the actual costs incurred for the project, net of VAT. |
| --- | --- |

6.42.

We found 10 projects in five OPs in which the Member State authorities had declared recoverable VAT as eligible expenditure. In those cases the audit authorities interpreted the eligibility rules incorrectly and did not report the situation as an irregularity. This contributed 0,3  percentage points to the estimated level of error. For three of these five OPs, the financial impact of the errors materially affected the reported residual error rate validated by the Commission (i.e. the rate exceeded 2 %). In our 2015 annual report we highlighted the controversy of including recoverable VAT in declarations of expenditure, especially in the case of public bodies (42). In this case, EU funds reimburse VAT as an eligible cost to Member State authorities and at the same time, the Member State collects this VAT via its normal taxation system. In some cases, the EU reimbursement may even exceed the actual costs incurred for the project, net of VAT.

| 6.42. | Nine out of the 10 projects mentioned by the ECA relate to four 2014-2020 ESF OPs in one Member State.

  The Commission had already identified this problem in previous audits, but the adaptation of the Member State’s system did not eliminate the problem in its full extent.


  The Commission is currently working closely together with the Member State’s administration to ensure that this matter could be resolved in the near future through the introduction of a simplified cost option or the introduction of the obligation of VAT recovery for final recipients. The Commission will apply the necessary financial corrections. |
| --- | --- |

6.42.

The Commission had already identified this problem in previous audits, but the adaptation of the Member State’s system did not eliminate the problem in its full extent.

The Commission is currently working closely together with the Member State’s administration to ensure that this matter could be resolved in the near future through the introduction of a simplified cost option or the introduction of the obligation of VAT recovery for final recipients. The Commission will apply the necessary financial corrections.

Box 6.6 —   Example of co-financing for ineligible VAT expenditure

In Poland, the managing authority signed grant agreements to help small businesses purchase equipment, with the overall aim of reducing unemployment. Where recipients stated that they did not intend to recover VAT, the managing authority assessed that the VAT expenditure was eligible for co-financing. This was incorrect, since the recipients were registered for VAT and the VAT expenditure was actually recoverable.

Ineligible expenditure

| 6.43. | We detected significant weaknesses in checks on the eligibility of participants in 11 projects. This particularly affected the YEI and the requirement concerning NEET status (43). We also found seven cases in which the audit authorities had not detected ineligible or overstated indirect costs. |
| --- | --- |

6.43.

We detected significant weaknesses in checks on the eligibility of participants in 11 projects. This particularly affected the YEI and the requirement concerning NEET status (43). We also found seven cases in which the audit authorities had not detected ineligible or overstated indirect costs.

| 6.43. | For the cases detected with ineligible or overstated indirect costs, the Commission will do the necessary follow up and will propose action as it deems necessary.

  Concerning indirect costs (see box 6.7), the issues identified by the ECA were to a large extent identified by the audit authority, who applied a 10 % financial correction on this expenditure. The Commission will follow up with the relevant authorities and will consider the implementation of any additional financial correction that may be required. |
| --- | --- |

6.43.

Concerning indirect costs (see box 6.7), the issues identified by the ECA were to a large extent identified by the audit authority, who applied a 10 % financial correction on this expenditure. The Commission will follow up with the relevant authorities and will consider the implementation of any additional financial correction that may be required.

Box 6.7 —   Example of ineligible expenditure — overdeclaration of indirect costs

The beneficiary, a large research institute in Germany, has its headquarters outside the eligible area for the OP. The audited project was financed by the ESF and implemented by a dedicated project group set up by the beneficiary in the eligible area. The project costs consisted mainly of direct spending on staff, materials and services, and a significant proportion of indirect spending under the same headings. To be eligible, indirect costs should be incurred in the eligible area, have a direct relationship with the project and they should be allocated based on their contribution to the project. We found, however, that most of the cost categories allocated to the project as indirect costs were in fact general costs incurred at the institute’s headquarters. Several costs relating to these categories were also directly charged to the project as actual expenditure incurred by the project group at the project location. During its audit, the audit authority was unable to obtain sufficient evidence about the composition of the indirect costs; as a result it applied a 10 % flat-rate correction to indirect costs. We found that the actual error was greater than 10 %, so we consider all costs not directly related to the project to be ineligible.

Our assessment of the work of audit authorities

| 6.44. | The work of audit authorities is a critical part of the assurance and control framework of Cohesion spending (see paragraph 6.22). This was the first year audit authorities implemented closures for the 2007 2013 programming period and the new control and assurance framework for 2014-2020. Our review of their work is part of a process with a view to possibly making more use of the Commission’s assurance model in the future. In this year’s audit we assessed the work of seven out of 21 audit authorities for the 2014-2020 period from Member States which, in 2017, submitted assurance packages with expenditure. We found a number of shortcomings which affect the extent to which their work can currently be relied upon. |
| --- | --- |

6.44.

The work of audit authorities is a critical part of the assurance and control framework of Cohesion spending (see paragraph 6.22). This was the first year audit authorities implemented closures for the 2007 2013 programming period and the new control and assurance framework for 2014-2020. Our review of their work is part of a process with a view to possibly making more use of the Commission’s assurance model in the future. In this year’s audit we assessed the work of seven out of 21 audit authorities for the 2014-2020 period from Member States which, in 2017, submitted assurance packages with expenditure. We found a number of shortcomings which affect the extent to which their work can currently be relied upon.

| 6.44. | The Commission welcomes the ECA’s audit approach, which has the potential to overall reduce duplication and overlaps of audit activities for programme authorities and beneficiaries.

  As in the previous programming period, the Commission continues to work closely with the 122 audit authorities covering ERDF/CF/ESF/YEI/FEAD to prevent possible shortcomings and ensure fully reliable audit results.


  In addition, the Commission's single audit strategy for Cohesion policy foresees a strong focus on re-performance work on the results of audit authorities on a rolling and risk basis. See also common Commission reply to paragraphs 6.49 and 6.50. |
| --- | --- |

6.44.

As in the previous programming period, the Commission continues to work closely with the 122 audit authorities covering ERDF/CF/ESF/YEI/FEAD to prevent possible shortcomings and ensure fully reliable audit results.

In addition, the Commission's single audit strategy for Cohesion policy foresees a strong focus on re-performance work on the results of audit authorities on a rolling and risk basis. See also common Commission reply to paragraphs 6.49 and 6.50.

| 6.45. | In all of the assurance and closure packages we examined, the audit authorities had reported a residual error rate below 2 %. However, because of the additional errors we detected, our recalculated rate was above 2 % for six of the 12 assurance packages for the 2014-2020 period and three of the 10 closure packages for 2007-2013. |
| --- | --- |

6.45.

In all of the assurance and closure packages we examined, the audit authorities had reported a residual error rate below 2 %. However, because of the additional errors we detected, our recalculated rate was above 2 % for six of the 12 assurance packages for the 2014-2020 period and three of the 10 closure packages for 2007-2013.

| 6.45. | For three programmes in one Member State, without contesting the irregularities raised, the Commission notes that the additional errors identified leading to a residual error rate above 2 % are all linked to a misinterpretation on VAT eligibility by all the Member State’s authorities and not by the audit authority alone.

  Furthermore, in the case of the SME Initiative programme specific legal requirements were in place at the time of issuing the audit authority's report which did not allow the audit authority to carry out audits at the level of transactions.


  See also Commission replies to paragraphs 6.29 and 6.37. |
| --- | --- |

6.45.

Furthermore, in the case of the SME Initiative programme specific legal requirements were in place at the time of issuing the audit authority's report which did not allow the audit authority to carry out audits at the level of transactions.

See also Commission replies to paragraphs 6.29 and 6.37.

Weaknesses in some audit authorities’ sampling affected the representativeness of samples

| 6.46. | Due to the large number of operations co-financed by each OP, audit authorities have to use sampling to obtain an opinion on the eligibility of expenditure. To produce reliable results, samples must be representative of the audited population and, as a general rule, based on a statistically valid method (44). We checked the audit authorities’ sampling method for the 22 assurance/closure packages we examined. |
| --- | --- |

6.46.

Due to the large number of operations co-financed by each OP, audit authorities have to use sampling to obtain an opinion on the eligibility of expenditure. To produce reliable results, samples must be representative of the audited population and, as a general rule, based on a statistically valid method (44). We checked the audit authorities’ sampling method for the 22 assurance/closure packages we examined.

| 6.47. | In the case of the OP under the SME Initiative, there was no sampling because neither the audit authority nor the external auditor contracted by the EIF carried out any audits at financial intermediary level (see paragraph 6.37). |
| --- | --- |

6.47.

In the case of the OP under the SME Initiative, there was no sampling because neither the audit authority nor the external auditor contracted by the EIF carried out any audits at financial intermediary level (see paragraph 6.37).

| 6.47. | There is a clear regulatory restriction for the audit authority to carry out audits at the level of final recipients in relation to the SME Initiative programmes in Article 40(3) CPR.

  The Commission refers to its reply to paragraph 6.37. |
| --- | --- |

6.47.

The Commission refers to its reply to paragraph 6.37.

| 6.48. | We found weaknesses, such as insufficient sample size, overrepresentation of certain operations and incorrect use of sampling parameters, in three of the 22 packages we examined (all of them for 2014-2020). To some extent, these weaknesses affected the representativeness of the samples, and hence also the reliability of the reported residual error rates concerned. |
| --- | --- |

6.48.

We found weaknesses, such as insufficient sample size, overrepresentation of certain operations and incorrect use of sampling parameters, in three of the 22 packages we examined (all of them for 2014-2020). To some extent, these weaknesses affected the representativeness of the samples, and hence also the reliability of the reported residual error rates concerned.

| 6.48. | See common Commission reply to paragraphs 6.64 and 6.65. |
| --- | --- |

6.48.

Other shortcomings in audit authorities’ work

| 6.49. | Insufficient or inadequate checks increase the risk of not detecting ineligible expenditure. Furthermore, the international audit standards (45) require auditors to document their checks, including clear references to all documents that are most relevant to the audited expenditure. This enables them to be accountable for their work and helps internal or external reviewers to conclude on the extent and sufficiency of the checks. |
| --- | --- |

6.49.

Insufficient or inadequate checks increase the risk of not detecting ineligible expenditure. Furthermore, the international audit standards (45) require auditors to document their checks, including clear references to all documents that are most relevant to the audited expenditure. This enables them to be accountable for their work and helps internal or external reviewers to conclude on the extent and sufficiency of the checks.

| 6.49 and 6.50. | Audit authorities should be able to demonstrate the scope and quality of the verifications they carried out. However, when it comes to documentation of the audit process, an appropriate balance should be found to ensure sound and efficient administrative procedures.

  The Commission will keep working closely with the audit authorities in order to address the issues raised by the ECA through sharing of best practices and exchange of audit tools and methodologies, including the Commission’s own checklists.


  Under its Single Audit Strategy for Cohesion policy, the Commission has planned to conduct 58 compliance audits and 19 fact-finding missions on a risk basis in 2018 and 2019 in order to ensure the reliability of the audit authorities’ work. It is envisaged that 21 of these compliance audits and eight fact-finding missions will be carried out in 2018 and the results of these will be available for the 2018 AARs.


  See also Commission reply to paragraph 6.26. |
| --- | --- |

6.49 and 6.50.

The Commission will keep working closely with the audit authorities in order to address the issues raised by the ECA through sharing of best practices and exchange of audit tools and methodologies, including the Commission’s own checklists.

Under its Single Audit Strategy for Cohesion policy, the Commission has planned to conduct 58 compliance audits and 19 fact-finding missions on a risk basis in 2018 and 2019 in order to ensure the reliability of the audit authorities’ work. It is envisaged that 21 of these compliance audits and eight fact-finding missions will be carried out in 2018 and the results of these will be available for the 2018 AARs.

See also Commission reply to paragraph 6.26.

| 6.50. | We were able to conclude for 96 out of the sample of 217 transactions (44 %) on the basis of our own review of the audit authorities’ work. We identified shortcomings with the scope, quality and documentation of the audit authorities’ work in 121 transactions (56 %), which required us to re-perform the audit work. The shortcomings related to 17 of the 22 assurance/closure packages we examined. They concerned, for example, checklists that did not cover all necessary points, or incorrect checks of the eligibility of expenditure. For 80 of these transactions (37 % of the total), this meant we had to visit the beneficiary. In 30 of the 121 transactions we re-performed, we found quantifiable errors that had not been previously identified by the audit authority. These related to 11 packages. |
| --- | --- |

6.50.

We were able to conclude for 96 out of the sample of 217 transactions (44 %) on the basis of our own review of the audit authorities’ work. We identified shortcomings with the scope, quality and documentation of the audit authorities’ work in 121 transactions (56 %), which required us to re-perform the audit work. The shortcomings related to 17 of the 22 assurance/closure packages we examined. They concerned, for example, checklists that did not cover all necessary points, or incorrect checks of the eligibility of expenditure. For 80 of these transactions (37 % of the total), this meant we had to visit the beneficiary. In 30 of the 121 transactions we re-performed, we found quantifiable errors that had not been previously identified by the audit authority. These related to 11 packages.

The Commission’s work and its reporting of the residual error rate in its annual activity reports

| 6.51. | AARs are the Commission’s main tool for reporting whether it has reasonable assurance that the control procedures put in place ensure legality and regularity of expenditure (46). For ‘Economic, social and territorial cohesion’, the AARs give a number of different rates as a measure of the expenditure at risk. Those rates include the residual error rate for the accounting year 2015/2016, for which the Commission has accepted the accounts and on which it has concluded in terms of regularity (47). |
| --- | --- |

6.51.

AARs are the Commission’s main tool for reporting whether it has reasonable assurance that the control procedures put in place ensure legality and regularity of expenditure (46). For ‘Economic, social and territorial cohesion’, the AARs give a number of different rates as a measure of the expenditure at risk. Those rates include the residual error rate for the accounting year 2015/2016, for which the Commission has accepted the accounts and on which it has concluded in terms of regularity (47).

| 6.51. | The Commission provides different rates in the AARs in relation to expenditure under shared management to measure the specific risks linked to different types of payments in the reporting year (2007-2013 closure and different accounting years for 2014-2020 expenditure), as well as an aggregated error rate for the calendar year 2017. |
| --- | --- |

6.51.

| 6.52. | In this sub-section, we examine the Commission’s work to obtain assurance that the Member States’ systems under the new control and assurance framework are functioning effectively and that the resulting residual error rate is a reliable estimate. |
| --- | --- |

6.52.

In this sub-section, we examine the Commission’s work to obtain assurance that the Member States’ systems under the new control and assurance framework are functioning effectively and that the resulting residual error rate is a reliable estimate.

| 6.53. | Our observations relate to the design of the assurance framework and the Commission’s work in accepting accounts, validating individual residual error rates and establishing an overall residual error rate. |
| --- | --- |

6.53.

Our observations relate to the design of the assurance framework and the Commission’s work in accepting accounts, validating individual residual error rates and establishing an overall residual error rate.

The design of the 2014-2020 control and assurance framework

The AARs should be further streamlined and adapted to the new control and assurance framework

| 6.54. | The new control and assurance framework means that it takes almost two years from the end of the relevant accounting period before the Commission can first report its conclusion on the reliability of audit authorities’ residual error rates for a given accounting year. This period includes eight months for the audit authorities to carry out their audit work. Subsequently the Commission carries out its desk reviews, complementary fact-finding missions and regularity audits.
  Box 6.8
  presents the timeline for the new framework. |
| --- | --- |

6.54.

The new control and assurance framework means that it takes almost two years from the end of the relevant accounting period before the Commission can first report its conclusion on the reliability of audit authorities’ residual error rates for a given accounting year. This period includes eight months for the audit authorities to carry out their audit work. Subsequently the Commission carries out its desk reviews, complementary fact-finding missions and regularity audits.
  Box 6.8
  presents the timeline for the new framework.

| 6.54. | The two years referred to by the ECA start at the end of the relevant accounting period and therefore include the eight months foreseen by the regulation for the audit authorities to carry out their audit work. Subsequently, and in line with its Single Audit Strategy for Cohesion Policy, the Commission aims to assess on time for the subsequent annual activity report, i.e. within a maximum of 13 months, the assurance packages received for each of the 419 Cohesion programmes.

  Following such thorough desk checks and on the spot, risk based audits and fact-finding missions, the DG will report in the subsequent annual activity report whether it considers the residual error rates previously reported as reliable or if further verifications are ongoing or needed.


  See also the common Commission reply to paragraph 6.49 and 6.50. |
| --- | --- |

6.54.

Following such thorough desk checks and on the spot, risk based audits and fact-finding missions, the DG will report in the subsequent annual activity report whether it considers the residual error rates previously reported as reliable or if further verifications are ongoing or needed.

See also the common Commission reply to paragraph 6.49 and 6.50.

Box 6.8 —   Timeline for the new control and assurance framework

Image

Source: European Court of Auditors.

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

| 6.55. | Last year we drew attention to the fact that the AAR reporting period is not the same as the period covered by the Member States’ assurance packages (48). The residual error rates reported by audit authorities relate to the accounting year. In the AARs, however, to reflect the budgetary principle of annuality, and following the guidance provided by DG BUDG and the Secretariat-General, the directors-general provide reasonable assurance for the calendar year. For this purpose, in the 2017 AARs, the directors-general of DGs REGIO and EMPL decided to estimate the risk by projecting a provisional residual error rate for 2017 calendar year expenditure, which they had not yet accepted and validated. |
| --- | --- |

6.55.

Last year we drew attention to the fact that the AAR reporting period is not the same as the period covered by the Member States’ assurance packages (48). The residual error rates reported by audit authorities relate to the accounting year. In the AARs, however, to reflect the budgetary principle of annuality, and following the guidance provided by DG BUDG and the Secretariat-General, the directors-general provide reasonable assurance for the calendar year. For this purpose, in the 2017 AARs, the directors-general of DGs REGIO and EMPL decided to estimate the risk by projecting a provisional residual error rate for 2017 calendar year expenditure, which they had not yet accepted and validated.

| 6.55. | The Commission refers to its reply to paragraph 6.34 of the ECA 2016 Annual report. The Financial Regulation and the timeframe set for the assurance for 2014-2020 allow for a better alignment of reporting periods, with only a six months gap compared to one year in 2007-2013. The DGs have adapted accordingly their annual activity reports and the way they obtain assurance for the different types of payments made, which cover up to 3 different programme accounting years, as described in the 2016 AARs (section A.1.2). The residual error rates for the 2016-2017 accounting year, received by 1 March 2018, were considered to be the best and most recent estimates for both calculating the risk on the expenditure of the year and for entering reservations on individual programmes, where necessary. This was particularly the case in 2017 due to the limited number of accounts with expenditure received and therefore error rates reported for the 2015-2016 accounting year.

  Furthermore, the Commission underlines that, at the time an AAR is signed off, expenditure declared in the previous calendar year is covered by the 10 % retention on EU interim payments. |
| --- | --- |

6.55.

Furthermore, the Commission underlines that, at the time an AAR is signed off, expenditure declared in the previous calendar year is covered by the 10 % retention on EU interim payments.

| 6.56. | The reporting requirements for AARs have not been sufficiently adapted to the new control and assurance framework. In our view, given that the residual error rates for the 2015/2016 accounting year are the only ones for which the Commission could have the necessary assurance from audit authorities and its own regularity work, they should be the main indicator for regularity in the 2017 AARs. They should also be the main basis for the DGs’ declarations of assurance for the specific policy areas. However, neither DG gives them sufficient prominence or mentions them as a key performance indicator. |
| --- | --- |

6.56.

The reporting requirements for AARs have not been sufficiently adapted to the new control and assurance framework. In our view, given that the residual error rates for the 2015/2016 accounting year are the only ones for which the Commission could have the necessary assurance from audit authorities and its own regularity work, they should be the main indicator for regularity in the 2017 AARs. They should also be the main basis for the DGs’ declarations of assurance for the specific policy areas. However, neither DG gives them sufficient prominence or mentions them as a key performance indicator.

| 6.56 and 6.57. | The DGs report in the AARs a key performance indicator on regularity (KPI 5) in line with central instructions to ensure a consistent and harmonised approach across all budget areas. Additional visibility was given to the residual risk rate in relation to the 2015-2016 accounts in the 2017 AARs (including in footnote to KPI 5 and in the executive summary), where a specific section is also devoted to the validation of reported residual error rates for that accounting year.

  The Commission is open to reflect on, and to discuss with the ECA, how to further improve and streamline its presentation of error rates in its future AARs. |
| --- | --- |

6.56 and 6.57.

The Commission is open to reflect on, and to discuss with the ECA, how to further improve and streamline its presentation of error rates in its future AARs.

| 6.57. | Furthermore, in the AARs the Commission presents at least 13 different rates for the two programming periods as a measure of the expenditure at risk. Such a large number of rates leads to a lack of clarity and potential confusion as to their relevance and the assurance provided. |
| --- | --- |

6.57.

Furthermore, in the AARs the Commission presents at least 13 different rates for the two programming periods as a measure of the expenditure at risk. Such a large number of rates leads to a lack of clarity and potential confusion as to their relevance and the assurance provided.

Advances to financial instruments should not be taken into account for the calculation of the residual error rate

| 6.58. | The set-up for the 2014-2020 programming period aims to simplify the closure of OPs by introducing a procedure for the annual examination and acceptance of accounts that is similar to ‘partial closure’. This can only work if the residual error rates reported by audit authorities are reliable and information is available that refers exclusively to eligible expenditure at closure (i.e. without advances). |
| --- | --- |

6.58.

The set-up for the 2014-2020 programming period aims to simplify the closure of OPs by introducing a procedure for the annual examination and acceptance of accounts that is similar to ‘partial closure’. This can only work if the residual error rates reported by audit authorities are reliable and information is available that refers exclusively to eligible expenditure at closure (i.e. without advances).

| 6.58. | The Commission has indeed indicated that annual accounts aim at further legal certainty for Member States in a multiannual context under shared management by introducing the validation of ‘annual blocks of eligible expenditure’. Such partial closure does not by definition cover advance payments made under financial instruments or State aid that should be further transformed into eligible expenditure in subsequent accounting years (cumulative reporting is therefore foreseen in annual accounts). In the AARs the Commission services have provided such information on residual error rates that refer only to eligible expenditure at closure (i.e. without advances from financial instruments).

  See also common Commission reply to paragraphs 6.59 to 6.62 below. |
| --- | --- |

6.58.

See also common Commission reply to paragraphs 6.59 to 6.62 below.

| 6.59. | Regulation (EU) No 1303/2013 does not specify how to calculate residual error rates. |
| --- | --- |

6.59.

Regulation (EU) No 1303/2013 does not specify how to calculate residual error rates.

| 6.59 to 6.62. | In line with Article 137 of Regulation (EU) No 1303/2013, programme accounts are based on the amounts declared to the Commission, including advance payments to financial instruments. Audit authorities provide residual error rates based on the expenditure included in the accounts.

  To constructively follow up on the 2016 ECA recommendation, audit authorities agreed to provide to the Commission additional detailed information allowing it to calculate in the AARs residual error rates excluding the impact of advances paid into financial instruments. Thus, the Commission could calculate the impact of advances paid in the 2016-2017 accounts to financial instruments (and to SME Initiative programmes) to be less than 0,2 percentage points on average for ERDF (based on 67 financial instruments) and 0,02 for ESF (based on 15 financial instruments) (see page 50 of DG REGIO’s 2017 annual activity report and page 58 of DG EMPL’s 2017 annual activity report).


  The ECA’s recommendation therefore helped improving the disclosure of information for individual programmes in the AARs, without such advance payments to financial instruments having shown so far a material overall impact on the reported error rates. |
| --- | --- |

6.59 to 6.62.

To constructively follow up on the 2016 ECA recommendation, audit authorities agreed to provide to the Commission additional detailed information allowing it to calculate in the AARs residual error rates excluding the impact of advances paid into financial instruments. Thus, the Commission could calculate the impact of advances paid in the 2016-2017 accounts to financial instruments (and to SME Initiative programmes) to be less than 0,2 percentage points on average for ERDF (based on 67 financial instruments) and 0,02 for ESF (based on 15 financial instruments) (see page 50 of DG REGIO’s 2017 annual activity report and page 58 of DG EMPL’s 2017 annual activity report).

The ECA’s recommendation therefore helped improving the disclosure of information for individual programmes in the AARs, without such advance payments to financial instruments having shown so far a material overall impact on the reported error rates.

| 6.60. | The audit authorities’ current practice of including advances to financial instruments in the audit population is very likely to lead to an understatement of the residual error rates reported to the Commission (49). |
| --- | --- |

6.60.

The audit authorities’ current practice of including advances to financial instruments in the audit population is very likely to lead to an understatement of the residual error rates reported to the Commission (49).

| 6.61. | Acting on our recommendation in last year’s annual report (50), in its AARs the Commission now provides additional residual error rates which exclude advances to financial instruments. |
| --- | --- |

6.61.

Acting on our recommendation in last year’s annual report (50), in its AARs the Commission now provides additional residual error rates which exclude advances to financial instruments.

| 6.62. | In previous programming period, the audit authorities, did not usually carry out audit work at financial intermediary level. For the 2014-2020 period, for the second and subsequent tranches of advances (51), audit authorities will need to verify that the eligibility conditions are met at the level of financial intermediaries. Partial closure cannot take place for OPs that include financial instruments unless the audit authorities carry out appropriate work at this level. |
| --- | --- |

6.62.

In previous programming period, the audit authorities, did not usually carry out audit work at financial intermediary level. For the 2014-2020 period, for the second and subsequent tranches of advances (51), audit authorities will need to verify that the eligibility conditions are met at the level of financial intermediaries. Partial closure cannot take place for OPs that include financial instruments unless the audit authorities carry out appropriate work at this level.

| 6.63. | This problem may be more acute in future years for those programmes where the number of financial instruments increases significantly (52). |
| --- | --- |

6.63.

This problem may be more acute in future years for those programmes where the number of financial instruments increases significantly (52).

The Commission’s work on assurance in the AARs

Sampling weaknesses remained unaddressed in the review of assurance packages

| 6.64. | Our work on the audit authorities’ sampling methodology showed that weaknesses in three of the 12 assurance packages we examined (25 %) affected the reliability of the reported residual error rates to some extent (see paragraphs 6.47 to 6.48). |
| --- | --- |

6.64.

Our work on the audit authorities’ sampling methodology showed that weaknesses in three of the 12 assurance packages we examined (25 %) affected the reliability of the reported residual error rates to some extent (see paragraphs 6.47 to 6.48).

| 6.64 and 6.65. | The Commission identified some of the issues raised by the ECA, but did not consider that the conditions of Article 31 of Regulation (EU) No 480/2014 applied to these cases.

  For the SME Initiative programme, the Commission refers to its reply to paragraph 6.47. |
| --- | --- |

6.64 and 6.65.

For the SME Initiative programme, the Commission refers to its reply to paragraph 6.47.

| 6.65. | In line with its internal procedures, the Commission checked the sampling method for all the packages submitted. However, it did not raise the issues referred to above. Where there are serious shortcomings, the regulation provides for a flat-rate correction (53). |
| --- | --- |

6.65.

In line with its internal procedures, the Commission checked the sampling method for all the packages submitted. However, it did not raise the issues referred to above. Where there are serious shortcomings, the regulation provides for a flat-rate correction (53).

| 6.66. | In all the above cases, the Commission settled the balance and released the 10 % previously retained to protect the EU budget (see
  Box 6.8
  ). |
| --- | --- |

6.66.

In all the above cases, the Commission settled the balance and released the 10 % previously retained to protect the EU budget (see
  Box 6.8
  ).

| 6.66. | The Commission has to settle the outstanding amount for the accounting year in question in all cases when conditions foreseen in Article 139(2) CPR are fulfilled. Where this results in a payment to be made, the Commission has a possibility to interrupt it where the residual risk remains material. When the balance results in a recovery, the Commission must proceed to recover the amount without delay, in line with the principle of sound financial management. |
| --- | --- |

6.66.

The Commission’s conclusion on the regularity of expenditure in the 2015/2016 accounting year is not yet final

| 6.67. | The Commission undertook in its 2016 AARs to carry out its in-depth assessment on regularity no later than nine months after the submission of assurance packages (54). This would have meant concluding on the residual error rates for the 2015/2016 accounting year in the 2017 AARs. Both DGs concluded that the residual error rate for the 2015/2016 accounting year was below the 2 % materiality threshold. DG EMPL did not finally conclude on some OPs for which it had not yet obtained the required assurance itself, and which were therefore still subject to its final assessment. |
| --- | --- |

6.67.

The Commission undertook in its 2016 AARs to carry out its in-depth assessment on regularity no later than nine months after the submission of assurance packages (54). This would have meant concluding on the residual error rates for the 2015/2016 accounting year in the 2017 AARs. Both DGs concluded that the residual error rate for the 2015/2016 accounting year was below the 2 % materiality threshold. DG EMPL did not finally conclude on some OPs for which it had not yet obtained the required assurance itself, and which were therefore still subject to its final assessment.

| 6.67. | There is no formal obligation to conclude on the validity of reported error rates for all programmes each year but the DGs are clearly working with this objective, when all conditions are fulfilled and allow for such a conclusion to be made by the Commission services. The Single Audit Strategy for Cohesion Policy foresees to carry out audits, where necessary, up to the end of the regulatory period for beneficiaries to keep supporting documents. Therefore specific situations (like for the ‘running-in’ of this first year of implementation of the assurance system) or administrative efficiency may lead Commission compliance audits to cover more than one accounting year, with possible bearing on the revision of previously reported error rates. |
| --- | --- |

6.67.

| 6.68. | The 2015/2016 accounting year was the first under the new control and assurance framework. For the 50 relevant assurance packages submitted by March 2017, DG EMPL carried out just two compliance audits (55) from June 2017 to April 2018 covering eight operations and two assurance packages in two Member States. DG REGIO carried out no such audits. We found that audit authorities underestimated the residual error rates which they reported to the Commission in six of the 12 assurance packages we examined. To protect the EU budget, the regulation gives the Commission the possibility to carry out further audits until the end of the retention period for supporting documents (see paragraph 6.8). These two elements could imply that other deficiencies detected in future Commission audits may further increase the residual error rates for the 2015/2016 accounting years. Consequently, the residual error rates on which the Commission concludes in the 2017 AARs are not yet final. |
| --- | --- |

6.68.

The 2015/2016 accounting year was the first under the new control and assurance framework. For the 50 relevant assurance packages submitted by March 2017, DG EMPL carried out just two compliance audits (55) from June 2017 to April 2018 covering eight operations and two assurance packages in two Member States. DG REGIO carried out no such audits. We found that audit authorities underestimated the residual error rates which they reported to the Commission in six of the 12 assurance packages we examined. To protect the EU budget, the regulation gives the Commission the possibility to carry out further audits until the end of the retention period for supporting documents (see paragraph 6.8). These two elements could imply that other deficiencies detected in future Commission audits may further increase the residual error rates for the 2015/2016 accounting years. Consequently, the residual error rates on which the Commission concludes in the 2017 AARs are not yet final.

| 6.68. | In order to protect the EU budget, the Commission has the possibility to carry out further audits taking into account the legal requirement for the availability of documents and audit evidence. Any irregularities identified, as a result of such audits need to be appropriately corrected with possible bearing on previously validated error rates. See also Commission reply to 6.9.

  In 2017, DGs REGIO and EMPL accompanied ECA on a significant number of its audits. The low number of assurance packages actually submitted in this first accounting year with limited expenditure declared and therefore limited possibilities to re-perform audits carried out by audit authorities, coupled with the extent of ECA's audit coverage of these programmes, caused the Commission's decision to revise its planned compliance audits in 2017. The purpose of this decision was to avoid duplicating the audits on the same programmes and beneficiaries.


  Other factors, including the possibility for future Commission compliance audits to look back over 3 accounting years (for administrative efficiency in case of low numbers of audits to be reviewed) and the overlap with the REGIO/EMPL audit work on closure of the 2007-13 period, were taken into account by the Commission, from both an efficiency and effectiveness perspective, when planning (and subsequently reviewing) its 2017 audit work. See also common Commission reply to paragraphs 6.56 and 6.57. |
| --- | --- |

6.68.

In 2017, DGs REGIO and EMPL accompanied ECA on a significant number of its audits. The low number of assurance packages actually submitted in this first accounting year with limited expenditure declared and therefore limited possibilities to re-perform audits carried out by audit authorities, coupled with the extent of ECA's audit coverage of these programmes, caused the Commission's decision to revise its planned compliance audits in 2017. The purpose of this decision was to avoid duplicating the audits on the same programmes and beneficiaries.

Other factors, including the possibility for future Commission compliance audits to look back over 3 accounting years (for administrative efficiency in case of low numbers of audits to be reviewed) and the overlap with the REGIO/EMPL audit work on closure of the 2007-13 period, were taken into account by the Commission, from both an efficiency and effectiveness perspective, when planning (and subsequently reviewing) its 2017 audit work. See also common Commission reply to paragraphs 6.56 and 6.57.

There is no overall residual error rate for Cohesion

| 6.69. | For both programming periods, the Commission’s AARs each give a separate residual error rate (56). However, the Commission does not calculate and provide an overall residual error rate covering the ‘Economic, social and territorial cohesion’ area (MFF sub-heading 1b) for the accounting year. |
| --- | --- |

6.69.

For both programming periods, the Commission’s AARs each give a separate residual error rate (56). However, the Commission does not calculate and provide an overall residual error rate covering the ‘Economic, social and territorial cohesion’ area (MFF sub-heading 1b) for the accounting year.

| 6.69 and 6.70. | As required by the Financial Regulation, the Commission's reporting is based on the calendar year.

  The Commission’s corporate annual management and performance report (AMPR) provides an aggregate residual error rate for cohesion, migration and fisheries based on data and indicators reported by each DG in their respective AARs.


  This approach has been the same since the 2015 AMPR for comparability reasons. |
| --- | --- |

6.69 and 6.70.

The Commission’s corporate annual management and performance report (AMPR) provides an aggregate residual error rate for cohesion, migration and fisheries based on data and indicators reported by each DG in their respective AARs.

This approach has been the same since the 2015 AMPR for comparability reasons.

| 6.70. | The Commission could produce this information with little additional effort in the Annual Management and Performance Report for the EU budget (AMPR), which would help the discharge authorities. Instead the AMPR provides a combined error rate for ‘Cohesion, migration and fisheries’ for the calendar year. |
| --- | --- |

6.70.

The Commission could produce this information with little additional effort in the Annual Management and Performance Report for the EU budget (AMPR), which would help the discharge authorities. Instead the AMPR provides a combined error rate for ‘Cohesion, migration and fisheries’ for the calendar year.

| 6.71. | In
  Box 6.9
  we provide a summary of the information provided by the AARs on the 2014-2020 programming period. |
| --- | --- |

6.71.

In
  Box 6.9
  we provide a summary of the information provided by the AARs on the 2014-2020 programming period.

Box 6.9 —   Overview of information in the AARs for the 2014-2020 period

| (million euros) |
| --- |
| Activity | Fund | Total expenditure certified in the assurance package | Number of assurance packages (72) | OPs (72) | Residual error rate (73) |
| 2014-2020 programming period | ERDF/CF | 993,7 | 20 | 34 | 0,6  % |
| ESF/YEI (74) | 1 443,5 | 33 | 49 | 0,7  % |
| FEAD | 144,3 | 8 | 8 | 0,6  % |
| Total without SME Initiative
   (75) | 2 581,5 | 50 | 70 | 0,7  % |
| Source: 2017 AARs of DG REGIO and DG EMPL. |

(million euros)

Activity

Fund

Total expenditure certified in the assurance package

Number of assurance packages (72)

OPs (72)

Residual error rate (73)

2014-2020 programming period

ERDF/CF

993,7

20

34

0,6  %

ESF/YEI (74)

1 443,5

33

49

0,7  %

FEAD

144,3

8

8

0,6  %

Total without SME Initiative
   (75)

2 581,5

50

70

0,7  %

Source: 2017 AARs of DG REGIO and DG EMPL.

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

| 6.72. | The reported residual error rates in 2017 AARs for the 2015/2016 accounting year are below the materiality level (57). However, the results of our audit of a representative sample of operations audited by audit authorities indicate that: the level of error remains material (above 2 %) and that a number of residual error rates submitted by these audit authorities were understated. |
| --- | --- |

6.72.

The reported residual error rates in 2017 AARs for the 2015/2016 accounting year are below the materiality level (57). However, the results of our audit of a representative sample of operations audited by audit authorities indicate that: the level of error remains material (above 2 %) and that a number of residual error rates submitted by these audit authorities were understated.

| 6.72. | The Commission has reported the issues raised by the ECA in the respective annual activity reports of DG REGIO and DG EMPL and taken them into account in its validated error rates, where it considered it possible. For the individual programmes concerned, where it is concluded that the residual error rates reported were understated, the Commission will take additional financial corrections. |
| --- | --- |

6.72.

CONCLUSION AND RECOMMENDATIONS

Conclusion

| 6.73. | The overall audit evidence indicates that the level of error in spending on ‘Economic, social and territorial cohesion’ was material (see paragraphs 6.26 to 6.43). |
| --- | --- |

6.73.

The overall audit evidence indicates that the level of error in spending on ‘Economic, social and territorial cohesion’ was material (see paragraphs 6.26 to 6.43).

| 6.73. | The Commission notes with satisfaction that the ECA’s estimate of the level of error for Cohesion policy, this year, represents a significant improvement compared to previous years. In particular, the Commission notes that the single SME Initiative programme present in the 2015-2016 accounts, with a specific regulatory framework compared to mainstream programmes due to its innovative nature, contributes 1 percentage point to this estimate. Based on all information it has obtained, the Commission concludes that, for the vast majority of programmes, there is no remaining material level of error in the 2015/2016 accounts. |
| --- | --- |

6.73.

| 6.74. | The number of weaknesses we found in the work of several audit authorities covered by our sample (see paragraphs 6.44 to 6.50) currently limits the reliance that can be placed on that work. |
| --- | --- |

6.74.

The number of weaknesses we found in the work of several audit authorities covered by our sample (see paragraphs 6.44 to 6.50) currently limits the reliance that can be placed on that work.

| 6.74 and 6.75. | The Commission has already reported some of the issues raised by the ECA in the respective annual activity reports of DG REGIO and DG EMPL and taken them into account in its validated error rates, where it considered it possible. The DGs will apply the necessary additional financial corrections.

  The Commission will keep working closely with the audit authorities in order to address the issues raised by the ECA.


  In addition, the Commission’s Single Audit Strategy for cohesion foresees a strong focus on reperformance work on the results of audit authorities on a risk basis.


  See also Commission replies to paragraphs 6.26, 6.29, common Commission reply to 6.34 and 6.35, 6.37, 6.39 and common Commission reply to 6.49 and 6.50. |
| --- | --- |

6.74 and 6.75.

The Commission will keep working closely with the audit authorities in order to address the issues raised by the ECA.

In addition, the Commission’s Single Audit Strategy for cohesion foresees a strong focus on reperformance work on the results of audit authorities on a risk basis.

See also Commission replies to paragraphs 6.26, 6.29, common Commission reply to 6.34 and 6.35, 6.37, 6.39 and common Commission reply to 6.49 and 6.50.

| 6.75. | Because of this and shortcomings in the Commission’s own work (see paragraphs 6.51 to 6.72), the overall residual error rates presented for the accounting year 2015/2016 in the Commission’s AARs are underestimated, and we cannot currently rely on them. Due to the additional errors we detected, our recalculated rate was above 2 % for six of the 12 assurance packages for the 2014-2020 period and three of the 10 closure packages for 2007-2013. |
| --- | --- |

6.75.

Because of this and shortcomings in the Commission’s own work (see paragraphs 6.51 to 6.72), the overall residual error rates presented for the accounting year 2015/2016 in the Commission’s AARs are underestimated, and we cannot currently rely on them. Due to the additional errors we detected, our recalculated rate was above 2 % for six of the 12 assurance packages for the 2014-2020 period and three of the 10 closure packages for 2007-2013.

| 6.76. | The new control and assurance framework has been designed with a view to ensure that the residual error rates are below the materiality threshold of 2 % on an annual basis. However, our audit showed that further improvements are necessary in particular in terms of the framework’s implementation at both audit authority and Commission level. |
| --- | --- |

6.76.

The new control and assurance framework has been designed with a view to ensure that the residual error rates are below the materiality threshold of 2 % on an annual basis. However, our audit showed that further improvements are necessary in particular in terms of the framework’s implementation at both audit authority and Commission level.

| 6.76. | Without prejudice to its common reply to paragraphs 6.74 and 6.75 above, the Commission also considers that further improvements are always welcome and will take the necessary steps to improve further the assurance framework and ensure that all irregularities are timely detected and corrected. As regards the Commission's own work, the Commission's audit plans must take into account the work planned by the ECA with a view to reduce overlaps and duplications of audits at the level of the responsible administrations and beneficiaries. This was particularly the case for the first 2014-2020 accounts with limited expenditure certified and therefore with limited possibilities to re-perform audits carried out by audit authorities.

  The Commission also refers to its reply to paragraph 6.68. |
| --- | --- |

6.76.

The Commission also refers to its reply to paragraph 6.68.

Recommendations

| 6.77. | Annex 6.2
  shows the findings of our follow-up review of the seven recommendations we made in our 2014 annual report (58). The Commission had implemented four recommendations in full, while two had been implemented in some respects and one had not been acted upon at all. |
| --- | --- |

6.77.

Annex 6.2
  shows the findings of our follow-up review of the seven recommendations we made in our 2014 annual report (58). The Commission had implemented four recommendations in full, while two had been implemented in some respects and one had not been acted upon at all.

| 6.77. | Regarding recommendation 3 from the 2014 ECA's annual report, the ECA had noted that the use of simplified cost options (SCOs) is limited to 36 % of the programme budget for ESF and to only 2 % for ERDF/CF.

  The Commission keeps promoting the use of simplified cost options during the 2014-2020 programming period. In this regard, the Commission has published on 27 March 2018 its final report on the use of SCOs in ESF, ERDF, CF and EAFRD) which showed that between 2014 and 2017 the large majority of ESIF managing authorities used SCOs (73 % and 95 % for respectively ERDF/CF and ESF programmes). In terms of projects, 65 % of ESF, 50 % of ERDF and 25 % of CF projects are using SCOs.


  Moreover, the Omnibus proposal, in its drafting resulting from the political agreement between the Council and Parliament, broadens the scope and applicability of SCOs.


  As for the recommendation deemed not to be acted upon at all, the Commission underlines that this recommendation was not accepted and therefore was not implemented. |
| --- | --- |

6.77.

The Commission keeps promoting the use of simplified cost options during the 2014-2020 programming period. In this regard, the Commission has published on 27 March 2018 its final report on the use of SCOs in ESF, ERDF, CF and EAFRD) which showed that between 2014 and 2017 the large majority of ESIF managing authorities used SCOs (73 % and 95 % for respectively ERDF/CF and ESF programmes). In terms of projects, 65 % of ESF, 50 % of ERDF and 25 % of CF projects are using SCOs.

Moreover, the Omnibus proposal, in its drafting resulting from the political agreement between the Council and Parliament, broadens the scope and applicability of SCOs.

As for the recommendation deemed not to be acted upon at all, the Commission underlines that this recommendation was not accepted and therefore was not implemented.

| 6.78. | Based on this review and our findings and conclusions for 2017, we recommend that the Commission: |
| --- | --- |

6.78.

Based on this review and our findings and conclusions for 2017, we recommend that the Commission:

| — | Recommendation 1: ensure that the audit arrangements for financial instruments managed by the EIF are adequate at the level of financial intermediaries. When the EIB/EIF uses agreed-upon procedures with external auditors, the Commission should define the minimum conditions of such contracts with a view to the need to provide assurance, in particular the obligation for sufficient audit work at the level of the Member State.

  Implementation date: immediate. |
| --- | --- |

—

Recommendation 1: ensure that the audit arrangements for financial instruments managed by the EIF are adequate at the level of financial intermediaries. When the EIB/EIF uses agreed-upon procedures with external auditors, the Commission should define the minimum conditions of such contracts with a view to the need to provide assurance, in particular the obligation for sufficient audit work at the level of the Member State.

Implementation date: immediate.

The Commission accepts the recommendation and considers that with the entry into force of the Omnibus proposal, in its drafting resulting from the political agreement between the Council and Parliament, and with new provisions for audit of financial instruments managed by EIF, the recommendation will be implemented.

Moreover the Member States will have to carry out verifications and audits at the level of financial intermediaries and, for audit authorities, at the level of final recipients in their jurisdiction, where relevant.

| — | Recommendation 2: propose legislative changes for the post-2020 financial framework which would exclude reimbursement of VAT to public bodies from EU funds.

  Implementation date: before approval of the post-2020 legislative framework. |
| --- | --- |

—

Recommendation 2: propose legislative changes for the post-2020 financial framework which would exclude reimbursement of VAT to public bodies from EU funds.

Implementation date: before approval of the post-2020 legislative framework.

The Commission partially accepts the recommendation and has made a legislative proposal for the financial framework 2021-2027.

The Commission proposal (COM (2018) 375 final) introduces a simple rule in relation to VAT, independently from the private/public status of beneficiaries: for projects below a total cost of EUR 5 million the VAT is considered eligible while above the threshold the VAT is ineligible.

| — | Recommendation 3: address the weaknesses we have identified in its verification of the audit authorities’ work in the context of the Commission’s regularity audits.

  Implementation date: immediate. |
| --- | --- |

—

Recommendation 3: address the weaknesses we have identified in its verification of the audit authorities’ work in the context of the Commission’s regularity audits.

Implementation date: immediate.

The Commission accepts the recommendation. In line with their Single Audit Strategy and agreed audit plan, the Commission services will from 2018 on focus their audit work on verifying the quality and compliance of audit authorities' work with a view to obtaining fully reliable audit opinions and results.

| — | Recommendation 4: address the complexity of the information presented on the 2014-2020 control and assurance framework in the AARs of DGs REGIO and EMPL, by:






  (i) | focusing on expenditure that has gone through the control cycle, i.e. assurance packages covering expenditure before 30 June ‘n-1’. For this purpose, the Commission should adjust its reporting to ensure that it does not present provisional estimates; |
| --- | --- | --- |

—

Recommendation 4: address the complexity of the information presented on the 2014-2020 control and assurance framework in the AARs of DGs REGIO and EMPL, by:

(i)

focusing on expenditure that has gone through the control cycle, i.e. assurance packages covering expenditure before 30 June ‘n-1’. For this purpose, the Commission should adjust its reporting to ensure that it does not present provisional estimates;

| (ii) | clearly indicating which expenditure has not yet been examined in depth (including regularity checks). It should indicate which preventive actions protect the EU budget and whether these actions are sufficient to provide assurance, but refrain from calculating a residual rate for expenditure that has not yet been examined. |
| --- | --- |

(ii)

clearly indicating which expenditure has not yet been examined in depth (including regularity checks). It should indicate which preventive actions protect the EU budget and whether these actions are sufficient to provide assurance, but refrain from calculating a residual rate for expenditure that has not yet been examined.

| (iii) | disclosing an overall residual error rate for MFF sub-heading 1b for each accounting year. |
| --- | --- |

(iii)

disclosing an overall residual error rate for MFF sub-heading 1b for each accounting year.

Implementation date: June 2019.

The Commission partially accepts this recommendation.

The Commission underlines that the annual activity reports of the concerned Directorates general already provide a clear focus on the validation of error rates for programmes and accounts in relation with accounting years ending 30 June n-1. This can be made even clearer in future reports.

In line with the Financial Regulation, the assurance required from authorising officers in the annual activity reports refers to all types of payments executed in the reporting year n. DGs report separately on the level of assurance obtained for each of them. The amount at risk is therefore established on the basis of the relevant expenditure of the calendar year.

The Commission reiterates furthermore that it is open to reflect on, and to discuss with the ECA, how to improve and simplify its system leading to the presentation of error rates in its AARs.

| — | Recommendation 5: ensure that audit arrangements are changed in accordance with the proposal made by the Commission for financial instruments in the post-2020 regulatory framework so that only the actual use of funds at final recipient level is used for the calculation of residual error rates.

  Implementation date: before implementation of the post-2020 legislative framework begins. |
| --- | --- |

—

Recommendation 5: ensure that audit arrangements are changed in accordance with the proposal made by the Commission for financial instruments in the post-2020 regulatory framework so that only the actual use of funds at final recipient level is used for the calculation of residual error rates.

Implementation date: before implementation of the post-2020 legislative framework begins.

The Commission accepts this recommendation to the extent the Commission’s proposal for the post-2020 regulatory framework is adopted by the co-legislators.

Following this proposal adopted on 29 May 2018, the Member State will declare expenditure of financial instruments based on disbursed amount to final recipients. There will be only one advance payment of 25 % to financial instruments that should not be part of the audited population defined in the regulatory framework which will limit the expenditure which may be declared before payment is made to final recipients.

| — | Recommendation 6: carry out sufficient regularity checks to conclude on the effectiveness of audit authorities’ work and obtain reasonable assurance on the regularity of expenditure at the latest in the AARs it publishes following the year of accepting the accounts.

  Implementation date: immediate. |
| --- | --- |

—

Recommendation 6: carry out sufficient regularity checks to conclude on the effectiveness of audit authorities’ work and obtain reasonable assurance on the regularity of expenditure at the latest in the AARs it publishes following the year of accepting the accounts.

Implementation date: immediate.

The Commission partially accepts this recommendation which is in line with its Single Audit Strategy for the concerned funds.

The Commission, has set as an objective to be able to report each year in the respective AARs on the reliability of the residual error rates reported by audit authorities in the previous year's assurance packages. It underlines at the same time that it has up to 3 years to carry out audits on the expenditure included in the accounts to conclude on the reliability of the error rates reported by audit authorities and to confirm the legality and regularity of the certified expenditure.

THE COURT’S OBSERVATIONS

PART 2 — ASSESSMENT OF PROJECT PERFORMANCE

| 6.79. | The principle of sound financial management in the implementation of the EU budget presupposes a focus not only on regulatory compliance but also on achieving the stated objectives (59). For this reason, in addition to checking the regularity of transactions, we assess the performance of the operations to which those transactions belong. |
| --- | --- |

6.79.

The principle of sound financial management in the implementation of the EU budget presupposes a focus not only on regulatory compliance but also on achieving the stated objectives (59). For this reason, in addition to checking the regularity of transactions, we assess the performance of the operations to which those transactions belong.

| 6.80. | Of the 217 transactions we examined this year, 113 came from operations that were physically complete at the time of our audit (56 for 2007-2013 and 57 for 2014-2020). For these operations, we assessed: |
| --- | --- |

6.80.

Of the 217 transactions we examined this year, 113 came from operations that were physically complete at the time of our audit (56 for 2007-2013 and 57 for 2014-2020). For these operations, we assessed:

| — | the way the performance system was designed (in particular whether the OPs had output and result indicators that were relevant to their objectives, and whether the output and result objectives specified in project documents (60) corresponded to the OP objectives for each priority axis); |
| --- | --- |

—

the way the performance system was designed (in particular whether the OPs had output and result indicators that were relevant to their objectives, and whether the output and result objectives specified in project documents (60) corresponded to the OP objectives for each priority axis);

| — | The actual performance of projects, i.e. whether they had reported on whether the targets set for each indicator were met and whether the objectives were achieved. |
| --- | --- |

—

The actual performance of projects, i.e. whether they had reported on whether the targets set for each indicator were met and whether the objectives were achieved.

| 6.81. | For financial instruments, we examined the actual disbursement rate (the amount disbursed to final recipients as a share of total funds). |
| --- | --- |

6.81.

For financial instruments, we examined the actual disbursement rate (the amount disbursed to final recipients as a share of total funds).

Assessment of performance system design

| 6.82. | The EU regulations relevant to this spending area require beneficiaries to define and report on outputs (61). Member States also have the option of defining result indicators that link project results to the corresponding indicators for the OP priority axis. Setting result indicators, wherever possible and meaningful, is good practice as it allows the authorities to measure the specific contribution made by a project to objectives of the corresponding priority axis. |
| --- | --- |

6.82.

The EU regulations relevant to this spending area require beneficiaries to define and report on outputs (61). Member States also have the option of defining result indicators that link project results to the corresponding indicators for the OP priority axis. Setting result indicators, wherever possible and meaningful, is good practice as it allows the authorities to measure the specific contribution made by a project to objectives of the corresponding priority axis.

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

| 6.83. | On examining the sample of 113 projects, we found a number of weaknesses in the way Member State authorities had designed their performance measurement systems at both OP and project level. These findings are summarised in
  Box 6.10
  . We found that a performance measurement system was broadly in place to link project outputs and results to the OP objectives for only 74 of the 113 projects (65 %). In five of the 74 cases, however, the authorities had wrongly classified outputs as results in the OP and/or the project approval documents. |
| --- | --- |

6.83.

On examining the sample of 113 projects, we found a number of weaknesses in the way Member State authorities had designed their performance measurement systems at both OP and project level. These findings are summarised in
  Box 6.10
  . We found that a performance measurement system was broadly in place to link project outputs and results to the OP objectives for only 74 of the 113 projects (65 %). In five of the 74 cases, however, the authorities had wrongly classified outputs as results in the OP and/or the project approval documents.

| 6.83. | A well-designed intervention logic as described in the operational programme shall ensure that the outputs and results at project level contribute to achieving the expected results of the operational programmes, bearing in mind that these are also influenced by external factors. |
| --- | --- |

6.83.

| 6.84. | In 34 cases the authorities had not defined result indicators at project level, and in four they had not set indicators or targets to measure performance at project level at all. In one further case, the corresponding OP itself had not defined any targets. In these circumstances, it is not possible to determine whether these projects contributed to the overall programme objectives. Around three quarters of these 39 cases relate to the 2007-2013 period. |
| --- | --- |

6.84.

In 34 cases the authorities had not defined result indicators at project level, and in four they had not set indicators or targets to measure performance at project level at all. In one further case, the corresponding OP itself had not defined any targets. In these circumstances, it is not possible to determine whether these projects contributed to the overall programme objectives. Around three quarters of these 39 cases relate to the 2007-2013 period.

| 6.84. | Assessing the contribution of the co-financed intervention (reflected by the output and project level result indicators) to the OP objectives (reflected by the result indicators) is a task for impact evaluation.

  Indeed, the insufficient focus on results has been identified in the ex post evaluation of the CF/ERDF. This has been addressed in the legislation governing the programming period 2014-2020 through strengthening of the intervention logic and focus on results. |
| --- | --- |

6.84.

Indeed, the insufficient focus on results has been identified in the ex post evaluation of the CF/ERDF. This has been addressed in the legislation governing the programming period 2014-2020 through strengthening of the intervention logic and focus on results.

| 6.85. | These findings complement our recent report on project selection and monitoring (62) in the 2014-2020 programming period. The report concluded that the selection criteria for ERDF and ESF projects in the 2014-2020 period do not systematically require the definition of quantified result indicators at project level. Even where such indicators exist, they do not necessarily correspond to the OP indicators. |
| --- | --- |

6.85.

These findings complement our recent report on project selection and monitoring (62) in the 2014-2020 programming period. The report concluded that the selection criteria for ERDF and ESF projects in the 2014-2020 period do not systematically require the definition of quantified result indicators at project level. Even where such indicators exist, they do not necessarily correspond to the OP indicators.

| 6.85. | The Commission considers that there is a difference between direct results at the level of projects financed and the results to be achieved at the level of the OP (reflected by the result indicators). Whereas direct results are influenced only by the action co-financed, results indicators are affected by different external factors outside the control of the managing authorities. A well-designed intervention logic shall ensure that the outputs and direct results of the selected projects contribute to achieving the expected results of the OP. |
| --- | --- |

6.85.

| 6.86. | Our report on absorption
   (63) also shows that, for the 2007-2013 period, the Commission and Member States took action to tackle slow absorption and ensure legality, but failed to take due account of performance considerations, which led to insufficient focus on results. |
| --- | --- |

6.86.

Our report on absorption
   (63) also shows that, for the 2007-2013 period, the Commission and Member States took action to tackle slow absorption and ensure legality, but failed to take due account of performance considerations, which led to insufficient focus on results.

| 6.86. | The Commission proposed measures to Member States being at risk of under-absorption which were in line with the 2007-2013 legal framework, the programme objectives and intervention logic and were adapted to the specific circumstances for each programme concerned. Therefore, there appeared to be no need for any exceptional consideration for results only for safeguards that the proposed results are indeed delivered. It is standard programme management practice that when a programme shows indication of a lower absorption rate, the actions taken to address these issues focus on absorption within the existing targets. |
| --- | --- |

6.86.

Box 6.10 —   Assessment of performance system design (113 projects)

Image

Source: European Court of Auditors.

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

Many projects do not fully achieve performance objectives

| 6.87. | In most of the cases we examined, we did not conclude that all the performance objectives had been fully achieved. For the 74 projects where both result and output indicators had been set, we found that these had been fully achieved in 26 cases (35 %), partially achieved in 43 cases (58 %), could not be assessed in two cases (3 %) and were not achieved in three cases (4 %). One of the projects that did not achieve its objectives was ‘non-functioning’ according to the definition in the closure guidelines (64). |
| --- | --- |

6.87.

In most of the cases we examined, we did not conclude that all the performance objectives had been fully achieved. For the 74 projects where both result and output indicators had been set, we found that these had been fully achieved in 26 cases (35 %), partially achieved in 43 cases (58 %), could not be assessed in two cases (3 %) and were not achieved in three cases (4 %). One of the projects that did not achieve its objectives was ‘non-functioning’ according to the definition in the closure guidelines (64).

| 6.87 and 6.88. | It is important to recall that the ECA sample concerned a mixture of 2007-2013 and 2014-2020 projects, with a significant change to the performance approach and programmes intervention logic under the 2014-2020 regulation. The reported results are therefore providing a limited view of the specific results for 2014-2020 so far.

  However, altogether the Commission notes that 93 % of projects with both result and output indicators had fully or partially met them, which is in line with previous years' results. The figure was even as high as 100 % in cases where only output indicators had been set. |
| --- | --- |

6.87 and 6.88.

However, altogether the Commission notes that 93 % of projects with both result and output indicators had fully or partially met them, which is in line with previous years' results. The figure was even as high as 100 % in cases where only output indicators had been set.

| 6.88. | Of the 34 cases where output indicators had been set (but not result indicators), we found that these had been fully achieved in 23 cases (68 %) and partially achieved in 11 cases (32 %) (see
  Box 6.11
  ). |
| --- | --- |

6.88.

Of the 34 cases where output indicators had been set (but not result indicators), we found that these had been fully achieved in 23 cases (68 %) and partially achieved in 11 cases (32 %) (see
  Box 6.11
  ).

| 6.89. | We were unable to assess the achievement of performance objectives in the remaining five cases because no indicators or targets had been set. |
| --- | --- |

6.89.

We were unable to assess the achievement of performance objectives in the remaining five cases because no indicators or targets had been set.

Box 6.11 —   Achievement of performance objectives

Image

Source: European Court of Auditors.

| 6.90. | In the 2014-2020 period, audit authorities are required to examine the reliability of performance data. We found that they generally carry out checks of project performance during their audits of operations. In 18 out of 57 cases the audit authority was unable to form an opinion on the achievement of objectives because the project was still ongoing. In 20 other cases the audit authority had limited its verifications to output objectives. |
| --- | --- |

6.90.

In the 2014-2020 period, audit authorities are required to examine the reliability of performance data. We found that they generally carry out checks of project performance during their audits of operations. In 18 out of 57 cases the audit authority was unable to form an opinion on the achievement of objectives because the project was still ongoing. In 20 other cases the audit authority had limited its verifications to output objectives.

| 6.90. | The Commission notes with satisfaction that audit authorities have included this additional element of performance data reliability into the scope of their audits on operations for 2014-2020, in line with the Commission guidance and recommendations and with the regulatory framework. These results are useful and complementary to the own thematic audits in this area carried out by the Commission. |
| --- | --- |

6.90.

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

Most Member States were unable to use their FISM contributions in full

| 6.91. | Member States are required to report annually on the actual disbursement of funding from FISMs to final recipients (65).
  Box 6.12
  shows how FISMs were used up to the last reporting period (66). Only four Member States fully used the available contributions, with substantial variation in disbursement rates. For the 2014-2020 period, 16 Member States reported no disbursements to final recipients as of the end of 2016 (67). |
| --- | --- |

6.91.

Member States are required to report annually on the actual disbursement of funding from FISMs to final recipients (65).
  Box 6.12
  shows how FISMs were used up to the last reporting period (66). Only four Member States fully used the available contributions, with substantial variation in disbursement rates. For the 2014-2020 period, 16 Member States reported no disbursements to final recipients as of the end of 2016 (67).

| 6.91. | Regarding the 2014-2020 period, in most of the Member States the funding agreements were signed in 2016 and even in the second part of 2016. The fact that no disbursements were made to final recipients by end 2016 is thus in line with the timing of the set-up of those financial instruments. |
| --- | --- |

6.91.

Box 6.12 —   Cumulative disbursement rates of financial instruments

Image

| Note (1) | Ireland and Luxembourg had not set up any financial instruments by end 2016. |
| --- | --- |

Note (1)

Ireland and Luxembourg had not set up any financial instruments by end 2016.

| Note (2) | Disbursement rates reported to the Commission in accordance with Article 67(2)(j) of Regulation (EC) No 1083/2006 and Article 46 of Regulation (EU) No 1303/2013. For 2014-2020, this covers the calendar year and not the accounting year. |
| --- | --- |

Note (2)

Disbursement rates reported to the Commission in accordance with Article 67(2)(j) of Regulation (EC) No 1083/2006 and Article 46 of Regulation (EU) No 1303/2013. For 2014-2020, this covers the calendar year and not the accounting year.

| Note (3) | In the 2014-2020 programming period Member States cannot usually request further OP contributions to financial instruments until they reach a certain level of disbursement to final recipients. |
| --- | --- |

Note (3)

In the 2014-2020 programming period Member States cannot usually request further OP contributions to financial instruments until they reach a certain level of disbursement to final recipients.

Source: European Court of Auditors based on Commission information.

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

Conclusion

| 6.92. | One of the main objectives of the regulatory provisions for the 2014-2020 period was to focus more on performance and results. Our work shows that, in general, there is a clear link between output objectives at OP and project level. Where they exist, most targets were reported as having been met, at least partially. However, many performance measurement systems lack result indicators at project level, which makes it difficult to assess a project’s overall contribution to specific OP objectives. |
| --- | --- |

6.92.

One of the main objectives of the regulatory provisions for the 2014-2020 period was to focus more on performance and results. Our work shows that, in general, there is a clear link between output objectives at OP and project level. Where they exist, most targets were reported as having been met, at least partially. However, many performance measurement systems lack result indicators at project level, which makes it difficult to assess a project’s overall contribution to specific OP objectives.

| 6.92. | The Commission welcomes this conclusion. The performance orientation in the 2014-2020 period was reinforced, inter-alia, by the ex-ante conditionalities. General ex-ante conditionality 7 requires Member States to have a system of result indicators that allows monitoring progress towards the desired results set for each specific objective in the OPs. The Commission assessed the fulfilment of general ex-ante conditionality 7 at the time of adopting the OPs and at the time of completion of the respective action plans by the Member States.

  The performance of the individual projects is measured by the outputs and results they deliver at project level. Assessing the contribution of the co-financed intervention (reflected by the output and result indicators at project level) to the OP objectives (reflected by the result indicators) is a task for impact evaluation. |
| --- | --- |

6.92.

The performance of the individual projects is measured by the outputs and results they deliver at project level. Assessing the contribution of the co-financed intervention (reflected by the output and result indicators at project level) to the OP objectives (reflected by the result indicators) is a task for impact evaluation.

---

(1)  See Articles 174 to 178 of the Treaty on the Functioning of the European Union (TFEU) (OJ C 326, 26.10.2012, p. 47).

(2)  Bulgaria, Czech Republic, Estonia, Greece, Croatia, Cyprus, Latvia, Lithuania, Hungary, Malta, Poland, Portugal, Romania, Slovenia and Slovakia. Spain was eligible for CF transitional support during the 2007-2013 programming period.

(3)  Regions eligible for YEI support are those where the level of unemployment among people aged 15 to 24 was above 25 % in 2012.

(4)  OPs can be amended at any time during the period, where duly justified.

(5)  DG Regional and Urban Policy (DG REGIO) and DG Employment, Social Affairs and Inclusion (DG EMPL).

(6)  Regulation (EU) No 1303/2013 of the European Parliament and of the Council of 17 December 2013 laying down common provisions on the European Regional Development Fund, the European Social Fund, the Cohesion Fund, the European Agricultural Fund for Rural Development and the European Maritime and Fisheries Fund and laying down general provisions on the European Regional Development Fund, the European Social Fund, the Cohesion Fund and the European Maritime and Fisheries Fund and repealing Council Regulation (EC) No 1083/2006 (OJ L 347, 20.12.2013, p. 320).

(7)  Managing authority, certifying authority and audit authority.

(8)  The assurance package is composed of a management declaration, an annual summary, the certified annual accounts, an annual control report and an audit opinion.

(9)  The accounting year for the assurance packages submitted in February 2017 ran from 1.7.2015 to 30.6.2016.

(10)  In its annual activity reports, the Commission refers to the ‘residual risk rate’ (RRR) when dealing with closure for the 2007-2013 programming period and to the ‘residual total error rate’ (RTER) when dealing with the 2014-2020 programming period. Though they apply to different timeframes, these two rates are conceptually the same. In this chapter, we refer to both as the ‘residual error rate(s)’.

(11)  The audit authority also issues an opinion on the functioning of the management and control systems and the completeness, accuracy and veracity of the audited accounts.

(12)  Article 28(11) of Commission delegated Regulation (EU) No 480/2014 of 3 March 2014 supplementing Regulation (EU) No 1303/2013 of the European Parliament and of the Council laying down common provisions on the European Regional Development Fund, the European Social Fund, the Cohesion Fund, the European Agricultural Fund for Rural Development and the European Maritime and Fisheries Fund and laying down general provisions on the European Regional Development Fund, the European Social Fund, the Cohesion Fund and the European Maritime and Fisheries Fund (OJ L 138, 13.5.2014, p. 5).

(13)  Article 127(1) of Regulation (EU) No 1303/2013.

(14)  As a payment or a recovery.

(15)  Article 139 of Regulation (EU) No 1303/2013.

(16)  Article 130 of Regulation (EU) No 1303/2013 limits the reimbursement of interim payments to 90 %. The remaining 10 % is released after the acceptance of the accounts.

(17)  Article 145(7) of Regulation (EU) No 1303/2013 and Article 99 of Council Regulation (EC) No 1083/2006 of 11 July 2006 laying down general provisions on the European Regional Development Fund, the European Social Fund and the Cohesion Fund and repealing Regulation (EC) No 1260/1999 (OJ L 210, 31.7.2006, p. 25).

(18)  Under Article 140 of Regulation (EU) No 1303/2013 managing authorities must ensure that all supporting documents for co-financed expenditure on operations for which the total eligible expenditure is more than 1 million euros are kept available for the Commission and the European Court of Auditors for a period of two years following submission of the accounts including the final expenditure on completed operations. For operations involving eligible expenditure of less than 1 million euros, the retention period is three years, following the submission of the annual accounts with the corresponding expenditure. The three-year period is universally applicable to the closure of 2007-2013 OPs (see Article 90 of Regulation (EC) No 1083/2006).

(19)  See Annex 4 (Materiality criteria), p. 23 for DG REGIO and p. 22 for DG EMPL.

(20)  The Commission closed the first OPs in the last quarter of 2017, with the exception of the Gibraltar ERDF programme, which it closed in 2016.

(21)  Germany, Ireland, Luxembourg, Malta, Netherlands, Austria, Romania, Slovenia, Slovakia, and the United Kingdom submitted assurance packages with zero expenditure. For one OP in Italy, the account submitted were not accepted in May 2017.

(22)  This represents only 0,7 % of the budget allocated for the entire programming period. It excludes advances to financial instruments, but includes amounts used at final recipient level.

(23)  Bulgaria, Estonia, Greece, France, Croatia, Cyprus, Hungary, Romania, Slovenia and Slovakia were not covered by the closure decisions. The deadline for submitting the closure documents for Croatia was 31 March 2018.

(24)  12 assurance packages (2014-2020) and 10 closure packages (2007-2013).

(25)  Settlement means regularising the balance of funding. It may entail the payment of amounts outstanding after pre-financing and any retentions have been cleared, a recovery (if the final expenditure is lower than the amounts already paid out), or a ‘zero payment’.

(26)  In this context, ‘review’ means examining the working methods and audit files of audit authorities, and considering the reliability and relevance of results in terms of their contribution to the audit conclusion. ‘Re-performance’ means obtaining additional evidence at source. Both review and re-performance relate to transactions that have already been audited.

(27)  We base our calculation of error on a representative sample. The figure quoted is the best estimate. We have 95 % confidence that the estimated level of error in the population lies between 0,7 % and 5,3 % (the lower and upper error limits respectively).

(28)  See the 2016 annual report, paragraph 6.19.

(29)  Article 44 of Council Regulation (EC) No 1083/2006 and Article 38 (1)(b) of Regulation (EU) No 1303/2013.

(30)  The SME Initiative is a joint Commission/European Investment Fund (EIF) financial instrument that aims to facilitate access to finance for small and medium-sized enterprises. See Article 39 and Annex XIV of Regulation (EU) No 1303/2013.

(31)  Articles 38(1)(a) and 39 of Regulation (EU) No 1303/2013.

(32)  Article 78(6) of Council Regulation (EC) No 1083/2006 and Article 42 of Regulation (EU) No 1303/2013.

(33)  Annex to the Commission Decision amending Decision C(2013) 1573 on the approval of the Guidelines on the closure of operational programmes adopted for assistance from the European Regional Development Fund, the European Social Fund and the Cohesion Fund (2007-2013), (C(2015) 2771 final, 30.4.2015, section 3.6).

(34)  A thematic audit is an audit of a specific key requirement or area of expenditure where the risk is considered to be systemic. Thematic audits complement regular system audits.

(35)  Article 40 of Regulation (EU) No 1303/2013.

(36)  A procedure agreed between an entity and a third party to produce factual findings about financial information or operational processes (ISRS 4400).

(37)  The amendment to Regulation (EU) No 1303/2013 in the Omnibus regulation aims to resolve the lack of audit rights at Member State level. The Omnibus regulation is expected to enter into force in the second half of 2018, which means that the same drawback will apply to the annual accounts submitted to the Commission in February 2018.

(38)  A financial intermediary is an entity acting as intermediary between the managing authority or the holding fund and the final recipients of funds channelled through financial instruments in shared management.

(39)  Commission Recommendation 2003/361/EC of 6 May 2003 concerning the definition of micro, small and medium-sized enterprises (OJ L 124, 20.5.2003, p. 36).

(40)  As of 31 December 2017, the Commission approved OPs under the SME initiative in six Member States.

(41)  CJEU case T-89/10 Judgment of the General Court of 20 September 2012 — Hungary v Commission.

(42)  See the 2015 annual report, paragraphs 6.33 to 6.35.

(43)  NEET status refers to individuals who are ‘not in employment, education and training’.

(44)  Article 127 of Regulation (EU) No 1303/2013 and Articles 27 and 28 of Commission Delegated Regulation (EU) No 480/2014.

(45)  International Standard on Auditing (ISA) 230 ‘Audit Documentation’ (effective for audits of financial statements for periods beginning on or after 15 December 2009).

(46)  Article 66(9) of Regulation (EU, Euratom) No 966/2012 of the European Parliament and of the Council of 25 October 2012 on the financial rules applicable to the general budget of the Union and repealing Council Regulation (EC, Euratom) No 1605/2002 (OJ L 298, 26.10.2012, p. 1).

(47)  DG EMPL 2017 annual activity report p. 12 and DG REGIO 2017 annual activity report p. 9.

(48)  See the 2016 annual report, paragraph 6.34.

(49)  This also applies, but to a lesser extent, to state aid advances.

(50)  See the 2016 annual report, paragraph 6.35 and Recommendation 2(a).

(51)  The entire contribution to financial instruments under the SME Initiative can be paid in one instalment. For all other financial instruments, a so-called ‘tranche’ system is used, where a first instalment is paid after set-up and subsequent amounts are subject to a minimum disbursement to final recipients from the previous tranches.

(52)  By the end of 2016, the total OP contribution committed to FISMs was nearly 13,3 billion euros (compared with 5,7 billion at the end of 2015), of which 10,3 billion euros came from the European Structural and Investment Funds (ESIF). A total of 3,6 billion euros (around 30 %) of this amount had been paid to FISMs (2015: 1,2 billion euros), including 3,1 billion euros from the ESIF, and final recipients had received 1,2 billion euros, including 1 billion euros from the ESIF. (Based on ‘Summaries of the data on the progress made in financing and implementing the financial instruments for the programming period 2014-2020 in accordance with Article 46 of Regulation (EU) No 1303/2013 of the European Parliament and of the Council’.)

(53)  Article 31 of Commission delegated Regulation (EU) No 480/2014 sets flat rate corrections at 100 %, 25 %, 10 % or 5 %, all of which can be reduced if appropriate.

(54)  Annex 4 (Materiality criteria), p. 23 for DG REGIO and p. 22 for DG EMPL.

(55)  DG EMPL reports three compliance audits in its AAR, but this number includes an audit by us in which it had observer status.

(56)  DG REGIO for ERDF/CF and DG EMPL for ESF/YEI.

(57)  DG REGIO acknowledges in its 2017 AAR (p. 45, footnote 27) that factoring in the error for the SME Initiative would increase the residual rate to 3,3 %.

(58)  Recommendations 2, 3 and 4 were also addressed to the Member States.

(59)  See the 2013 annual report, paragraph 10.10.

(60)  Project applications, grant agreements, contracts and/or co-financing decisions.

(61)  Article 37 of Regulation (EC) No 1083/2006 and Article 27(4) of Regulation (EU) No 1303/2013.

(62)  Special report No 21/2018 ‘Selection and monitoring for ERDF and ESF projects in the 2014-2020 period are still mainly outputs-oriented’ (www.eca.europa.eu).

(63)  Special report No 17/2018 ‘Commission’s and Member States’ actions in the last years of the 2007-2013 programmes tackled low absorption but had insufficient focus on results’ (www.eca.europa.eu).

(64)  Annex to the Commission Decision amending Decision C(2013) 1573 on the approval of the guidelines on the closure of operational programmes adopted for assistance from the European Regional Development Fund, the European Social Fund and the Cohesion Fund (2007-2013), C(2015) 2771 final of 30.4.2015, paragraph 3.5.

(65)  In the assurance package for 2014-2020 and for 2007-2013, the information submitted pursuant to Article 67(2)(j) of Regulation (EC) No 1083/2006.

(66)  31 December 2016 for the 2014-2020, and 31 March 2017 for the 2007-2013 programming period.

(67)  Five out of these 16 member States (Czech Republic, Denmark, Cyprus, Luxembourg, Slovenia) have not set up financial instruments until end of 2016.

(68)  In line with the harmonised definition of underlying transactions (for details see
  Annex 1.1
  , paragraph 15).

(69)  This figure consists of clearings of pre-financing of 2007-2013 period for OPs closed in 2017.

(70)  This figure includes 0,3 billion euro of contributions to financial instruments under shared management.

(71)  66 % of the population relates to the 2007-2013 and 34 % to the 2014-2020 programming period.

(72)  Most OPs are multi-funding, i.e. cover expenditure from more than one fund. Thus, the total number of assurance packages and OPs is lower than the sum of the figures shown for the funds managed by each DG.

(73)  Without the impact of advances to financial instruments.

(74)  Including one Italian OP for which the accounts were accepted in September 2017.

(75)  Our audit population for the SME Initiative consisted of disbursed expenditure of 290,9 million euros.

ANNEX 6.1

RESULTS OF TRANSACTION TESTING FOR ECONOMIC, SOCIAL AND TERRITORIAL COHESION

| | 2017 | 2016 |
| --- | --- | --- |
| |
| SIZE AND STRUCTURE OF THE SAMPLE |
| |
| Total transactions | 217 | 180 |
| |
| ESTIMATED IMPACT OF QUANTIFIABLE ERRORS |
| | | |
| Estimated level of error | 3,0  % | 4,8  % |
| | | |
| | Upper Error Limit (UEL) | 5,3  % | |
| | Lower Error Limit (LEL) | 0,7  % | |
| Note: The estimated level of error for 2017 is based on our revised audit approach and includes the impact of all relevant corrective actions.

  Source: European Court of Auditors. |

2017

2016

SIZE AND STRUCTURE OF THE SAMPLE

Total transactions

217

180

ESTIMATED IMPACT OF QUANTIFIABLE ERRORS

Estimated level of error

3,0  %

4,8  %

Upper Error Limit (UEL)

5,3  %

Lower Error Limit (LEL)

0,7  %

Note: The estimated level of error for 2017 is based on our revised audit approach and includes the impact of all relevant corrective actions.

Source: European Court of Auditors.

ANNEX 6.2

FOLLOW-UP OF PREVIOUS RECOMMENDATIONS FOR ECONOMIC, SOCIAL AND TERRITORIAL COHESION

E = DG Employment, Social Affairs and Inclusion; R = DG Regional and Urban Policy; X = Common assessment for both DGs

| Year | Court recommendation | Court's analysis of the progress made | Commission reply |
| --- | --- | --- | --- |
| Fully implemented | Being implemented | Not implemented | Not applicable | Insufficient evidence |
| In most respects | In some respects |
| 2014 | Chapter 6, recommendation 1: the Commission should carry out a focused analysis of the national eligibility rules for the 2007-2013 and 2014-2020 programming periods in view of identifying good practices. Based on such analysis, it should provide guidance to Member States on how to simplify and avoid unnecessarily complex and/or burdensome rules that do not add value with respect to the results to be achieved by the policy (‘gold-plating’) | | | X (1) | | | | |
| Chapter 6, recommendation 2: managing authorities and intermediate bodies in Member States should intensify their efforts to address the weaknesses in ‘first level checks’ by taking into account all available information. In addition, the Commission should request audit authorities through their system audits to re-perform some of these checks and share the good practices and lessons learnt | X (2) | | | | | | |
| Chapter 6, recommendation 3: Member States should make better use of the possibilities set out in the Common Provisions Regulation and ESF Regulation for the 2014-2020 programming period concerning simplified cost options for projects exceeding 50 000 euro public support | | | X (3) | | | | |
| Chapter 6, recommendation 4: Member States should ensure the full and timely payment of funding under the 2007-2013 programming period by reimbursing the beneficiaries within a reasonable time after they have submitted for reimbursement a payment claim. In alignment with the rules applicable to the 2014-2020 programming period, we consider that all such payments should be made within 90 days after the submission of a correct payment claim by the beneficiary | X | | | | | | |
| Chapter 6, recommendation 5: the Commission should submit a legislative proposal to amend, through a legislative act of equal legal value, Council Regulation (EC) No 1083/2006 with respect to the extension of the eligibility period for financial instruments under shared management to the Council and the Parliament | | | | X (4) | | | |
| 2014 | Chapter 6, recommendation 6: the Commission should extend to all Member States its assessment of the reliability of the financial corrections reported by the certifying authorities and its impact on the Commission’s calculation of the ‘residual error rate’ | X (2) | | | | | | |
| Chapter 6, recommendation 7: the Commission should further strengthen the control system for audit authorities by:






  — | requesting audit authorities to provide specific information on audits of operations (in particular the coverage) to verify the accuracy and reliability of the information provided in the annual control reports; |

Year

Court recommendation

Court's analysis of the progress made

Commission reply

Fully implemented

Being implemented

Not implemented

Not applicable

Insufficient evidence

In most respects

In some respects

2014

Chapter 6, recommendation 1: the Commission should carry out a focused analysis of the national eligibility rules for the 2007-2013 and 2014-2020 programming periods in view of identifying good practices. Based on such analysis, it should provide guidance to Member States on how to simplify and avoid unnecessarily complex and/or burdensome rules that do not add value with respect to the results to be achieved by the policy (‘gold-plating’)

X (1)

Chapter 6, recommendation 2: managing authorities and intermediate bodies in Member States should intensify their efforts to address the weaknesses in ‘first level checks’ by taking into account all available information. In addition, the Commission should request audit authorities through their system audits to re-perform some of these checks and share the good practices and lessons learnt

X (2)

Chapter 6, recommendation 3: Member States should make better use of the possibilities set out in the Common Provisions Regulation and ESF Regulation for the 2014-2020 programming period concerning simplified cost options for projects exceeding 50 000 euro public support

X (3)

Chapter 6, recommendation 4: Member States should ensure the full and timely payment of funding under the 2007-2013 programming period by reimbursing the beneficiaries within a reasonable time after they have submitted for reimbursement a payment claim. In alignment with the rules applicable to the 2014-2020 programming period, we consider that all such payments should be made within 90 days after the submission of a correct payment claim by the beneficiary

X

Chapter 6, recommendation 5: the Commission should submit a legislative proposal to amend, through a legislative act of equal legal value, Council Regulation (EC) No 1083/2006 with respect to the extension of the eligibility period for financial instruments under shared management to the Council and the Parliament

X (4)

2014

Chapter 6, recommendation 6: the Commission should extend to all Member States its assessment of the reliability of the financial corrections reported by the certifying authorities and its impact on the Commission’s calculation of the ‘residual error rate’

X (2)

Chapter 6, recommendation 7: the Commission should further strengthen the control system for audit authorities by:

—

requesting audit authorities to provide specific information on audits of operations (in particular the coverage) to verify the accuracy and reliability of the information provided in the annual control reports;

| — | ensuring that all audit authorities appropriately cover in their audit of operations checks of compliance with state aid and public procurement rules; |
| --- | --- |

—

ensuring that all audit authorities appropriately cover in their audit of operations checks of compliance with state aid and public procurement rules;

| — | requesting audit authorities to certify the accuracy of the data on financial corrections reported by certifying authorities for each OP whenever such action is deemed necessary. |
| --- | --- |

—

requesting audit authorities to certify the accuracy of the data on financial corrections reported by certifying authorities for each OP whenever such action is deemed necessary.

X (2)

---

(1)  The Commission has not yet finalised a focused analysis, although it has taken measures through cooperation and by issuing guidance for Member States.

(2)  Implementation should continue throughout the 2014-2020 programming period.

(3)  The use of simplified cost options is limited to 36 % of the programme budget for ESF and to only 2 % for ERDF/CF.

(4)  The Commission did not accept this recommendation.

---

CHAPTER 7

‘Natural resources’

TABLE OF CONTENTS

| Introduction | 7.1-7.9 |
| --- | --- |

| Brief description of ‘Natural resources’ | 7.3-7.6 |
| --- | --- |

| Audit scope and approach | 7.7-7.9 |
| --- | --- |

| Part 1 — Regularity of transactions | 7.10-7.43 |
| --- | --- |

| Direct payments were free from material error | 7.14-7.17 |
| --- | --- |

| We find a persistently high level of error in the other spending areas | 7.18-7.25 |
| --- | --- |

| Annual activity reports and other governance arrangements: review of the regularity information provided by the auditee | 7.26-7.39 |
| --- | --- |

| The Commission’s assessment of the certification bodies’ work | 7.26-7.37 |
| --- | --- |

| DG AGRI’s annual activity report | 7.38 |
| --- | --- |

| DG MARE, DG ENV and DG CLIMA annual activity reports | 7.39 |
| --- | --- |

| Conclusion and recommendations | 7.40-7.43 |
| --- | --- |

| Conclusion | 7.40-7.41 |
| --- | --- |

| Recommendations | 7.42-7.43 |
| --- | --- |

| Part 2 — Performance | 7.44-7.67 |
| --- | --- |

| Performance assessment of the geospatial aid application | 7.46-7.55 |
| --- | --- |

| Performance assessment of rural development investment projects | 7.56-7.64 |
| --- | --- |

| Conclusion | 7.65-7.66 |
| --- | --- |

| Recommendations | 7.67 |
| --- | --- |

| Annex 7.1 — | Results of transaction testing for ‘Natural resources’ |
| --- | --- |

Annex 7.1 —

| Annex 7.2 — | Overview of the results of transaction testing for each Member State for market measures, rural development, the environment, climate action and fisheries |
| --- | --- |

Annex 7.2 —

| Annex 7.3 — | Overview of errors with an impact of at least 20 % for market measures, rural development, the environment, climate action and fisheries |
| --- | --- |

Annex 7.3 —

| Annex 7.4 — | Follow-up of previous recommendations |
| --- | --- |

Annex 7.4 —

| THE COURT’S OBSERVATIONS | |
| --- | --- |
| INTRODUCTION |
| 7.1. | This chapter presents our findings for the MFF heading ‘Natural resources’. This covers spending under the European Agricultural Guarantee Fund (EAGF), and on rural development, the environment, climate action and fisheries.
  Box 7.1
  gives an overview of the main activities and spending under this heading in 2017. |

THE COURT’S OBSERVATIONS

INTRODUCTION

7.1.

This chapter presents our findings for the MFF heading ‘Natural resources’. This covers spending under the European Agricultural Guarantee Fund (EAGF), and on rural development, the environment, climate action and fisheries.
  Box 7.1
  gives an overview of the main activities and spending under this heading in 2017.

Box 7.1 —   MFF heading 2 ‘Natural resources’ — 2017 breakdown

Image

| Total payments for the year | 56,7 |
| --- | --- |
| - advances
   (35) | -0,5 |
| + clearings of advances
   (35) | 0,3 |
| Audited population, total | 56,5 |
| Source: 2017 consolidated accounts of the European Union. |

Total payments for the year

56,7

- advances
   (35)

-0,5

- clearings of advances
   (35)

0,3

Audited population, total

56,5

Source: 2017 consolidated accounts of the European Union.

THE COURT’S OBSERVATIONS

| 7.2. | Part 1
  of this chapter sets out our findings on regularity.
  Part 2
  examines the performance of the new geospatial aid application (GSAA), which farmers may use to submit area-based aid claims online, and of a sample of rural development projects. |
| --- | --- |

7.2.

Part 1
  of this chapter sets out our findings on regularity.
  Part 2
  examines the performance of the new geospatial aid application (GSAA), which farmers may use to submit area-based aid claims online, and of a sample of rural development projects.

Brief description of ‘Natural resources’

| 7.3. | Agriculture and rural development policies account for 98 % of spending on ‘Natural resources’ and are implemented through the common agricultural policy (CAP). The three general objectives set for the CAP in EU legislation are (1): |
| --- | --- |

7.3.

Agriculture and rural development policies account for 98 % of spending on ‘Natural resources’ and are implemented through the common agricultural policy (CAP). The three general objectives set for the CAP in EU legislation are (1):

| (a) | viable food production, with a focus on agricultural income, agricultural productivity and price stability; |
| --- | --- |

(a)

viable food production, with a focus on agricultural income, agricultural productivity and price stability;

| (b) | the sustainable management of natural resources and climate action, with a focus on greenhouse gas emissions, biodiversity, soil and water; |
| --- | --- |

(b)

the sustainable management of natural resources and climate action, with a focus on greenhouse gas emissions, biodiversity, soil and water;

| (c) | balanced territorial development. |
| --- | --- |

(c)

balanced territorial development.

| 7.4. | The Commission, in particular the Directorate-General for Agriculture and Rural Development (DG AGRI), shares management of the CAP with accredited paying agencies in the Member States. CAP spending mostly consists of direct payments to farmers, which are fully funded by the EU budget through the EAGF. The CAP also supports agricultural market measures and rural development programmes in the Member States (2). Since 2015, independent certification bodies in the Member States have given an opinion on the regularity of the paying agencies’ spending. |
| --- | --- |

7.4.

The Commission, in particular the Directorate-General for Agriculture and Rural Development (DG AGRI), shares management of the CAP with accredited paying agencies in the Member States. CAP spending mostly consists of direct payments to farmers, which are fully funded by the EU budget through the EAGF. The CAP also supports agricultural market measures and rural development programmes in the Member States (2). Since 2015, independent certification bodies in the Member States have given an opinion on the regularity of the paying agencies’ spending.

| 7.5. | We examined the characteristics of the various aid schemes and assessed internal controls. On the basis of this work and previous audit results, we consider market measures and rural development expenditure to be more prone to error than direct payments. The main risks to regularity are: |
| --- | --- |

7.5.

We examined the characteristics of the various aid schemes and assessed internal controls. On the basis of this work and previous audit results, we consider market measures and rural development expenditure to be more prone to error than direct payments. The main risks to regularity are:

| — | beneficiaries providing inaccurate information on areas or animals in their aid applications, and paying agencies not detecting this; |
| --- | --- |

—

beneficiaries providing inaccurate information on areas or animals in their aid applications, and paying agencies not detecting this;

| — | beneficiaries not meeting agri-environment-climate commitments or organic farming requirements in certain rural development schemes; |
| --- | --- |

—

beneficiaries not meeting agri-environment-climate commitments or organic farming requirements in certain rural development schemes;

| — | paying agencies reimbursing ineligible costs or ineligible beneficiaries for market measures or for rural development investment projects. |
| --- | --- |

—

paying agencies reimbursing ineligible costs or ineligible beneficiaries for market measures or for rural development investment projects.

| 7.6. | This MFF heading also covers EU spending on the common fisheries policy, mainly funded through the European Maritime and Fisheries Fund, and part of EU spending on the environment and climate action. |
| --- | --- |

7.6.

This MFF heading also covers EU spending on the common fisheries policy, mainly funded through the European Maritime and Fisheries Fund, and part of EU spending on the environment and climate action.

Audit scope and approach

| 7.7. | For
  Part 1
  of this chapter on the regularity of transactions, applying the audit approach and methods set out in
  Annex 1.1
  , in 2017 we examined: |
| --- | --- |

7.7.

For
  Part 1
  of this chapter on the regularity of transactions, applying the audit approach and methods set out in
  Annex 1.1
  , in 2017 we examined:

| (a) | a sample of 230 transactions, designed to be representative of the full range of spending under this MFF heading (3), consisting of transactions from 21 Member States (4); |
| --- | --- |

(a)

a sample of 230 transactions, designed to be representative of the full range of spending under this MFF heading (3), consisting of transactions from 21 Member States (4);

| (b) | DG AGRI’s assessment of the certification bodies’ work in forming their opinions on the regularity of CAP expenditure. Our examination was performed in line with the new strategy of the Court aimed at applying an attestation approach in the future and is designed to provide insight on one of the key elements feeding into the Commission’s assurance model for CAP spending in 2014-2020; |
| --- | --- |

(b)

DG AGRI’s assessment of the certification bodies’ work in forming their opinions on the regularity of CAP expenditure. Our examination was performed in line with the new strategy of the Court aimed at applying an attestation approach in the future and is designed to provide insight on one of the key elements feeding into the Commission’s assurance model for CAP spending in 2014-2020;

| (c) | whether the annual activity reports of DG AGRI, the Directorate-General for Maritime Affairs and Fisheries (DG MARE), the Directorate-General for Environment (DG ENV) and the Directorate-General for Climate Action (DG CLIMA) presented information on the regularity of spending that is broadly consistent with our results. |
| --- | --- |

(c)

whether the annual activity reports of DG AGRI, the Directorate-General for Maritime Affairs and Fisheries (DG MARE), the Directorate-General for Environment (DG ENV) and the Directorate-General for Climate Action (DG CLIMA) presented information on the regularity of spending that is broadly consistent with our results.

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

| 7.8. | Our work allows us to provide an assessment of ‘Natural resources’ as a whole, as well as of direct payments (5). It also allows us to contribute to the audit conclusions presented in
  Chapter 1
  . |
| --- | --- |

7.8.

Our work allows us to provide an assessment of ‘Natural resources’ as a whole, as well as of direct payments (5). It also allows us to contribute to the audit conclusions presented in
  Chapter 1
  .

| 7.9. | For
  Part 2
  of this chapter, focused on performance, we examined: |
| --- | --- |

7.9.

For
  Part 2
  of this chapter, focused on performance, we examined:

| (a) | on the basis of a sample of 24 paying agencies and 110 farms, whether the introduction of the GSAA had improved the submission and processing of area-related aid applications; |
| --- | --- |

(a)

on the basis of a sample of 24 paying agencies and 110 farms, whether the introduction of the GSAA had improved the submission and processing of area-related aid applications;

| (b) | delivery, costs and alignment with rural development priorities of a sample of 29 rural development investment projects. |
| --- | --- |

(b)

delivery, costs and alignment with rural development priorities of a sample of 29 rural development investment projects.

PART 1 — REGULARITY OF TRANSACTIONS

| 7.10. | Annex 7.1
  provides an overview of the results of transaction testing for ‘Natural resources’. Of the 230 transactions examined, 178 (77 %) were free of error. On the basis of the 42 errors (6) we have quantified, we estimate the level of error for ‘Natural resources’ as a whole to be 2,4  % (7). |
| --- | --- |

7.10.

Annex 7.1
  provides an overview of the results of transaction testing for ‘Natural resources’. Of the 230 transactions examined, 178 (77 %) were free of error. On the basis of the 42 errors (6) we have quantified, we estimate the level of error for ‘Natural resources’ as a whole to be 2,4  % (7).

| 7.10. | The Commission welcomes the fact that the level of error estimated by the ECA is consistent with the error rate for CAP expenditure established by the Commission and published in the 2017 annual activity report (AAR) of the Directorate-General for Agriculture and Rural Development (DG AGRI) (2,22  %).

  The Commission notes with satisfaction that the overall estimated level of error continues decreasing, as reported by both the ECA and the Commission. The more risky spending areas are also improving over time, in particular thanks to the implementation of remedial action plans.


  The Commission considers that the risk to the EU budget is adequately covered by the corrective capacity, which consists of net financial corrections and recoveries from beneficiaries. The corrective capacity reported in DG AGRI’s 2017 AAR amounted to 2,10  % of the relevant CAP expenditure, and the final amount at risk was estimated at 0,12  %. |
| --- | --- |

7.10.

The Commission notes with satisfaction that the overall estimated level of error continues decreasing, as reported by both the ECA and the Commission. The more risky spending areas are also improving over time, in particular thanks to the implementation of remedial action plans.

The Commission considers that the risk to the EU budget is adequately covered by the corrective capacity, which consists of net financial corrections and recoveries from beneficiaries. The corrective capacity reported in DG AGRI’s 2017 AAR amounted to 2,10  % of the relevant CAP expenditure, and the final amount at risk was estimated at 0,12  %.

| 7.11. | We estimate the level of error to be below our materiality threshold of 2 %, for spending on EAGF direct payments (8). These represent 74 % of spending under the MFF heading ‘Natural resources’. However, we find a persistently high level of error in spending on market measures and rural development, together with spending on the environment, climate action and fisheries. For these spending areas,
  Annex 7.2
  provides an overview of the results of transaction testing by Member State, while
  Annex 7.3
  provides an overview of the errors with an impact of at least 20 % of the transaction value examined. |
| --- | --- |

7.11.

We estimate the level of error to be below our materiality threshold of 2 %, for spending on EAGF direct payments (8). These represent 74 % of spending under the MFF heading ‘Natural resources’. However, we find a persistently high level of error in spending on market measures and rural development, together with spending on the environment, climate action and fisheries. For these spending areas,
  Annex 7.2
  provides an overview of the results of transaction testing by Member State, while
  Annex 7.3
  provides an overview of the errors with an impact of at least 20 % of the transaction value examined.

| 7.11. | The Commission is very satisfied with the ECA's finding that EAGF direct payments, representing 41,7 billion euro in financial year 2017, are free of material error. The Commission notes that the ECA’s estimated level of error for direct payments is consistent with the error rate for direct payments presented in DG AGRI’s 2017 AAR (1,92  %). |
| --- | --- |

7.11.

| 7.12. | Box 7.2
  gives a breakdown of our estimated level of error for ‘Natural Resources’ for 2017. Errors concerning ineligible beneficiaries, activities, projects or expenditure account for 64 % of our estimated level of error of 2,4  %. |
| --- | --- |

7.12.

Box 7.2
  gives a breakdown of our estimated level of error for ‘Natural Resources’ for 2017. Errors concerning ineligible beneficiaries, activities, projects or expenditure account for 64 % of our estimated level of error of 2,4  %.

Box 7.2 —   Most errors concerned breaches of eligibility conditions

Image

Source: ECA.

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

| 7.13. | The Commission and the Member State authorities had applied corrective measures that directly affected 16 of the transactions we sampled. These measures reduced our estimated level of error for this chapter by 1,1 percentage points. In 12 cases of quantified error, the national authorities had sufficient information to prevent, or to detect and correct, the error before declaring the expenditure to the Commission. Had the national authorities made proper use of all the information at their disposal, the estimated level of error for this chapter would have been 0,9 percentage points lower. |
| --- | --- |

7.13.

The Commission and the Member State authorities had applied corrective measures that directly affected 16 of the transactions we sampled. These measures reduced our estimated level of error for this chapter by 1,1 percentage points. In 12 cases of quantified error, the national authorities had sufficient information to prevent, or to detect and correct, the error before declaring the expenditure to the Commission. Had the national authorities made proper use of all the information at their disposal, the estimated level of error for this chapter would have been 0,9 percentage points lower.

| 7.13. | The Commission welcomes the ECA statement that corrective measures have been applied and will continue to encourage and support Member States to take all necessary actions to prevent, detect and correct errors.

  In particular, the Commission will continue to work with the Member States to ensure their control and management systems are reliable, taking into account that resources of paying agencies to detect ineligible expenditure are limited and should be used in proportion to the risk. |
| --- | --- |

7.13.

In particular, the Commission will continue to work with the Member States to ensure their control and management systems are reliable, taking into account that resources of paying agencies to detect ineligible expenditure are limited and should be used in proportion to the risk.

Direct payments were free from material error

| 7.14. | Four main schemes under the EAGF account for 90 % of all direct payments: |
| --- | --- |

7.14.

Four main schemes under the EAGF account for 90 % of all direct payments:

| (a) | two schemes providing decoupled income support
   (9) based on the area of agricultural land declared by farmers: the ‘basic payment scheme’ (BPS) (17,5  billion euros in 2017) and the ‘single area payment scheme’ (SAPS) (4,1  billion euros in 2017); |
| --- | --- |

(a)

two schemes providing decoupled income support
   (9) based on the area of agricultural land declared by farmers: the ‘basic payment scheme’ (BPS) (17,5  billion euros in 2017) and the ‘single area payment scheme’ (SAPS) (4,1  billion euros in 2017);

| (b) | a payment intended to support agricultural practices beneficial for the climate and the environment, commonly referred to as the ‘greening’ payment (11,8  billion euros in 2017); |
| --- | --- |

(b)

a payment intended to support agricultural practices beneficial for the climate and the environment, commonly referred to as the ‘greening’ payment (11,8  billion euros in 2017);

| (c) | coupled support, linked to specific types of agricultural produce (e.g. beef and veal, milk or protein crops) (3,9  billion euros in 2017). |
| --- | --- |

(c)

coupled support, linked to specific types of agricultural produce (e.g. beef and veal, milk or protein crops) (3,9  billion euros in 2017).

| 7.15. | We tested 121 direct payments (10). Of these, 103 transactions were unaffected by error. We detected 11 transactions subject to minor overpayments (below 5 %), mainly due to farmers providing inaccurate information on areas. We found errors exceeding 5 % of the amount examined in 7 direct payments, including 2 cases where the error exceeded 20 %. |
| --- | --- |

7.15.

We tested 121 direct payments (10). Of these, 103 transactions were unaffected by error. We detected 11 transactions subject to minor overpayments (below 5 %), mainly due to farmers providing inaccurate information on areas. We found errors exceeding 5 % of the amount examined in 7 direct payments, including 2 cases where the error exceeded 20 %.

| 7.15. | The Commission welcomes the ECA’s assessment (see also Commission reply to paragraph 7.11).

  The Commission considers that minor errors are impossible to avoid at a reasonable cost and notes that the level of error estimated by the ECA for direct payments is below materiality of 2 %. |
| --- | --- |

7.15.

The Commission considers that minor errors are impossible to avoid at a reasonable cost and notes that the level of error estimated by the ECA for direct payments is below materiality of 2 %.

| 7.16. | The main management tool for direct payments is the Integrated Administration and Control System (IACS), which incorporates the Land Parcel Identification System (LPIS) (11). We have previously reported that the LPIS in particular makes a significant contribution to preventing and reducing levels of error (12). In last year’s annual report, we observed that the Member States’ paying agencies had identified eligible areas more accurately than in previous years (13). For 2017, we maintain this positive assessment. In addition, paying agencies have now started to carry out preliminary cross-checks on direct aid applications (14). This new procedure alerts farmers to certain errors in their applications, and so gives them the chance to correct overlaps and double declarations at an early stage, without facing sanctions. In paragraphs 7.46 to 7.55 we discuss the further advances made with the GSAA. |
| --- | --- |

7.16.

The main management tool for direct payments is the Integrated Administration and Control System (IACS), which incorporates the Land Parcel Identification System (LPIS) (11). We have previously reported that the LPIS in particular makes a significant contribution to preventing and reducing levels of error (12). In last year’s annual report, we observed that the Member States’ paying agencies had identified eligible areas more accurately than in previous years (13). For 2017, we maintain this positive assessment. In addition, paying agencies have now started to carry out preliminary cross-checks on direct aid applications (14). This new procedure alerts farmers to certain errors in their applications, and so gives them the chance to correct overlaps and double declarations at an early stage, without facing sanctions. In paragraphs 7.46 to 7.55 we discuss the further advances made with the GSAA.

| 7.16. | The Commission welcomes the positive assessment by the ECA of the role of LPIS in preventing and reducing levels of error.

  The Commission also appreciates the ECA's assessment of the GSAA, which the Commission considers an important tool in preventing errors and in contributing to simplification for farmers and Paying Agencies.


  See also the Commission reply to paragraph 7.19. |
| --- | --- |

7.16.

The Commission also appreciates the ECA's assessment of the GSAA, which the Commission considers an important tool in preventing errors and in contributing to simplification for farmers and Paying Agencies.

See also the Commission reply to paragraph 7.19.

| 7.17. | As part of the 121 direct payments we tested, we visited 35 beneficiaries receiving greening payments (see paragraph 7.14 (b)) and found errors in 8 cases. Seven payments were affected by error due to farmers providing inaccurate information on areas, as occurs with direct aid schemes in general. Only in one case did we find a direct breach of the greening requirements. We have previously found that greening requirements are undemanding and largely reflect usual farming practice (15). |
| --- | --- |

7.17.

As part of the 121 direct payments we tested, we visited 35 beneficiaries receiving greening payments (see paragraph 7.14 (b)) and found errors in 8 cases. Seven payments were affected by error due to farmers providing inaccurate information on areas, as occurs with direct aid schemes in general. Only in one case did we find a direct breach of the greening requirements. We have previously found that greening requirements are undemanding and largely reflect usual farming practice (15).

| 7.17. | The Commission considers that greening was an important development in the direction of more environment friendly farming. Structural change in farming practices requires time and often investment, training and guidance.

  The greening requirements are provided in legislation adopted by the co-legislator: the European Parliament and the Council. |
| --- | --- |

7.17.

The greening requirements are provided in legislation adopted by the co-legislator: the European Parliament and the Council.

We find a persistently high level of error in the other spending areas

| 7.18. | We tested 109 payments covering spending on rural development, the environment, climate action and fisheries, with the following results. |
| --- | --- |

7.18.

We tested 109 payments covering spending on rural development, the environment, climate action and fisheries, with the following results.

| (a) | Of the 84 rural development transactions, 60 were unaffected by error, 15 contained errors below 20 % of the amount examined, while in 4 cases we found errors with an impact equal to or exceeding 20 %. For five payments, we detected issues of non-compliance which had no financial impact. |
| --- | --- |

(a)

Of the 84 rural development transactions, 60 were unaffected by error, 15 contained errors below 20 % of the amount examined, while in 4 cases we found errors with an impact equal to or exceeding 20 %. For five payments, we detected issues of non-compliance which had no financial impact.

| (b) | Of the 19 market measures transactions, 12 were unaffected by error, while in 2 cases we found errors with an impact exceeding 20 %. For five payments, we detected issues of non-compliance which had no financial impact. |
| --- | --- |

(b)

Of the 19 market measures transactions, 12 were unaffected by error, while in 2 cases we found errors with an impact exceeding 20 %. For five payments, we detected issues of non-compliance which had no financial impact.

| (c) | Of the six transactions in the environment, climate action and fisheries policy areas, three were unaffected by error, and three contained errors below 20 % of the amount examined. |
| --- | --- |

(c)

Of the six transactions in the environment, climate action and fisheries policy areas, three were unaffected by error, and three contained errors below 20 % of the amount examined.

| 7.19. | The main sources of error were non-compliance with eligibility conditions (see paragraphs 7.21, 7.24, 7.25 and
  Box 7.6
  ), the provision of inaccurate information on areas or animal numbers (see paragraph 7.22 and
  Box 7.4
  ), and beneficiaries’ non-compliance with agri-environmental commitments (see paragraph 7.23 and
  Box 7.5
  ). |
| --- | --- |

7.19.

The main sources of error were non-compliance with eligibility conditions (see paragraphs 7.21, 7.24, 7.25 and
  Box 7.6
  ), the provision of inaccurate information on areas or animal numbers (see paragraph 7.22 and
  Box 7.4
  ), and beneficiaries’ non-compliance with agri-environmental commitments (see paragraph 7.23 and
  Box 7.5
  ).

| 7.19. | The Commission recalls that all area and animal based rural development measures are administered under IACS. Therefore, the LPIS, which prevents and reduces levels of errors and makes cross-checks possible, is also relevant for these measures. |
| --- | --- |

7.19.

Rural development

| 7.20. | The CAP co-finances the rural development expenditure disbursed through Member States' rural development programmes. Of the 84 rural development transactions examined, 50 payments to farmers were based on area or animal numbers, such as agri-environment payments, compensatory payments to farmers in areas with natural constraints, or payments for animal welfare. The other 34 were non-area related, typically investment projects, such as support for on-farm investments, business start-up aid, and support for basic services and village renewal in rural areas. |
| --- | --- |

7.20.

The CAP co-finances the rural development expenditure disbursed through Member States' rural development programmes. Of the 84 rural development transactions examined, 50 payments to farmers were based on area or animal numbers, such as agri-environment payments, compensatory payments to farmers in areas with natural constraints, or payments for animal welfare. The other 34 were non-area related, typically investment projects, such as support for on-farm investments, business start-up aid, and support for basic services and village renewal in rural areas.

| 7.21. | Eligibility conditions are set for rural development investment projects to target aid at certain categories of beneficiaries and activities, in order to improve the effectiveness of spending. Of the 34 non-area related transactions examined, we found 5 investment projects that did not comply with all the eligibility conditions. For example, in one case we identified costs incorrectly allocated to the project, and in another case we found no evidence supporting some of the declared costs. |
| --- | --- |

7.21.

Eligibility conditions are set for rural development investment projects to target aid at certain categories of beneficiaries and activities, in order to improve the effectiveness of spending. Of the 34 non-area related transactions examined, we found 5 investment projects that did not comply with all the eligibility conditions. For example, in one case we identified costs incorrectly allocated to the project, and in another case we found no evidence supporting some of the declared costs.

| 7.22. | Among the 50 payments based on area or animal numbers, we found 9 where beneficiaries had provided inaccurate information (see
  Box 7.4
  ). |
| --- | --- |

7.22.

Among the 50 payments based on area or animal numbers, we found 9 where beneficiaries had provided inaccurate information (see
  Box 7.4
  ).

| 7.22. | The Commission notes that IACS (including LPIS) applies to these rural development measures and contributes to preventing and reducing levels of errors. |
| --- | --- |

7.22.

Box 7.4 —   Several beneficiaries had provided inaccurate information

In Greece, a farmer with a holding in a mountainous area received a compensatory payment for areas with natural constraints. The eligibility rules specified that the farmer had to maintain a minimum density of livestock per hectare of pasture. During our visit to the holding, we found that the number of animals held by the farmer was insufficient to reach the minimum density of livestock on all of the pasture for which the farmer had applied for payment. Therefore, some of the area declared by the farmer was ineligible for support, leading to a 15 % error.

We found other cases of beneficiaries providing inaccurate information on areas or the number of animals (which also had an impact of less than 20 %) in France, Croatia, Poland and the United Kingdom (Northern Ireland).

| 7.23. | Twenty-two of the 50 animal- or area-related transactions examined were for organic farming and agri-environment-climate payments. To receive such payments, beneficiaries are required to (i) adopt and maintain organic farming practices, (ii) use agricultural production methods compatible with the protection of the environment, landscape and natural resources, or (iii) contribute to climate change mitigation and adaptation. We found 3 cases where the farmers had not complied with some or all of their commitments (see
  Box 7.5
  ). |
| --- | --- |

7.23.

Twenty-two of the 50 animal- or area-related transactions examined were for organic farming and agri-environment-climate payments. To receive such payments, beneficiaries are required to (i) adopt and maintain organic farming practices, (ii) use agricultural production methods compatible with the protection of the environment, landscape and natural resources, or (iii) contribute to climate change mitigation and adaptation. We found 3 cases where the farmers had not complied with some or all of their commitments (see
  Box 7.5
  ).

Box 7.5 —   Some beneficiaries did not meet their agri-environmental commitments

A farmer in Italy (Veneto) received aid under a measure for the environmental optimisation of agronomic techniques and irrigation. In order to receive the aid, the beneficiary had to commit to planting catch-crops (16) on part of the holding, reducing the use of chemical fertilisers and water in irrigation, and keeping cultivation and irrigation registers. We found that the beneficiary had not complied with any of these commitments, leading to a 100 % error. After our visit, the paying agency launched a procedure to recover the aid.

We found other cases where beneficiaries had not complied with some or all of their agri-environmental commitments in Greece and Sweden.

Box 7.5 — Some beneficiaries did not meet their agri-environmental commitments

The Commission notes that the beneficiary was not subject to an on-the-spot check by the Paying Agency. The Italian authorities instigated a recovery procedure from the beneficiary concerned.

Market measures

| 7.24. | The 19 market measures transactions we sampled covered schemes such as aid to fruit and vegetable producer organisations, support to the wine sector, or exceptional aid to milk and dairy farmers. The paying agencies had reimbursed costs that were at least partly ineligible in two cases (see
  Box 7.6
  ). |
| --- | --- |

7.24.

The 19 market measures transactions we sampled covered schemes such as aid to fruit and vegetable producer organisations, support to the wine sector, or exceptional aid to milk and dairy farmers. The paying agencies had reimbursed costs that were at least partly ineligible in two cases (see
  Box 7.6
  ).

Box 7.6 —   Some beneficiaries failed to comply with the eligibility rules for market measures

In Poland, a dairy farmer received aid under a measure supporting farmers purchasing heifers from other herds to increase their own herd’s breeding value and the competitiveness of their holding. The farmer received the support after purchasing heifers from his father, who was also a dairy farmer and kept his herd in the same cowshed as the beneficiary. Two days earlier, the beneficiary had sold a similar number of heifers to his father, who also received support under the same measure. There was no physical transfer of animals, and the total number of animals owned by the beneficiary and his father remained unchanged. Therefore, we assessed that the beneficiary farm’s breeding value and competitiveness had not changed, and that the farmer should not have received the aid, leading to a 100 % error.

We found an additional eligibility error in a project in Spain supporting the restructuring of vineyards.

Box 7.6 — Some beneficiaries failed to comply with the eligibility rules for market measures

The Commission will take this finding into account when planning future conformity clearance enquiries.

The environment, climate action and fisheries

| 7.25. | In three out of six cases, we found errors arising from the reimbursement of ineligible expenditure, including incorrectly calculated costs, non-compliance with procurement rules, and overstated personnel costs. |
| --- | --- |

7.25.

In three out of six cases, we found errors arising from the reimbursement of ineligible expenditure, including incorrectly calculated costs, non-compliance with procurement rules, and overstated personnel costs.

THE COURT’S OBSERVATIONS

Annual activity reports and other governance arrangements: review of the regularity information provided by the auditee

The Commission’s assessment of the certification bodies’ work

| 7.26. | The work of the certification bodies in the Member States feeds into the Commission’s assurance model for CAP spending in 2014-2020 (see
  Box 7.7
  ). Since 2015, the certification bodies have been required to give an annual opinion on the legality and regularity of the expenditure for which the Member States have requested reimbursement. This opinion should be based on a representative sample of transactions. |
| --- | --- |

7.26.

The work of the certification bodies in the Member States feeds into the Commission’s assurance model for CAP spending in 2014-2020 (see
  Box 7.7
  ). Since 2015, the certification bodies have been required to give an annual opinion on the legality and regularity of the expenditure for which the Member States have requested reimbursement. This opinion should be based on a representative sample of transactions.

| 7.27. | Every year, the director of each paying agency provides the Commission with a management declaration on the effectiveness of their control systems, together with a report presenting the results of the paying agency’s administrative and on-the-spot checks (‘the control statistics’). The certification bodies are required to state whether their examination casts doubt on the assertions in the management declarations. |
| --- | --- |

7.27.

Every year, the director of each paying agency provides the Commission with a management declaration on the effectiveness of their control systems, together with a report presenting the results of the paying agency’s administrative and on-the-spot checks (‘the control statistics’). The certification bodies are required to state whether their examination casts doubt on the assertions in the management declarations.

Box 7.7 —   The Commission’s assurance model for CAP spending in 2014-2020

Image

Source: ECA.

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

| 7.28. | We have previously reported that we consider the certification bodies’ role in providing an opinion on the regularity of expenditure to be a positive development. However, we identified significant weaknesses in the framework applicable to the first year they had this role (2015), rendering the opinions provided by the certification bodies not fully compliant with the applicable standards and rules (17). |
| --- | --- |

7.28.

We have previously reported that we consider the certification bodies’ role in providing an opinion on the regularity of expenditure to be a positive development. However, we identified significant weaknesses in the framework applicable to the first year they had this role (2015), rendering the opinions provided by the certification bodies not fully compliant with the applicable standards and rules (17).

| 7.28. | The Commission considers that the recommendations made by the ECA in the special report on the new role of the certification bodies in the first year of implementation, with which the Commission agreed, have already been implemented, in particular in the updated guidelines for the certification bodies for financial year 2018/2019. |
| --- | --- |

7.28.

| 7.29. | Between 2015 and 2017, the Commission performed 47 specific review visits to assess work carried out by certification bodies. The Commission concluded in ten cases that the work it reviewed was reliable (18)
   (19) (see
  Box 7.8
  ). |
| --- | --- |

7.29.

Between 2015 and 2017, the Commission performed 47 specific review visits to assess work carried out by certification bodies. The Commission concluded in ten cases that the work it reviewed was reliable (18)
   (19) (see
  Box 7.8
  ).

| 7.29. | The Commission carried out 47 audit missions (20), covering 42 paying agencies and 35 certification bodies over the period 2015-2017. Of the 35 certification bodies visited (21), 10 were found reliable on the basis of the mission. In addition, the reliability of the certification bodies' work was comprehensively assessed within the financial clearance exercise taking account all elements, also the observations from the audit missions. Thus, these missions were meant to contribute to the final comprehensive assessments as regards reliability of the overall work of the certification bodies. Consequently, the reliance has increased for a number of certification bodies. |
| --- | --- |

7.29.

Box 7.8 —   2015-2017 review visits’ conclusion on the reliance that can be placed on the certification bodies’ work

Image

Source: ECA based on DG AGRI’s reviews.

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

| 7.30. | In 2017, we examined 12 of these review visits (22). We reperformed six of them on the spot (23), and examined the other six (24) through a review of documentation at the Commission. |
| --- | --- |

7.30.

In 2017, we examined 12 of these review visits (22). We reperformed six of them on the spot (23), and examined the other six (24) through a review of documentation at the Commission.

We noted improvements in the Commission’s methodology and approach ...

| 7.31. | We noted improvements in the methodology and approach the Commission applies during its review visits. In 2016, the Commission started presenting clear, standard conclusions on the extent to which it can rely on certification bodies’ work. In 2017, the Commission’s review visits included an examination of the certification bodies’ checks on the completeness, accuracy and representativity of the paying agencies’ control statistics. |
| --- | --- |

7.31.

We noted improvements in the methodology and approach the Commission applies during its review visits. In 2016, the Commission started presenting clear, standard conclusions on the extent to which it can rely on certification bodies’ work. In 2017, the Commission’s review visits included an examination of the certification bodies’ checks on the completeness, accuracy and representativity of the paying agencies’ control statistics.

| 7.31. | The Commission welcomes the ECA’s positive assessment. This development reflected the evolution in the objective of the missions. For 2015 the missions were more of an advisory nature, whereas in 2016 and 2017 they were meant as comprehensive assessments on reliability and the overall quality of the certification bodies' work. |
| --- | --- |

7.31.

... however, we identified certain issues that had not been raised in the Commission’s reviews

| 7.32. | We identified two significant issues in addition to those raised by the Commission in its reviews. These were: |
| --- | --- |

7.32.

We identified two significant issues in addition to those raised by the Commission in its reviews. These were:

7.32.

| (a) | One certification body had not selected any greening payments in its sample, although they represent 30 % of spending on direct payments. |
| --- | --- |

(a)

One certification body had not selected any greening payments in its sample, although they represent 30 % of spending on direct payments.

| (a) | As regards greening, the Commission obtained audit evidence that the sample was generated by statistical software and was not manipulated; thus, it was considered statistically representative. |
| --- | --- |

(a)

As regards greening, the Commission obtained audit evidence that the sample was generated by statistical software and was not manipulated; thus, it was considered statistically representative.

| (b) | One paying agency had not yet finalised its checks when it was informed of the transactions that the certification body had sampled. Such a situation creates the risk that sample is not representative, as paying agencies might carry out more intensive checks on the sampled items on which the certification bodies will base their assessments. |
| --- | --- |

(b)

One paying agency had not yet finalised its checks when it was informed of the transactions that the certification body had sampled. Such a situation creates the risk that sample is not representative, as paying agencies might carry out more intensive checks on the sampled items on which the certification bodies will base their assessments.

| (b) | The Commission agrees with the ECA that there may be a risk that the paying agency may have carried out more thorough inspections for the transactions in the certification body's sample. This topic was discussed on several occasions with certification bodies at the expert group meetings and they were advised to put in place safeguards not to disclose their sample before the paying agency carried out its controls. If the certification body had doubts that the paying agency performed more thorough inspections on some transactions, the certification body was advised to perform additional audit procedures in order to ascertain this. |
| --- | --- |

(b)

The Commission agrees with the ECA that there may be a risk that the paying agency may have carried out more thorough inspections for the transactions in the certification body's sample. This topic was discussed on several occasions with certification bodies at the expert group meetings and they were advised to put in place safeguards not to disclose their sample before the paying agency carried out its controls. If the certification body had doubts that the paying agency performed more thorough inspections on some transactions, the certification body was advised to perform additional audit procedures in order to ascertain this.

Further improvement to be made in the certification bodies’ contribution to the Commission’s assurance model

| 7.33. | The Commission carried out review visits to 15 certification bodies in 2017. The scope of these visits was often limited to specific types of spending. Overall, the Commission’s review covered work by certification bodies on spending of 3,4 billion euros (25), or about 6,1  % of total CAP spending. |
| --- | --- |

7.33.

The Commission carried out review visits to 15 certification bodies in 2017. The scope of these visits was often limited to specific types of spending. Overall, the Commission’s review covered work by certification bodies on spending of 3,4 billion euros (25), or about 6,1  % of total CAP spending.

| 7.33. | The certification bodies' reliance is assessed not only on the basis of the dedicated missions, but also on the basis of the financial clearance reporting and of the conformity missions where the certification bodies' work is covered. This has been done not only for 2017, but over the period 2015-2017 and will continue at an increased rate as the Commission's audits are refocused more towards the work of the certification bodies.

  The Commission has taken a prudent approach vis-a-vis the level of reliance on the certification bodies' work. In many cases, there are recommendations following the missions, which were taken into account leading to an increased reliance on the certification body’s work after the original mission. The Commission’s reliance on the certification bodies' work has increased since 2015. As a result, the certification bodies' work provides a significant input to the adjustments to Member States' reported error rates in the 2017 DG AGRI AAR. As it is an ongoing process, the Commission expects the reliability to continue to increase in the coming years. |
| --- | --- |

7.33.

The Commission has taken a prudent approach vis-a-vis the level of reliance on the certification bodies' work. In many cases, there are recommendations following the missions, which were taken into account leading to an increased reliance on the certification body’s work after the original mission. The Commission’s reliance on the certification bodies' work has increased since 2015. As a result, the certification bodies' work provides a significant input to the adjustments to Member States' reported error rates in the 2017 DG AGRI AAR. As it is an ongoing process, the Commission expects the reliability to continue to increase in the coming years.

| 7.34. | The Commission concluded that only 4 of the 15 certification bodies it had visited in 2017 were reliable (26). These 4 reviews provide assurance on a budget of 700 million euros, or 1,3  % of total CAP spending. |
| --- | --- |

7.34.

The Commission concluded that only 4 of the 15 certification bodies it had visited in 2017 were reliable (26). These 4 reviews provide assurance on a budget of 700 million euros, or 1,3  % of total CAP spending.

| 7.35. | As in previous years, DG AGRI calculated the annual error rates published in its annual activity report by adjusting the error rates reported in the paying agencies’ control statistics. In making the adjustments, DG AGRI took into account the results of its own compliance checks in the Member States, and the certification bodies’ opinions on the regularity of the expenditure claimed for reimbursement (see paragraph 7.27 and
  Box 7.7
  ). |
| --- | --- |

7.35.

As in previous years, DG AGRI calculated the annual error rates published in its annual activity report by adjusting the error rates reported in the paying agencies’ control statistics. In making the adjustments, DG AGRI took into account the results of its own compliance checks in the Member States, and the certification bodies’ opinions on the regularity of the expenditure claimed for reimbursement (see paragraph 7.27 and
  Box 7.7
  ).

| 7.36. | Based on their paying agencies’ control statistics, Member States reported an overall level of error close to 1 %. Subsequently, DG AGRI reported in its annual activity report an adjusted error rate (AER) of around 2,2  % for CAP spending as a whole. We reviewed DG AGRI’s adjustments to the error rates reported in the paying agencies’ control statistics. We found that a quarter of the total amount of the adjustments was directly attributable to the certification bodies’ work. As in previous years, DG AGRI based most of its adjustments on its own compliance checks of paying agencies’ expenditure. DG AGRI often calculated these adjustments using flat rates, intended to reflect the seriousness and extent of weaknesses it found in the control systems. Even where DG AGRI considers certification bodies’ work reliable, it may apply adjustments on top of the error rates they report. In 2017, this was the case for two of the four certification bodies mentioned in paragraph 7.34. |
| --- | --- |

7.36.

Based on their paying agencies’ control statistics, Member States reported an overall level of error close to 1 %. Subsequently, DG AGRI reported in its annual activity report an adjusted error rate (AER) of around 2,2  % for CAP spending as a whole. We reviewed DG AGRI’s adjustments to the error rates reported in the paying agencies’ control statistics. We found that a quarter of the total amount of the adjustments was directly attributable to the certification bodies’ work. As in previous years, DG AGRI based most of its adjustments on its own compliance checks of paying agencies’ expenditure. DG AGRI often calculated these adjustments using flat rates, intended to reflect the seriousness and extent of weaknesses it found in the control systems. Even where DG AGRI considers certification bodies’ work reliable, it may apply adjustments on top of the error rates they report. In 2017, this was the case for two of the four certification bodies mentioned in paragraph 7.34.

| 7.36. | The Commission does not calculate an overall error rate per Member States as not all spending areas are covered by control statistics. In its AAR, DG AGRI reports on the error rates in control statistics per spending area (market measures, direct payments, rural development). DG AGRI’s adjustments combine the results of the certification bodies’ work and DG AGRI’s findings, which sometimes overlap and sometimes are in different areas. In any event they are combined and should be considered together, not separately. |
| --- | --- |

7.36.

| 7.37. | The certification bodies’ contribution to the Commission’s assurance model has increased since 2015. However, further improvements are required if the Commission is to achieve its objective of using the certification bodies’ work as its primary source of assurance on the regularity of CAP spending. |
| --- | --- |

7.37.

The certification bodies’ contribution to the Commission’s assurance model has increased since 2015. However, further improvements are required if the Commission is to achieve its objective of using the certification bodies’ work as its primary source of assurance on the regularity of CAP spending.

| 7.37. | The Commission welcomes the ECA's observation. The Commission considers that the work of the certification bodies has improved as in the third year of application of the new approach to assurance, the certification bodies delivered better established and substantiated results compared to previous years. Whilst further improvements are necessary, the Commission considers that the Certification Bodies are a key element in the CAP assurance building model. |
| --- | --- |

7.37.

DG AGRI’s annual activity report

| 7.38. | The adjusted error rates reported by DG AGRI of around 2,2  % for CAP expenditure and 1,9  % for direct payments are consistent with our audit conclusion (see paragraph 7.40). |
| --- | --- |

7.38.

The adjusted error rates reported by DG AGRI of around 2,2  % for CAP expenditure and 1,9  % for direct payments are consistent with our audit conclusion (see paragraph 7.40).

| 7.38. | The Commission is very satisfied that the audit conclusion of the ECA is consistent with these error rates reported in DG AGRI’s AAR.

  The low error rates substantiate reasonable assurance for the declaration of assurance of the director-general of DG AGRI. To address the causes of error, reservations are made as regards specific measures or Paying Agencies where corrective action need to be taken.


  The Commission emphasises that the overall error rate is on a decreasing trend, which is also confirmed by the ECA's conclusion. Moreover, for the first year, the error rate in DG AGRI's AAR for the whole EAGF fund (comprising direct aids and market measures) is below materiality.


  For rural development, although the Commission’s error rate has steadily decreased over the last years, taking into account the need to balance legality and regularity with the policy objectives while bearing in mind the delivery costs, it cannot be expected with any real certainty that a non-material error rate would be attainable with reasonable efforts. |
| --- | --- |

7.38.

The low error rates substantiate reasonable assurance for the declaration of assurance of the director-general of DG AGRI. To address the causes of error, reservations are made as regards specific measures or Paying Agencies where corrective action need to be taken.

The Commission emphasises that the overall error rate is on a decreasing trend, which is also confirmed by the ECA's conclusion. Moreover, for the first year, the error rate in DG AGRI's AAR for the whole EAGF fund (comprising direct aids and market measures) is below materiality.

For rural development, although the Commission’s error rate has steadily decreased over the last years, taking into account the need to balance legality and regularity with the policy objectives while bearing in mind the delivery costs, it cannot be expected with any real certainty that a non-material error rate would be attainable with reasonable efforts.

DG MARE, DG ENV and DG CLIMA annual activity reports

| 7.39. | The annual activity reports were prepared in line with the Commission’s internal instructions, and the methods used to calculate the error rates did not point to any methodological problems. The number of transactions that we audited in 2017 in the areas of fisheries, the environment and climate action was statistically too small for us to compare the information on regularity of spending reported by these three DGs with our audit results. |
| --- | --- |

7.39.

The annual activity reports were prepared in line with the Commission’s internal instructions, and the methods used to calculate the error rates did not point to any methodological problems. The number of transactions that we audited in 2017 in the areas of fisheries, the environment and climate action was statistically too small for us to compare the information on regularity of spending reported by these three DGs with our audit results.

Conclusion and recommendations

Conclusion

| 7.40. | The overall audit evidence indicates that the level of error in spending on ‘Natural resources’ was material (see paragraph 7.10). However, direct aid schemes, representing 74 % of spending under this MFF heading, were not materially affected by error in 2017 (see paragraph 7.11). |
| --- | --- |

7.40.

The overall audit evidence indicates that the level of error in spending on ‘Natural resources’ was material (see paragraph 7.10). However, direct aid schemes, representing 74 % of spending under this MFF heading, were not materially affected by error in 2017 (see paragraph 7.11).

| 7.41. | For this MFF heading, our testing of transactions produced an estimated overall level of error of 2,4  % (see
  Annex 7.1
  ). |
| --- | --- |

7.41.

For this MFF heading, our testing of transactions produced an estimated overall level of error of 2,4  % (see
  Annex 7.1
  ).

Recommendations

| 7.42. | Annex 7.4
  shows the findings of our follow-up review of the five recommendations we made in our 2014 annual report. The Commission had implemented one recommendation in full, while three had been implemented in most respects and one in some respects. |
| --- | --- |

7.42.

Annex 7.4
  shows the findings of our follow-up review of the five recommendations we made in our 2014 annual report. The Commission had implemented one recommendation in full, while three had been implemented in most respects and one in some respects.

| 7.43. | Based on this review and our findings and conclusion for 2017, we recommend that the Commission: |
| --- | --- |

7.43.

Based on this review and our findings and conclusion for 2017, we recommend that the Commission:

| — | Recommendation 1: assess the effectiveness of the Member States’ actions to address the causes of errors for payments for market measures and rural development, and issue further guidance where necessary (see paragraphs 7.18 to 7.24 and
  Annex 7.4
  ).
  Target implementation date: 2019; |
| --- | --- |

—

Recommendation 1: assess the effectiveness of the Member States’ actions to address the causes of errors for payments for market measures and rural development, and issue further guidance where necessary (see paragraphs 7.18 to 7.24 and
  Annex 7.4
  ).

Target implementation date: 2019;

The Commission accepts this recommendation and will continue to request the Member States to establish remedial action plans when serious deficiencies and weaknesses are identified and to monitor the effectiveness of their implementation. All relevant guidelines are updated on a regular basis. See also Commission reply to paragraph 7.38.

| — | Recommendation 2: carry out a closer examination of the quality of the certification bodies’ transaction testing (see paragraph 7.32).
  Target implementation date: 2019; |
| --- | --- |

—

Recommendation 2: carry out a closer examination of the quality of the certification bodies’ transaction testing (see paragraph 7.32).

Target implementation date: 2019;

The Commission accepts this recommendation and considers that it is being implemented through its dedicated certification body audits, conformity audits and the financial clearance assessment.

The Commission will continue providing guidance as to the quality of the certification bodies' work.

| — | Recommendation 3: check the implementation of the remedial action taken by Member State authorities where the Commission found it could place no or limited reliance on a certification body’s work (see paragraph 7.34).
  Target implementation date: 2019. |
| --- | --- |

—

Recommendation 3: check the implementation of the remedial action taken by Member State authorities where the Commission found it could place no or limited reliance on a certification body’s work (see paragraph 7.34).

Target implementation date: 2019.

The Commission accepts the recommendation and considers that it is being implemented.

For all cases where it was found that no reliance can be placed on the certification body’s work, a conformity clearance procedure was launched in order to discuss the remedial actions to be implemented by the Member State. Concerning the limited reliance cases, those are followed up systematically on the basis of the Member State's reply and/or the certification body’s report for the following financial year.

PART 2 — PERFORMANCE

| 7.44. | In 2017, we issued six special reports on ‘Natural resources’ spending. Special reports on the CAP examined rural development programming, support to young farmers, greening (see paragraphs 3.45 to 3.48), and the role of the certification bodies. We also issued reports on fisheries controls and on the Natura 2000 environmental network. |
| --- | --- |

7.44.

In 2017, we issued six special reports on ‘Natural resources’ spending. Special reports on the CAP examined rural development programming, support to young farmers, greening (see paragraphs 3.45 to 3.48), and the role of the certification bodies. We also issued reports on fisheries controls and on the Natura 2000 environmental network.

| 7.45. | In addition, during our testing of the regularity of transactions in 2017, we assessed the performance of the geospatial aid application (GSAA) for area-based payments and of rural development investment projects. |
| --- | --- |

7.45.

In addition, during our testing of the regularity of transactions in 2017, we assessed the performance of the geospatial aid application (GSAA) for area-based payments and of rural development investment projects.

Performance assessment of the geospatial aid application

| 7.46. | The GSAA is a web application that farmers can use to submit area-based aid claims online for processing by paying agencies. The paying agencies must make the GSAA available to beneficiaries of area-based aid by 2018 (27), although a Commission implementing decision granted an extension to this deadline for six Member States (28). Once it is available, beneficiaries should then submit their claims using the GSAA. If beneficiaries are not in a position to use the GSAA, the authorities must provide the required assistance or paper application forms. In any case, the authorities must ensure that the declared areas are digitised. |
| --- | --- |

7.46.

The GSAA is a web application that farmers can use to submit area-based aid claims online for processing by paying agencies. The paying agencies must make the GSAA available to beneficiaries of area-based aid by 2018 (27), although a Commission implementing decision granted an extension to this deadline for six Member States (28). Once it is available, beneficiaries should then submit their claims using the GSAA. If beneficiaries are not in a position to use the GSAA, the authorities must provide the required assistance or paper application forms. In any case, the authorities must ensure that the declared areas are digitised.

| 7.46. | The Commission notes that introduction of the GSAA has been implemented promptly in most Member States.

  While 6 Member States have been granted an extension to the deadline, for 3 Member States, the extension only pertains to specific issues for some Rural Development aid applications or for shared parcels, hence representing a small proportion of the overall aid (see the second footnote to this paragraph). |
| --- | --- |

7.46.

While 6 Member States have been granted an extension to the deadline, for 3 Member States, the extension only pertains to specific issues for some Rural Development aid applications or for shared parcels, hence representing a small proportion of the overall aid (see the second footnote to this paragraph).

| 7.47. | The application incorporates LPIS data on land parcels, permitting farmers to check and update their declared agricultural area on screen (see
  Box 7.9
  ). |
| --- | --- |

7.47.

The application incorporates LPIS data on land parcels, permitting farmers to check and update their declared agricultural area on screen (see
  Box 7.9
  ).

Box 7.9 —   The GSAA allows farmers to update their data on screen

When filing an aid application using the GSAA, farmers are able to plot the boundary of each field on screen, making any necessary corrections.

Image

Source: Online demonstration screen (United Kingdom — Northern Ireland: Department of Agriculture, Environment and Rural Affairs).

THE COURT’S OBSERVATIONS

| 7.48. | The application is intended to prevent farmers from making errors when declaring their eligible areas, to make administrative cross-checks more efficient and to provide more reliable data for monitoring and evaluation. |
| --- | --- |

7.48.

The application is intended to prevent farmers from making errors when declaring their eligible areas, to make administrative cross-checks more efficient and to provide more reliable data for monitoring and evaluation.

| 7.49. | On our visits to 110 farms to examine area-based payments, we assessed the farmers’ use of the application. We asked those who had used the application: |
| --- | --- |

7.49.

On our visits to 110 farms to examine area-based payments, we assessed the farmers’ use of the application. We asked those who had used the application:

| — | whether it had helped them to avoid errors when submitting an aid claim; |
| --- | --- |

—

whether it had helped them to avoid errors when submitting an aid claim;

| — | if they now required less time to complete their aid claims; |
| --- | --- |

—

if they now required less time to complete their aid claims;

| — | if they considered the application more user-friendly than the previous system; |
| --- | --- |

—

if they considered the application more user-friendly than the previous system;

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

| — | whether the paying agency had provided sufficient assistance and guidance; |
| --- | --- |

—

whether the paying agency had provided sufficient assistance and guidance;

| — | for their overall assessment of the GSAA compared with the previous system they had used. |
| --- | --- |

—

for their overall assessment of the GSAA compared with the previous system they had used.

| 7.50. | We also surveyed 24 paying agencies (29) and asked: |
| --- | --- |

7.50.

We also surveyed 24 paying agencies (29) and asked:

| — | whether they had introduced the application and, if so, what proportion of beneficiaries had access and actually used the system; |
| --- | --- |

—

whether they had introduced the application and, if so, what proportion of beneficiaries had access and actually used the system;

| — | whether the application had led to fewer errors in submitted aid claims; |
| --- | --- |

—

whether the application had led to fewer errors in submitted aid claims;

| — | whether they had achieved cost- and time-savings in processing aid claims. |
| --- | --- |

—

whether they had achieved cost- and time-savings in processing aid claims.

Beneficiaries and paying agencies were positive in their assessment of the geospatial aid application

| 7.51. | Of the 24 paying agencies surveyed, 21 informed us that the application was available to all direct aid beneficiaries. In the United Kingdom (England) for 2016, and in Slovakia and Spain (Castilla-La Mancha) for 2017, the application was available to 62 %, 32 % and 22 % of beneficiaries respectively, covering 50 %, 75 % and 83 % of the area claimed. The paying agencies saw a strong uptake of the application among beneficiaries, except in Poland, where, for 2016, only 0,8  % of beneficiaries were using it, with others submitting paper-based applications. |
| --- | --- |

7.51.

Of the 24 paying agencies surveyed, 21 informed us that the application was available to all direct aid beneficiaries. In the United Kingdom (England) for 2016, and in Slovakia and Spain (Castilla-La Mancha) for 2017, the application was available to 62 %, 32 % and 22 % of beneficiaries respectively, covering 50 %, 75 % and 83 % of the area claimed. The paying agencies saw a strong uptake of the application among beneficiaries, except in Poland, where, for 2016, only 0,8  % of beneficiaries were using it, with others submitting paper-based applications.

| 7.51. | The Commission recognises the overall positive image conveyed by the ECA’s data. The Commission monitors implementation of the GSAA on the basis of the areas covered rather than numbers of beneficiaries, in line with Article 17 of Commission Implementing Regulation (EU) No 809/2014.

  See also Commission replies to paragraphs 7.52 and 7.65. |
| --- | --- |

7.51.

See also Commission replies to paragraphs 7.52 and 7.65.

| 7.52. | More than three-quarters of the beneficiaries we visited had used the application. Where beneficiaries had not used the GSAA, in some cases the application was not available or had initially been introduced as an option which the beneficiaries had not yet taken up. This was the case where paying agencies still permitted the submission of paper-based aid claims, which some beneficiaries preferred as they lacked the necessary computer skills or did not trust the computerised system. |
| --- | --- |

7.52.

More than three-quarters of the beneficiaries we visited had used the application. Where beneficiaries had not used the GSAA, in some cases the application was not available or had initially been introduced as an option which the beneficiaries had not yet taken up. This was the case where paying agencies still permitted the submission of paper-based aid claims, which some beneficiaries preferred as they lacked the necessary computer skills or did not trust the computerised system.

| 7.52. | The Commission notes that the gradual phasing-in of the GSAA and the option of maintaining the paper-based claims were provided for in EU law because it was expected that some farmers may have difficulties in adjusting to the new system. See Article 17(3) and recital 15 of Implementing Regulation (EU) No 809/2014. |
| --- | --- |

7.52.

| 7.53. | Most paying agencies we visited considered that the application had helped to prevent some errors by beneficiaries. The farmers we met generally agreed with this assessment, as 88 % of those who replied to our question about the application’s usefulness in avoiding errors told us that the application had helped them to correct mistakes in their claims. |
| --- | --- |

7.53.

Most paying agencies we visited considered that the application had helped to prevent some errors by beneficiaries. The farmers we met generally agreed with this assessment, as 88 % of those who replied to our question about the application’s usefulness in avoiding errors told us that the application had helped them to correct mistakes in their claims.

| 7.54. | Of those beneficiaries who replied to our question on time-savings, 67 % stated that they now needed less time to complete their aid claim. Similarly, more than half of the paying agencies confirmed having achieved time-savings in processing claims. Two paying agencies, which had only started using the application in 2016 or 2017, deemed it too early to assess possible time-savings. Three paying agencies considered that their previous online system already had the main characteristics of the GSAA. |
| --- | --- |

7.54.

Of those beneficiaries who replied to our question on time-savings, 67 % stated that they now needed less time to complete their aid claim. Similarly, more than half of the paying agencies confirmed having achieved time-savings in processing claims. Two paying agencies, which had only started using the application in 2016 or 2017, deemed it too early to assess possible time-savings. Three paying agencies considered that their previous online system already had the main characteristics of the GSAA.

| 7.55. | Of the responding beneficiaries, 72 % told us that the GSAA application was more user-friendly than previous systems, and they were all satisfied with the assistance and guidance provided by the paying agencies. On the whole, the beneficiaries’ assessment was positive (see
  Box 7.10
  ). |
| --- | --- |

7.55.

Of the responding beneficiaries, 72 % told us that the GSAA application was more user-friendly than previous systems, and they were all satisfied with the assistance and guidance provided by the paying agencies. On the whole, the beneficiaries’ assessment was positive (see
  Box 7.10
  ).

| 7.55. | The Commission recognises the overall positive image conveyed. |
| --- | --- |

7.55.

Box 7.10 —   Beneficiaries were satisfied with the GSAA

Image

Source: ECA.

THE COURT’S OBSERVATIONS

Performance assessment of rural development investment projects

| 7.56. | We assessed 29 sampled rural development investment projects, covering diverse measures, including: |
| --- | --- |

7.56.

We assessed 29 sampled rural development investment projects, covering diverse measures, including:

| — | construction of farm buildings and modernisation of farm equipment; |
| --- | --- |

—

construction of farm buildings and modernisation of farm equipment;

| — | provision of business start-up aid to young farmers and small farmers; |
| --- | --- |

—

provision of business start-up aid to young farmers and small farmers;

| — | development of rural infrastructure such as road improvements and broadband networks. |
| --- | --- |

—

development of rural infrastructure such as road improvements and broadband networks.

| 7.57. | We assessed whether: |
| --- | --- |

7.57.

We assessed whether:

| — | the eligibility conditions set for the related measure were in line with the priorities identified in the rural development programme, and the selection procedure was appropriate; |
| --- | --- |

—

the eligibility conditions set for the related measure were in line with the priorities identified in the rural development programme, and the selection procedure was appropriate;

| — | the beneficiaries had carried out the projects as planned; |
| --- | --- |

—

the beneficiaries had carried out the projects as planned;

| — | Member States had checked that the declared costs were reasonable; |
| --- | --- |

—

Member States had checked that the declared costs were reasonable;

| — | appropriate use had been made of simplified cost options. |
| --- | --- |

—

appropriate use had been made of simplified cost options.

The eligibility conditions and project selection criteria were generally aligned with rural development priorities

| 7.58. | The EU has defined 11 thematic objectives to provide a link between the Europe 2020 Strategy and the European Structural and Investment Funds, which include the EAFRD. For rural development policy, the long-term strategic objectives for the 2014-2020 period are structured into six priorities, broken down into 18 focus areas (30) (see
  Box 7.11
  ). A single measure can contribute to several rural development priorities and several measures can be relevant for one rural development priority. |
| --- | --- |

7.58.

The EU has defined 11 thematic objectives to provide a link between the Europe 2020 Strategy and the European Structural and Investment Funds, which include the EAFRD. For rural development policy, the long-term strategic objectives for the 2014-2020 period are structured into six priorities, broken down into 18 focus areas (30) (see
  Box 7.11
  ). A single measure can contribute to several rural development priorities and several measures can be relevant for one rural development priority.

Box 7.11 —   Illustration of the relationships between thematic objectives, rural development priorities and measures

Image

Source: European Court of Auditors.

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

| 7.59. | In 26 of the 29 cases examined, we found that the measure was in line with the priorities and focus areas identified in the rural development programmes, and that Member States had applied appropriate selection procedures. However, as we noted in our special report 16/2017, the contribution of rural development priorities and focus areas to each thematic objective is difficult to assess. |
| --- | --- |

7.59.

In 26 of the 29 cases examined, we found that the measure was in line with the priorities and focus areas identified in the rural development programmes, and that Member States had applied appropriate selection procedures. However, as we noted in our special report 16/2017, the contribution of rural development priorities and focus areas to each thematic objective is difficult to assess.

| 7.59. | The rural development measures represent instruments to achieve the objectives of the priorities and focus areas. Due to their diversity and multi-purpose nature, it is not possible to establish a direct link between measures and thematic objectives. Such correspondence becomes evident once the measures are attributed to the focus areas. |
| --- | --- |

7.59.

| 7.60. | In the remaining three cases, the national authorities had not set appropriate eligibility conditions or used effective selection procedures. In one of these cases, the national authorities had set adequate selection criteria in advance and allocated points, based on the application’s fulfilment of these criteria. However, the authorities did not set a minimum threshold of points, and so all project applications received funding. For two other projects, the national authorities had set the minimum threshold too low to ensure sufficient targeting. |
| --- | --- |

7.60.

In the remaining three cases, the national authorities had not set appropriate eligibility conditions or used effective selection procedures. In one of these cases, the national authorities had set adequate selection criteria in advance and allocated points, based on the application’s fulfilment of these criteria. However, the authorities did not set a minimum threshold of points, and so all project applications received funding. For two other projects, the national authorities had set the minimum threshold too low to ensure sufficient targeting.

| 7.60. | The national authorities can set commitments and other obligations that ensure the effective implementation of a measure, while respecting the eligibility criteria that are normally included in the EU legislation. |
| --- | --- |

7.60.

In most cases, beneficiaries carried out the projects as planned and Member States checked the reasonableness of costs

| 7.61. | At the time of our audit, 19 of the 29 projects we examined had been completed. We found that 17 of these projects had been carried out as planned (see an example in
  Box 7.12
  ). |
| --- | --- |

7.61.

At the time of our audit, 19 of the 29 projects we examined had been completed. We found that 17 of these projects had been carried out as planned (see an example in
  Box 7.12
  ).

Box 7.12 —   Example of a project carried out as planned

We examined a payment to an agricultural holding in Italy (Veneto), made under a measure designed to enhance farm viability and competitiveness, by facilitating farm restructuring and modernisation.

The eligibility conditions and selection criteria targeted investments enhancing the sustainability of holdings, reducing the environmental impact or increasing animal welfare. The investment consisted in the acquisition of silos and automated equipment for the storage and preparation of animal feed.

The holding modernised its assets and improved its viability by reducing the cost of animal feeding.

| 7.62. | In 4 of the 29 projects we examined, the payment consisted of a lump sum. In 23 cases, the national authorities had put in place procedures aimed at verifying that the declared costs were reasonable, such as a procurement procedure, reference costs or a comparison of offers. Such procedures were either not in place or not applied in the remaining two cases. |
| --- | --- |

7.62.

In 4 of the 29 projects we examined, the payment consisted of a lump sum. In 23 cases, the national authorities had put in place procedures aimed at verifying that the declared costs were reasonable, such as a procurement procedure, reference costs or a comparison of offers. Such procedures were either not in place or not applied in the remaining two cases.

Member States made little use of simplified cost options

| 7.63. | In the 2014-2020 period, Member States may, as an alternative to reimbursing incurred costs, use simplified cost options: standard scales of unit costs, lump sums and flat-rate financing (31). Simplified cost options have the potential to simplify administration and keep project costs under control (32). |
| --- | --- |

7.63.

In the 2014-2020 period, Member States may, as an alternative to reimbursing incurred costs, use simplified cost options: standard scales of unit costs, lump sums and flat-rate financing (31). Simplified cost options have the potential to simplify administration and keep project costs under control (32).

| 7.63. | The use of simplified cost options (SCOs) has been developed further under this programming period for non-IACS measures and other measures which are not reimbursed using SCOs enshrined in the fund specific regulation. |
| --- | --- |

7.63.

| 7.64. | We considered that 23 of the projects we examined could have applied simplified cost options for at least some elements of cost, but only 5 actually did so (33). This corroborates the finding of our recent special report on the financing of rural development projects that limited use is made of such options, in part because of the wide variety of measures and beneficiaries (34). |
| --- | --- |

7.64.

We considered that 23 of the projects we examined could have applied simplified cost options for at least some elements of cost, but only 5 actually did so (33). This corroborates the finding of our recent special report on the financing of rural development projects that limited use is made of such options, in part because of the wide variety of measures and beneficiaries (34).

| 7.64. | The Commission considers that the use of SCOs is a novelty for non-area and non-animal-related expenditure. It needs some time to be taken up by Member States. However, some SCOs are currently being introduced through amendments to rural development programmes. |
| --- | --- |

7.64.

Conclusion

| 7.65. | The majority of area aid applicants we visited were already using the GSAA, leading to fewer errors and time-savings in most cases. Twenty-three per cent of the farmers we interviewed were still submitting applications without using the GSAA. |
| --- | --- |

7.65.

The majority of area aid applicants we visited were already using the GSAA, leading to fewer errors and time-savings in most cases. Twenty-three per cent of the farmers we interviewed were still submitting applications without using the GSAA.

| 7.65. | The Commission notes that EU legislation provided for gradual phasing-in of the GSAA. In line with the timing, Member States were required to cover 25 % of land with GSAA in claim year 2016 (financial year 2017), 75 % in claim year 2017 (financial year 2018) and ensure coverage in claim year 2018 (financial year 2019) (see Article 17(2) of Implementing Regulation (EU) No 809/2014). |
| --- | --- |

7.65.

| 7.66. | In 2017, we visited 29 rural development investment projects. Overall, for the projects we visited, the eligibility conditions were aligned with the priorities identified in the rural development programmes and the selection procedures were appropriate. The beneficiaries we visited generally carried out the sampled rural development investment projects as planned, and Member States checked that costs were reasonable. However, Member States made little use of simplified cost options. |
| --- | --- |

7.66.

In 2017, we visited 29 rural development investment projects. Overall, for the projects we visited, the eligibility conditions were aligned with the priorities identified in the rural development programmes and the selection procedures were appropriate. The beneficiaries we visited generally carried out the sampled rural development investment projects as planned, and Member States checked that costs were reasonable. However, Member States made little use of simplified cost options.

Recommendations

| 7.67. | Based on our findings and conclusion, we recommend that the Commission: |
| --- | --- |

7.67.

Based on our findings and conclusion, we recommend that the Commission:

| — | Recommendation 4: monitor progress made by the paying agencies in supporting farmers not yet using the GSAA and promote best practices, in order to maximise the benefits and achieve full implementation of the new system within the regulatory deadlines (see paragraphs 7.51 and 7.52).
  Target implementation date: 2020. |
| --- | --- |

—

Recommendation 4: monitor progress made by the paying agencies in supporting farmers not yet using the GSAA and promote best practices, in order to maximise the benefits and achieve full implementation of the new system within the regulatory deadlines (see paragraphs 7.51 and 7.52).

Target implementation date: 2020.

The Commission accepts this recommendation and considers that it is being implemented. The Commission is monitoring progress in the Member States and will continue to do so. The GSAA has been implemented promptly in most Member States, in accordance with the timeline set out in EU legislation.

---

(1)  Article 110(2) of Regulation (EU) No 1306/2013 of the European Parliament and of the Council of 17 December 2013 on the financing, management and monitoring of the common agricultural policy and repealing Council Regulations (EEC) No 352/78, (EC) No 165/94, (EC) No 2799/98, (EC) No 814/2000, (EC) No 1290/2005 and (EC) No 485/2008 (OJ L 347, 20.12.2013, p. 549).

(2)  Market measures are fully funded by the EAGF, with the exception of certain co-financed measures, such as promotion measures and the school fruit scheme. Rural development programmes are co-funded by the European Agricultural Fund for Rural Development (EAFRD).

(3)  The sample consisted of 121 direct payments and 19 market measures funded by the EAGF, 84 rural development payments funded by the EAFRD, and 6 payments for the environment, climate action and fisheries.

(4)  Belgium, Bulgaria, Denmark, Germany, Ireland, Greece, Spain, France, Croatia, Italy, Lithuania, Hungary, Netherlands, Austria, Poland, Portugal, Romania, Slovakia, Finland, Sweden and the United Kingdom. The sample also included five transactions under direct management.

(5)  In line with the new approach of the Court (see Annex 1.1, paragraph 12), when planning the audit, we decided not to provide an assessment, or estimated level of error, for the area of ‘rural development, market measures, the environment, climate action and fisheries’. We provide insight on the type of errors that occur in this area (see paragraphs 1.25, 7.18 to 7.25 and Annex 7.3).

(6)  We also found 10 cases of non-compliance with the rules, which had no financial impact.

(7)  We base our calculation of error on a representative sample. The figure quoted is the best estimate. We have 95 % confidence that the estimated level of error in the population lies between 0,9 % and 3,9 % (the lower and upper error limits respectively).

(8)  Based on our previous years’ results (see paragraph 7.19 of our 2016 annual report), we have decided to examine market measures together with the other areas that we consider to be particularly prone to error (see paragraph 7.5).

(9)  Decoupled aid payments are made for all eligible agricultural land, irrespective of whether it is used for production.

(10)  We visited 77 farms to check that the beneficiaries had complied with the rules. For the remaining 44 payments, we obtained sufficient evidence through desk reviews, based on information provided to us by the paying agencies.

(11)  IACS relies on databases of holdings, applications and agricultural areas, which are used for administrative cross-checks on all aid applications. LPIS is a geographic information system containing spatial data sets from multiple sources, which together form a record of agricultural areas in the Member States.

(12)  See paragraph 7.13 of our 2016 annual report.

(13)  See paragraph 7.15 of our 2016 annual report.

(14)  Article 11(4) of Commission Implementing Regulation (EU) No 809/2014 of 17 July 2014 laying down rules for the application of Regulation (EU) No 1306/2013 of the European Parliament and of the Council with regard to the integrated administration and control system, rural development measures and cross compliance (OJ L 227, 31.7.2014, p. 69).

(15)  For more information see paragraphs 7.43 to 7.54 of our 2016 annual report, and paragraphs 26 to 39 of our special report No 21/2017 ‘Greening: a more complex income support scheme, not yet environmentally effective’.

(16)  Fast-growing crops grown between plantings of main crops, meant to enhance biodiversity and prevent soil erosion.

(17)  See paragraph 90 of our special report No 7/2017 ‘The certification bodies’ new role on CAP expenditure: a positive step towards a single audit model but with significant weaknesses to be addressed’, and paragraph 7.54 of our 2015 annual report.

(18)  The scope of the Commission’s review visits is normally limited to certain of the sub-populations of the CAP budget (EAGF IACS, EAGF non-IACS, EAFRD IACS, EAFRD non-IACS) audited by the certification bodies.

(19)  The Commission’s review visits conclude that ‘Based on the review performed nothing has come to DG AGRI’s attention that causes it to believe that reliance cannot be placed on the audit work performed by the CB for financial year 2017’, i.e. they provide negative assurance.

(20)  There were missions to the same certification body covering a different population and a different paying agency.

(21)  In three years, the Commission visited 35 out of the 55 certification bodies.

(22)  We examined one review visit from 2015, four from 2016 and seven from 2017.

(23)  Czech Republic, Germany (Lower Saxony), Estonia, Greece, Romania and the United Kingdom (Wales).

(24)  Denmark, Spain (Asturias and La Rioja), Italy (Agenzia per le Erogazioni in Agricoltura), Slovakia and Sweden.

(25)  The figure relates to 2016 expenditure, since this was the most recent year for which data was available at the time of the Commission’s reviews.

(26)  The Commission had limited reliance on eight certification bodies and could not rely on the remaining three.

(27)  Article 17 of Commission Implementing Regulation (EU) No 809/2014 states that GSAA must be available:

| (a) | As from claim year 2016, to a number of beneficiaries corresponding to that required to cover at least 25 % of the total area determined for the basic payment scheme or the single area payment scheme in the previous year; |
| --- | --- |

(a)

As from claim year 2016, to a number of beneficiaries corresponding to that required to cover at least 25 % of the total area determined for the basic payment scheme or the single area payment scheme in the previous year;

| (b) | As from claim year 2017, to a number of beneficiaries corresponding to that required to cover at least 75 % of the total area determined for the basic payment scheme or the single area payment scheme in the previous year; |
| --- | --- |

(b)

As from claim year 2017, to a number of beneficiaries corresponding to that required to cover at least 75 % of the total area determined for the basic payment scheme or the single area payment scheme in the previous year;

| (c) | As from claim year 2018, to all beneficiaries. |
| --- | --- |

(c)

As from claim year 2018, to all beneficiaries.

(28)  Commission Implementing Decision C(2018) 2838 sets the following deadlines: 2020 for payment claims for rural development area-related measures in Denmark and Italy; 2020 for aid applications and payment claims for all beneficiaries in Luxembourg, Poland and the United Kingdom (England); 2019 for parcels shared by two or more beneficiaries for crop rotation in special production in Finland.

(29)  Belgium (Flanders), Bulgaria, Denmark, Germany (Lower Saxony), Ireland, Greece, Spain (Andalusia, Castilla-La Mancha, Castilla and León), France, Croatia, Italy (Lombardy, Veneto), Lithuania, Hungary, Austria, Poland, Portugal, Romania, Slovakia, Finland, Sweden and the United Kingdom (England, Northern Ireland).

(30)  More information on the 2014-2020 performance framework is in our special report No 16/2017 ‘Rural Development Programming: less complexity and more focus on results needed’.

(31)  Article 67(1) of Regulation (EU) No 1303/2013 of the European Parliament and of the Council of 17 December 2013 laying down common provisions on the European Regional Development Fund, the European Social Fund, the Cohesion Fund, the European Agricultural Fund for Rural Development and the European Maritime and Fisheries Fund and laying down general provisions on the European Regional Development Fund, the European Social Fund, the Cohesion Fund and the European Maritime and Fisheries Fund and repealing Council Regulation (EC) No 1083/2006 (OJ L 347, 20.12.2013, p. 320).

(32)  See paragraphs 73 and 74 of special report No 11/2018 ‘New options for financing rural development projects: simpler but not focused on results’.

(33)  In 3 of the 5 cases, the use of a lump sum was mandatory under the applicable EU rules.

(34)  See paragraph 79 of our special report No 11/2018.

(35)  In line with the harmonised definition of underlying transactions (for details see
  Annex 1.1
  , paragraph IX).

ANNEX 7.1

RESULTS OF TRANSACTION TESTING FOR ‘NATURAL RESOURCES’

| | 2017 | 2016 |
| --- | --- | --- |
| |
| SIZE AND STRUCTURE OF THE SAMPLE |
| |
| Direct payments | 121 | 201 |
| Market measures, rural development, the environment, climate action and fisheries | 109 | 179 |
| Total transactions ‘Natural Resources’ | 230 | 380 |
| |
| ESTIMATED IMPACT OF QUANTIFIABLE ERRORS |
| | | |
| Estimated level of error: ‘Natural Resources’ | 2,4  % | 2,5  % |
| | | |
| | Upper Error Limit (UEL) | 3,9  % | |
| | Lower Error Limit (LEL) | 0,9  % | |

2017

2016

SIZE AND STRUCTURE OF THE SAMPLE

Direct payments

121

201

Market measures, rural development, the environment, climate action and fisheries

109

179

Total transactions ‘Natural Resources’

230

380

ESTIMATED IMPACT OF QUANTIFIABLE ERRORS

Estimated level of error: ‘Natural Resources’

2,4  %

2,5  %

Upper Error Limit (UEL)

3,9  %

Lower Error Limit (LEL)

0,9  %

ANNEX 7.2

OVERVIEW OF THE RESULTS OF TRANSACTION TESTING FOR EACH MEMBER STATE FOR MARKET MEASURES, RURAL DEVELOPMENT, THE ENVIRONMENT, CLIMATE ACTION AND FISHERIES (1)

Image

---

(1)  Excluding the five examined transactions under direct management in the areas of the environment, climate action and fisheries.

ANNEX 7.3

OVERVIEW OF ERRORS WITH AN IMPACT OF AT LEAST 20 % FOR MARKET MEASURES, RURAL DEVELOPMENT, THE ENVIRONMENT, CLIMATE ACTION AND FISHERIES

| THE COURT’S OBSERVATIONS | THE COMMISSION’S REPLIES |
| --- | --- |
| Introduction |
| Applying the general audit methodology set out in
  Annex 1.1
  , we tested a representative sample of transactions to estimate the level of irregularity within the population for this MFF heading. The errors we detected in testing do not constitute an exhaustive list — either of individual errors or of possible error types. Below we describe four errors with an impact of at least 20 % of the transaction value examined for spending on market measures, rural development, the environment, climate action and fisheries.
  Boxes 7.5
  and
  7.6
  contain the two remaining examples we found. These 6 errors were found in transactions worth between 3 500 euros and 1,6  million euros, with a median value of just under 17 000 euros (1). | The Commission takes note of the ECA's comment in Annex 7.2 that the overview of ECA transactions is not a guide to the relative level of error in the Member States in the sample. The Commission points out that detailed information on the Commission's and Member States' audit results are presented for each Member State in the Annual Activity Reports and their technical annexes of the Commission departments implementing EU funds in shared management. |
| Examples of error |
| Market measures, rural development, the environment, climate action and fisheries |
| Ineligible beneficiary/activity/project/expenditure |
| Example 1 — Ineligible project due to insufficient return on the investment |
| In Portugal we examined a payment made to a farm to upgrade its irrigation system. To be eligible, the aid application had to demonstrate that the investment would generate a positive return. On the basis of the information included in the aid application, the authorities approved the project. However, at the time of approval, the beneficiary was no longer farming one of the parcels included in the calculation of the return on the investment. Considering the parcels actually farmed by the beneficiary, the calculation would not have shown a positive return on the investment. Therefore, the project should not have received support, leading to a 100 % error. | |
| Example 2 — Support for a beneficiary without sufficient replanting rights |
| In Spain we examined a payment contributing to the costs for restructuring and converting vineyards. Under the national rules, the beneficiary needed to hold replanting rights for the area to be restructured before the deadline for submitting the aid application. For one parcel, though, the visited beneficiary had obtained the replanting rights after the deadline, leading to a 44 % error. | |
| Example 3 — Technical assistance for rural development also used for the EAGF |
| We examined a payment to the Greek paying agency for technical assistance relating to rural development programmes. We found that the financed IT support and infrastructure were also used to manage EAGF aid. Since only the contribution to rural development operations was eligible, we considered part of the costs ineligible, and estimated a 23 % error.
  We also found errors due to ineligible beneficiaries/activities/projects/expenditure (quantified below 20 %) in Germany, Croatia and Portugal, and in three directly managed transactions concerning spending on the environment. | The Commission will take this finding into account when planning future conformity clearance enquiries. |
| Non-respect of agri-environment-climate commitments |
| Example 4 — Non-respect of agri-environmental commitments in nitrate-sensitive areas |
| In Greece we examined a payment to a farmer under an agri-environment-climate measure for the protection of nitrate-sensitive areas. The commitment set limitations on the amount of fertiliser and volume of irrigation water that could be used on the parcels. Parcels with a slope exceeding 6 % were subject to stricter limitations, due to the greater risk of outflow of fertilisers and water. However, on two parcels with a slope exceeding 6 %, the beneficiary had not complied with the stricter fertilisation and irrigation requirements, leading to a 20 % error.
  We also found an error due to the non-respect of agri-environmental commitments (quantified below 20 %) in Sweden. | The measurement provided by the national authorities indicated that the inclination of the slope was below 6 %. For parcels of varying inclination it is not always technically evident how to measure the slope. It is the understanding of the Commission that for a parcel of the nature of the parcel in question, the absolute lowest and absolute highest point should not necessarily be taken for measuring the slope. It is rather the highest and lowest point representative of the parcel which should be taken.


  The Commission will discuss this point further with the national authorities. |

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

Introduction

Applying the general audit methodology set out in
  Annex 1.1
  , we tested a representative sample of transactions to estimate the level of irregularity within the population for this MFF heading. The errors we detected in testing do not constitute an exhaustive list — either of individual errors or of possible error types. Below we describe four errors with an impact of at least 20 % of the transaction value examined for spending on market measures, rural development, the environment, climate action and fisheries.
  Boxes 7.5
  and
  7.6
  contain the two remaining examples we found. These 6 errors were found in transactions worth between 3 500 euros and 1,6  million euros, with a median value of just under 17 000 euros (1).

The Commission takes note of the ECA's comment in Annex 7.2 that the overview of ECA transactions is not a guide to the relative level of error in the Member States in the sample. The Commission points out that detailed information on the Commission's and Member States' audit results are presented for each Member State in the Annual Activity Reports and their technical annexes of the Commission departments implementing EU funds in shared management.

Examples of error

Market measures, rural development, the environment, climate action and fisheries

Ineligible beneficiary/activity/project/expenditure

Example 1 — Ineligible project due to insufficient return on the investment

In Portugal we examined a payment made to a farm to upgrade its irrigation system. To be eligible, the aid application had to demonstrate that the investment would generate a positive return. On the basis of the information included in the aid application, the authorities approved the project. However, at the time of approval, the beneficiary was no longer farming one of the parcels included in the calculation of the return on the investment. Considering the parcels actually farmed by the beneficiary, the calculation would not have shown a positive return on the investment. Therefore, the project should not have received support, leading to a 100 % error.

Example 2 — Support for a beneficiary without sufficient replanting rights

In Spain we examined a payment contributing to the costs for restructuring and converting vineyards. Under the national rules, the beneficiary needed to hold replanting rights for the area to be restructured before the deadline for submitting the aid application. For one parcel, though, the visited beneficiary had obtained the replanting rights after the deadline, leading to a 44 % error.

Example 3 — Technical assistance for rural development also used for the EAGF

We examined a payment to the Greek paying agency for technical assistance relating to rural development programmes. We found that the financed IT support and infrastructure were also used to manage EAGF aid. Since only the contribution to rural development operations was eligible, we considered part of the costs ineligible, and estimated a 23 % error.

We also found errors due to ineligible beneficiaries/activities/projects/expenditure (quantified below 20 %) in Germany, Croatia and Portugal, and in three directly managed transactions concerning spending on the environment.

The Commission will take this finding into account when planning future conformity clearance enquiries.

Non-respect of agri-environment-climate commitments

Example 4 — Non-respect of agri-environmental commitments in nitrate-sensitive areas

In Greece we examined a payment to a farmer under an agri-environment-climate measure for the protection of nitrate-sensitive areas. The commitment set limitations on the amount of fertiliser and volume of irrigation water that could be used on the parcels. Parcels with a slope exceeding 6 % were subject to stricter limitations, due to the greater risk of outflow of fertilisers and water. However, on two parcels with a slope exceeding 6 %, the beneficiary had not complied with the stricter fertilisation and irrigation requirements, leading to a 20 % error.

We also found an error due to the non-respect of agri-environmental commitments (quantified below 20 %) in Sweden.

The measurement provided by the national authorities indicated that the inclination of the slope was below 6 %. For parcels of varying inclination it is not always technically evident how to measure the slope. It is the understanding of the Commission that for a parcel of the nature of the parcel in question, the absolute lowest and absolute highest point should not necessarily be taken for measuring the slope. It is rather the highest and lowest point representative of the parcel which should be taken.

The Commission will discuss this point further with the national authorities.

---

(1)  I.e. half of all errors with an impact of at least 20 % were found in transactions worth less than 17 000 euros, and the remainder in transactions worth more than this amount.

ANNEX 7.4

FOLLOW-UP OF PREVIOUS RECOMMENDATIONS

| Year | Court Recommendation | Court's analysis of the progress made | Commission reply |
| --- | --- | --- | --- |
| Fully implemented | Being implemented | Not implemented | No longer applicable | Insufficient evidence |
| In most respects | In some respects |
| 2014 | 7.77. | Following this review and the findings and conclusions for 2014, we recommend that, for EAGF: |

Year

Court Recommendation

Court's analysis of the progress made

Commission reply

Fully implemented

Being implemented

Not implemented

No longer applicable

Insufficient evidence

In most respects

In some respects

2014

7.77.

Recommendation 1: the Member States make further efforts to include reliable and up-to date information in their LPIS databases on the size and eligibility of agricultural land, notably of permanent pasture, and systematically analyse and use all the information available in the context of administrative checks, including up-todate orthoimages, in order to avoid payments for ineligible land;

X

for rural development that the Commission:

Recommendation 2: take appropriate measures to require that Member States' action plans include remedial actions addressing the frequently found causes of error;

X

Recommendation 3: revise the strategy for its rural development conformity audits so as to establish whether systems weaknesses found in one specific region, for Member States with regional programmes, are also present in the other regions, especially for investment measures;

X

2014

and for both the EAGF and rural development that the Commission:

Recommendation 4: ensure that the new assurance procedure on legality and regularity of transactions, which will become mandatory as of the financial year 2015, is correctly applied by the certification bodies and produces reliable information about the level of error, so as to be able to rely on it.

X

| 7.78. | Furthermore, we recommend that, in the area of fisheries, the Commission: |
| --- | --- |

7.78.

Recommendation 5: ensure that Member State audit authorities carry out their tasks more thoroughly, notably by performing the required on-the-spot controls, applying quality control procedures and improving audit documentation.

X

---

CHAPTER 8

Security and citizenship

TABLE OF CONTENTS

| Introduction | 8.1-8.5 |
| --- | --- |

| Brief description of the MFF heading | 8.2-8.4 |
| --- | --- |

| Audit scope and approach | 8.5 |
| --- | --- |

| Regularity of transactions | 8.6-8.7 |
| --- | --- |

| Examination of selected systems | 8.8-8.13 |
| --- | --- |

| Shared management | 8.8-8.12 |
| --- | --- |

| Annual activity reports and other governance arrangements | 8.13 |
| --- | --- |

| Conclusion and recommendations | 8.14-8.15 |
| --- | --- |

| Recommendations | 8.15 |
| --- | --- |

| THE COURT’S OBSERVATIONS | |
| --- | --- |
| INTRODUCTION |
| 8.1. | This chapter presents our findings for the MFF heading ‘Security and citizenship’.
  Box 8.1
  gives an overview of the main activities and spending under this heading in 2017. |

THE COURT’S OBSERVATIONS

INTRODUCTION

8.1.

This chapter presents our findings for the MFF heading ‘Security and citizenship’.
  Box 8.1
  gives an overview of the main activities and spending under this heading in 2017.

Box 8.1 —   MFF heading ‘Security and citizenship’ — 2017 breakdown

Image

| Total payments for the year | 2,9 |
| --- | --- |
| - advances
   (12) | -1,8 |
| + clearings of advances
   (12) | 1,6 |
| Audited population, total | 2,7 |
| Source: 2017 consolidated accounts of the European Union. |

Total payments for the year

2,9

- advances
   (12)

-1,8

- clearings of advances
   (12)

1,6

Audited population, total

2,7

Source: 2017 consolidated accounts of the European Union.

THE COURT’S OBSERVATIONS

Brief description of the MFF heading

| 8.2. | Heading 3 covers a range of policies whose common objective is to strengthen the concept of European citizenship by creating an area of freedom, justice and security without internal frontiers. |
| --- | --- |

8.2.

Heading 3 covers a range of policies whose common objective is to strengthen the concept of European citizenship by creating an area of freedom, justice and security without internal frontiers.

| 8.3. | As shown in
  Box 8.1
  , the most significant area of expenditure is migration and security. Thus most spending comes from just two funds — the Asylum, Migration and Integration Fund (1) (AMIF) and the Internal Security Fund (ISF). These began in 2014 and will run until 2020, having replaced the SOLID programme (‘Solidarity and Management of Migration Flows’), which consisted of four instruments (2) and two programmes (3). Like SOLID, the management of most AMIF and ISF funding is shared between the Member States and the Commission’s DG for Migration and Home Affairs (DG Home). The objective of AMIF is to contribute to the effective management of migration flows and bring about a common EU approach to asylum and immigration. The ISF aims to achieve a high level of security in the EU. It has two instruments (4): ISF Borders and Visa and ISF Police. The first provides support for harmonised border management measures and the development of a common visa policy, while the second focuses on cooperation between law enforcement agencies and improving capacity to manage security-related risks and crises. |
| --- | --- |

8.3.

As shown in
  Box 8.1
  , the most significant area of expenditure is migration and security. Thus most spending comes from just two funds — the Asylum, Migration and Integration Fund (1) (AMIF) and the Internal Security Fund (ISF). These began in 2014 and will run until 2020, having replaced the SOLID programme (‘Solidarity and Management of Migration Flows’), which consisted of four instruments (2) and two programmes (3). Like SOLID, the management of most AMIF and ISF funding is shared between the Member States and the Commission’s DG for Migration and Home Affairs (DG Home). The objective of AMIF is to contribute to the effective management of migration flows and bring about a common EU approach to asylum and immigration. The ISF aims to achieve a high level of security in the EU. It has two instruments (4): ISF Borders and Visa and ISF Police. The first provides support for harmonised border management measures and the development of a common visa policy, while the second focuses on cooperation between law enforcement agencies and improving capacity to manage security-related risks and crises.

| 8.4. | Another significant share of the heading budget consists of funding for 12 decentralised agencies (5) that are active in the implementation of key EU priorities in the areas of migration and security, judicial cooperation and health. Next come the ‘Food and feed’ programme, which aims to ensure human, animal and plant health at all stages of the food chain, and ‘Creative Europe’ — the EU framework programme of support for the culture and audio-visual sectors. Lastly, the budget covers a number of programmes aimed at fulfilling the common objective of strengthening the security and citizenship area; in particular, the programmes on justice, on consumers and on rights, equality and citizenship. |
| --- | --- |

8.4.

Another significant share of the heading budget consists of funding for 12 decentralised agencies (5) that are active in the implementation of key EU priorities in the areas of migration and security, judicial cooperation and health. Next come the ‘Food and feed’ programme, which aims to ensure human, animal and plant health at all stages of the food chain, and ‘Creative Europe’ — the EU framework programme of support for the culture and audio-visual sectors. Lastly, the budget covers a number of programmes aimed at fulfilling the common objective of strengthening the security and citizenship area; in particular, the programmes on justice, on consumers and on rights, equality and citizenship.

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

Audit scope and approach

| 8.5. | Applying the audit approach and methods set out in
  Annex 1.1
  , in 2017 we examined the following for ’Security and citizenship’.






  (a) | a sample of 15 transactions, which was designed to help us form a view on 2017 spending from the budget as a whole, but not to be representative of the full range of spending under this MFF heading (i.e. we did not estimate the level of error under heading 3). This choice was motivated by the relatively low level of payments for this policy area in 2017 (around 2 % of the EU total). The sample consisted of eight transactions under shared management with Member States (6), five under direct management by the Commission, and two that involved the clearing of advances to agencies; |
| --- | --- | --- |

8.5.

Applying the audit approach and methods set out in
  Annex 1.1
  , in 2017 we examined the following for ’Security and citizenship’.

(a)

a sample of 15 transactions, which was designed to help us form a view on 2017 spending from the budget as a whole, but not to be representative of the full range of spending under this MFF heading (i.e. we did not estimate the level of error under heading 3). This choice was motivated by the relatively low level of payments for this policy area in 2017 (around 2 % of the EU total). The sample consisted of eight transactions under shared management with Member States (6), five under direct management by the Commission, and two that involved the clearing of advances to agencies;

| (b) | the main systems used by the Commission and the Member States to provide assurance on the regularity of payments made under SOLID, AMIF and the ISF; |
| --- | --- |

(b)

the main systems used by the Commission and the Member States to provide assurance on the regularity of payments made under SOLID, AMIF and the ISF;

| (c) | whether the annual activity report of DG Home presented information on regularity of spending that was broadly consistent with our results. |
| --- | --- |

(c)

whether the annual activity report of DG Home presented information on regularity of spending that was broadly consistent with our results.

REGULARITY OF TRANSACTIONS

| 8.6. | Of the 15 transactions examined, three (20 %) contained errors, of which two were above the materiality threshold of 2 %: one shared management transaction under AMIF in France (error of 10 %), and one relating to an operational subsidy paid to EASO for expenditure incurred in 2016 and included in the Commission’s 2017 accounts (7) (error of 2,9  %). As stated in paragraph 8.5(a), the sample was not intended to be representative of spending under this heading; therefore we have not calculated an error rate. We explain the finding on the AMIF transaction in
  Box 8.2
  . |
| --- | --- |

8.6.

Of the 15 transactions examined, three (20 %) contained errors, of which two were above the materiality threshold of 2 %: one shared management transaction under AMIF in France (error of 10 %), and one relating to an operational subsidy paid to EASO for expenditure incurred in 2016 and included in the Commission’s 2017 accounts (7) (error of 2,9  %). As stated in paragraph 8.5(a), the sample was not intended to be representative of spending under this heading; therefore we have not calculated an error rate. We explain the finding on the AMIF transaction in
  Box 8.2
  .

| 8.6. | The error related to AMIF France has been corrected in the 2018 accounts (amount deducted from 2018 accounts).

  The error on EASO was detected by the ECA auditors during their 2016 annual audit in the agency. The Board of the Agency is aware of the error and is closely following the action plan presented by the Executive Director in order to address the weaknesses detected by the ECA.


  In the 2017 accounts, due to regulatory obligations, the Commission could not have rejected the EASO costs affected by error, but has highlighted the issue in its 2017 Annual Activity report (a reputational reservation was issued by the Authorising Officer). |
| --- | --- |

8.6.

The error on EASO was detected by the ECA auditors during their 2016 annual audit in the agency. The Board of the Agency is aware of the error and is closely following the action plan presented by the Executive Director in order to address the weaknesses detected by the ECA.

In the 2017 accounts, due to regulatory obligations, the Commission could not have rejected the EASO costs affected by error, but has highlighted the issue in its 2017 Annual Activity report (a reputational reservation was issued by the Authorising Officer).

Box 8.2 —   Error in the EU contribution to the French refugee resettlement programme.

In France, AMIF supports the national resettlement programme with a one-off payment of 10 000  euros per refugee arriving in the country. We checked an EU payment of 100 000  euros for the resettlement of ten Syrian refugees. We found that, although only nine of the ten individuals actually arrived in France, the French authorities did not reduce their payment request accordingly. The EU contribution for the resettlement programme was therefore overstated by 10 000  euros.

Box 8.2 — Error in the EU contribution to the French refugee resettlement programme.

The Member State has already corrected the error in the 2018 accounts and has put in place corrective measures such as a reinforced verification procedure and the creation of an integrated IT solution.

| 8.7. | In addition, we found inconsistencies in the way Member States treated the eligibility of value-added tax declared by public bodies. This issue, which undermines the sound financial management of EU spending, is described in
  Box 8.3
  . |
| --- | --- |

8.7.

In addition, we found inconsistencies in the way Member States treated the eligibility of value-added tax declared by public bodies. This issue, which undermines the sound financial management of EU spending, is described in
  Box 8.3
  .

Box 8.3 —   Inconsistencies in the eligibility of VAT declared by public bodies

Box 8.3 — Inconsistencies in the eligibility of VAT declared by public bodies

The Commission acknowledges the fact that the treatment at Member State level depends on the national legislation.

The Commission will clarify, in its guidance to Member States, how to mitigate the risk related to exceeding the co-financing rate when according to national rules VAT could represent part of a co-financing higher than that initially foreseen.

According to the EU legislation, non-recoverable VAT is eligible for EU co-financing. In Spain, the External Border Fund financed 95 % of the cost of fitting communication equipment on border patrol vessels. The beneficiary was a law enforcement agency funded by the national budget. The expenditure consisted of service invoices from an external contractor and included VAT (ranging from 7 % to 21 %). As the law enforcement agency cannot recover VAT, the Spanish authorities consider VAT to be eligible for financing. However, the VAT charged by a service provider automatically flows to the national budget and therefore does not represent a net cost to the Member State. In this case, because of the high co-financing rate of 95 %, the total EU contribution for this action exceeded the net costs actually incurred by the Member State.

THE COURT’S OBSERVATIONS

A similar outcome was avoided in Croatia, where the EU Schengen facility was used to fully finance the reconstruction of border posts. The beneficiary was the Croatian Ministry of the Interior and the expenditure consisted of works invoices from an external contractor, including VAT at 25 %. Mindful of the Commission’s instructions that ‘Community co-financing may not exceed total eligible expenditure excluding VAT’, the Croatian authorities treated the VAT as ineligible for EU financing and covered it from national resources.

The Spanish case illustrates the potential downside of making VAT an eligible item of expenditure for public bodies funded by national budgets. It shows that, when public bodies implement actions at a high rate of EU co-financing and the EU also reimburses the related VAT, the EU contribution may exceed the net costs actually incurred by the Member State. This undermines the sound financial management of EU funds

EXAMINATION OF SELECTED SYSTEMS

Shared management

AMIF and ISF

| 8.8. | Three years into the seven-year programming period, Member States have significantly increased the implementation rate of their national programmes.
  Box 8.4
  shows the annual payments which Member States reported in their accounts for 2016 and submitted to the Commission for clearance and subsequent reimbursement in 2017. |
| --- | --- |

8.8.

Three years into the seven-year programming period, Member States have significantly increased the implementation rate of their national programmes.
  Box 8.4
  shows the annual payments which Member States reported in their accounts for 2016 and submitted to the Commission for clearance and subsequent reimbursement in 2017.

Box 8.4 —   Payments for AMIF and ISF significantly higher during the 2016 financial year

Image

THE COURT’S OBSERVATIONS

| 8.9. | We reviewed the procedures leading to the Commission’s clearance of the annual accounts of ten AMIF and ISF national programmes submitted by Member States (8) for the 2016 financial year. We examined the completeness and consistency of the Commission’s assessment of (a) the annual accounts and implementation reports submitted by the responsible authorities, and (b) the audit opinions submitted by the audit authorities. We also examined whether, in its assessment, the Commission took into account the findings of previous audits, including our own. We did not find any major flaws in the Commission’s procedures and agree with its clearance decisions. |
| --- | --- |

8.9.

We reviewed the procedures leading to the Commission’s clearance of the annual accounts of ten AMIF and ISF national programmes submitted by Member States (8) for the 2016 financial year. We examined the completeness and consistency of the Commission’s assessment of (a) the annual accounts and implementation reports submitted by the responsible authorities, and (b) the audit opinions submitted by the audit authorities. We also examined whether, in its assessment, the Commission took into account the findings of previous audits, including our own. We did not find any major flaws in the Commission’s procedures and agree with its clearance decisions.

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

| 8.10. | In line with the reporting requirements for AMIF and the ISF, the accounts cleared by the Commission in 2017 did not distinguish between pre-financing payments (advances) made by Member States to final beneficiaries, and payments made to reimburse expenditure actually incurred. As a result, the Commission cannot obtain information on how much was actually spent.
  Box 8.5
  shows how the present situation undermines the Commission’s supervisory role. |
| --- | --- |

8.10.

In line with the reporting requirements for AMIF and the ISF, the accounts cleared by the Commission in 2017 did not distinguish between pre-financing payments (advances) made by Member States to final beneficiaries, and payments made to reimburse expenditure actually incurred. As a result, the Commission cannot obtain information on how much was actually spent.
  Box 8.5
  shows how the present situation undermines the Commission’s supervisory role.

Box 8.5 —   The Commission had insufficient information on actual spending from AMIF and ISF

In Estonia, grant agreements under AMIF and the ISF provide for advances of 100 % of a project’s planned costs. In line with the AMIF/ISF reporting requirements, the ISF annual accounts submitted to the Commission for 2016 included 13 million euros in payments, which represented approximately 35 % of the total allocation for the 2014–2020 funding period. However, during our visit to Estonia we found that 12,7  million euros (97,6  % of the reported amount) in fact concerned advances to final beneficiaries.

This shows that the current AMIF/ISF reporting requirements prevent the Commission from obtaining all the necessary financial information. Reporting only on payments made can give a misleading view of the actual implementation of funds, which in turn undermines the Commission’s supervisory role.

Box 8.5 — The Commission had insufficient information on actual spending from AMIF and ISF

The Commission requested Member States to improve already in the accounts presented in 2018, the information reported on the different type of spending.

The breakdown between pre-financing and expenditure incurred is already a reality for the accounts submitted in February/March 2018 (both interim and final payments are flagged and by default the advances to final beneficiaries are identified).

THE COURT’S OBSERVATIONS

| 8.11. | We tested the work done by five national audit authorities
   (9) preparatory to their certification of the AMIF/ISF annual accounts for 2016. Our findings are presented in
  Box 8.6
  . |
| --- | --- |

8.11.

We tested the work done by five national audit authorities
   (9) preparatory to their certification of the AMIF/ISF annual accounts for 2016. Our findings are presented in
  Box 8.6
  .

Box 8.6 —   System weaknesses relating to AMIF and the ISF

| Member States |
| --- |
| Weakness | Effect |
| Weaknesses in audit activities performed by audit authorities:






  — | In Sweden, the audit authority did not sufficiently document its work to show which audit procedures it actually carried out. |

Member States

Weakness

Effect

Weaknesses in audit activities performed by audit authorities:

—

In Sweden, the audit authority did not sufficiently document its work to show which audit procedures it actually carried out.

| — | In both Sweden and France, the audit authority did not properly document its supervision of audit work as required by international auditing standards. |
| --- | --- |

—

In both Sweden and France, the audit authority did not properly document its supervision of audit work as required by international auditing standards.

| — | In Estonia, the audit strategy did not include an assessment of the limitations imposed by the extensive use of pre-financing payments on the audit of the AMIF/ISF accounts. |
| --- | --- |

—

In Estonia, the audit strategy did not include an assessment of the limitations imposed by the extensive use of pre-financing payments on the audit of the AMIF/ISF accounts.

Increased risk to the eligibility, management and control of funded actions.

SOLID

| 8.12. | We assessed DG Home’s ex-post audit work through the review of ten ex-post conformity audits (10). These audits aim to detect and correct irregular expenditure from programmes that the Commission has already closed. Our findings highlight some system weaknesses but do not call into question the Commission’s audit results. |
| --- | --- |

8.12.

We assessed DG Home’s ex-post audit work through the review of ten ex-post conformity audits (10). These audits aim to detect and correct irregular expenditure from programmes that the Commission has already closed. Our findings highlight some system weaknesses but do not call into question the Commission’s audit results.

Box 8.7 —   System weaknesses relating to SOLID

| Commission | |
| --- | --- |
| Weakness | Effect | Commission reply |
| Outsourced audit work on SOLID:






  — | Delays persist in the reporting of ex-post conformity audits: reports with findings on projects implemented in 2007 were audited ex-post in 2013, but at the end of 2017 the Member States had still not agreed and accepted the audit results. |

Commission

Weakness

Effect

Commission reply

Outsourced audit work on SOLID:

—

Delays persist in the reporting of ex-post conformity audits: reports with findings on projects implemented in 2007 were audited ex-post in 2013, but at the end of 2017 the Member States had still not agreed and accepted the audit results.

Delays prevent Member States from addressing the root causes of audit findings at the appropriate time.

The backlog of SOLID ex-post audits impacts audit work on AMIF and the ISF, which is done by the same Commission staff.

Outsourced audit work on SOLID — addressing the root causes of audit findings

The primary objective of an ex-post control is to determine the residual level of error in the audited programme(s); the Commission's assurance is also based on system audits throughout the entire programming period, which is the main opportunity for Member States to take corrective measures for system deficiencies. Where needed, system recommendations to correct deficiencies were also issued by the Commission following its analysis of the documents submitted by the Member States for each annual closure package. An ex-post audit is the last opportunity to determine the correct amount that should have been charged to the Union budget by the Member States for a particular annual programme.

Outsourced audit work on SOLID — audit work on AMIF and the ISF

For AMIF/ISF, the audit methodology in place allows for a faster reporting process and it is not expected to experience delays in this respect. In its Audit Plan for 2018, DG HOME plans to carry out up to 7 system audits on the AMIF/ISF Funds, in comparison to 3 system audits carried out on these Funds in 2017. Moreover, targeted actions have been taken with a view to deal, with immediate effect, with the SOLID ex-post audits which are still open. DG HOME is currently improving the existing methodology for SOLID audits, with the aim to streamline both the audit work and the reporting process. It is a priority objective of DG HOME to address the remaining backlog without delay.

| — | Insufficiently documented quality control procedures for outsourced audit work. |
| --- | --- |

—

Insufficiently documented quality control procedures for outsourced audit work.

Risks to the quality of ex-post conformity audits.

Quality control procedures for outsourced audit work

DG Home has enhanced, as agreed with the ECA auditors, its supervision of the ex-post work performed by the external contractors. It carried out the review of a sample of audit files and re-performed the work done based on the supporting documents available. DG HOME concluded that the audit work carried out by the external contractor was satisfactory. With the aim to maintain the enhanced level of supervision on its external contractor, DG HOME plans to carry out a similar exercise during 2018.

| — | Control procedures for double/multiple funding are not exhaustive. |
| --- | --- |

—

Control procedures for double/multiple funding are not exhaustive.

Risk of double funding going undetected.

Control procedures for double/multiple funding

While there is no specific question requesting formally the auditor to check the double funding, the detailed checks on the income side allow for detecting to some extent potential double funding, as the auditors have to trace the provenance of all the income.

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

Annual activity reports and other governance arrangements

| 8.13. | We reviewed the annual activity report of DG Home and we did not identify any information that contradicts the Court's findings. However, our limited sample of 15 transactions for 2017 is not sufficient for us to compare our audit results with the information reported by DG Home on the regularity of spending. |
| --- | --- |

8.13.

We reviewed the annual activity report of DG Home and we did not identify any information that contradicts the Court's findings. However, our limited sample of 15 transactions for 2017 is not sufficient for us to compare our audit results with the information reported by DG Home on the regularity of spending.

CONCLUSION AND RECOMMENDATIONS

| 8.14. | The audit scope for this MFF heading (see paragraph 8.5) does not allow for a quantified conclusion in the same way as in other chapters of this report. Our examination of selected systems nevertheless highlighted two main issues where there is room for improvement. |
| --- | --- |

8.14.

The audit scope for this MFF heading (see paragraph 8.5) does not allow for a quantified conclusion in the same way as in other chapters of this report. Our examination of selected systems nevertheless highlighted two main issues where there is room for improvement.

Recommendations

| 8.15. | The Commission should: |
| --- | --- |

8.15.

The Commission should:

| — | Recommendation 1: provide guidance to Member States on using EU funds in accordance with the principle of sound financial management. In particular, the AMIF/ISF implementing guidelines should specify that, when public bodies implement EU actions, the EU co-financing may not exceed the total eligible expenditure excluding VAT. |
| --- | --- |

—

Recommendation 1: provide guidance to Member States on using EU funds in accordance with the principle of sound financial management. In particular, the AMIF/ISF implementing guidelines should specify that, when public bodies implement EU actions, the EU co-financing may not exceed the total eligible expenditure excluding VAT.

The Commission accepts the recommendation.

| — | Recommendation 2: require Member States, in the annual accounts of their AMIF and ISF national programmes, to break down the nature of the amounts they report into recoveries, pre-financing and expenditure actually incurred; and report in its AAR from 2018 onwards the actual spending per fund. |
| --- | --- |

—

Recommendation 2: require Member States, in the annual accounts of their AMIF and ISF national programmes, to break down the nature of the amounts they report into recoveries, pre-financing and expenditure actually incurred; and report in its AAR from 2018 onwards the actual spending per fund.

The Commission accepts the recommendation and has partially implemented it both in relation to:

| — | enhanced information from Member States on the nature of the amounts at the moment of reporting their annual accounts and; |
| --- | --- |

—

enhanced information from Member States on the nature of the amounts at the moment of reporting their annual accounts and;

| — | providing to the Member States guidance on the reporting of recoveries (issued on 8 December 2017). |
| --- | --- |

—

providing to the Member States guidance on the reporting of recoveries (issued on 8 December 2017).

---

(1)  The legal act establishing AMIF can be found on the Eur-Lex website.

(2)  The legal acts establishing these instruments can be found on the Eur-Lex website: External Borders Fund, European Return Fund, European Refugee Fund, European Fund for the integration of third-country nationals.

(3)  Prevention and Fight against Crime (ISEC) and Prevention, Preparedness and Consequence Management of Terrorism and other Security Related Risks (CIPS).

(4)  The legal acts establishing these instruments can be found on the Eur-Lex website: ISF Borders and Visa, ISF Police.

(5)  Health: ECDC, EFSA, EMA. Home affairs: Frontex, EASO, Europol, CEPOL, eu-LISA, EMCDDA. Justice: Eurojust, FRA, EIGE.

(6)  Belgium, Estonia, Spain, France, Croatia, Lithuania, Austria, and Sweden.

(7)  Our specific annual report with our opinion on the legality and regularity of EASO expenditure for 2016 can be found on the ECA website.

(8)  ISF for Estonia, Greece, Italy, Lithuania and Austria; AMIF for France, Luxembourg, Spain, Sweden and the United Kingdom.

(9)  France and Sweden for AMIF; Austria, Estonia and Lithuania for the ISF.

(10)  EIF and ERF in Spain; EIF, ERF and RF in Germany; ERF and EIF in Italy; EIF and ERF in Bulgaria; EIF in Greece.

(11)  Includes expenditure on consumers, justice, rights, equality and citizenship.

(12)  In line with the harmonised definition of underlying transactions (for details see
  Annex 1.1
  , paragraph 15).

---

CHAPTER 9

Global Europe

TABLE OF CONTENTS

| Introduction | 9.1-9.5 |
| --- | --- |

| Brief description of ‘Global Europe’ | 9.2-9.4 |
| --- | --- |

| Audit scope and approach | 9.5 |
| --- | --- |

| Part 1 — Regularity of transactions | 9.6-9.19 |
| --- | --- |

| Annual activity reports and other governance arrangements | 9.12-9.19 |
| --- | --- |

| Assessment of DG NEAR systems | 9.12-9.18 |
| --- | --- |

| Assessment of DG DEVCO systems | 9.19 |
| --- | --- |

| Part 2 — Performance issues in ‘Global Europe’ projects | 9.20-9.23 |
| --- | --- |

| Conclusions and recommendations | 9.24-9.26 |
| --- | --- |

| Recommendations | 9.25-9.26 |
| --- | --- |

| Annex 9.1 — | Operational Expenditure by Delegation 2017 |
| --- | --- |

Annex 9.1 —

| Annex 9.2 — | Follow-up of previous recommendations for ‘Global Europe’ |
| --- | --- |

Annex 9.2 —

| THE COURT’S OBSERVATIONS | |
| --- | --- |
| INTRODUCTION |
| 9.1. | This chapter presents our findings for the MFF heading ‘Global Europe’.
  Box 9.1
  gives an overview of the main activities and spending under this heading in 2017. |

THE COURT’S OBSERVATIONS

INTRODUCTION

9.1.

This chapter presents our findings for the MFF heading ‘Global Europe’.
  Box 9.1
  gives an overview of the main activities and spending under this heading in 2017.

Box 9.1 —   MFF heading ‘Global Europe’ — 2017 breakdown

Image

| Total payments for the year | 9,8 |
| --- | --- |
| - advances
   (9) | -6,5 |
| + clearings of advances
   (9) | 4,9 |
| Audited population, total | 8,2 |
| Source: 2017 Consolidated accounts of the European Union. |

Total payments for the year

9,8

- advances
   (9)

-6,5

- clearings of advances
   (9)

4,9

Audited population, total

8,2

Source: 2017 Consolidated accounts of the European Union.

THE COURT’S OBSERVATIONS

Brief description of ‘Global Europe’

| 9.2. | ‘Global Europe’ covers expenditure on all external action policies (foreign policy) funded by the EU general budget. These policies:






  — | promote EU values abroad, such as human rights, democracy and the rule of law; |
| --- | --- | --- |

9.2.

‘Global Europe’ covers expenditure on all external action policies (foreign policy) funded by the EU general budget. These policies:

—

promote EU values abroad, such as human rights, democracy and the rule of law;

| — | address major global challenges, such as climate change and biodiversity loss; |
| --- | --- |

—

address major global challenges, such as climate change and biodiversity loss;

| — | increase the impact of EU development cooperation, with the aim of helping to eradicate poverty; |
| --- | --- |

—

increase the impact of EU development cooperation, with the aim of helping to eradicate poverty;

| — | invest in the long-term prosperity and stability of the EU's neighbours, both by preparing candidate countries for membership and the neighbourhood policy; |
| --- | --- |

—

invest in the long-term prosperity and stability of the EU's neighbours, both by preparing candidate countries for membership and the neighbourhood policy;

| — | enhance European solidarity after natural or man-made disasters; |
| --- | --- |

—

enhance European solidarity after natural or man-made disasters;

| — | improve crisis prevention and conflict resolution, preserve peace and strengthen international security; |
| --- | --- |

—

improve crisis prevention and conflict resolution, preserve peace and strengthen international security;

| — | advance and promote EU and mutual interests abroad by supporting the external dimension of EU policies. |
| --- | --- |

—

advance and promote EU and mutual interests abroad by supporting the external dimension of EU policies.

| 9.3. | The main directorates-general involved in implementing the external action budget are the Directorate-General for International Cooperation and Development (DG DEVCO), the Directorate-General for Neighbourhood Policy and Enlargement Negotiations (DG NEAR), the Directorate-General for Civil Protection and Humanitarian Aid Operations (DG ECHO) and the Service for Foreign Policy Instruments (FPI). |
| --- | --- |

9.3.

The main directorates-general involved in implementing the external action budget are the Directorate-General for International Cooperation and Development (DG DEVCO), the Directorate-General for Neighbourhood Policy and Enlargement Negotiations (DG NEAR), the Directorate-General for Civil Protection and Humanitarian Aid Operations (DG ECHO) and the Service for Foreign Policy Instruments (FPI).

| 9.4. | In 2017, payments for ‘Global Europe’ amounted to 9,8  billion euros and were disbursed using several instruments (see 
  Box 9.1
  ) and delivery methods (1), in more than 150 countries (see 
  Annex 9.1
  ). |
| --- | --- |

9.4.

In 2017, payments for ‘Global Europe’ amounted to 9,8  billion euros and were disbursed using several instruments (see 
  Box 9.1
  ) and delivery methods (1), in more than 150 countries (see 
  Annex 9.1
  ).

Audit scope and approach

| 9.5. | Using the audit approach and methods set out in
  Annex 1.1
  , the following for ‘Global Europe’ in 2017 was examined:






  (a) | We have sampled a total of 56 transactions of which 4 were taken over from the RER study. We have therefore examined a sample of 52 transactions, which was designed to help us form a view on 2017 spending from the budget as a whole and not to be representative of the full range of spending under this MFF heading (i.e. we did not estimate the level of error under heading 4). For part of our population covered by DG NEAR and DG DEVCO RER 2017 studies (9 %), we integrated adjusted results (2), of these studies. The sampled transactions consisted of 21 DG NEAR, 16 DG DEVCO, 7 DG ECHO and 8 other transactions. |
| --- | --- | --- |

9.5.

Using the audit approach and methods set out in
  Annex 1.1
  , the following for ‘Global Europe’ in 2017 was examined:

(a)

We have sampled a total of 56 transactions of which 4 were taken over from the RER study. We have therefore examined a sample of 52 transactions, which was designed to help us form a view on 2017 spending from the budget as a whole and not to be representative of the full range of spending under this MFF heading (i.e. we did not estimate the level of error under heading 4). For part of our population covered by DG NEAR and DG DEVCO RER 2017 studies (9 %), we integrated adjusted results (2), of these studies. The sampled transactions consisted of 21 DG NEAR, 16 DG DEVCO, 7 DG ECHO and 8 other transactions.

| (b) | Where we detected errors, we examined the associated systems to identify weaknesses that had allowed the errors to occur. |
| --- | --- |

(b)

Where we detected errors, we examined the associated systems to identify weaknesses that had allowed the errors to occur.

| (c) | We made performance-related checks on seven projects in two EU Delegations. DG NEAR had implemented three of these projects and DG DEVCO had implemented the other four. |
| --- | --- |

(c)

We made performance-related checks on seven projects in two EU Delegations. DG NEAR had implemented three of these projects and DG DEVCO had implemented the other four.

| (d) | We assessed the annual activity reports of DG DEVCO and DG NEAR presented information on regularity of spending that was broadly consistent with our results. |
| --- | --- |

(d)

We assessed the annual activity reports of DG DEVCO and DG NEAR presented information on regularity of spending that was broadly consistent with our results.

PART 1 — REGULARITY OF TRANSACTIONS

| 9.6. | Of the 52 transactions examined, we identified six quantifiable errors (in 8 % of the audited transactions) which had had an impact on the amounts charged to the EU budget. We also found six cases of non-compliance with legal and financial provisions, e.g. the lack of a financial guarantee. As referred to in paragraph 9.5(a), the sample was not intended to be representative of spending under this MFF heading, so we have not calculated an error rate. In examining these transactions, we identified cases of effective internal control systems, for which we provide an example in
  Box 9.2
  . The findings regarding the ineligible expenditure are explained in
  Boxes 9.3 and 9.4
  . |
| --- | --- |

9.6.

Of the 52 transactions examined, we identified six quantifiable errors (in 8 % of the audited transactions) which had had an impact on the amounts charged to the EU budget. We also found six cases of non-compliance with legal and financial provisions, e.g. the lack of a financial guarantee. As referred to in paragraph 9.5(a), the sample was not intended to be representative of spending under this MFF heading, so we have not calculated an error rate. In examining these transactions, we identified cases of effective internal control systems, for which we provide an example in
  Box 9.2
  . The findings regarding the ineligible expenditure are explained in
  Boxes 9.3 and 9.4
  .

Box 9.2 —   Example of an effective internal control system

DG DEVCO

We audited expenditure declared by an NGO under a grant contract signed with the Commission. The expenditure we audited had been accepted by the Commission. The aim of the supported project was to control invasive bird species in six island countries in the Pacific Ocean. The amount of the EU grant was 1,16  million euros.

A financial audit carried out at project level by an external auditor showed that 15 909 euros of declared expenditure was ineligible (supporting documents were missing, and there were errors associated with VAT). The Commission corrected this error in the final payment.

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

Box 9.3 —   Expenditure not incurred and accepted by the Commission

DG DEVCO — Iraq

We audited expenditure declared by an international organisation under a contribution agreement signed with the Commission. This capacity building project of regional authorities had a budget of 11,5  million euros (100 % EU-funded), and a duration of 3,5  years.

We reviewed the expenditure incurred during the first two years of the project. In this period, the international organisation had declared 7,6  million euros of expenditure, which had been accepted by the Commission. Our checks revealed that actual expenditure for the period had been 6 million euros. The difference, 1,6  million euros, were commitments booked by the international organisation but not yet spent. This amount is considered ineligible, as no expenditure had yet been incurred.

Box 9.3 — Expenditure not incurred and accepted by the Commission

This finding is related to an interim report and in the context of the final payment, the final financial report will present only real expenditure incurred. The finding of the ECA will be taken into account when calculating the next payment or the balance payment.

Box 9.4 —   Ineligible expenditure regarding currency-exchange losses

DG DEVCO — centrally managed projects

We audited the final amount of expenditure declared by an international organisation under a contribution agreement signed with the Commission. The aim of the agreement was to support policy dialogue on national health policies, strategies and plans in 28 target countries. The expenditure we audited had been accepted by the Commission. The amount of the EU grant was 5 million euros.

The implementing organisation had suffered exchange-rate losses linked to the payment of staff salaries. These losses had been charged to the project’s budget through the payroll system. These costs were ineligible.

Box 9.4 — Ineligible expenditure regarding currency-exchange losses

The Commission will ensure that the necessary follow-up actions will be taken.

THE COURT’S OBSERVATIONS

| 9.7. | In two areas, payment conditions limited the extent to which transactions were prone to error. The first of these areas was budget support (3). The second area comprised cases where the ‘notional approach’ had been applied in multi-donor projects implemented by international organisations (4). |
| --- | --- |

9.7.

In two areas, payment conditions limited the extent to which transactions were prone to error. The first of these areas was budget support (3). The second area comprised cases where the ‘notional approach’ had been applied in multi-donor projects implemented by international organisations (4).

| 9.8. | Budget support is a financial contribution either to a state’s general budget, or to its budget for a specific policy or objective. We examined whether the Commission had complied with the conditions governing budget-support payments to partner countries, and whether it had verified that the general eligibility conditions (such as satisfactory improvements in public-sector financial management) were met before disbursement. |
| --- | --- |

9.8.

Budget support is a financial contribution either to a state’s general budget, or to its budget for a specific policy or objective. We examined whether the Commission had complied with the conditions governing budget-support payments to partner countries, and whether it had verified that the general eligibility conditions (such as satisfactory improvements in public-sector financial management) were met before disbursement.

| 9.9. | However, given the legal provisions’ broad scope for interpretation, the Commission has considerable flexibility in deciding whether these general conditions have been met. Our regularity audit cannot go beyond the stage at which aid is paid to the partner country, since the funds are then merged with the recipient country’s budget resources. Any weaknesses in its financial management leading to misuse at national level will not lead to errors in our audit (5). |
| --- | --- |

9.9.

However, given the legal provisions’ broad scope for interpretation, the Commission has considerable flexibility in deciding whether these general conditions have been met. Our regularity audit cannot go beyond the stage at which aid is paid to the partner country, since the funds are then merged with the recipient country’s budget resources. Any weaknesses in its financial management leading to misuse at national level will not lead to errors in our audit (5).

| 9.10. | Under the ‘notional approach’, when the Commission’s and other donors’ contributions to multi-donor projects are pooled and are not earmarked for specific, identifiable items of expenditure, the Commission assumes that EU eligibility rules have been complied with as long as the total pooled amount includes sufficient eligible expenditure to cover the EU’s contribution. We took this approach, as applied by the Commission, into account in our substantive testing (6). |
| --- | --- |

9.10.

Under the ‘notional approach’, when the Commission’s and other donors’ contributions to multi-donor projects are pooled and are not earmarked for specific, identifiable items of expenditure, the Commission assumes that EU eligibility rules have been complied with as long as the total pooled amount includes sufficient eligible expenditure to cover the EU’s contribution. We took this approach, as applied by the Commission, into account in our substantive testing (6).

| 9.11. | The ten multi-donor transactions where the ‘notional approach’ was applied and the two budget-support transactions we examined contained no errors. |
| --- | --- |

9.11.

The ten multi-donor transactions where the ‘notional approach’ was applied and the two budget-support transactions we examined contained no errors.

Annual activity reports and other governance arrangements

Assessment of DG NEAR systems

Systems weaknesses revealed through transaction testing

| 9.12. | In connection with twinning contracts, whereby Member States provide staff to carry out a project, we found that one EU Delegation had not checked the previous salaries of Resident Twinning Advisors (RTAs) seconded to EU-funded projects. The administration from which the RTA is seconded is entitled to reimbursement of an amount equivalent to the RTA’s salary for the duration of secondment. In one project, we found that the RTA’s salary during his secondment was higher than the amount he would have received had he continued to work for his home administration. |
| --- | --- |

9.12.

In connection with twinning contracts, whereby Member States provide staff to carry out a project, we found that one EU Delegation had not checked the previous salaries of Resident Twinning Advisors (RTAs) seconded to EU-funded projects. The administration from which the RTA is seconded is entitled to reimbursement of an amount equivalent to the RTA’s salary for the duration of secondment. In one project, we found that the RTA’s salary during his secondment was higher than the amount he would have received had he continued to work for his home administration.

2017 residual error rate (RER) study

| 9.13. | In 2017, DG NEAR had its third residual error rate (RER) study carried out by an external contractor. The aim of the study was to estimate how many errors in DG NEAR’s area of responsibility had not been prevented, or detected but not corrected, by DG NEAR’s internal control system. |
| --- | --- |

9.13.

In 2017, DG NEAR had its third residual error rate (RER) study carried out by an external contractor. The aim of the study was to estimate how many errors in DG NEAR’s area of responsibility had not been prevented, or detected but not corrected, by DG NEAR’s internal control system.

| 9.14. | The study examined a representative sample of transactions made under contracts closed between September 2016 and August 2017, and employed a methodology used by DG DEVCO since 2012. We assessed this methodology, finding it to be broadly fit for purpose. In our analysis of the study we found, nevertheless, a number of areas with scope for improvement. DG NEAR does not stratify the population to cover in more detail those areas which are more prone to error (e.g. grants) or to focus less on those with confirmed lower risk (e.g. budget support). We consider that one of the errors dropped by the contractor should have been kept. There is also scope for improvement in the degree of judgement left to the contractor for error estimates for individual transactions. |
| --- | --- |

9.14.

The study examined a representative sample of transactions made under contracts closed between September 2016 and August 2017, and employed a methodology used by DG DEVCO since 2012. We assessed this methodology, finding it to be broadly fit for purpose. In our analysis of the study we found, nevertheless, a number of areas with scope for improvement. DG NEAR does not stratify the population to cover in more detail those areas which are more prone to error (e.g. grants) or to focus less on those with confirmed lower risk (e.g. budget support). We consider that one of the errors dropped by the contractor should have been kept. There is also scope for improvement in the degree of judgement left to the contractor for error estimates for individual transactions.

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

| 9.15. | The results of DG NEAR’s 2017 RER are presented in its AAR (7). The study estimated the global RER for the DG to be 0,67  %, i.e. below the 2 % materiality threshold set by the Commission. |
| --- | --- |

9.15.

The results of DG NEAR’s 2017 RER are presented in its AAR (7). The study estimated the global RER for the DG to be 0,67  %, i.e. below the 2 % materiality threshold set by the Commission.

Annual activity report

| 9.16. | For the 2017 budget year, we reviewed DG NEAR’s 2017 annual activity report. |
| --- | --- |

9.16.

For the 2017 budget year, we reviewed DG NEAR’s 2017 annual activity report.

| 9.17. | In order to address the Court's recommendations on the overstatement of corrective capacity, DG NEAR had made considerable efforts and adopted a prudent approach when analysing recovery orders. More specifically, DG NEAR had correctly included in the calculation of the corrective capacity only the amounts recovered due to irregularities and errors detected ex-post. |
| --- | --- |

9.17.

In order to address the Court's recommendations on the overstatement of corrective capacity, DG NEAR had made considerable efforts and adopted a prudent approach when analysing recovery orders. More specifically, DG NEAR had correctly included in the calculation of the corrective capacity only the amounts recovered due to irregularities and errors detected ex-post.

| 9.18. | In its 2017 AAR, DG NEAR does not include a section drawing attention to the limitations of the RER study. |
| --- | --- |

9.18.

In its 2017 AAR, DG NEAR does not include a section drawing attention to the limitations of the RER study.

Assessment of DG DEVCO systems

| 9.19. | Our tests on transactions revealed some control weaknesses in the Commission’s systems concerning second-level procurement procedures (procurement procedures carried out by beneficiaries). In two projects, we found that the beneficiaries of grants had not respected the principles of transparency and fair competition when contracting services. In one of the cases they did not provide evidence justifying the use of a direct award. In the other, they could not justify that all bidders were treated equally. |
| --- | --- |

9.19.

Our tests on transactions revealed some control weaknesses in the Commission’s systems concerning second-level procurement procedures (procurement procedures carried out by beneficiaries). In two projects, we found that the beneficiaries of grants had not respected the principles of transparency and fair competition when contracting services. In one of the cases they did not provide evidence justifying the use of a direct award. In the other, they could not justify that all bidders were treated equally.

| 9.19. | The Commission wants to stress that with regard to one of the detected weaknesses a crisis situation had been declared in the country concerned, justifying flexible procedures. Nonetheless the importance of supporting documents has been well noted and highlighted to the parties concerned.

  The second weakness was detected under a contract dating back to 2010. Since then various actions have been taken under DEVCO’s action plans addressing i.a. this type of weakness which should therefore lead to a reduction of such errors. |
| --- | --- |

9.19.

The second weakness was detected under a contract dating back to 2010. Since then various actions have been taken under DEVCO’s action plans addressing i.a. this type of weakness which should therefore lead to a reduction of such errors.

| 9.20. | Additional checks on DG DEVCO’s systems, including its RER study and its Annual Activity Report for 2017 are presented in detail in our annual report on the 8th, 9th, 10th and 11th European Development Funds (see paragraphs 30 to 42). |
| --- | --- |

9.20.

Additional checks on DG DEVCO’s systems, including its RER study and its Annual Activity Report for 2017 are presented in detail in our annual report on the 8th, 9th, 10th and 11th European Development Funds (see paragraphs 30 to 42).

PART 2 — PERFORMANCE ISSUES IN ‘GLOBAL EUROPE’ PROJECTS

| 9.21. | This year, in addition to checking regularity, we assessed performance aspects for seven of the sampled transactions. We selected completed projects and carried out our checks on the spot when visiting EU Delegations. |
| --- | --- |

9.21.

This year, in addition to checking regularity, we assessed performance aspects for seven of the sampled transactions. We selected completed projects and carried out our checks on the spot when visiting EU Delegations.

| 9.22. | For each project, we assessed whether clear output and outcome indicators existed. We also checked whether the project’s output objectives had been achieved as planned in terms of quantity, quality and timing. We made additional checks on the accepted costs of the projects in order to verify that they were in line with the approved financial offers. |
| --- | --- |

9.22.

For each project, we assessed whether clear output and outcome indicators existed. We also checked whether the project’s output objectives had been achieved as planned in terms of quantity, quality and timing. We made additional checks on the accepted costs of the projects in order to verify that they were in line with the approved financial offers.

| 9.23. | All of the examined projects had clear and relevant performance indicators. Their logical frameworks were well structured, and their outputs were realistic and achievable. However, we found a number of issues that detracted from the projects’ performance (see
  Box 9.5)
  . |
| --- | --- |

9.23.

All of the examined projects had clear and relevant performance indicators. Their logical frameworks were well structured, and their outputs were realistic and achievable. However, we found a number of issues that detracted from the projects’ performance (see
  Box 9.5)
  .

Box 9.5 —   Performance-related issues on projects visited

Box 9.5 — Performance-related issues on projects visited

| (a) | In two cases, the cost of transporting supplies (ballot boxes and papers) was much higher than the value of the supplies themselves. In the first case, it had cost 152 000  euros to transport goods worth 78 000  euros. In the second case, it had cost 131 500  euros to transport merchandise worth 70 150  euros. |
| --- | --- |

(a)

In two cases, the cost of transporting supplies (ballot boxes and papers) was much higher than the value of the supplies themselves. In the first case, it had cost 152 000  euros to transport goods worth 78 000  euros. In the second case, it had cost 131 500  euros to transport merchandise worth 70 150  euros.

| (a) | The Commission would like to highlight the sensitivity of elections. The political parties demanded explicitly that the sensitive electoral materials should be bought abroad to avoid fraud but excluded neighbouring countries due to their alleged sympathies with certain political parties/candidates. In addition, sensitive electoral materials are produced by limited and specialised companies that can deliver on time, safely and with quality. Launching an open tender outside the existing long-term agreements may not have yielded better results and could have delayed the delivery of materials given the timing of elections. |
| --- | --- |

(a)

The Commission would like to highlight the sensitivity of elections. The political parties demanded explicitly that the sensitive electoral materials should be bought abroad to avoid fraud but excluded neighbouring countries due to their alleged sympathies with certain political parties/candidates. In addition, sensitive electoral materials are produced by limited and specialised companies that can deliver on time, safely and with quality. Launching an open tender outside the existing long-term agreements may not have yielded better results and could have delayed the delivery of materials given the timing of elections.

| (b) | The main objective of one project was to construct latrines in schools in remote areas. When we visited the projects, we noted that while the EU project had been implemented correctly, the schools lacked basic equipment, such as tables and chairs, which was necessary to begin the school year. |
| --- | --- |

(b)

The main objective of one project was to construct latrines in schools in remote areas. When we visited the projects, we noted that while the EU project had been implemented correctly, the schools lacked basic equipment, such as tables and chairs, which was necessary to begin the school year.

| (b) | The project did not foresee chairs and tables or other school furniture, but only latrines to urgently improve basic hygiene standards. Even though the Commission would like to finance other aspects of the school structure, interventions are much focused and limited.

  The school system in Guinea-Bissau is severely underresourced. Lack of school furniture is quite usual. Furniture is rarely available in the school classrooms outside of lessons period, to avoid potential theft. |
| --- | --- |

(b)

The project did not foresee chairs and tables or other school furniture, but only latrines to urgently improve basic hygiene standards. Even though the Commission would like to finance other aspects of the school structure, interventions are much focused and limited.

| (c) | A works project for the construction of a bridge should have been completed in 32 months but had taken 64 months because of unexpected delays in a parallel project implemented by the local authorities. |
| --- | --- |

(c)

A works project for the construction of a bridge should have been completed in 32 months but had taken 64 months because of unexpected delays in a parallel project implemented by the local authorities.

CONCLUSIONS AND RECOMMENDATIONS

| 9.24. | The audit scope for this MFF heading (see paragraph 9.5) does not allow for a quantified conclusion in the same way as in other chapters of this report. Our examination of transactions and systems nevertheless highlighted three main issues where there is scope for improvement. |
| --- | --- |

9.24.

The audit scope for this MFF heading (see paragraph 9.5) does not allow for a quantified conclusion in the same way as in other chapters of this report. Our examination of transactions and systems nevertheless highlighted three main issues where there is scope for improvement.

Recommendations

| 9.25. | Annex 9.2
  shows the findings of our follow-up review of the two recommendations we made in our 2014 annual report (8). The Commission has implemented both of them in full. |
| --- | --- |

9.25.

Annex 9.2
  shows the findings of our follow-up review of the two recommendations we made in our 2014 annual report (8). The Commission has implemented both of them in full.

| 9.26. | Based on our findings for 2017, we recommend that the Commission: |
| --- | --- |

9.26.

Based on our findings for 2017, we recommend that the Commission:

| — | Recommendation 1 (DG NEAR) RER Study: for the 2019 RER study onwards, provide the RER contractor with more precise guidelines on checking second-level procurement. |
| --- | --- |

—

Recommendation 1 (DG NEAR) RER Study: for the 2019 RER study onwards, provide the RER contractor with more precise guidelines on checking second-level procurement.

The Commission accepts the recommendation.

| — | Recommendation 2 (DG NEAR) RER Study: for the 2019 RER study onwards, stratify the RER population based on the inherent risk of the projects, with more weight placed on direct management grants and less on budget support transactions. |
| --- | --- |

—

Recommendation 2 (DG NEAR) RER Study: for the 2019 RER study onwards, stratify the RER population based on the inherent risk of the projects, with more weight placed on direct management grants and less on budget support transactions.

The Commission accepts the recommendation.

It will explore with the RER contractor ways of stratifying the RER population, while still taking into consideration the need to maintain a sound and representative sample overall.

| — | Recommendation 3 (DG NEAR) RER Study: in the 2018 AAR and onwards, disclose the limitations of the RER study. |
| --- | --- |

—

Recommendation 3 (DG NEAR) RER Study: in the 2018 AAR and onwards, disclose the limitations of the RER study.

The Commission accepts the recommendation.

| — | Recommendation 4 (DG DEVCO): by 2020, revisit existing guidance to beneficiaries of projects implemented under indirect management with the aim of ensuring that planned activities are executed in a timely manner and contribute to the practical use of the projects outputs, so as to obtain the best value for money. |
| --- | --- |

—

Recommendation 4 (DG DEVCO): by 2020, revisit existing guidance to beneficiaries of projects implemented under indirect management with the aim of ensuring that planned activities are executed in a timely manner and contribute to the practical use of the projects outputs, so as to obtain the best value for money.

The Commission accepts the recommendation.

---

(1)  Such as work/supply/service contracts, grants, special loans, loan guarantees and financial assistance, budgetary support and other targeted forms of budgetary aid.

(2)  As a result of our review on RER studies we have found that the methodology behind the DEVCO RER study foresees a very limited number of on-the-spot checks. In addition, both DEVCO and NEAR RER studies envisage a limited scope for examination of procurement procedures. Therefore, this year we adjusted the result of the RER study with proportions of error on compliance with public procurement rules. The basis for adjustment was the Court’s SoA 2014-2016 findings for Global Europe.

(3)  Budget support payments financed by the general budget in 2017 amounted to 955 million euros.

(4)  The payments to international organisations from the general budget in 2017 amounted to 3,1 billion euros. We cannot state the proportion of this sum to which the notional approach applied, since the Commission does not monitor it separately.

(5)  The efficiency and effectiveness of budget support is addressed in a number of the Court’s special reports, the latest ones being SR 32/2016 ‘EU assistance to Ukraine’, SR 30/2016 ‘The effectiveness of EU support to priority sectors in Honduras’.

(6)  We did not perform checks on underlying items of expenditure if the Commission’s contribution was below 75 % of the action’s budget. In cases where such contributions lay between 75 % and 90 %, we assessed the need to perform checks on underlying items of expenditure on a case by case basis.

(7)  See DG NEAR’s 2017 annual activity report, pages 40 and 41.

(8)  We chose our 2014 report for this year’s follow-up exercise as, typically, enough time should have elapsed for the Commission to implement our recommendations.

(9)  In line with the harmonised definition of underlying transactions (for details see
  Annex 1.1
  , paragraph 15).

ANNEX 9.1

OPERATIONAL EXPENDITURE BY DELEGATION 2017

Image

Sources: Map background ©OpenStreetMap contributors licence under the Creative Commons Attribution-ShareAlike 2.0 licence (CC BY-SA) and European Court of Auditors, based on the 2017 consolidated annual accounts of the European Union.

ANNEX 9.2

FOLLOW-UP OF PREVIOUS RECOMMENDATIONS FOR ‘GLOBAL EUROPE’

| Year | Court recommendation | Court's analysis of the progress made | Commission's reply |
| --- | --- | --- | --- |
| Fully implemented | Being implemented | Not implemented | Not applicable | Insufficient evidence |
| In most respects | In some respects |
| 2014 | Recommendation 1: set up and implement internal control procedures to ensure that pre-financing is cleared on the basis of actual incurred expenditure not including legal commitments. | x | | | | | | |
| Recommendation 2: strengthen the ex ante controls for grant contracts namely by EuropeAid making operational the intended actions following the recommendation made in the EDF 2011 annual report for risk-based planning and systematic follow-up for verification and on-the-spot monitoring visits. | x | | | | | | |

Year

Court recommendation

Court's analysis of the progress made

Commission's reply

Fully implemented

Being implemented

Not implemented

Not applicable

Insufficient evidence

In most respects

In some respects

2014

Recommendation 1: set up and implement internal control procedures to ensure that pre-financing is cleared on the basis of actual incurred expenditure not including legal commitments.

x

Recommendation 2: strengthen the ex ante controls for grant contracts namely by EuropeAid making operational the intended actions following the recommendation made in the EDF 2011 annual report for risk-based planning and systematic follow-up for verification and on-the-spot monitoring visits.

x

---

CHAPTER 10

‘Administration’

CONTENTS

| Introduction | 10.1-10.5 |
| --- | --- |

| Brief description of the MFF heading | 10.3 |
| --- | --- |

| Audit scope and approach | 10.4-10.5 |
| --- | --- |

| Regularity of transactions | 10.6 |
| --- | --- |

| Annual activity reports and other governance arrangements | 10.7 |
| --- | --- |

| Observations on specific institutions and bodies | 10.8-10.13 |
| --- | --- |

| European Parliament | 10.9-10.11 |
| --- | --- |

| European Commission | 10.12 |
| --- | --- |

| European Court of Auditors | 10.13 |
| --- | --- |

| Conclusion and recommendations | 10.14-10.16 |
| --- | --- |

| Conclusion | 10.14 |
| --- | --- |

| Recommendations | 10.15-10.16 |
| --- | --- |

| Annex 10.1 — | Results of transaction testing for ‘Administration’ |
| --- | --- |

Annex 10.1 —

| Annex 10.2 — | Follow-up of previous recommendations for ‘Administration’ |
| --- | --- |

Annex 10.2 —

| THE COURT’S OBSERVATIONS | |
| --- | --- |
| INTRODUCTION |
| 10.1. | This chapter presents our findings for the MFF heading 5 ‘Administration’ (1).
  Box 10.1
  gives an overview of the spending of each institution under this heading in 2017. |

THE COURT’S OBSERVATIONS

INTRODUCTION

10.1.

This chapter presents our findings for the MFF heading 5 ‘Administration’ (1).
  Box 10.1
  gives an overview of the spending of each institution under this heading in 2017.

Box 10.1 —   MFF heading 5 — 2017 breakdown

| (billion euros) |
| --- |
| |

(billion euros)

Image

| Total payments for the year | 9,7 |
| --- | --- |
| - advances
   (10) | -0,1 |
| + clearings of advances
   (10) | 0,1 |
| Audited population, total | 9,7 |
| Source: 2017 consolidated accounts of the European Union. |

Total payments for the year

9,7

- advances
   (10)

-0,1

- clearings of advances
   (10)

0,1

Audited population, total

9,7

Source: 2017 consolidated accounts of the European Union.

THE COURT’S OBSERVATIONS

| 10.2. | We report separately on the EU agencies and other bodies (2). Our mandate does not cover the financial audit of the European Central Bank. |
| --- | --- |

10.2.

We report separately on the EU agencies and other bodies (2). Our mandate does not cover the financial audit of the European Central Bank.

Brief description of the MFF heading

| 10.3. | Administrative expenditure comprises expenditure on human resources, which accounts for about 60 % of the total, as well as expenditure on buildings, equipment, energy, communications and information technology. Our work over many years indicates that this spending is low-risk. |
| --- | --- |

10.3.

Administrative expenditure comprises expenditure on human resources, which accounts for about 60 % of the total, as well as expenditure on buildings, equipment, energy, communications and information technology. Our work over many years indicates that this spending is low-risk.

Audit scope and approach

| 10.4. | Applying the audit approach and methods set out in
  Annex 1.1
  , we examined the following for MFF heading 5. |
| --- | --- |

10.4.

Applying the audit approach and methods set out in
  Annex 1.1
  , we examined the following for MFF heading 5.

| (a) | We examined a sample of 55 transactions, in line with paragraph 13 of
  Annex 1.1
  . The sample was designed to be representative of the range of spending under this MFF heading (see
  Box 10.1
  and paragraph 10.3). |
| --- | --- |

(a)

We examined a sample of 55 transactions, in line with paragraph 13 of
  Annex 1.1
  . The sample was designed to be representative of the range of spending under this MFF heading (see
  Box 10.1
  and paragraph 10.3).

| (b) | We also examined whether the annual activity reports of all the EU’s institutions and bodies, and among them of the European Commission’s directorates-general (DGs) and offices primarily responsible for administrative expenditure (3), presented information on regularity of spending that was broadly consistent with our own results. |
| --- | --- |

(b)

We also examined whether the annual activity reports of all the EU’s institutions and bodies, and among them of the European Commission’s directorates-general (DGs) and offices primarily responsible for administrative expenditure (3), presented information on regularity of spending that was broadly consistent with our own results.

| 10.5. | The European Court of Auditors’ own spending is audited by an external firm (4). The results of its audit of our financial statements for the year ending 31 December 2017 are presented in paragraph 10.13. |
| --- | --- |

10.5.

The European Court of Auditors’ own spending is audited by an external firm (4). The results of its audit of our financial statements for the year ending 31 December 2017 are presented in paragraph 10.13.

REGULARITY OF TRANSACTIONS

| 10.6. | Annex 10.1
  provides an overview of the results of transaction testing. Of the 55 transactions examined, 9 (16 %) contained errors. On the basis of the 3 errors we have quantified (see paragraphs 10.11 and 10.12), we estimate the level of error to be 0,5  % (5). |
| --- | --- |

10.6.

Annex 10.1
  provides an overview of the results of transaction testing. Of the 55 transactions examined, 9 (16 %) contained errors. On the basis of the 3 errors we have quantified (see paragraphs 10.11 and 10.12), we estimate the level of error to be 0,5  % (5).

ANNUAL ACTIVITY REPORTS AND OTHER GOVERNANCE ARRANGEMENTS

| 10.7. | The annual activity reports we reviewed did not identify material levels of error; this is consistent with our own audit results. |
| --- | --- |

10.7.

The annual activity reports we reviewed did not identify material levels of error; this is consistent with our own audit results.

OBSERVATIONS ON SPECIFIC INSTITUTIONS AND BODIES

| 10.8. | We did not identify any specific issues concerning the Council, the Court of Justice of the European Union, the European Economic and Social Committee, the Committee of the Regions, the European Ombudsman, the European Data Protection Supervisor or the European External Action Service. |
| --- | --- |

10.8.

We did not identify any specific issues concerning the Council, the Court of Justice of the European Union, the European Economic and Social Committee, the Committee of the Regions, the European Ombudsman, the European Data Protection Supervisor or the European External Action Service.

THE COURT’S OBSERVATIONS

REPLY OF THE EUROPEAN PARLIAMENT

European Parliament

| 10.9. | Of the eight European Parliament transactions we examined, two related to work carried out on buildings under a contract resulting from a procurement procedure. In the first case, the European Parliament did not obtain sufficient evidence that the contractor complied with one technical and professional selection criterion relating to the qualifications and professional experience of the staff employed to carry out the work. In the second case, the framework contract was to be awarded to the tenderer that quoted the lowest price. The contract amount resulted from two components: the cost of the works and the contractor’s gross profit margin, expressed as a percentage of that cost. The tenderers were only asked to provide their gross profit margins and only the gross profit margins were included in the financial evaluation of the tenders. The cost of the works was not part of the tendering procedure but was estimated by Parliament. In order to ensure that works were ordered on a competitive basis during the implementation of the framework contract, we checked how Parliament had set the unit prices shown on order forms. We noted that, for some works, the Parliament had not sought more than one bid. Using this approach may mean that works are not procured at the lowest price. |
| --- | --- |

10.9.

Of the eight European Parliament transactions we examined, two related to work carried out on buildings under a contract resulting from a procurement procedure. In the first case, the European Parliament did not obtain sufficient evidence that the contractor complied with one technical and professional selection criterion relating to the qualifications and professional experience of the staff employed to carry out the work. In the second case, the framework contract was to be awarded to the tenderer that quoted the lowest price. The contract amount resulted from two components: the cost of the works and the contractor’s gross profit margin, expressed as a percentage of that cost. The tenderers were only asked to provide their gross profit margins and only the gross profit margins were included in the financial evaluation of the tenders. The cost of the works was not part of the tendering procedure but was estimated by Parliament. In order to ensure that works were ordered on a competitive basis during the implementation of the framework contract, we checked how Parliament had set the unit prices shown on order forms. We noted that, for some works, the Parliament had not sought more than one bid. Using this approach may mean that works are not procured at the lowest price.

| 10.9. | In the first case Parliament has based the decision on the documents submitted under the Rules of Application, but will duly take into account the Court’s observations in future procedures; in the second case measures were taken to obtain the most competitive prices in this complicated contract; Parliament has meanwhile improved the process by a more intensive recourse to framework contracts with reopening of competition. |
| --- | --- |

10.9.

| 10.10. | One transaction in our sample for the European Ombudsman related to a procurement procedure led by the European Parliament for the selection of a travel agency. One of the selection criteria required the tenderers to have an annual turnover that was five times the estimated yearly value of the contract for which they were tendering (6). We consider this criterion to be overly strict and it may have prevented smaller companies from tendering. |
| --- | --- |

10.10.

One transaction in our sample for the European Ombudsman related to a procurement procedure led by the European Parliament for the selection of a travel agency. One of the selection criteria required the tenderers to have an annual turnover that was five times the estimated yearly value of the contract for which they were tendering (6). We consider this criterion to be overly strict and it may have prevented smaller companies from tendering.

| 10.10. | Parliament takes note of the Court’s observations; in the meantime, further to the 2016 amendment of the Financial Regulation, the threshold applied — inter alia in the ongoing procedure for a new contract — is twice the estimated annual contract value. It is noted that the requirements of the contract could only be satisfied by a restricted number of companies, at the time all satisfying the criterion — a restriction of competition did not occur. |
| --- | --- |

10.10.

| 10.11. | Our examination of one transaction relating to the payment of subsidies to groups of visitors revealed problems with the declaration of expenditure submitted by one such group, as the amounts included in the supporting documentation did not match those claimed in the declaration of expenditure (7). In another case, we detected ineligible expenditure by a group which submitted a claim for part of a trip to Brussels that was unrelated to its visit to the European Parliament. |
| --- | --- |

10.11.

Our examination of one transaction relating to the payment of subsidies to groups of visitors revealed problems with the declaration of expenditure submitted by one such group, as the amounts included in the supporting documentation did not match those claimed in the declaration of expenditure (7). In another case, we detected ineligible expenditure by a group which submitted a claim for part of a trip to Brussels that was unrelated to its visit to the European Parliament.

| 10.11. | Parliament takes note of the fact that for one of the groups some of the supporting documents did not match with the expenditure claimed. It is for this reason that Parliament has set up an ex post verification program to control the supporting documents. For expenditure which are not duly justified or not eligible a recovery order is issued.

  In respect of the eligibility of expenditure in relation to the visits, Parliament considers that the eligibility should be assessed taking into account the overall objectives of the visitors program, the enlarged visitors offer as laid out in the EP Visitors' Strategy approved by the Parliament's Bureau in April 2015, and the logistic constraints for organising the transport of the visitors groups. |
| --- | --- |

10.11.

In respect of the eligibility of expenditure in relation to the visits, Parliament considers that the eligibility should be assessed taking into account the overall objectives of the visitors program, the enlarged visitors offer as laid out in the EP Visitors' Strategy approved by the Parliament's Bureau in April 2015, and the logistic constraints for organising the transport of the visitors groups.

THE COMMISSION’S REPLY

European Commission

| 10.12. | As in previous years (8), we found a small number of errors relating to staff costs and some weaknesses in the PMO’s management of family allowances. We have brought these to the attention of the Commission’s management. |
| --- | --- |

10.12.

As in previous years (8), we found a small number of errors relating to staff costs and some weaknesses in the PMO’s management of family allowances. We have brought these to the attention of the Commission’s management.

| 10.12. | The responsibility to declare/update personal information, including on family allowances, lies first and foremost with the agents.

  The Commission, for its part, has already put in place several measures to further improve the update of the personal situation and the management of family allowances. |
| --- | --- |

10.12.

The Commission, for its part, has already put in place several measures to further improve the update of the personal situation and the management of family allowances.

European Court of Auditors

| 10.13. | The external auditor’s report (9) states that ‘the financial statements give a true and fair view of the financial position of the European Court of Auditors as of 31 December 2017, and of the results of its operations, its cash flows and the changes in net assets for the year then ended’. |
| --- | --- |

10.13.

The external auditor’s report (9) states that ‘the financial statements give a true and fair view of the financial position of the European Court of Auditors as of 31 December 2017, and of the results of its operations, its cash flows and the changes in net assets for the year then ended’.

THE COURT’S OBSERVATIONS

CONCLUSION AND RECOMMENDATIONS

Conclusion

| 10.14. | The overall audit evidence indicates that the level of error in spending on ‘Administration’ was not material. For this MFF heading, our testing of transactions produced an estimated overall level of error of 0,5  % (see
  Annex 10.1
  ). |
| --- | --- |

10.14.

The overall audit evidence indicates that the level of error in spending on ‘Administration’ was not material. For this MFF heading, our testing of transactions produced an estimated overall level of error of 0,5  % (see
  Annex 10.1
  ).

Recommendations

| 10.15. | Annex 10.2
  shows the findings of our follow-up review of the three recommendations we made in our 2014 annual report. We did not review two recommendations because our audit work for 2017 did not cover transactions of this kind. The institutions and bodies concerned had implemented the third recommendation in most respects. |
| --- | --- |

10.15.

Annex 10.2
  shows the findings of our follow-up review of the three recommendations we made in our 2014 annual report. We did not review two recommendations because our audit work for 2017 did not cover transactions of this kind. The institutions and bodies concerned had implemented the third recommendation in most respects.

REPLY OF THE EUROPEAN PARLIAMENT

| 10.16. | Based on this review and our findings and conclusions for 2017, we recommend that: |
| --- | --- |

10.16.

Based on this review and our findings and conclusions for 2017, we recommend that:

| — | Recommendation 1: in the context of the revision of the Financial Regulation, the European Parliament improves the guidelines for authorising officers on the design and checks of the selection and award criteria for procurement procedures (see paragraphs 10.9 and 10.10). |
| --- | --- |

—

Recommendation 1: in the context of the revision of the Financial Regulation, the European Parliament improves the guidelines for authorising officers on the design and checks of the selection and award criteria for procurement procedures (see paragraphs 10.9 and 10.10).

Parliament notes that topics as design of procedures and check of compliance with selection criteria do form part of appropriate guidance. Overriding issues on increasing competition are the subject of assessment by Parliament’s coordination body in matters of procurement, which presently also assesses related issues in the light of the Court’s special report 17/2016.

| — | Recommendation 2: during the next revision of the rules governing the reception of groups of visitors, the European Parliament strengthens the procedure for submitting declarations of expenditure by requiring groups to provide supporting documentation together with their cost claims (see paragraph 10.11). |
| --- | --- |

—

Recommendation 2: during the next revision of the rules governing the reception of groups of visitors, the European Parliament strengthens the procedure for submitting declarations of expenditure by requiring groups to provide supporting documentation together with their cost claims (see paragraph 10.11).

Parliament takes note of this recommendation which will be considered at the moment of a review of the rules; in the meantime frequency and intensity of controls will be adapted to the risk incurred.

THE COMMISSION’S REPLY

| — | Recommendation 3: the European Commission improves as soon as possible its systems for managing statutory family allowances by reinforcing consistency checks on the declaration by staff members of allowances received from other sources (see paragraph 10.12). |
| --- | --- |

—

Recommendation 3: the European Commission improves as soon as possible its systems for managing statutory family allowances by reinforcing consistency checks on the declaration by staff members of allowances received from other sources (see paragraph 10.12).

The Commission accepts the recommendation and it has already taken measures to improve the management of family allowances.

---

(1)  This includes the administrative expenditure of all the EU institutions, pensions and payments to the European Schools. For the last of these, we issue a specific annual report which is submitted to the Board of Governors of the European Schools. A copy of this report is sent to the European Parliament, the Council and the European Commission.

(2)  Our specific annual reports on agencies and other bodies are published in the Official Journal.

(3)  DG Human Resources and Security, Office for the Administration and Payment of Individual Entitlements (PMO), Offices for Infrastructure and Logistics in Brussels and in Luxembourg, Publications Office and DG Informatics.

(4)  PricewaterhouseCoopers, Société à responsabilité limitée, Réviseur d'Entreprises.

(5)  We base our calculation of error on a representative sample. The figure quoted is the best estimate. We have 95 % confidence that the estimated level of error in the population lies between 0,0 % and 1,2 % (the lower and upper error limits respectively).

(6)  According to Paragraph 5 of Article 146 on selection criteria of the Rules of Application of the Financial Regulation in force in 2013, at the time of performance of the procurement procedure, ‘The information requested by the contracting authority as proof of the financial, economic, technical and professional capacity of the candidate or tenderer and the minimum capacity levels required in accordance with paragraph 2 may not go beyond the subject of the contract (...)’. We consider that two to three times the estimated yearly value of the contract is a reasonable criterion. Paragraph 1 of Article 147 on economic and financial capacity of the Rules of Application of the Financial Regulation applicable as from 1st January 2016clarifies this issue and merely requires that ‘(...) the minimum yearly turnover shall not exceed two times the estimated annual contract value, except in duly justified cases linked to the nature of the purchase, which the contracting authority shall explain in the procurement documents.’

(7)  Paragraph 2 of Article 20 of the rules governing the reception of groups of visitors states that groups must submit their final declaration of expenditure no later than thirty days after the visit. However, the rules do not require them to submit supporting documents (e.g. third-party invoices, boarding passes) at this stage. Such documents must be kept for a period of three years and need only be provided to Parliament in the event of ex-post controls.

(8)  See the 2015 annual report, paragraph 9.12, and the 2014 annual report, paragraph 9.13.

(9)  See the external auditor’s report on the financial statements referred to in paragraph 10.5.

(*1)  European Economic and Social Committee (EESC) 1 % — 0,1.

(*2)  Court of Auditors 1 % — 0,1.

(*3)  Others (Committee of the Regions, European Ombudsman and European Data Protection Supervisor) 1 % — 0,1.

(10)  In line with the harmonised definition of underlying transactions (for details see
  Annex 1.1
  , paragraph 15).

ANNEX 10.1

RESULTS OF TRANSACTION TESTING FOR ‘ADMINISTRATION’

| | 2017 | 2016 |
| --- | --- | --- |
| |
| SIZE AND STRUCTURE OF THE SAMPLE |
| |
| Total transactions | 55 | 100 |
| |
| ESTIMATED IMPACT OF QUANTIFIABLE ERRORS |
| | | |
| Estimated level of error | 0,5  % | 0,2  % |
| | | |
| | Upper Error Limit (UEL) | 1,2  % | |
| | Lower Error Limit (LEL) | 0,0  % | |

2017

2016

SIZE AND STRUCTURE OF THE SAMPLE

Total transactions

55

100

ESTIMATED IMPACT OF QUANTIFIABLE ERRORS

Estimated level of error

0,5  %

0,2  %

Upper Error Limit (UEL)

1,2  %

Lower Error Limit (LEL)

0,0  %

ANNEX 10.2

FOLLOW-UP OF PREVIOUS RECOMMENDATIONS FOR ‘ADMINISTRATION’

| Year | Court recommendation | Court's analysis of the progress made | Institution's reply |
| --- | --- | --- | --- |
| Fully implemented | Being implemented | Not implemented | Not applicable (*1) | Insufficient evidence |
| In most respects | In some respects |
| 2014 | Recommendation 1 (European Parliament):


  European political parties

  The European Parliament reinforce its checks on the costs reimbursed by European political parties to their affiliated organisations. In addition, the European Parliament develop appropriate rules for political parties on public procurement and monitor their application through appropriate checks and better guidance (see the 2014 annual report, paragraphs 9.11 and 9.17). | | | | | X | | |
| Recommendation 2 (EESC):


  Procurement

  The EESC should improve the design, coordination and conduct of procurement procedures through appropriate checks and better guidance(see the 2014 annual report, paragraphs 9.12 and 9.17). | | | | | X | | |
| Recommendation 3 (institutions and bodies):


  Salary and family allowances

  The institutions and bodies should improve their monitoring systems for the timely updating of the personal situation of staff members which may have an impact on the calculation of family allowances (see the 2014 annual report, paragraphs 9.13 and 9.17). | | X | | | | | |

Year

Court recommendation

Court's analysis of the progress made

Institution's reply

Fully implemented

Being implemented

Not implemented

Not applicable (*1)

Insufficient evidence

In most respects

In some respects

2014

Recommendation 1 (European Parliament):

European political parties

The European Parliament reinforce its checks on the costs reimbursed by European political parties to their affiliated organisations. In addition, the European Parliament develop appropriate rules for political parties on public procurement and monitor their application through appropriate checks and better guidance (see the 2014 annual report, paragraphs 9.11 and 9.17).

X

Recommendation 2 (EESC):

Procurement

The EESC should improve the design, coordination and conduct of procurement procedures through appropriate checks and better guidance(see the 2014 annual report, paragraphs 9.12 and 9.17).

X

Recommendation 3 (institutions and bodies):

Salary and family allowances

The institutions and bodies should improve their monitoring systems for the timely updating of the personal situation of staff members which may have an impact on the calculation of family allowances (see the 2014 annual report, paragraphs 9.13 and 9.17).

X

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(*1)  Our audit work for 2017 did not include the examination of transactions of this kind. These recommendations will be followed up in future years.

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