SPECIAL REPORT No 1/95 on the cohesion financial instrument together with the Commission's replies (95/C 59/01)

(Observations pursuant to Article 188c (4), second subparagraph, of the EC Treaty)

0. INTRODUCTION

0.1. The Treaty on European Union, signed in Maastricht on 7 February 1992, has been in force since 1 November 1993. Article 130d of the Treaty establishing the European Community, as amended by the Treaty on European Union, provides for the setting-up, before 31 December 1993, of a Cohesion Fund to contribute financially, within the framework of Community action leading to the strengthening of its economic and social cohesion (Title XIV), 'to projects in the fields of environment and trans-European networks in the area of transport infrastructure'.

0.2. Pending the coming into force of the Treaty on European Union and following the conclusions of the Edinburgh European Council of December 1992, on 30 March 1993 the Council adopted Regulation (EEC) No 792/93 establishing a cohesion financial instrument (1). Based on Article 235 of the EC Treaty, this instrument allows financial support for Ireland, Greece, Portugal and Spain in the fields to which the new Cohesion Fund is to apply.

0.3. This Regulation came into force on 1 April 1993 and was initially supposed to come to an end on 1 April 1994. It was extended until 31 December 1994 by Council Regulation (EC) No 566/94 of 10 March 1994 (2). The Regulation establishing the Cohesion Fund (3) came into force on 26 May 1994 and as of that date replaced the Regulation relating to the cohesion financial instrument.

0.4. The cohesion financial instrument had to be set up within a very short space of time, a fact which has inevitably added to the difficulties faced by the Community and national authorities concerned and therefore also helps to explain many of the deficiencies or other shortcomings found in the definition of the management systems or in the application of these systems.

0.5. The observations which follow relate primarily to the effects and implications of the approach chosen of financing by project and to the difficulty of ensuring both the commitment of the total overall funding and the effective use of the resources made available to the instrument. They result mainly from an audit performed by the Court of Auditors in the Commission departments and in the Member States. Given the very tight deadlines and the fact that the financing decisions were relatively recent, the enquiries often had to be confined to checks on records. These have, however, enabled the Court to put forward certain points which should help to improve the way in which the Cohesion Fund is operated.

1. THE FINANCIAL RESOURCES AND THEIR USE IN 1993

1.1. In accordance with the financial forecasts approved at the Edinburgh European Council in December 1992, the total commitment appropriations for the Cohesion Fund and the cohesion financial instrument amount to 15 150 Mio ECU at 1992 prices for the period 1993-99 (Table 1). The indicative allocation of the total resources between the recipient Member States is as follows: Spain (52-58 %), Greece (16-20 %), Portugal (16-20 %) and Ireland (7-10 %) (4). The rate of assistance granted by the financial instrument is between 80 % and 85 % of public or similar expenditure. In exceptional cases, preliminary studies and technical support measures may be financed at 100 % of their total cost.

1.2. The amounts entered in the 1993 budget for the commitment and payment appropriations relating to the financial instrument are 1 565 Mio ECU and 1 000 Mio ECU respectively (Chapter B2-30). Table 2 shows the situation in terms of commitments and payments, by Member State and by type, for 1993. It shows that the 'appropriate balance' mentioned in Article 8(2) of Regulation (EEC) No 792/93 has, taken overall, been ensured at a level of 60 % for transport infrastructure and 40 % for the environmental projects. This allocation varies considerably from one Member State to another.

1.3. The Court noted that 48,75 % of the commitments were made by the last decisions granting aid, adopted by the Commission in December 1993. In the meantime, in view of the likelihood of non-utilization, 200 Mio ECU in payment appropriations had been transferred to another budget item. The payments made are only the initial advances disbursed following each decision. They are automatic and are not significant of the real state of progress of the projects. In relation to the initial forecasts (1 000 Mio ECU) drawn up before the Regulation for the cohesion financial instrument was approved, the use of the payment appropriations at 31 December 1993 reflected an under-consumption of 26,4 %, which was also due to the late date of adoption of the financing decisions. As 200 Mio ECU had been transferred, the under-consumption of payment appropriations at 31 December 1993 was 8 %.

1.4. In 1994, the initial commitment and payment appropriations amounted to 1 853 Mio ECU and 1 679 Mio ECU respectively. On 26 May 1994, the date on which the Cohesion Fund Regulation came into force, immediately replacing that of the cohesion financial instrument, the Commission committed 280,767 Mio ECU (15,15 %) and paid 101,893 Mio ECU (6,07 %).

2. MANAGEMENT OF THE INSTRUMENT AND COORDINATION

2.1. The management of the cohesion financial instrument is the responsibility of a new Directorate set up within the Secretariat-General of the Commission and put under the authority of the Commissioner for Budgets and Financial Control. This structure is likely to lead to problems regarding the separation of the functions of authorizing officer, Financial Controller and accounting officer, a principle which is stipulated in Article 21 of the Financial Regulation. This organizational structure was not altered when the Cohesion Fund was set up.

2.2. The creation of a new management structure, in addition to those existing in the Directorates-General (DG) for Transport (DG VII), for Environment (DG XI), for Agriculture (DG VI) and for Regional Policy (DG XVI) has further aggravated the problems of coordination between the various Commission departments, already noted by the Court (5) (6). More rigorous structures should be set up to ensure a more unified approach to Community aid measures in the fields concerned and to allow better coordination of the instruments.

2.3. In addition, the projects likely to be financed by the financial instrument are also eligible for many of the Community's structural aid measures: in particular, the aid measures managed by DGs VII, XI, VI and XVI, those to be carried out within the framework of the financial mechanism provided for by the Agreement on the European Economic Area (EEA), and those resulting from the growth initiative and from the new financing instruments decided in Edinburgh. Improvement in the communication of information is absolutely essential, in order on the one hand to reduce the risks of duplicate financing (Article 7 of the Regulation on the cohesion financial instrument), and on the other to avoid the financing, by the Cohesion Fund, of projects which would have been rejected within the framework of another aid measure, or vice versa.

2.4. These risks arise because there are several 'windows' for the acceptance and approval of projects of a similar kind. Thus, some of the projects financed by the cohesion instrument were appraised and even approved in several different departments of the Commission, which represents, moreover, a pointless duplication of material and human resources.

2.5. On several occasions (7) (8), the Court noted deficiencies in the coordination between the various Commission departments, in particular in the context of the management of the various budget appropriations for structural purposes. For example, in its Special Report on transport infrastructure, it stated that 'each of the Directorates-General insists on its own independent budgetary administration and control, without any real cooperation with the other DGs and without making optimal use of the financial resources employed' (9).

2.6. Similarly, the Court pointed out in its Special Report concerning the environment (10) that 'a number of departments have responsibility for specific aspects of environmental policy (. . .). This spread of responsibilities requires substantial coordination, which is far from having been achieved (. . .). The lack of coordination has repercussions for the work carried out'. It also drew attention to the fact that 'increased coordination is necessary, in particular on the assumption that the implementation of the Cohesion Fund would mean the involvement of several Directorates-General of the Commission'.

2.7. The DGs mentioned above, which in theory must be regarded as leaders in their respective field, play only a passive role within the still very limited framework of inter-departmental cooperation: they analyse the technical aspects connected with the proposals for a decision to grant aid, and in general the relevant departments restrict themselves to checking, on the basis of the background information placed at their disposal, that there are no formal obstacles to the adoption of the decision.

2.8. The replies of the DGs consulted are used by the authorizing officer to prove that the projects are in line with Community policies, in particular those relating to environmental protection, transport and the award of public contracts. Contrary to the usual practice followed in the context of the European Regional Development Fund (ERDF), the DG for Competition is not always consulted despite the implications that some projects may have for competition policy, particularly in the field of air and maritime transport.

2.9. The amount of time that the DGs concerned are allowed during the consultation procedure for examining the documentation relating to the projects (which is, moreover, often incomplete) is in some cases extremely short. In such circumstances, these deadlines do not give the DGs adequate time to acquire detailed knowledge of the quality of the projects, or to enable them to ensure coordination and consistency with other structural measures. The departments need to be allowed enough time to make the checks requested.

2.10. According to Council Directive 85/337 (11), the Member States must take the necessary steps to ensure that public and private projects likely to have considerable impact on the environment are subjected to an assessment of these effects prior to authorization. The Commission sometimes institutes infringement procedures for failure to apply this Directive and such action may be accompanied, for example in the case of the ERDF, by the suspension of payments to the projects concerned which have not been the subject of a preliminary environmental impact study. Nevertheless, under the cohesion financial instrument, the Commission has approved projects for which the environmental impact has not been assessed, for example the Adra bypass project and the Requena-Chiva motorway project (Spain).

2.11. With regard to coordination with the recipient Member States, the efforts made to clarify the key concepts of the Regulation (kind of expenditure eligible, time when expenditure is incurred, sufficient scale of the projects, definitions of independent stages and items of expenditure) must be continued. Thus, the Greek authorities thought that the financial instrument provided funding only for works to be carried out before April 1994, whereas in fact this date concerned only the temporary validity of the instrument.

3. THE IMPLEMENTATION OF THE REGULATION

3.1. On the basis of Article 130d of the Treaty on European Union, the Fund Regulation chose as its approach the financing of projects, and not the financing of programmes, which has been the approach adopted within the framework of the Structural Funds (SFs) since the 1988 reform. The cohesion financial instrument also makes provision for the system of financing by project. The projects must, however, be 'of a sufficient scale', which is supposed to enable the Commission to make a suitable selection of projects and then carry out an appropriate follow-up.

Priorities for the aid measures

3.2. The approach adopted, in the absence of overall planning, consists of evaluating the conformity of each individual project on the basis of the criteria referred to in the Regulation. The Commission has not laid down any priorities; the projects are examined in the order in which they arrive so as to comply with the three-month deadline within which, according to the Regulation (12), they are to be approved.

3.3. As far as transport infrastructure is concerned, the financial instrument's assistance is provided for in the case of projects which have been included in trans-European network programmes adopted by the Council or proposed by the Commission. The Council did not approve the creation of trans-European networks for combined transport, road and inland waterways until October 1993 (13). In the fields of air or maritime transport, conventional rail transport and vessel traffic service (VTS), the networks have not yet been approved in this way. In March 1994, the Commission proposed Community guidelines for the development of the trans-European transport network (14). In the meantime, many projects have been financed. The Commission's guidelines were drawn up bearing these projects in mind, and the missing proposals concerning the trans-European networks will be drawn up on the same basis. The logical sequence for any planning has thus been reversed for the cohesion financial instrument, where the financing of projects has been approved before the adoption of the corresponding Community plans.

3.4. The consistency of the projects with the national infrastructure programmes is not always ensured either. For example, the Commission agreed to finance, under the financial instrument, projects for the improvement of roads and conventional railways [the Fuenta La Higuera - Jativa project and the Las Dueñas-Novellana project (Spain)], the aim of which was to cut down the corresponding transport times. However, the 'Master plan for infrastructure', drawn up by the Spanish Ministry of Public Works, Transport and the Environment for the period 1993-2007, provides for the construction of motorways and tracks for high-speed trains for the same routes.

3.5. The fifth Community policy and action programme for the environment and durable and environmentally-friendly development (15) has as its objectives, as regards the management of water resources, the fight against water pollution, the cleaning of polluted watercourses and a balance between supply and demand to be achieved by more rational use and management of resources. The latter objective has not always been complied with, especially in the water-supply projects for cities, which were decided to meet short-term needs. These projects rarely form part of a general action plan for water management, specifying the strategy to be followed for each basin and also including measures to prevent any permanent excessive withdrawals.

3.6. Whilst these projects are justifiable in that they improve the quality of life of the people concerned, they have only a limited impact, however, in terms of environmental protection, as provided for in Article 8 (3) of the Regulation. The same is true, for example, for the projects concerning the integration of archaeological sites and the purchase of vehicles to be used by firemen, and the project concerning the Natural History Centre in Goulandris (Greece).

3.7. Lastly, assessments of the impact of environmental projects on the environment are sometimes lacking. For example, the main aim of a water-supply project for the urban area of Seville in Andalusia (Spain) was to ensure constancy of supply of drinking water. To do this, the water from a dam that was initially intended for irrigation was diverted without the effects on agriculture of this operation being assessed. In another case, in Greece, in order to prevent rain-water from causing floods in a village (Villia), it was decided to carry out channelling work by means of two distinct, complementary projects. As, to date, only one of these two projects has been carried out, the flooding problems have not been solved. A better overall view could have made it possible to identify these adverse effects.

3.8. The Treaty on European Union provides for financial support from the Cohesion Fund when a measure based on Article 130s, paragraph 1, involves costs deemed disproportionate for the public authorities of a Member State. In addition, the fifth Community programme for the environment lays down that the Fund's contribution is to be tied to the condition that projects must trace their origin to the Community legislation. However, the contribution of the financial instrument to projects that are concerned with the practical application of the directives based on Article 130s of the Treaty, and in particular those relating to the treatment of urban waste water (16) and waste (17), is somewhat limited. A number of small-scale projects concerning sewerage systems do not include the purification of the effluent.

Decision-making texts

3.9. Discrepancies between the different language versions of Regulation (EEC) No 792/93 and between the decisions to grant aid affect fundamental concepts such as commitment, payment and the deadlines for implementation. Following the Court's audit enquiries, the Commission was asked, in a letter dated 13 December 1993, to take the necessary measures to rectify the points mentioned above.

3.10. Moreover, the financing plans annexed to the decisions and the texts of these decisions do not always tally with each other. Thus, the financing plan for the project known as the 'Dublin-Galway railway link' (Ireland) stipulates that all expenditure will be carried out in 1993, and two thirds of the total amount of aid planned were advanced by the Commission. However, according to the text of the decision, most of the work will not be carried out until 1994. Part of the sum advanced was therefore paid out prematurely. Another example was noted in the case of a decision on a project in Spain, which on the one hand regarded expenditure incurred before 7 September 1993 as non-eligible, and on the other granted aid for the period from 1 February to 31 May 1993. This error has been corrected following an audit visit by the Court.

3.11. Expenditure is not eligible for aid from the financial instrument if it was incurred before the date on which the Commission received the application relating thereto. However, for requests submitted before 1 September 1993, expenditure incurred as from 1 January 1993 can be taken into consideration (18). Similarly, the percentage of the aid which may be paid as an advance depends on the date on which the request is submitted. The request relating to the 'Ballyjamesduff regional water supply scheme (stage I)' project was submitted on 2 September and the amount of the advance paid was calculated according to the percentage applicable on that date. However, the financing plan annexed to the corresponding decision to grant aid, on the basis of which the advance was calculated, contains forecasts of expenditure for the whole of 1993.

Use of the ecu

3.12. Regulation (EEC) No 1866/90 (19) stipulates that Member States must specify in their aid request the system (in ECU or in national currency) that they are using for their expenditure declarations. In the standard 'aid application' form drawn up by the Commission, this point is ignored, and Member States have not specified in their aid request the currency they have chosen.

3.13. In addition, contrary to the provisions of the aforementioned Regulation, the decisions granting aid have allowed the Member States the possibility of deciding at a later date whether to submit their expenditure declarations in ecus or in national currency. The purpose of the provision in the Regulation was precisely to stipulate a prior choice, so that the exchange-rate system to be applied was determined upon submission of the aid request.

3.14. In paragraphs 6.15 to 6.18 of its Annual Report for 1993 (20), the Court noted several problems with regard to the use of the ecu, in particular the exchange rate applicable for the conversion into ecus of aid applications and declarations of expenditure expressed in national currency. Difficulties with regard to the date to be taken into consideration for the exchange rate were also observed for the cohesion financial instrument, and the Court considers that measures should be taken rapidly in order to arrive at a uniform, more coherent conversion system.

Advances and interest generated

3.15. The Regulation of the financial instrument specifies that the Community contribution must be the subject of a single commitment, for the total amount of assistance. Where the project financed has to be carried out over a number of years, the amount of the advances that can be paid is calculated in proportion to (which may be up to two thirds) the amount of assistancecorresponding to the expenditure planned for the first year. As a result of this situation, it is financially best for the Member States to submit projects for which most, or even all, of the works have to be carried out during the first year.

3.16. An examination of the Commission's decisions thus shows that the majority of the projects approved were supposed to be finished by the end of 1993 or the beginning of 1994. In Greece, the work for all the projects approved in 1993 was to be completed by the end of March 1994. The Court noted, however, that, given the scale of the works to be carried out, completion by the intended deadlines proved in many cases to be impossible. The approval of numerous requests for extension, submitted by the Member States even after the deadline for the completion of the works, reflects inadequate forecasting and very weak ex ante assessment of the projects.

3.17. Furthermore, the Commission has failed to introduce precise instructions to be followed by the Member States for using the advances and in particular the interest that they may generate. In view of the amounts involved, the large number of projects under way, the projects which are late in being completed and the fact that initially all the payments made are only advances, special monitoring is essential to make sure that these funds, and where applicable the interest earned on them, are actually used for attaining the objectives of the instrument.

4. THE PROJECTS

The scale of the projects

4.1. Projects, including groups of related projects, must be of a sufficient scale to have a significant impact in the field of environmental protection or the improvement of trans-European transport infrastructure networks (21). Nevertheless, the Court noted that very few of them can be regarded as being of sufficient scale to achieve the objectives of the instrument, with some being of an extremely small scale. For 30 projects the cost of implementation is less than 1 Mio ECU. Such projects should belong within the framework of other more suitable Community or national instruments. The projects to construct a car park at the airport of Hierro (Spain) (427 996 ECU) and two rail crossings at the port of Belview (Ireland) (725 000 ECU) are significant examples.

4.2. The inclusion of such projects in the cohesion financial instrument rather than in an operational ERDF programme seems to be dictated by the urgent need to select projects allowing rapid use of appropriations, and by the existence of a more advantageous Community rate of assistance than in the other structural measures. Achievement of the aims of the cohesion financial instrument does not therefore seem to be a high priority. An examination of the project-selection procedures in the Member States has enabled the Court to confirm this situation.

4.3. There is a danger that the objective of mobilizing the instrument's aid and the receipt of payments as quickly as possible may encourage the Member States to give priority to submitting small-scale projects which can be completed more quickly. That has an effect contrary to the provisions of the Regulation, which envisage the financing of significant projects.

The groups of projects

4.4. Article 8 (3) of the Regulation for the cohesion financial instrument stipulates that the latter may contribute to the financing of groups of related projects. However, some of the large projects financed under the cohesion instrument are actually groups of small projects which do not form a coherent whole. The groups of projects function as operational programmes, but without benefiting from the advantages of this form of assistance in terms of planning and flexibility. They have, by contrast, the usual drawbacks of this type of project, in particular concerning their completion in the event of the failure of or delays in one or more projects. This was the reason behind certain Commission decisions as of April 1994 concerned with rearranging groups of projects approved in December 1993.

4.5. The criteria followed by the Commission for grouping together individual projects submitted by the Member States and for approving them as a group of projects are not always consistent, in particular as regards the environment.

4.6. Projects which are very different in kind and which are to be carried out in several separate regions are sometimes grouped together in order to avoid numerous small projects being submitted. Thus, the projects concerning the improvement of the management of water resources in the Spanish regions of Andalucia, Castilla La Mancha, Madrid and Navarre were grouped together. However, in Greece, groups of the first stages of small projects for different purposes were approved in the field of the environment (22). Similarly, the 'Athenian archaeological site integration' project in Greece is in fact made up of projects whose total costs are 283 000 ECU, 490 000 ECU, 226 000 ECU, 642 000 ECU or 774 000 ECU. The 'improvement of the road network' project (Ireland) (30 Mio ECU) is in fact composed of 12 road development operations for small road sections not even connected one to another. In May 1994, the Commission approved advances of 9,425 Mio ECU for six projects in Spain for a total cost of 140,7 Mio ECU. These projects were in fact composed of 3, 4, 8, 14, 54 and 162 individual projects to invest in small businesses, and the contribution of the cohesion instrument served merely to reimburse the subsidies paid by the Spanish government.

The project stages

4.7. The Regulation provides for the financing of stages of projects, on condition that they are technically and financially discrete (23). Nevertheless, in some cases, projects which in theory were not suitable for splitting up were broken down into various stages with the aim of being able to receive aid from the instrument as from 1 January 1993.

4.8. As the rate of aid granted by the financial instrument was higher (between 80 % and 85 %) than that of the other forms of Community intervention, the Member States, in agreement with the Commission, withdrew from the latter those projects which were under way and already jointly financed, in particular by the ERDF and the European Investment Bank (EIB). These projects were financed under the financial instrument during the second six months of 1993, with retroactive effect from 1 January 1993, even though they were already included in certain Objective 1 Operational Programmes and some of them received financing from the EIB of up to 45 % of the total cost. The most significant examples come from the 'PRODAC' Operational Programme in Portugal and the 'Peripherality' Operational Programme in Ireland.

4.9. This practice, which was not formalized (despite the fact that this should have been done by an amendment to the decisions on the ERDF programmes from which the projects were transferred), is unsatisfactory. It makes it difficult to implement the operational coordination between the SFs and the cohesion financial instrument, which require that both the Commission decisions (the one amending its initial decision and the one granting aid from the financial instrument) should be prepared and approved in parallel.

4.10. Given that there is only one contract with the company responsible for the physical execution of the project, some of these project stages are actually only 'payment stages', defined in practice as the part of the project that has not yet received any payment connected with the ERDF joint financing. In these cases (for example, the Cruz-Braga motorway in Portugal), the project is split up in such a way that the expenditure incurred before 1 January 1993 remains eligible for the ERDF, whereas that incurred after this date is financed under the cohesion financial instrument, including the price revisions corresponding to the works financed by the ERDF.

4.11. These practices raise questions as to the value of the 1989-93 Community Support Frameworks (CSF) from which large parts have been removed in order to be financed instead by the cohesion financial instrument, where programming plays no role. Moreover, the breaking-down of the projects into stages could well make it easier to split up public contracts in order to avoid the application of the ceilings specified in the guidelines on this subject. Lastly, the splitting-up of projects into various stages makes it more difficult to monitor compliance with the provisions of Article 7 of the Regulation concerning the combination and overlapping of the assistance. The Court, with reference to the Commission's reply, points out that risks to which it refers, and the additional measures needed to overcome them, exist regardless of whether there are examples of situations where actual irregularities have been identified.

4.12. The technique of splitting-up the road projects into stages makes it possible to submit requests for aid for the stages that are most in conformity with Community provisions and to avoid the most doubtful ones. In the case of the Madrid M-40 ring-road (Spain), three projects were submitted and approved for a total cost of 277 Mio ECU without including a section of approximately 3 km, which was, however, located in the middle. This section gives rise to very considerable environmental problems because of the crossing of the 'Monte del Pardo', which has been made inevitable by the choice of routes for the adjacent sections. However, assistance to any project stage whatsoever obviously contributes towards the financing of the whole.

The revenue-generating projects

4.13. In cases where the transport infrastructure projects generate revenue, in particular airports, ports and toll motorways, the practice followed by the Commission is not consistent. In some cases, the cost to be financed was determined by deducting the estimated revenue. More often, this important financial effect was either taken into account in a flat-rate way to vary the rate of assistance between 80 % and 85 %, or ignored, with the result that public aid wholly finances an investment which could to a very great extent have been covered by the future income.

4.14. In the field of the environment, for the projects for the installation of sewers, water-supply systems and water-drainage systems or waste-water treatment plants and waste-processing plants, the decisions have not taken into account the income generated by means of the price of water and other fees. Similarly, they have not taken into consideration the 'polluter pays' principle, even though this principle is recognized as fundamental for Community action in the field of the environment by the Treaty (Article 130r) and by Community directives, in particular Council Directives 91/156/EEC on waste (24) and 91/271/EEC on urban waste-water treatment (25).

4.15. In projects where the income expected to be generated was estimated, the decisions to grant aid showed in the financing plans only the cost to be financed, and not the total cost. The latter, however, is the amount which should be declared as disbursed in order to show that the project is progressing satisfactorily or that it has been completed in accordance with the objectives envisaged. There needs to be an improvement in the way in which the eligible costs and the total costs are presented in the decisions, especially in the case of partial financing by revenue, in order to make it easier to compare forecasts and operations actually carried out.

The procedure for approving the projects

4.16. The procedure for approving the projects starts with the presentation by the beneficiary Member State of a request for aid on a standard form drawn up by the Commission. This document implicitly accepts as eligible items of expenditure such as the cost of purchasing the land, 'contingencies', price revisions, taxes, in particular VAT, and 'miscellaneous items'. The Commission did not take advantage of this opportunity to define more clearly the criteria for the eligibility of expenditure. These criteria have always posed numerous practical problems when Structural Fund aid is allocated. The checks carried out on the spot by the Court revealed that, in the absence of any clear information on this matter, local managers have encountered difficulties when trying to decide which items of expenditure were eligible.

4.17. As for the management of the Structural Funds, the Commission must ensure that the amount of refundable VAT is not included in the eligible expenditure, as it does not represent a cost to the project. Moreover, as regards non-refundable VAT, there are grounds for considering that, with a rate of aid of 85 % and a normal minimum VAT rate of 15 %, the national contribution to the financing of the project can virtually be recovered in the form of fiscal revenue.

4.18. The audit enquiries have revealed, as capital expenditure, the cost of the acquisition of land. This cost represents 26 % of the total eligible cost of the 'Madrid ring-road between the N5 and the N6' project. Similarly, a project to restore Greek archaeological sites only includes expenditure relating to the compulsory purchase of buildings (26). In the context of the ERDF, the limit normally applied by the Commission for this kind of expenditure is 10 % of the total cost. It would be advisable to avoid granting large amounts of aid for the purchase of land and already existing buildings, the impact of which, moreover, in terms of value added, is usually modest.

4.19. Finally, experience has shown that in cases where the sites are not yet available, the deadlines set for the completion of the projects are almost never kept to because of the complexity and the slowness of the compulsory purchase procedures. The delays observed by the Court in the construction of the Madrid ring-road confirm these difficulties. This sort of situation leads to large amounts of resources advanced by the financial instrument being blocked on Member States' accounts.

The assessment of the projects

4.20. The Commission is required to assess the projects to see whether they comply with the criteria laid down in the Regulation. In particular, a cost-benefit analysis must be made. The Court's examination of the Commission's files produced no evidence to show that such a detailed assessment was always carried out. Analyses of this kind are sometimes missing. Where they exist, they have generally been carried out by the Member States, possibly after work has started, or even after it has been completed.

4.21. Sometimes, they show internal rates of return (IRR) for the projects which are low enough to justify their being financed, and the results of the analyses carried out by the EIB give lower, or even negative, IRRs. In the case of the water-supply project in Athens (Evinos), the preliminary studies showed the lack of rationality in the scale and the programming of the investments and the absence of reliable information. It proved necessary, moreover, to carry out a full hydrological study and an overall analysis of the water-resources management in the region. In spite of these studies, the Commission decided to finance the project (total cost: 196 Mio ECU).

4.22. The Commission has defined neither a suitable methodology nor minimum profitability thresholds. Consequently, the practical usefulness of the cost-benefit analyses, which are supposed to guarantee that the Community resources will produce economic advantages that are in proportion to the resources mobilized, is reduced.

4.23. The Commission has sometimes approved projects which have already been under way for several years, or even which ought to have been closed in financial terms. These projects already have adequate - national or sometimes Community - financial resources available for their completion. The Commission should make sure that the financial resources granted under the cohesion instrument do not encourage the recipient Member States to fail to stand by their undertaking not to reduce their investment efforts in the fields concerned.

4.24. Moreover, this practice makes it impossible to give suitable publicity to the instrument's aid measures, and it has some paradoxical effects, in particular in terms of environmental protection. Thus, in the case of the Adra bypass (Spain), the Commission Decision makes the second payment conditional upon the Spanish authorities' undertaking to apply corrective measures so as to minimize the adverse effects on the environment. This undertaking, just like the environmental impact study, was nevertheless made after the date of completion of the work, and therefore took place at a time when it was no longer possible to consider alternative solutions or other changes. The corrective measures are thus likely to have no more than a marginal effect on the project, apart from their additional cost. The Commission's reply reinforces the Court's point: there was no prior consideration of the environmental impact of upgrading this bypass to motorway standards, and no consideration of possible alternative means of accommodating the relevant traffic flows.

4.25 Before approving a project, the Commission has to determine the expected impact in relation to the instrument's objectives. This impact must be quantified on the basis of appropriate indicators so that the potential and actual impact of the projects' implementation can subsequently be assessed, in order to judge whether the original objectives can be or have been achieved (Article 9 (8)). Few impact indicators have been devised, so that no on-going and ex post assessment of the projects is possible.

5. PUBLIC CONTRACTS

5.1. In Spain, Greece and Portugal, some awarding bodies in, amongst others, the water and transport sectors benefit from specific procedures and rules regarding the awarding of contracts which allow them not to use the public tendering procedures, as Directive 93/38/EEC (27), which aims to submit the bodies operating in these sectors to such procedures for the award of contracts, is not yet applicable in the countries in question. This Directive will not apply to Spain until 1 January 1997 and will first be applicable in Greece and Portugal as of 1 January 1998. The Court has found that works, such as railway infrastructure projects in Portugal costing 49 Mio ECU, were awarded by the negotiated procedure. Even those bodies governed by national rules for the awarding of contracts by the open procedure have made large contracts by direct negotiation for reasons of urgency. This was the case in Spain for water-supply works costing more than 77 Mio ECU.

5.2. Furthermore, in Greece, the Court noted that contracts for some of the jointly financed projects (e.g. the construction of the new terminal building at Corfu airport) had been awarded with very large price reductions, which were sometimes as much as 71 % of the indicative amount calculated by the Member State for its invitation to tender. As the latter amount had been used as the basis for the aid request and for the Commission's decision to grant aid, it was used to justify the payment of advances which, bearing in mind the amount of the related contract, proved to be more than adequate to finance the entire project. The monitoring by the Commission of these situations ought to make it possible to identify cases of this kind and, where necessary, should result in a proportionate reduction in the aid granted to the projects concerned.

5.3. The provisions of paragraph 12 of the Commission Notice C(88)2510 (28) to the Member States on monitoring compliance with public procurement rules in the case of projects and programmes financed by the SFs and financial instruments have remained a dead letter. This paragraph stipulates that, in the case of projects giving rise to contracts falling under sectors not covered by the directives in force, the recipient may undertake, in a specific clause, to open up contracts to Community competition. In addition, the Commission, in the same Notice, itself undertook, by way of an incentive, to give priority to aid applicants who open up contracts to Community competition, or who undertake in writing to do so.

6. MONITORING

6.1. The monitoring has to be ensured 'by reference to physical and financial indicators' specified in the Commission decision approving the operations concerned. Scrutiny of the Commission decisions has not shown any physical indicator arranged in such a way as to show, for the operations concerned, 'the stage reached in the operation and the goals to be attained within a given timespan', and 'the progress achieved on the management side and any related problems' (29). This lack of indicators makes any monitoring and assessment of the financed projects difficult.

6.2. In order to assess whether a measure is progressing satisfactorily, the project or stage of project needs to have been identified perfectly from the beginning of the works, then in the request for aid, and finally in the decision. However, in the aid requests and in the decisions, the Court has frequently found descriptions of a very general nature, a fact which prevents any checking of the state of physical progress of the projects and its comparison with the forecasts.

6.3. The first requests for payment submitted by the Member States contained neither a detailed timetable for the completion of the works nor any monitoring indicators. This being so, the Commission did not make the intermediate payments within the time limits stipulated in the Regulation, and asked the Member States to provide the missing information. This request arrived late, and the Commission should not have taken its decisions to grant aid in the absence of monitoring indicators and a precise timetable for the completion of the work.

6.4. A description of the management and audit systems set up by the Member States has to be notified to the Commission so that the latter can check that the administrative and financial mechanisms ensure effective implementation of each project (30). In practice, this description remains very general in nature, and sometimes does no more than mention that the systems are 'those currently into force'.

6.5. One single Monitoring Committee for each recipient Member State was supposed to be set up within three months of the approval of the projects by the Commission (31). By April 1994, no Monitoring Committee had yet been formed, even though most of the projects were supposed to have been finished, or in the process of completion. This example shows the low degree of importance attached by the Commission and the national authorities to the Monitoring Committees, whose tasks are, however, to monitor the smooth running of the projects according to the plan initially envisaged, to ascertain that they achieve the set aims and to check on compliance with Community policies, in particular the policy on the environment.

Technical assistance

6.6. Within the framework of technical assistance, two measures have been taken by the Commission. The first is the signing of a contract with the EIB in order to finance the carrying-out of project assessments. The second is a contract with an expert who is to draw up reports, in particular on the definition of methods for analysing projects in the field of transport (amount committed: 46 000 ECU).

6.7. The first draft report submitted by the expert, 'Vade-mecum on the evaluation of transport investments', shows little innovation on this subject. The work is primarily based on working papers of the European Research Committee for Transport (EURET) (32), to which the expert belongs, with these documents sometimes simply being transposed. The EURET programme is financed by the Directorate-General for Transport (DG VII). The Court is astonished at the Commission's decision to employ an outside expert instead of using its own departments, which, moreover, are developing a similar methodology.

7. CONCLUSIONS

7.1. The fact that the financial instrument is only temporary and the need to make swift use of the large amounts of appropriations made available to it have obliged the Member States concerned and the Commission to present, decide on and implement the projects to be financed under this instrument as a matter of urgency. Nevertheless, this urgency must not obscure the need for sound management based on effective monitoring and audit systems. It must be pointed out that considerable progress still needs to be made in terms of the Commission and the Member States, in their implementation of the instrument, becoming more aware of their responsibilities with regard to the sound financial management of resources.

7.2. In order to prevent the defects found in the implementation of the financial instrument from recurring in the context of the recently created Cohesion Fund, it is essential that the Commission and the Member States swiftly take steps to make it easier to achieve the aims assigned to the Fund, in accordance with the regulations in force. There needs to be effective coordination with all the other structural aid measures, particularly with the SFs by means of the CSFs. This coordination should be accompanied by a stepping-up of the efforts to prepare and assess projects (especially with a quantification of the effects) concerning the environment or transport infrastructure which are likely to have a significant impact on economic and social convergence. The Court notes the Commission's acknowledgement (paragraph 4.22) that progress remains to be made in this area.

This report was adopted by the Court of Auditors in Luxembourg at its meeting of 12 January 1995.

For the Court of Auditors

André J. MIDDELHOEK

President

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(1) OJ No L 79, 1. 4. 1993, p. 74.

(2) OJ No L 72, 16. 3. 1994, p. 1.

(3) Council Regulation (EC) No 1164/94 of 16 May 1994 establishing a Cohesion Fund. OJ No L 130, 25. 5. 1994, p. 1.

(4) Annex I to Regulation (EEC) No 792/93.

(5) Special Report No 1/93, OJ No C 69, 11. 3. 1993.

(6) Special Report No 3/92, OJ No C 245, 23. 9. 1992.

(7) Council Directive 85/337/EEC of 27 June 1985, OJ No L 175, 5. 7. 1985, p. 40.

(8) Article 8 (6) of the Regulation.

(9) Council Decisions 93/628/EEC, 93/629/EEC, 93/630/EEC of 29 October 1993, OJ No L 305, 10. 12. 1993.

(10) Proposal for a European Parliament and Council Decision on Community guidelines for the development of the trans-European transport network of 28 March 1994 - Doc. COM(94)106 final of 7. 4. 1994.

(11) Resolution of the Council and Representatives of the Governments of the Member States, meeting within the Council of 1 February 1993, on a Community programme of policy and action in relation to the environment and sustainable development, OJ No C 138, 17. 5. 1993.

(12) Council Directive 91/271/EEC of 21 May 1991 on urban waste-water treatment, OJ No L 135, 30. 5. 1991, p. 40.

(13) Council Directive 91/156/EEC of 18 March 1991 amending Directive 75/442/EEC on waste, OJ No L 78, 26. 3. 1991, p. 32.

(14) Article 9 (2) of the Regulation in all the language versions except for the French version, which reads 'committed' instead of 'incurred'. This important error, which was noted by the Court and notified to the Commission on 13. 12. 1993, has still not been corrected.

(15) Commission Regulation (EEC) No 1866/90 of 2 July 1990 on arrangements for using the ecu for the purposes of the budgetary management of the Structural Funds, OJ No L 170, 3. 7. 1990, p. 36.

(16) OJ No C 327, 24. 11. 1994.

(17) Article 8 (3) of the Regulation.

(18) Decisions 94/226/EEC and 94/530/EC of 27 October 1993 and 6 December 1993 respectively.

(19) Article 9 (1) of the Regulation.

(20) Development of the archaeological site situated in Areopagitou Street.

(21) Council Directive 93/38/EEC of 14 June 1993 coordinating the procurement procedures of entities operating in the water, energy, transport and telecommunications sectors.

(22) OJ No C 22, 28. 1. 1989, p. 3.

(23) Article 25 of Regulation (EEC) No 4253/88 amended by Council Regulation (EEC) No 2082/93 of 20 July 1993, OJ No L 193, 31. 7. 1993, p. 20.

(24) Article 9 (7) of the Regulation.

(25) Annex IV to the decisions granting assistance.

(26) 'Committee of the concerted action EURET 1.1., cost-benefit and multi-criteria analysis for new road construction.'

REPLY BY THE COMMISSION TO THE SPECIAL REPORT OF THE COURT OF AUDITORS ON THE COHESION FINANCIAL INSTRUMENT

0. INTRODUCTION

0.4. The cohesion financial instrument (CFI) came into force at a time when ratification of the Maastricht Treaty had not yet taken place and was still uncertain. Its limited life created uncertainty as to the availability of resources after April 1994 and influenced the Member States and the Commission with regard to the projects they would submit and adopt. In particular, doubts about the availability of financial resources after 1994 led the Member States to submit projects or, in most cases, stages of projects, with a limited life and hampered the submission of major projects of long duration.

Despite its limited staff, the administrative unit established within the Secretariat-General to manage the CFI succeeded, within a few months, in introducing all the legal and administrative provisions for management of the instrument, approving 232 decisions and committing and paying the corresponding appropriations. The Commission wishes to emphasise the magnitude of the effort involved, both for its own departments and the Member States, in establishing this system within a limited space of time while coping with the legal uncertainty described above.

1. THE FINANCIAL RESOURCES AND THEIR USE IN 1993

1.2. Although the breakdown between transport and environment in Spain in 1993 was 71:29, all the other Member States achieved a degree of balance, the proportions being 61:39 in the case of Ireland, 57:43 in that of Portugal and 38:62 even in the case of Greece, which made a particular effort in the environment sector.

The administrative procedures and financial mechanisms available to the Member States in the environment sector were not as tried and tested as those available for transport infrastructure. The Commission made constant efforts to encourage submission of projects in the environment sector in order to achieve the 'appropriate balance' referred to in Regulation (EEC) No 792/93.

1.3. The ECU 1 000 million in payment appropriations had been entered in the 1993 budget before approval of the CFI Regulation. Once the instrument had been adopted and there was some indication of the projects which the Member States intended to submit, the authorizing department asked for ECU 200 million of these appropriations to be released. This meant that the payment appropriations available in fact totalled ECU 800 million. If this release is taken into account, the rate of utilization of payment appropriations was 92 %, a remarkably high figure for a year in which the CFI did not come into force until 1 April and a sufficient quantity of projects was not submitted until 1 September.

2. MANAGEMENT OF THE INSTRUMENT AND COORDINATION

2.1. The separation of functions of authorizing officer, Financial Controller and accounting officer is ensured by their location in three different Directorates-General. Consultations between these Directorates-General are mandatory and the agreement of each is required before any decision can be taken. The allocation of responsibilities between the Members of the Commission is the result of a decision taken by the College.

2.2. Coordination and dialogue between the department responsible for the Cohesion Fund and the Directorates-General for Transport, the Environment and Regional Policies are ensured through:

- meetings between these departments to discuss the most appropriate strategy for assisting each country and the projects likely to be adopted;

- mandatory consultation of these Directorates-General when applications are being considered. There was no disagreement between the departments on any CFI decision;

- where necessary, joint meetings with the authorities of the Member States.

This ensures coordination of the instruments.

Furthermore, since it is aware of the need to ensure coordination of the various forms of assistance used to finance infrastructure projects forming part of the trans-European networks, particularly in the transport sector, the Commission has instructed the Secretariat-General to establish and keep up to date a trend chart, a technical instrument for coordination which provides Commission departments with an overall view of projects or parts of projects which have already been financed or for which an application is being considered by one of the financial instruments, including the European Investment Bank.

2.3. There is no risk of the same item of expenditure being financed by the CFI and the Structural Funds. The procedures in force avoid this risk and make it easy to check whether an investment project has already been submitted to another financial instrument.

In this context, it should be noted that:

- the provisions on cumulation (Article 7 (1)) are not intended to prevent the Structural Funds and the Cohesion Fund from financing two different stages of the same project;

- Article 7 (2) of the Regulation permits assistance from the cohesion financial instrument to complement assistance from the financial instruments established under the policies on the transport and the environment provided that total Community support does not exceed 90 % of total expenditure.

The legislation in force permits the CFI and the Structural Funds to finance two different stages of the same project and also permits financing from the CFI to be granted to projects receiving assistance under the policies on transport or the environment.

2.4. The established procedures permit coordination of measures under the various instruments while respecting the provisions on cumulation contained in the Regulation.

2.5.-2.7. The cohesion financial instrument has a specific purpose different from those of the Structural Funds and the sectoral financial instruments, viz the promotion of economic and social cohesion in the medium-term through the financing of projects relating to the environment and the trans-European transport networks.

A distinction should be made between the procedures for financial management which require the precise identification of responsibilities and are governed by well-defined administrative rules and arrangements for inter-departmental coordination on the preparation of assistance.

Directorate H (Cohesion Fund) manages the resources for this instrument, and in particular budget item B2-3000, in line with the objectives laid down for it and in accordance with the administrative rules in force, which also provide for consultations with other departments and their agreement. This naturally entails the establishment of formal procedures.

This Directorate undertakes coordination with the other departments, principally using the means listed in paragraph 2.2., to ensure the best possible use of financial resources and a consistent overall approach. In cooperation with the Secretariat-General, the Directorates-General concerned help define guidelines for assistance and the selection of the projects to be adopted.

The Cohesion Fund Directorate has undertaken several thousand consultations and no case under the cohesion financial instrument has been adopted without interdepartmetnal agreement.

2.8. The Directorate-General for Competition is consulted whenever projects financed under the instrument may have an impact on competition in the environment sector, and in particular in the case of aid schemes. Meetings have also been held between the Cohesion Fund Directorate and the Directorate-General for Competition to identify for various categories of project the implications for competition policy of investments submitted to the cohesion financial instrument.

2.9. The Directorates-General concerned are consulted initially on the application submitted by the Member State and subsequently on the preliminary draft decision. Under the administrative rules in force, the departments concerned have 15 working days in which to reply to each of these consultations, although normally they have considerably longer in practice. On a number of occasions, the adoption of decisions has been delayed by the need to secure agreement from the various departments.

2.10. Compliance of each project submitted with Directive 85/337/EEC is monitored before approval. Projects which are not in line with the Directive are not adopted and the Commission has rejected a number of projects where the procedure for an environmental impact study had not been correctly followed.

The only two projects in Spain to which the Court refers were undertaken in accordance with procedures based on national legislation, including those relating to the environmental impact study. They concern projects for the widening of motorways which, in the view of the Spanish authorities, did not fall under Annex I to the Directive. Following discussions with the Commission, the Spanish authorities undertook to accept in future the Commission's interpretation of the procedures for analysing impact on the environment for this type of investment. For its part, the Commission considered, on the basis of the checks carried out, that the measures proposed to counter the negative impact on the environment were sufficient. Furthermore, the two projects were approved on condition that the Spanish authorities took steps to offset this negative impact. In this instance, the measures involved were such that they could easily be taken after construction had been completed.

2.11. An effort was made to provide clarification to the Greek authorities during preparatory missions by the Commission in Greece on 25 and 26 April, 17 and 18 June and 30 July 1993. Preparatory missions were also undertaken in the other Member States.

Unlike the other beneficiary countries, the Greek authorities chose to submit works to be completed before April 1994, despite the Commission pointing out that there was no deadline for the completion of works. The Greek authorities have subsequently requested the Commission to amend the dates for carrying out many projects in order to regularize the situation.

3. THE IMPLEMENTATION OF THE REGULATION

Planning

3.2. The priorities for assistance are laid down in the Council Regulation and the guidelines for the development of the transport networks (proposed by the Commission or accepted by Council) and the fifth programme of policy and action in relation to the environment adopted by the Council in 1992.

3.3. Assistance from the cohesion financial instrument is not restricted to simply financing transport infrastructure projects which appear in the programmes for the trans-European networks adopted by the Council or proposed by the Commission.

The Edinburgh European Council extended the flexibility available under Article 130d of the Treaty by providing that 'other transport infrastructure projects contributing to the achievement of the objectives of Article 129b of the Treaty may be financed until the appropriate guidelines have been adopted by the Council.'

That flexibility was also reaffirmed in the second indent of Article 2 of the Regulation establishing a cohesion financial instrument, which provides the legal basis on which the Commission decisions are adopted.

All the projects adopted are consistent with these Community guidelines for the development of the trans-European transport networks proposed by the Commission on 28 March 1994.

3.4. The projects for the improvement of roads and railways in the context of combined transport referred to by the Court form part of the trans-European network programmes adopted by the Council. These projects were included in the Spanish sectoral plans and so are fully consistent with the Spanish programmes.

The Spanish master plan covers infrastructure needs up to 2007. It is complementary to the work now in progress and did not in 1993 include a schedule for the completion of projects or a classification by priorities.

In any case, the Commission is not aware that the Spanish authorities intend to construct high-speed train tracks along the same route which differ from the projects for rail track approved under the cohesion financial instrument.

3.5. The Commission has always encouraged the Member States to submit projects which form part of the water management plans defined by basin or system and setting out the strategy to be followed.

The Commission's approach may be illustrated by Decision 94/527/EC concerning the supply of water to Athens from the River Evinos.

In that case, Community assistance is subject to:

- notification to the Commission of any revenue generated by the project;

- completion of a full hydrological study on the Evinos karstic system and of a study comprising an overall approach to the management of water resources in the region based primarily on the supply of water to Athens, the results of these studies to be taken into account in carrying out the project;

- detection of leaks in the Mornos dam and the pipelines taking water to Athens and the preparation of remedial measures;

- construction of a regulating dam upstream of the Evinos dam to ensure a minimum discharge of 1 cu.m./sec. throughout the year, and in particular in summer;

- implementation of a programme to monitor the quality of water from the Evinos dam similar to that currently applied to the Mornos dam.

3.6. The Court considers that certain projects financed by the cohesion financial instrument 'have only a limited impact in terms of environmental protection.'

It should be noted that Article 2 of Regulation (EEC) No 792/93 states that the cohesion financial instrument will provide assistance to environmental projects contributing to the achievement of the objectives of Article 130r of the Treaty.

The projects referred to by the Court are eligible under that Article and are pursuing the objectives of the fifth Community programme of policy and action in relation to the environment and sustainable development which concern respect for the environment: the urban environment, the protection and development of the historic sites in towns and cities, the creation of green areas, preservation of nature and habitats in areas devastated by forest fires in Mediterranean areas and environmental research and education.

3.7. The Member States responsible for the preparation and implementation of the projects are required by Community legislation to assess the environmental impact of projects.

As stated above, Community legislation is always respected as far as the projects approved are concerned.

In the case of the project concerned with water quality in Seville, the use for drinking of water originally intended for agriculture was not harmful to the environment. The project in fact complied with Directives 80/778/EEC and 75/440/EEC.

In the case of the project for channelling rain-water, account was taken of the risks of flooding that the channel could cause in settlements lower down. This is demonstrated by the fact that the Commission approved at the same time two projects concerned with channelling in the two areas to which the Court refers. This should have enabled the Member State to resolve the problems mentioned by the Court.

3.8. Under the Regulation, assistance from the cohesion financial instrument is not restricted to measures based on Article 130s of the Treaty.

The Commission is of the opinion, however, that, in at least one Member State, more projects could relate to the implementation of the directives.

Finance for sewerage systems includes a clause making assistance from the instrument subject to the connection of the stages of the projects financed to a treatment station.

Decision-making texts

3.9. There are differences between the various language versions of the regulation adopted by the Council which were reflected in the earliest versions of the decisions to grant assistance. These decisions were subsequently corrected. The differences have no effect on management.

3.10. In the case of the project for the Dublin-Galway railway, the application for assistance received by the Commission shows that the project was submitted on 28 June 1993 and so all expenditure incurred from 1 January 1993 is eligible for assistance under the instrument.

The financing plan submitted by the Irish authorities and subsequently included in the decision shows that all expenditure would be carried out in 1993. The date of March 1994 for the end of the works was given by the Irish authorities as a precautionary measure in case there were delays in implementing the project. As provided for in the regulation, the advance was paid on the basis of expenditure programmed for 1993. It was paid in the normal way.

In the case of the Seville water-supply project, Commission Decision C(94) 1317 of 31 May 1994 corrected the substantive error which gave 7 September 1993 instead of 1 January in the decision to grant assistance.

3.11. The financing plan for the 'Ballyjamesduff regional water supply' project, always shows eligible expenditure, meaning, in this case, costs incurred after 2 September. Hence the advance was calculated, as required by the regulation, with reference only to eligible costs planned for 1993.

Use of the ecu

3.14. The Commission will consider the recommendation made by the Court.

Advances and interest generated

3.16. Annex III to the Decision to grant assistance does not prevent the dates for the end of the works being changed where the application for extension is made by the Member State after the original deadline for completion.

That Annex simply states that in such a case the amendment must be made in accordance with the procedure for substantial amendments (i.e. the same procedure as that used to approve the decision). That was done in the case in question.

Clearly, the capacity for planning works, monitoring and checking implementation of projects by the Member States should be improved.

3.17. The Commission decisions provide for the payment of interest on amounts wrongly disbursed. The Commission pays very close attention to the progress of the projects which it is financing as far as the payment of advances is concerned. The Financial Regulation makes no provision for the payment of interest on advances.

In any case, as the Commission stated in its reply to paragraphs 6.11.-6.14. of the Court's annual report, it is currently examining all these situations.

4. THE PROJECTS

The scale of the projects

4.1. Whether a project has a significant impact does not depend solely on its size.

During negotiations in the Council, it was agreed that, when projects are considered from the point of view of whether they are of a sufficient scale to have a significant impact, due attention should be paid not merely to their size and the impact expected but also to the specific context in which they are proposed, e.g. the extent of the transport or environment sector in the country in question.

It should be noted that, to assess significant impact in the case of stages of a project, reference should be made to the project as a whole and in the case of a group of connected projects to the group as a whole. Many CFI decisions relate to stages of a project or groups of connected projects.

In the case of the Irish project concerning two rail crossings in the port of Belview, the investment should be seen in the broader context of the construction of a new container port being financed by the ERDF, which has been operational since September 1993. The investments financed by the CFI will improve access by rail, which accounts for 60 % of traffic, and by road and deepen the access channel. This is a very good example of a small-scale investment which will have a significant economic impact and make other investments part-financed by the Community more productive.

Finance for Hierro airport is justified by the need to improve access to the trans-European networks and the small scale of the region's economy.

4.2. It is likely that the need to use the appropriations available in 1993 and the high rate of assistance were among the criteria taken into account by the Member States when selecting projects for submission to the Commission. However, this does not mean, as the Court deduces, that the aims of the cohesion financial instrument were relegated to a position of secondary importance.

All the projects adopted by the cohesion financial instrument complied with the objectives laid down for the instrument.

4.3. The Commission would stress the considerations already referred to in relation to paragraph 4.1. However, it would wish the Member States to submit larger-scale projects under the Cohesion Fund. In any case, Regulation (EC) No 1164/94 contains guidance on the minimum size of projects.

The groups of projects

4.4. In accordance with Article 8 (3) of Regulation (EEC) No 792/93, the Commission has grouped in a single decision series of projects pursuing the same aim or similar objectives but in different places (integration of archaeological sites, management of water resources).

It should be noted that projects concerned with the implementation of the environmental directives are frequently of a small scale and spread over a large area of the Member States concerned. In this connection, Parliament has always stressed that important projects in the field of the environment should not be excluded from Community financing because of their small scale.

With reference to road improvement projects in Ireland, the Irish authorities consider that the appropriate and most economic strategy for improving the country's road network should comprise assistance for new roads or the widening of existing roads depending on the volume of traffic at a number of points along the major routes. The Commission has accepted this strategy while awaiting the launching of other projects on a larger scale. In any case, most of the works are located along the east of Ireland route, where the Commission has adopted other projects.

4.5.-4.6. Connected projects are grouped in accordance with the criteria set out in the previous paragraph and are therefore consistent.

Projects concerning the management of water resources in various regions of Spain were grouped where there was a shared objective: the supply of drinking water.

In Greece, environmental projects were grouped where their aims and/or objectives (water supply, waste water, archaeology, nature, waste) were similar.

Projects concerning archaeological sites in Greece form part of an overall plan for the integration of sites and the restoration of the historic centre of Athens. They comprise only some of the projects in the decision to grant aid, the total cost of which comes to ECU 5,8 million.

All the 12 road improvement projects in Ireland are located on European network routes although they involve sections where traffic volume is not high enough to justify the building of new roads along fresh routes. The fact that the road improvement projects are not linked is not of great importance since the quality of existing roads in Ireland varies enormously and road improvement projects are undertaken where required. In any case, all the projects are included in a long-term programme to improve the whole length of priority routes. Furthermore, eight of the 12 projects are located on the Dublin-Rosslare-Cork route where the Cohesion Fund has decided to finance a large number of other projects.

The other projects in Spain, which were designed to reduce and offset industrial pollution were grouped on the basis of the types of measures planned.

The project stages

4.7. The Commission has informed the Member States, Parliament and the Council that the term 'technically and financially discrete stages' refers to:

- stages constituting an operational unit (e.g. a sewage plant) or defined in geographical terms (e.g. clearly demarcated successive sections of a single motorway or railway line), or

- stages corresponding to a certain period of implementation of the project and to certain works physically identified through appropriate quantified indicators and carried out over the same period.

In this instance, projects were split in compliance with the second of these criteria.

It should be noted that expenditure on projects for which applications for assistance were submitted before 1 September 1993 is eligible from 1 January 1993 where work began before that date, irrespective of whether the projects were divided into stages.

4.8.-4.10. When the regulation was being negotiated, the Council considered that Article 7 (1) did not prevent aid being granted from the CFI and one of the Structural Funds to different stages of the same project.

Such a situation was in fact inevitable since, in some of the cohesion countries, virtually all investments in the transport and environment sectors had in the past been part-financed by the ERDF.

Before the CFI decision was adopted, the Portuguese authorities had sent DG XVI a formal application for the Cruz-Braga project to be deleted from Prodac. However, in view of the small scale of the project so withdrawn, the rules governing amendments to ERDF operational programmes did not require a formal amendment to the Commission decision adopting the programme since the whole matter could be dealt with by the Monitoring Committee for the programme in question. The amendment to Prodac was made before the project was approved by the cohesion financial instrument.

The list of projects in the 'Peripherality' operational programme in Ireland is clearly stated to be 'indicative.' Some projects in the 1989-93 programme also appear in the 1994-99 programme because during the first period there were insufficient funds to finance all projects on the indicative list. This means that there was no need to amend the first 'Peripherality' programme.

In general, the Member States are fully aware of the need to avoid double financing of an item of expenditure and the rules for the management of the operational programmes under the Structural Funds mean that they can be adjusted as required.

The concept of 'stage of project' was defined in paragraph 4.7. When the Court states that 'the way in which the project is split up is arbitrary' and refers to 'payment stages', it is talking about the definition of stages made by the Commission. That definition applies equally to the Cohesion Fund, as was agreed when Regulation (EC) No 1164/94 was negotiated.

There is contractual provision for price revisions, which are governed by the national rules on public procurement. This means that such expenditure is automatically eligible if it relates to work covered by the decision. As far as eligibility in time is concerned, the effective date is that on which the invoice was actually paid.

The Commission monitors projects which have been divided into stages with particular attention, as is demonstrated by inspection missions relating to the Cruz-Braga motorway undertaken from 21 to 25 March and from 18 to 20 June 1994.

4.11. The Commission regards these practices as confirming the role of the CSF as a programming instrument. When projects or stages of projects are taken over from the ERDF, account is taken of the programming objectives of the CSFs and of the priorities of the CFI, particularly in terms of the advancement of the trans-European networks.

In the case mentioned by the Court, the programming exercise underlying the Prodac programme was not affected by the fact that a phase of the Cruz-Braga project was withdrawn from this programme. That phase was in fact replaced by other projects concerned with the secondary road network in Portugal, which were not eligible for assistance from the cohesion financial instrument. This substitution also meant that all finance for the Portuguese CSF could be carried out for 1989/93. In addition, the Portuguese authorities gave a formal undertaking to submit an application for assistance from the Cohesion Fund for the next part (Braga-Valencia) of this trans-European road route running as far as the Spanish border so that the IP-1 can be finished to the north. The method used means that the resources of the two financial instruments can be used on the projects which most closely conform to their respective objectives.

The Commission has always sought to avoid an artificial splitting up of tenders or contracts. The Court does not specify where it believes such an artificial splitting up took place and the Commission therefore deduces that it found no such instance and that the existence of a risk of this type is the view of the Court founded on no substantive evidence.

4.12. In the case of the Madrid ring road, decisions refer to projects, not to stages. Each project complied with the criteria and requirements of the regulation and, in particular, environmental impact studies were carried out. The Court refers to environmental problems posed by a project which was not submitted to the Commission. The Commission will certainly investigate this point but it does not at present have any evidence which casts doubt on the quality of these projects, which are making a very substantial contribution to the objectives of the instrument and which relate to a spot of key importance to the trans-European networks.

The revenue-generating projects

4.13. The Commission defines as 'revenue-generating projects':

- infrastructure whose use is subject to charges paid directly by users and which give rise to substantial net revenue for promoters;

- productive investments.

Where support is granted to a revenue-generating project, the Commission, in consultation with the Member State, deducts the revenue from eligible expenditure on the projects where such revenue is directly related to the investment financed and constitutes a substantial net benefit to the promoter.

The practice followed in the management of the CFI is consistent with these principles. Accordingly, where revenue is not substantial or directly related to the investment, it is not taken into account.

4.14. The Commission has considered whether the 'polluter pays' principle can be applied to environmental projects. As far as investments in sewerage systems, supply systems and drainage systems part-financed by the CFI are concerned, the Commission did not regard the cases examined as generating additional revenue which could be linked directly to the investment.

The Commission has no evidence that, in the cases in question, increased water-treatment capacity or improvements to sewerage systems resulted in changes in the prices paid by users and substantial increases in revenue for the promoter.

No account can be taken of indirect effects on prices and revenue.

The Commission will nevertheless look again at the application of the 'polluter pays' principle in the water sector.

4.15. It is clear to both the Commission and the Member States that the cost to be declared when expenditure incurred is submitted in applications for payment is the total cost of the works as shown in the Commission decision.

The eligible cost is defined as a percentage of total cost. Total cost and eligible cost are defined in the decision. Under the Cohesion Fund, the presentation of total cost and eligible cost in Commission decisions has been made more explicit. It is perfectly possible to monitor the progress of these investments.

The procedure for approving the projects

4.16. The Commission does not consider it appropriate to draw up a list of eligible expenditure since it believes that the concepts set out in the regulation and detailed in the application form sent to the Member States were sufficient. No particular problem has been found in management. In any case, the form was recently revised and extended for use under the new regulation.

4.17. The amount of refundable VAT is always excluded from expenditure eligible for assistance from the CFI. The rates of 80 % to 85 % are derived from the conclusions of the European Council and the Council regulations.

4.18. The cost of the acquisition of land forms part of the cost of the investment and, particularly in urban areas, may be substantial. For the purposes of the financial instrument, the Commission did not consider it appropriate to place an upper limit on such expenditure as a proportion of the total cost of the project. In each instance, it assesses whether the expenditure is justified in the overall context of the project.

As far as the cases mentioned by the Court are concerned, compulsory purchase costs for projects concerning the Madrid ring road are those normally encountered for this type of investment in urban areas.

In Greece, one of the 'archaeological sites' projects, where the cost amounts to ECU 226 000 out of a total of ECU 5.8 million, concerns the compulsory purchase of land required to create a usable space between the Acropolis, the Theatre of Bacchus and the new museum and for the construction of pedestrian streets. The Commission considered the integration of archaeological sites as a whole, as they were submitted by the Greek authorities. In this case, compulsory purchase accounts for only a limited proportion of the total cost approved by the Commission.

The assessment of the projects

4.20. The Commission assesses projects to see whether the medium-term economic and social benefits are commensurate with the resources deployed.

This assessment is normally carried out using:

- analyses of costs and benefits submitted by the Member States. In the cases of transport infrastructure projects and the larger environmental projects, these are normally in the form of cost/benefit analyses. In other cases, they may include more qualitative factors;

- elements supplied by the EIB, either following the Bank's examination of the project in question or the system or route of which it forms part, or following its opinion on an application given at the request of the Commission;

- other factors for assessment available to the Commission.

This means that the assessment process involves a number of parties and uses contributions from a variety of sources.

In general, all projects include an analysis of costs and advantages although naturally the type and quality of the analysis may vary depending on the nature of the project and may include quantified cost/benefit analyses or analyses based on a qualitative assessment of certain advantages.

These analyses are normally sent to the Commission before the project is approved.

The Commission considers that the Member States should make more effort to improve their techniques of economic analysis, particularly in the field of the environment. Steps to achieve this have been taken both by the Commission and by the Member States.

4.21. The Member States find it difficult to quantify all the benefits expected from environmental projects. In some cases, the rate of return given by cost/benefit analyses is quite low but other benefits which cannot be quantified make the project viable.

In the case of the Evinos project, construction of the dam was subject to clauses on water management and the completion of investments downstream of the dam (see paragraph 3.5).

The Commission regards the water-supply problems affecting Athens as very serious in both the short and the longer term in view of the steady decline in rainfall throughout this century and increasing needs, which require a permanent change in the water supply system. The situation has deteriorated still further in recent years. In these circumstances, completion of the Evinos dam was essential and could not be delayed further, as is demonstrated by the annexed graphs.

The technical, environmental and hydrological studies submitted to the CFI covered the increase in the Mornos water resources in the Evinos basin, the existing potential for increasing water supplies to Greater Athens and hydrological studies of the Ylikis basin. Article 6 of the Commission decision to grant finance required an updating of these hydrological studies and a study of the Evinos karst system.

It should be noted that, through the specific clauses of Article 6 of this decision, the Commission also imposed a requirement that the project be soundly implemented in the broad sense of the term, i.e. through a study of the management of water resources, the detection of leaks in the Mornos reservoir and the pipelines taking water to Athens and water quality.

4.22. Techniques of cost/benefit analysis are widely used in the field of transport and there is no need to define new methodologies. What is required is a comparison of the methodologies used in the various countries in order to identify points of difference and so encourage convergence of approach.

In the field of the environment, however, assessment methodologies should be defined and the Commission is seeking to improve the situation.

4.23. The Commission is unable to refuse to finance projects which are already under way.

The Commission recently wrote to the Member States to ask them what steps they had taken to ensure that the commitments they had given about their total investment effort would be honoured.

4.24. If the Commission had not made the second payment for the Adra bypass conditional on an undertaking by the Spanish authorities to take steps to correct the negative impact on the environment, there is no guarantee that such steps would have been taken. In this instance, the corrective measures required, the improvement of banks by planting, were not of the sort that could have been taken before the works were finished. The Court's comment is irrelevant in this instance since the project concerned the conversion of an existing road into a motorway following the same route.

4.25. Impact indicators are included in the cost/benefit analyses and other economic assessments which accompany projects.

This makes possible the ex post assessment of projects. Obviously, it is easier to identify such indicators in the case of transport than that of the environment. The works in progress should also provide adequate impact indicators for the environment as well.

The Commission and the Member States are making considerable efforts in this respect.

5. PUBLIC CONTRACTS

5.1. The Commission ensures that every project submitted for its approval complies scrupulously with the public procurement directives.

As far as the Commission is aware, the projects referred to comply with national and Community legislation.

5.2. The Commission is particularly concerned by the public procurement procedures in Greece, and in particular the large discounts proposed by tenderers. It has taken appropriate steps in this regard, including consultations with the Greek authorities.

During these contacts, the Greek authorities informed the Commission of the introduction of new legislation to deal with the problems of abnormally low tenders. Special measures will be taken to deal with projects for which the award procedure is in progress. The Commission has informed the Greek authorities of its position on this matter and discussions are currently in progress.

5.3. The Court's remarks have to some extent been overtaken by developments in legislation.

Paragraph 12 of the Commission Notice referred to States that, pending adoption of the 'excluded sectors' directive before the Council, the Commission intends to give, by way of an incentive, (wherever numbers of applications of the same type are excessive and all other things being equal) priority to applicants for assistance who open up contracts to Community competition. The Directive referred to (90/351/EEC as amended by 93/83/EEC) was adopted on 17 September 1990 with a derogation for Spain, Greece and Portugal.

In view of that derogation and the wording of paragraph 12, the Commission considers that implementation can take place only at national level.

6. MONITORING

6.1. The Court makes reference to provisions on monitoring which apply to operational programmes financed by the Structural Funds. They also apply, mutatis mutandis, to projects part-financed by the CFI.

The physical indicators are defined in the applications for payment and the monitoring report prepared by the Monitoring Committee. The Commission does not consider it appropriate to define the physical indicators in advance in the decisions to grant assistance. It is technically difficult and not appropriate to include in a legal instrument details of the physical monitoring system which is to be followed. Such an obligation does not appear in the Cohesion Fund Regulation adopted by the Council.

6.2. The description of the projects annexed to the decisions to grant assistance always includes a description of the physical object and fuller details are to be found in the applications to which the decisions refer. It is clearly not possible for very detailed and lengthy descriptions to be annexed to decisions.

6.3. The schedule for the completion of works is set out in the decision while the physical indicators are specified in the applications for payment. The Commission has already stated that it does not agree that physical indictors should be included in the decision to grant assistance.

6.4. The Member States have given very general answers to the question on the form asking for a description of the management and audit systems set up.

Fact-finding and audit missions have established that there are separate systems for the management of projects part-financed by each instrument. Regular checks are carried out on these projects at national level, as provided for by the legislation in force in each country.

In order to supplement the information already collected, a letter was sent on 15 July 1994 to the four beneficiary Member States under the Cohesion Fund asking them to send the Commission a description of their management and audit systems.

6.5. The Monitoring Committees have been set up in the meantime and are working effectively. The clauses in the decisions referring to the period of three months concern only the reaching of joint agreement on the composition and operation of the Committees and the frequency of their meetings.

The Commission, in agreement with the Member States, decided to set up one Monitoring Committee per country, except in the case of certain major projects (the Evinos dam), where a specific Committee was established.

In accordance with the period specified in the decision to grant assistance, the Commission wrote to the Member States on this matter on 20 October 1993. The Member States replied to this letter over the following months and made proposals on the composition and operation of the Monitoring Committees.

Each Monitoring Committee has been preceded by preparatory meetings at various levels to define reporting systems and methods of working. The reporting systems were subsequently refined and given official status by a note from the Commission to the Member States. The first meetings of the Monitoring Committees were held as follows: Ireland - 21 June 1994 (preparatory meeting 2 February 1994); Greece - 13 July 1994 (preparatory meeting 28 March 1994); Portugal - 28 April 1994 (preparatory meeting 24 March 1994) and Spain - 18 May 1994.

The monitoring and audit systems established comply strictly with the Council regulation and, as the experience of 1994 demonstrates, are ideally suited to monitoring the projects decided on.

The Court's report was drawn up on the basis of checks carried out when the projects had been only recently approved and monitoring and audit systems only recently established. A judgment of the effectiveness of the audit and monitoring system at that stage is clearly premature.

Technical assistance

6.7. The expert in question is a member of the committee of experts set up under the Euret concerted action programme. He was selected on the basis of his ability, and in particular because he could apply to the management of the CFI the results secured in the context of Euret.

He was not employed to develop new methodologies. His duties included examining the methods followed by the Member States in preparing cost/benefit analyses of transport projects, comparison of the values and unit prices used and preparation of a frame of reference which would enable the results of the various analyses to be compared and the methods used refined.

This expert also contributes to the assessment of projects submitted to the CFI and the Cohesion Fund.

7. CONCLUSIONS

7.1. The Commission is fully aware of its responsibilities and has taken the steps which these imply, particularly in view of the short time within which the CFI operations were established. Improvements have been made since the period covered by the Court's report and further improvements will be made in the light of the report. The Commission would stress that it has undertaken to consider a number of points raised by the Court.

The Cohesion Fund Regulation, as proposed by the Commission and adopted by the Council with the assent of Parliament, and the provisions concerning assessment, monitoring and audit of projects take account of the experience acquired during management of the CFI.

The authorizing officer and Financial Control, each following their own criteria, will undertake a series of on-the-spot checks in each of the beneficiary Member States with particular attention to the management and audit systems established and will propose any improvements which appear necessary.

7.2. The Commission has taken and will continue to take all the measures required to achieve the objectives laid down for the Cohesion Fund and will take account of the experience gained to improve practice.

The Commission has stated on a number of occasions that this problem is well under control. The Court ignores completely the substantial efforts with regard to the assessment of projects already made by the Commission and the Member States, where appropriate in cooperation with the EIB.

These efforts are, however, continuing and the Commission recently enhanced its technical capacity.

GRAPH SHOWING THE TOTAL VOLUME OF WATER STOCKS IN THE RESERVOIRS MARATHON + ILIKI + MORNOS

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