Report

on the financial statements of the European Agency for Reconstruction for the financial year 2001, together with the Agency's replies

(2002/C 326/01)

CONTENTS

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THE COURT'S OPINION

1. This report is addressed to the Council and the European Parliament, in accordance with Article 8 of Council Regulation (EEC) No 2667/2000(1) of 5 December 2000.

2. The Court has examined the financial statements of the European Agency for Reconstruction for the financial year ended 31 December 2001 (see paragraph 11). In accordance with Article 8 of Council Regulation (EC) No 2667/2000, the Agency's budget was implemented under the responsibility of its Director. This responsibility includes the drawing up and presentation of the financial statements(2), in accordance with the internal financial provisions provided for under Article 9 of the same Regulation. The Court of Auditors is required under Article 248 of the Treaty establishing the European Community to examine these accounts.

3. The Court undertook its audit in accordance with its audit policies and standards. These have been adapted from generally accepted international auditing standards to reflect the specific characteristics of the Community context. The Court carried out such tests of the accounting records and applied such other audit procedures as it deemed necessary in the circumstances. By means of this audit the Court obtained a reasonable basis for the opinion expressed below.

4. This examination has allowed the Court to obtain reasonable assurance that the accounts for the financial year ended 31 December 2001 are reliable and that the underlying operations are, taken as a whole, legal and regular.

5. Without calling into question the audit opinion expressed in paragraph 4, the Court nevertheless draws attention to the situation described in paragraphs 10 and 11.

MAIN OBSERVATIONS CONCERNING FINANCIAL MANAGEMENT

Implementation of the budget

6. The Agency's budgetary appropriations are managed as non-differentiated appropriations. In order to achieve its objectives, the Agency receives a subsidy from the Commission in the form of non-differentiated appropriations, of which a maximum percentage may be used to cover administrative and staff expenditure. The Agency became operational at the beginning of 2000. One of the main features of the year 2001 was that the Agency extended its activity to the Republic of Serbia and the Republic of Montenegro. Table 1(3) shows the implementation of the appropriations for the financial year 2001.

7. The appropriations entered in the budget for the financial year 2001 amounted to 410,6 million euro. In reality, after taking into account 0,6 million euro in counterpart funds, which were not entered in the budget, the appropriations available for expenditure in the 2001 financial year came to 411,2 million euro.

8. The Agency had an outstanding balance of 411,6 million euro to be committed against appropriations granted by the Commission in 2000. This amount included an estimate of the appropriations required to continue the programmes of assistance to Serbia managed by the Commission. More precise estimates by the Agency led to its cancellation of 120,7 million euro of the appropriations related to these programmes.

9. In its Annual Report concerning the financial year 2000, the Court pointed out weaknesses in the Agency's budgetary accounting. The Agency began installation of the SI2 computerised budgetary accounts system during the second half of 2001. In addition, the Agency also had to incorporate into this system the financial data relating to numerous projects which had previously been managed by the Commission.

10. The Agency took the accumulated values for the projects as its basis for the purpose of incorporating the existing data into the SI2 system. Because of this, it is not always possible, in the SI2 context, to identify the original financial year of the appropriations used and, in the case of the payments made in 2001 for the projects initiated by the Commission, to distinguish between those payments made by the Agency and those made by the Commission. Although the Court was able to obtain reasonable assurance that the basic data were reliable, in order to obtain an accurate impression of the implementation of the budget, auxiliary tools constructed on the basis of electronic data sheets must be used. These tools are not easy to apply. The Agency should reduce or even eliminate the necessity of resorting to these tools, which have a definite inherent risk of error.

Drawing up the financial statements

11. The financial statements sent by the Agency on 29 March 2002 contained errors. These were pointed out to the Agency and an amended version was sent on 4 October 2002. The Court's opinion concerns the revised versions of the revenue and expenditure account and balance sheet, which are shown in summary form in Tables 2 and 3.

12. In 2001, each Agency establishment kept its own accounts. Reconciliations should have been made regularly to ensure that these accounts were consistent with the central accounts. In addition, the Agency continued to use spreadsheets for the purpose of keeping its general accounts, with all the risks that this entails.

Application of financial provisions

13. The difficult environment in which the Agency operates meant that a financial controller could not be appointed by the Commission during the first half of 2001.

14. Recovery orders for sums owed to the Agency are not issued on a systematic basis, contrary to the provisions of the Financial Regulation.

15. At the Commission's request, on 26 July 2001, a contract(4) lasting 15 months was signed with an expert by private treaty to provide technical assistance to the departments of the presidency of the Federal Republic of Yugoslavia. Despite the principle of recruiting an expert having been agreed in late 2000, the latter had been recruited without an invitation to tender on grounds of urgency. The contract was also partly retroactive in nature, since the expert had begun working two months prior to contract signature.

The housing programme

16. One of the priorities ascribed to the Agency concerns the repair or rebuilding of housing damaged during the hostilities, especially amongst the poorest sections of the population. The Court has analysed the results achieved as a result of implementing this action in 2000 (Table 4 sets out the principal related data). Although the total number of houses rebuilt exceeded the target initially set by 4 %, the breakdown of these houses in accordance with the type of work to be carried out diverges considerably from that envisaged in the contracts and subsequent amendments. For example, the number of units viewed as needing to be completely rebuilt is practically double. Such information should prompt the Agency to look into ways of improving the selection of the work to be carried out, so that genuine needs are met more effectively.

FOLLOW-UP OF PREVIOUS OBSERVATIONS CONCERNING THE AGENCY'S EFFICIENCY

17. In its Annual Report concerning the financial year 2000(5), the Court analysed various aspects of the Agency's efficiency and the sustainability of both the actions it finances in Kosovo and their impact.

18. From the point of view of efficiency, the Agency has been able to maintain a high level of commitments and payments, whilst keeping staff and operating costs low by pursuing its policy of reducing the advances paid to its contractors, but paying them promptly once work has been completed.

19. In line with the recommendation made by the Court(6), the Agency continued to focus its efforts on areas deemed to be priority areas. As of 2001, emphasis was placed on institutional measures(7).

20. A second recommendation(8) made by the Court was that the frequency of the meetings of the Governing Board should be reduced, because of the extra workload and administrative costs these incurred. This has been done and no unfavourable consequences were experienced as a result.

21. A third and final recommendation(9) concerned the measures to be taken to assure the sustainability of actions financed by the EU. To this end, the Commission, in cooperation with the United Nations Organisation, prepared action plans for five key sectors(10). At the end of 2001, it decided that the actions plans would now include objectives and performance indicators. The European office of the United Nations Interim Administration Mission in Kosovo(11) monitors the implementation of these plans by means of quarterly reports. The Commission should continue to develop and intensify its cooperation with the United Nations Organisation for the purpose of monitoring and evaluating the programmes and thus ensuring the sustainability of their impact. Monitoring systems have been set up at Agency level. However, there is no global monitoring plan which would ensure that all projects were monitored systematically. An evaluation unit has been set up and has issued its first evaluation reports. Recommendations made in these reports are applied when future activities are programmed.

22. With regard to infrastructure, particularly transport infrastructure, the results achieved may be deemed satisfactory. However, the plan to decrease financing for Kosovo after the rebuilding phase could have repercussions as regards maintenance of the road network and hinder its development.

23. Over the 1999-2001 period, the energy sector received aid amounting to 287,5 million euro, 74 million euro of which were for financing imports. In this connection, the United Nations Mission in Kosovo has estimated the investments that are still needed at 200 million euro. The Commission has decided to reduce its aid to the "energy sector". Aid to this sector is to be concentrated on accompanying measures, which are introduced all too slowly, especially as regards debt collection. According to statistics drawn up by the United Nations Interim Administration Mission in Kosovo in December 2001, only 62 % of electricity supplies are invoiced and only 28 % of invoices are actually paid; on an annual basis, the difference between the value of the electricity supplied and that of the revenue collected is estimated at some 100 million euro. A shortfall of this nature is unacceptable and increased efforts to ensure that revenue is collected properly would considerably reduce the need for external financing in the energy sector.

This report was adopted by the Court of Auditors in Luxembourg at its meeting of 24 October 2002.

For the Court of Auditors

Juan Manuel Fabra Vallés

President

(1) OJ L 306, 7.12.2000, p. 7.

(2) As required under Article 8 of Council Regulation (EC) No 2667/2000, the accounts for all the Agency's revenue and expenditure for the financial year 2001 were drawn up on 29 March 2002 to be forwarded to the Agency's Management Board, the European Parliament, the Commission and the Court of Auditors. The final corrected version of these accounts was drawn up on 4 October 2002 and received by the Court on 7 October 2002. A summarised version of the financial statements is presented in the tables annexed to this report.

(3) It should be noted that the allocated appropriations include 65,9 million euro in appropriations not used by TAFKO.

(4) Contract 01/06/009.

(5) OJ C 355, 13.12.2001, paragraph 21 onwards.

(6) See paragraphs 72 and 73 of the report concerning the financial year 2001 (OJ C 355, 13.12.2001).

(7) The programmes foreseen in this area are aimed, firstly, at encouraging the private sector within a market economy and, secondly, at supporting actions fostering respect for democratic rules, human rights and legality in general.

(8) See paragraphs 74 and 75 of the report concerning the financial year 2001 (OJ C 355, 13.12.2001).

(9) See paragraphs 76 and 77 of the report concerning the financial year 2001 (OJ C 355, 13.12.2001).

(10) Energy, transport, enterprise development, water and health.

(11) The United Nations Interim Administration Mission in Kosovo is organised into four offices: "justice and police", "civil administration", "democratisation and institutional measures" and "economic development", that latter of which is managed by the European Union.

Table 1

Implementation of the budget for the financial year 2001NB:

Any discrepancies in totals are due to the effects of rounding.

Source:

Data compiled by the Agency - These tables summarise the data supplied by the Agency in its own financial statements.

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Table 2

Revenue and expenditure for the financial years 2001 and 2000

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NB:

Any discrepancies in totals are due to the effects of rounding.

Source:

Data compiled by the Agency. These tables summarise the data supplied by the Agency in its own financial statements.

Table 3

Balance sheet as at 31 December 2001 and 31 December 2000NB:

Any discrepancies in totals are due to the effects of rounding.

Source:

Data compiled by the Agency - These tables summarise the data provided by the Agency in its own financial statements.

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Table 4

Number of housing units to be repaired((Category III housing basically requires roofing work. In the case of category IV. A housing, the remaining structural elements can be re-used, and in that of category IV. B, complete rebuilding is needed.))

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Source:

European Agency for Reconstruction.

The agency's replies

Budgetary implementation

10. The Agency entered the cumulative amounts of payments prior to the introduction of SI2 because it was impracticable to reproduce one by one the whole history of payments for several years of assistance (Kosovo, Serbia and Montenegro since 1998 and the former Yugoslav Republic of Macedonia since 1996). The distinction between payments made by the Commission and by the Agency, regarding the historical data for Kosovo (1998 to February 2000) is available in the Agency's files.

Financial accounts set-up

12. The financial year 2002 started with the new accounting system (SI2) which is centralised and eliminates the risks mentioned when closing the financial year.

Application of financial rules

14. The Agency recovered all debts from third parties using specific internal forms as recovery orders.

Housing programme

16. The fact that the objectives were exceeded is particularly significant considering that for the 2001 programme over 80 % of the reconstructed houses were classified as fully destroyed.