On 16 February 2022, the Court of Justice upheld the validity of Regulation (EU, Euratom) 2020/2092 on a general regime of conditionality for the protection of the EU budget, which two Member States, Hungary and Poland, had contested. In March 2022, the Commission adopted guidelines on the application of the regulation. Following the work carried out throughout 2021, the Commission sent a first notification to Hungary in April 2022 as a subsequent step under the general regime of conditionality, triggering the procedure that may lead to the imposition of measures against a Member State for breaches of the principles of the rule of law. The Commission constantly monitors the situation across Member States and will start the procedure under the conditionality regulation if the conditions are fulfilled.

The Commission is following up on its commitment to continue providing a single data-mining and risk-scoring tool (Arachne) to Member States. It supports the programme authorities in identifying risks for the expenditure by adapting the tool put at the disposal of Member States under the previous financial framework. The Commission will continue to offer support to Member States to allow for its effective use. In the ongoing revision of the financial regulation the Commission proposed to strengthen the use of this data-mining and risk-scoring tool.

The Commission has proposed a targeted revision of the financial regulation (). Given that the changes brought about by the 2018 revision need time to produce their full effect, this proposal focuses on alignment with the new long-term budget, certain improvements on crisis management following lessons learned during the COVID-19 crisis and enhanced protection of the EU’s financial interests.

The constraints of the 2021-2027 multiannual financial framework will pose challenges for the EU to respond in full to the situation following the Russian invasion of Ukraine. The Commission is committed to ensuring that every euro in the EU budget is used to maximum effect, including by reallocating and reprioritising when unanticipated challenges arise. However, there are limits to what can be achieved within the constraints of the current multiannual financial framework. Much of the flexibility in the budget has already been used to react to multiple crises, with the result that there will be less room to respond to future crises. An urgent reflection is therefore warranted on how to ensure that the EU budget is equipped to respond to the many demands and expectations placed on it in these exceptionally turbulent times.

Against a backdrop of continued immense challenges, close cooperation with other EU institutions and the Member States remains essential. As has been true for the pandemic, the dramatic unfolding of events in Ukraine makes a robust and coordinated EU-level response both necessary and justified as an indispensable complement to the work of the Member States.

On the basis of the assurances and reservations in the annual activity reports, taking into account the opinion of the internal auditor, the College of Commissioners adopts this Annual Management and Performance Report for the EU Budget – Financial year 2021 and takes overall political responsibility for the management of the EU budget.

All authorising officers by delegation have provided reasonable assurance, although qualified with reservations where appropriate. The annual activity reports demonstrate that all Commission departments have put in place solid internal controls and provide evidence of the efforts undertaken to improve cost-effectiveness, further simplify the rules and adequately protect the budget from fraud, errors and irregularities.

The Commission ensures that the EU budget serves citizens. Thanks to the effective tools in place and to the proactive management of the EU budget, the Commission has been able to deliver on its policy objectives and respond to multiple challenges. The Commission has provided its beneficiaries, implementing partners and the Member States with the necessary degree of flexibility, while ensuring sound financial management and maintaining an appropriate level of assurance on the management of the EU budget.

Based on the positive assessment of evidence for the fulfilment of the milestones of the payment request, the authorising officer by delegation confirmed that he had reasonable assurance of the legality and regularity of the single payment made in 2021 under the Recovery and Resilience Facility.

To gauge the level of risk associated with operations, the Commission makes a qualitative assessment of results from audits and controls both at the level of Member States and the Commission. In a context where payments are based on a qualitative assessment of the fulfilment of milestones and targets and where these milestones and targets are very diverse, control results cannot be extrapolated. Therefore, unlike other funding programmes, a meaningful error rate based on statistical methods cannot be determined.

·After disbursements, the Commission may perform ex post controls and audits () to check the achievement of milestones and targets. The Commission may also carry out ad hoc audits in case of suspicion of serious irregularities. If necessary, the Commission will recover proportionate amounts or require early repayment of the loans.

·During the implementation of the facility, the Commission assesses whether the milestones and targets have been satisfactorily fulfilled and all other conditions for disbursement have been met. If this is not the case, payments are suspended or proportionally reduced. The Commission also audits the functioning of the Member States’ management and control systems to protect the EU’s financial interests, and more particularly the measures to prevent, detect and correct cases of fraud, corruption, conflicts of interest and double funding.

·During the assessment of the recovery and resilience plans, the Commission assesses the Member States’ control systems and invites the Member States to include additional milestones in the plans to address identified weaknesses before the first payment.

As a result, the focus of the Commission’s controls is on the satisfactory achievement of the agreed milestones and targets. To ensure sound financial management, the Commission relies on the Member States’ controls, and complements them as necessary at the following three stages.

Since the facility is a performance-based instrument, the legality and regularity of the payments made by the Commission depend on the actual achievement of the milestones and targets. Member States are primarily responsible for the protection of the financial interests of the EU, including checking compliance with applicable EU and national law. For that purpose, they put in place appropriate control frameworks at the national level, in particular with a view to preventing, detecting and correcting fraud, corruption and conflicts of interests and avoiding double-funding.

Funding is disbursed in several instalments upon the achievement of milestones and targets to which Member States have committed themselves. In 2021, the Commission disbursed EUR 54 billion in pre-financing payments to 20 Member States (), which helped kick-start the implementation of the investment and reform measures outlined in Member States’ recovery and resilience plans. The Commission disbursed a first payment for milestones and targets of EUR 10 billion to Spain before the end of 2021, after receiving the payment request in November 2021.

Twenty-two recovery and resilience plans were positively assessed by the Commission and adopted by the Council in 2021. These plans account for a total allocation of EUR 291 billion in non-repayable financing and EUR 154 billion in loans. These 22 recovery and resilience plans include a total of over 3 700 measures (around one third of which are reforms and two thirds investments), along with over 5 100 milestones and targets to be fulfilled by 2026.

Established at the beginning of 2021, the Recovery and Resilience Facility is a new performance-based instrument, of an exceptional and temporary nature, at the service of EU recovery. With a total envelope of EUR 723.8 billion (in current prices) – EUR 338 billion in grants and EUR 385.8 billion in loans – its purpose is to mitigate the social and economic impact of the COVID-19 pandemic and promote a long-lasting recovery that embraces the green and digital transitions. Member States are the beneficiaries of the funds, which are disbursed against the achievement of predefined milestones and targets.

In addition to financial corrections and recoveries, the Commission is taking action to address weaknesses leading to medium and higher risks. These include communication targeted at the most error-prone beneficiaries, more extensive use of simplified forms of grants, better controls and building the capacity of national authorities with deficiencies in their management and control systems.

In particular, the following involve higher-risk expenditure: some programmes for cohesion policy funds that show serious deficiencies and/or have maximum error rates above 2.5%; the programmes in the cohesion policy funds and the paying agencies for agriculture-related direct payments, market measures and rural development that have risk at payments above 2.5%; and expenditure related to complex grants in other funding programmes. Where the level of risk remains high, this is reported transparently through the issuance of reservations. For 2021, there are 16 reservations with a total financial impact of EUR 987 million, which is less than 1% of the total expenditure. These reservations are a keystone in the accountability chain. They outline the challenges and weaknesses encountered, along with the measures envisaged to address them.

The European Commission categorisation of expenditure into higher-; medium- and lower-risk segments, as percentages of the total of relevant expenditure for 2021.

Notwithstanding this overall good result, the Commission identifies which programmes have a higher level of risk, allowing it to focus its action where it matters most. Thanks to its detailed analysis, the Commission has robust evidence of the differentiated risk level for the EU’s expenditure. Based on the risk at payment, expenditure is divided into lower- (below 1.9%), medium- (between 1.9% and 2.5%) and higher-risk (above 2.5%) segments. For natural resources and cohesion, this analysis is carried out at the level of individual paying agencies and programmes in the Member States, which allows to show that the situation is differentiated by programmes. This also allows the Commission to address specific weaknesses even for policies that, taken globally, are low risk, such as the common agricultural policy.

Source: the European Commission, the 2015-2021 annual management and performance reports for the EU budget.

Risk at payment and closure for the European Commission for the 2015-2021 period.

For 2021, the risk at closure is estimated at 0.8%. As this is well below the threshold of 2% – also used by the European Court of Auditors – the Commission considers that the budget as a whole is effectively protected. This is confirmed by the internal auditor’s opinion ().

Overall, the risk at payment is below the materiality threshold of 2%. The Commission estimates that, after its preventive controls, the remaining level of error – i.e. the risk at payment – is 1.9% (). This result is similar to that of 2020. Given the multiannual character of the funding programmes, the Commission deploys substantial efforts to perform controls after the payments and to make corrections until the closure of the programmes. These efforts are reflected in the estimated risk at closure (), which corresponds to the risk at payment minus the Commission’s future corrections forecast.

As a result of its controls and audits, in 2021 the Commission implemented preventive and corrective measures for an amount of EUR 1 063 million, EUR 298 million of which represented preventive measures, while the corrective measures implemented added up to EUR 765 million. This brings the cumulative amount of preventive and corrective measures implemented for the years 2017 to 2021 to EUR 26 billion. In addition, the Member States themselves implemented preventive and corrective measures for a total amount of EUR 4 557 million in 2021, partly based on Commission audits.

The Commission and the Member States take action to prevent and correct weaknesses and errors. The Commission’s key preventive mechanisms consist of ex ante controls and audits (see Annex 5 in Volume III), including system audits to detect weaknesses in the implementing partners’ management and control systems. Under shared management, Member States’ authorities also perform verifications and audits. Where preventive mechanisms have not been effective, errors affecting EU expenditure are detected and corrected after the Commission’s payments by Member States and the Commission.

The Commission’s control results confirm that the EU budget is well managed

The Commission reviewed the annual reports and opinions for 416 programmes and carried out 61 audits.

More than 900 000 checks were carried out by the Member States and 97 audits by the Commission.

The Commission and the Member States perform hundreds of thousands of checks every year. The Commission builds its assurance from the bottom up and at a detailed level, i.e. by programme or other relevant segment of expenditure. This allows the Commission to detect weaknesses and errors, to identify the root causes of systemic errors, to take targeted corrective actions and to ensure that any lessons learned are factored into the design of future financial programmes.

Within its internal control framework, the Commission relies on multiannual and risk-differentiated control strategies to prevent, detect and correct errors and weaknesses in the control systems. EU spending programmes are multiannual by design, and so are the related control strategies. This implies that detection and correction of errors may happen at any time, up to the point of closure at the end of a programme’s life cycle. Moreover, the control strategies are adjusted to the different management modes, the actors involved, the policy areas and/or the funding methods and associated risks. This differentiation of the control strategies is necessary to ensure their cost-effectiveness, i.e. that they strike the right balance between a low level of error (effectiveness), fast payments (efficiency) and reasonable costs (economy).

In 2021, the relevant departments put a particular focus on the adaptation of their internal control systems to the needs of NextGenerationEU, be it through setting up a high-level risk and compliance policy for borrowing and lending activities or by designing specific audit and control strategies for spending under the Recovery and Resilience Facility.

The Commission’s internal control framework is an essential safeguard for the Commission’s operations. This is all the more the case in the context of the pandemic and the ensuing response measures. In 2021, the Commission continued to closely monitor the risks arising from the pandemic and their effective mitigation. The Commission’s anti-fraud strategy has continued to play a significant role in preventing the possible misuse of EU funds.

The Commission’s governance system and chain of accountability are tailored to its unique structure and role. The College of Commissioners is politically responsible for the management of the EU budget. It delegates the day-to-day operational management to the 51 authorising officers by delegation (), who manage and steer their departments and are accountable for the share of the EU budget implemented in their department. Their annual activity reports contain a declaration of assurance on the use of the resources assigned to them, which they may qualify with reservations in case of weaknesses.

In order to make the best possible use of taxpayers’ money, it is essential to ensure that funding reaches the intended beneficiaries in compliance with the applicable rules. To achieve this objective, the Commission relies on a number of tools, which have proved to be fit for purpose over the years.

On 18 May 2022, the Commission proposed REPowerEU – a plan to rapidly reduce dependence on Russian fossil fuels. REPowerEU () puts forward an additional set of actions to save energy, produce clean energy and diversify our energy supplies, with the final aim to achieve a more resilient energy system and a true energy union. The Commission has proposed that REPowerEU be implemented through the Recovery and Resilience Facility, and has proposed a number of financing sources to strengthen the funding for the facility for this purpose, including redeploying funds from existing programmes and creating new, additional resources.

In addition, the Russian aggression against Ukraine is causing challenges for which no long-term budgetary solutions exist yet. All of the support provided so far has focused on addressing the immediate needs generated by the arrival of a large number of refugees from Ukraine in the EU and providing humanitarian and other support to Ukraine and neighbouring countries. However, the war against Ukraine will have significant impacts well beyond the immediate humanitarian and security situation. Ukraine will need to rely on international support during the war and to rebuild the country later, requiring a very significant effort leading to large financial needs in both the short and the long term. New challenges such as high inflation, energy security, food security and other knock-on effects also require budgetary solutions at the EU level. These unforeseen needs created by a war in Europe are well beyond the means available in the current multiannual financial framework and NextGenerationEU. Therefore, new financing sources will have to be identified.

The annual margins and flexibility in the EU long-term budget are small compared to the annual budget. Taken together, the margins and flexibility instruments under the new long-term budget over the full 7-year term amount to a maximum of EUR 22 billion, or roughly EUR 3 billion annually. Comparing that number to an annual budget of roughly EUR 170-180 billion provides a flexibility of less than 2%. The Commission was able to mobilise significant amounts of liquidity in 2021 primarily thanks to making existing 2014-2020 cohesion policy funds more flexible and to the presence of NextGenerationEU. Once used, these options are no longer available, thereby significantly reducing the margin of manoeuvre in the EU budget. Relying on at-scale redeployments of funds from existing programmes would require political choices, as this would impact the long-term capacity of the EU budget to achieve the political priorities stated in the objectives of individual programmes.

Resources available from dedicated flexibility mechanisms and flexible use of cohesion funding. All amounts are in billion EUR.

While a substantial part of the funding made available through flexible budget management has been used, the remaining amounts need to address two major crises. The below graph shows that at the beginning of 2021, not counting the Recovery and Resilience Facility, a maximum of EUR 242 billion was available to address the various challenges, namely the EU internal effects of COVID-19. At the beginning of 2022, a maximum of EUR 174 billion was available to respond both to the ongoing effects of COVID-19 and to address the consequences of the Russian war of aggression in Ukraine. These amounts being upper limits, the amounts that are actually available are lower. Under cohesion policy, including REACT-EU, the currently available amounts that do not necessitate reallocations from other priorities and can be used to address the economic fallout of COVID-19 or expenditures to accommodate refuges from Ukraine under CARE – Cohesion Action for Refugees in Europe amount to EUR 17 billion, so any contribution beyond those EUR 17 billion would require redirection from other policy priorities. Moreover, the long-term budget flexibility covers 7-year amounts, which are therefore not available for a single year.

To assist Member States, on a proposal by the Commission, the co-legislators agreed to extend the flexibilities of the remaining 2014-2020 cohesion policy funds, including REACT-EU, and home affairs funds. While crucially necessary to provide liquidity and support, this too relied on redirecting interventions financed from the 2014-2020 cohesion and home affairs programmes, entailing the aforementioned operational challenges.

This will put further pressure on the EU budget and on its management and implementation, underlining the imperative of an agenda focused on building resilience. Given the high level of uncertainty regarding the evolution of the war in Ukraine, it is currently impossible to estimate the funding amounts required in Ukraine and the EU. However, these needs will be significant. In early 2022, the Commission has focused on providing immediate relief to Ukraine and to the people fleeing the country. By the end of May 2022, the Commission had already disbursed the entire budget of EUR 1.2 billion () from the new emergency macro-financial assistance programme for Ukraine. An emergency package of over EUR 550 million from the EU budget provided further support, combining various measures such as emergency and humanitarian assistance and a state- and resilience-building contract. Furthermore, the EU budget is now mobilising EUR 800 million as pledged on 9 April and 5 May. On 18 May 2022, the Commission proposed granting Ukraine new exceptional macro-financial assistance in 2022 in the form of loans of up to EUR 9 billion.

2022 will be another year of uncertainty and challenges, including for the EU budget. Russia’s invasion of Ukraine in 2022 has unleashed new major dynamics that have profound implications for Ukraine as well as for the EU and its economy and society. At the same time, we are facing several other challenges: the pandemic is not over, new variants may emerge, and continued vigilance is essential. Inflation has reached levels not seen in decades, reducing the effective financial capacity of the EU budget, which is updated by a fixed deflator of 2% – well below the actual level of inflation. Supply-chain tensions are contributing to high inflationary pressures and are affecting the EU’s open strategic autonomy in areas such as microchips. The number of natural disasters seems to be increasing.

Focusing cohesion policy on the fight against COVID-19 has allowed the EU to react swiftly. The additional flexibility introduced in cohesion funding has allowed the EU to provide liquidity to Member States very quickly by accelerating payments significantly. While indispensable in supporting Member States addressing immediate crisis needs in the health sector, employment and business, in particular the small and medium-sized enterprises, redirecting cohesion funding meant temporarily diverting support away from some long-term investment priorities. REACT-EU, preparing the green and digital transition, has provided an opportunity to compensate for such short-term reprioritisation of cohesion funding, allowing the resumption of projects previously halted in favour of emergency needs.

The late adoption of the 2021-2027 multiannual financial framework gave rise to serious challenges in 2021. The legal acts establishing the new generation of programmes were only adopted by the co-legislators in the course of 2021. However, thanks to intensive preparatory work, the Commission was able to launch many of the programmes without further delay, in particular those directly managed by the institution itself. In shared management, the late adoption of the common provisions regulation, setting out the regulatory framework for programmes under management shared with Member States (such as the cohesion policy funds), meant that the implementation of the new programmes could not begin in 2021, even though preparations on the ground have started. While the 2021 budget was carried over to future years, the Commission is working intensively with the Member States to adopt partnership agreements and programmes as soon as possible.

After a challenging 2021, pressures on the EU budget will increase further in 2022

Despite the demanding market conditions in 2022, EU bond issuances have continued to be in demand. Due to Russia’s unprovoked and unjustified invasion of Ukraine and the wider economic climate, bond markets have come under significant pressure recently. In spite of these challenging conditions, the Commission has had no difficulty placing further bonds on the market, even though borrowing costs have gone up in line with the more challenging market conditions generally. The flexibility provided by the Commission’s diversified funding strategy will enable the Commission to continue its funding programme in a cost-effective manner. NextGenerationEU green bonds have continued to receive outstanding demand and positive feedback, due in part to the publication of the Green Bond Dashboard ().

The first NextGenerationEU green bond issuance was a success in many respects. With EUR 12 billion raised in October 2021, the EU’s first issuance was the largest green bond issuance worldwide to date. The fact that it was oversubscribed 11 times showed the high market demand for such an asset. These green bonds also contribute to accelerating a virtuous circle of providing finance for sustainable investments. Following the first issuance, the Commission raised another EUR 2.5 billion of green bonds under the EU green bond programme in 2021, and EUR 6 billion by the end of May 2022. Over the next few years, this programme is expected to turn the EU into the world’s largest issuer of green bonds, providing a boost to green finance more generally and enhancing the appeal of the euro for global investors, and thus its international role.

NextGenerationEU also reflects our political goals in terms of funding strategy, as we are issuing up to EUR 250 billion as green bonds. The Commission published the blueprint for its green bond programme, the NextGenerationEU Green Bond Framework (), in September 2021. This framework outlines the arrangements for and conditions of its green bonds in line with best market practices. It has been certified by external experts, providing assurance to prospective investors that the proceeds from the EU green bond issuances will be used to finance legitimate green investments and reforms.

To fund NextGenerationEU, the Commission set up an efficient bond issuance programme in record time. Formally starting work only at the beginning of 2021, the Commission issued the first bond on 15 June 2021 to great acclaim and record demand. By the end of 2021, the Commission had raised almost EUR 93.5 billion in long-term funding, complemented by short-term EU-Bills, to fund the first planned disbursements to Member States under NextGenerationEU. These novel EU bonds have been very well received by the markets, partly by assuming the role of a euro-denominated safe asset, something the market has been requesting for some time. The borrowing cost in 2021 for 10-year borrowing was mostly negative, and well below the average of the borrowing costs of individual Member States.

Breakdown of the 2014-2020 budget by progress of the underlying programmes. The graph displays progress as measured by the share of the indicators selected for the programme performance overview that have met or are well on track to meet their respective targets. For example, it shows that for programmes accounting for 60% of the 2014-2020 budget, all indicators have met or are well on track to meet their respective targets.

At the point of transition between long-term budgets, EU programmes under the 2014-2020 budget continue to be implemented and to deliver results to EU citizens. The EU budget is primarily an investment budget, focused on delivering long-term value to the EU. Many programmes have continued to make progress towards their respective performance targets. The graph below shows that for programmes accounting for 85% of the EU budget, the vast majority of performance indicators are on track. Annexes 1 and 4 to the present report provide more detail on the individual programmes and their performance.

The EU has responded to diverse global challenges by using the EU budget effectively and flexibly. To respond to the structural investment gap globally, the EU launched the Global Gateway initiative. The initiative will mobilise EUR 300 billion between EU institutions and Member States, in a Team Europe approach, supporting investments in digital, energy and transport infrastructure and strengthening health, education and research systems. Addressing more immediate needs, the provision of COVID-19 vaccines to non-EU countries and supporting solutions for the refugee crisis triggered through developments in Afghanistan and Syria have taken centre stage. The budgetary agreement accompanying the Syrian refugee package in autumn 2021 was a major milestone. At the same time, tension had already started to build up on the EU’s eastern borders in 2021, where migratory movements were instrumentalised to put political pressure on the EU. In budgetary terms, these various challenges have required proactive reprioritisation and the extensive use of existing flexibility. The external dimension has accounted for EUR 0.9 billion, the largest part of the EUR 2 billion in budgetary reinforcements used in 2021.

·Furthering gender equality, where a pilot methodology is being applied, which reflects the fact that most of the EU budget has the potential to contribute positively to furthering gender equality.

·Halting and reversing biodiversity loss, where the tracking methodology has been largely updated in a similar fashion.

·The fight against climate change, where the updated tracking methodology relies on an effect-based classification of interventions. It has been enshrined in a consistent manner across all key basic acts.

For the first time, key overarching EU policy goals – such as the fight against climate change – are fully integrated into the EU’s budget programmes. As part of the Annual Management and Performance Report for the EU Budget package, the Commission is presenting the methodologies used to track the contribution of the EU budget to three such policy goals.

·To contribute to the digital transition and address its challenges, reforms and investments in this area go towards building digital public services (37%), increasing the level of digitalisation of businesses, in particular small and medium-sized enterprises (20%), and providing people with the necessary digital skills to participate in these changes (17%) (). In line with the digital decade communication (), which identifies the importance of digital public services, measures include e-government solutions to modernise and improve public administration processes, for example through integrating e-identification solutions in government processes and ensuring interoperability across various digital public platforms.

·In relation to mitigating and addressing climate change, roughly three quarters of financing is focused on the energy transition and building sustainable transport. To reach carbon neutrality by 2050, the focus is on both increasing energy supply from clean sources and decreasing demand for energy overall. Areas of investment include building up renewable energy generation and many projects focusing on energy efficiency, for example by improving building and insulation quality.

The twin transitions under the Recovery and Resilience Facility: key priorities for climate and digital

The recovery effort is targeted towards building a greener and more digital future. The EU has increased its ambition for climate-related financing to 30% of the overall EU budget including NextGenerationEU, also reflecting EU global commitments, including the Paris Agreement and the sustainable development goals. Under the Recovery and Resilience Facility, at least 37% of financing will go towards investments and reforms tackling climate change and at least 20% towards furthering the digital transition. Many of the national recovery and resilience plans adopted by the end of 2021 exceed these minimum requirements, showing the shared commitment to the twin climate and digital transitions across the EU. Overall, Member States have committed about 40% of financing to tackling climate change and about 26% to furthering the digital transition. Replacing fossil energy and the digital transition are key – not only to emerge stronger from the pandemic but also to strengthen our open strategic autonomy and withstand the impact of Russia’s war against Ukraine. Key priorities are highlighted in the box below.

Beyond liquidity, the EU budget is a vehicle for European solidarity. Next to the COVID-19 pandemic, natural disasters such as drought-driven forest fires and severe floods have taken a large toll on many Member States. Through the EU Civil Protection Mechanism, the EU has provided EUR 332 million in immediate disaster relief to affected Member States. In 2021, the mechanism was activated 114 times. In 2022, the war in Ukraine has already triggered the largest emergency operation since the creation of the mechanism.

The EU provided liquidity to Member States by using all available budgetary resources. Under the Recovery and Resilience Facility, Member States received EUR 64 billion in 2021 – mostly in the form of prefinancing for the national recovery and resilience plans for those Member States with approved plans (). Cohesion policy implementation accelerated in 2021 and a record amount of EUR 69 billion was paid to Member States. This was also thanks to the swift reaction to the COVID-19 crisis. The Coronavirus Response Investment Initiatives, established in 2020, allowed the fully flexible mobilisation of all the remaining funds in the 2014-2020 cohesion policy programmes. EUR 23 billion was reallocated to the health sector and measures to address the effects of the crisis. Finally, through additional financing from NextGenerationEU via REACT-EU, an additional EUR 7 billion was paid out, leading to Member States receiving a total of EUR 140 billion in liquidity in 2021.

The new long-term budget has also provided the opportunity to review the efficiency of EU budget implementation. Programmes need to ensure a more integrated approach to policy challenges, for example the Neighbourhood, Development and International Cooperation Instrument – Global Europe, which brings together most of the former EU external action programmes within the EU budget. Another example is the redesign of executive agencies, where the Commission has established new agencies to fully align their portfolios with the Commission’s strategic priorities and exploit the synergies between programmes and policies (such as the new European Health and Digital Executive Agency).

Performance and results are at the heart of the new long-term budget and NextGenerationEU. The new programmes have been designed to deliver tangible results on the ground. In the case of the Recovery and Resilience Facility, payments are explicitly linked to the achievement of milestones and targets by the Member States. Moreover, every EU programme contains clear and ambitious objectives and related indicators to help ensure that these objectives are achieved. The Commission published a communication in June 2021 describing the new performance framework ().

NextGenerationEU works thanks to a tailor-made, performance-orientated approach. With an unprecedented size of up to EUR 807 billion (), NextGenerationEU has drastically increased the firepower of the EU budget. Its key programme, the Recovery and Resilience Facility, is a unique and innovative tool to finance investments and reforms. Member States submit their recovery and resilience plans, comprising reforms and investments that reply to the six broad policy areas within the scope of the facility, the country-specific recommendations adopted by the Council in the context of the European Semester, and the green and digital targets. Financing provided under the facility depends on the successful implementation of the investments and reforms contained in the plans, in line with the performance focus of the new long-term budget (see box below). Twenty-two national recovery and resilience plans had been adopted by the end of the year.

The EU’s 2021-2027 multiannual financial framework and NextGenerationEU. All amounts are in billion EUR, in current prices.

The EU managed not only to overcome the crisis but also to seize the opportunities that arose from it. The EU budget makes Europe fit for the future by anticipating its response to the crucial challenges of climate action and digitalisation. It invests in a more sustainable and resilient future for the EU and its Member States. Together with the 2021-2027 multiannual financial framework, the dedicated recovery instrument NextGenerationEU is at the heart of the EU’s collective action. With a record stimulus package of more than EUR 2 trillion, the EU economy started rebounding in 2021 – faster than expected.

In 2021, the EU sent a signal of solidarity and strength, countering the unprecedented crisis. Solidarity was key to containing the COVID-19 pandemic and to mitigating its economic and social impact. We saw the largest and quickest vaccination roll-out in the history of the EU, following the common procurement of vaccines through the innovative use of the EU budget via the Emergency Support Instrument. The EU budget also funded the infrastructure for issuing and verifying the digital COVID-19 certificates, which has set a standard well beyond EU borders. The EU supported citizens and business to overcome the fallout from the crisis. At the same time, it reacted to global challenges.

Rising to the challenge: the EU invests in a greener, more digital and resilient future

This report is part of the broader integrated financial and accountability reporting package (), which also includes the consolidated annual accounts (), a long-term forecast of future inflows and outflows covering the next 5 years (), the report on internal audits () and the report on the follow-up to the discharge ().

·Volume III contains technical annexes supporting the report. It includes Annex 4, with detailed programme-by-programme performance information in the ‘Programme performance overview’.

·Volume II presents a more comprehensive picture of the implementation of the EU budget. Annex 1 provides an overview of the performance of the EU budget in 2021. Annex 2 provides a high-level overview of internal control and financial management. Annex 3 covers the performance and compliance aspects of the Recovery and Resilience Facility.

·Volume I provides the key facts and achievements in relation to budgetary management for 2021.

The report is composed of three volumes, as described below.

The Annual Management and Performance Report for the EU Budget – Financial year 2021, together with its annexes, is the Commission’s main contribution to the annual discharge procedure () by which the European Parliament and the Council of the European Union scrutinise the implementation of the EU budget. It fulfils the Commission’s obligations under the Treaty on the Functioning of the European Union () and the financial regulation (). Implementing the EU budget is a shared responsibility. The Commission works hand in hand with the Member States and with other partners and organisations.

TO THE EUROPEAN PARLIAMENT, THE COUNCIL AND THE COURT OF AUDITORS Annual Management and Performance Report for the EU Budget - Financial Year 2021

In 2021, most of the year was dedicated to preparatory work for the submission of the plans by the Member States and the assessment of the plans by the Commission. While most of the disbursements for 2021 consisted of pre-financing, there was a single payment of EUR 10 billion to Spain. This payment concerned the fulfilment of 52 milestones, mainly relating to reforms that had already been carried out by the second quarter of 2021. Based on the positive assessment of the evidence of the fulfilment of the milestones in the payment request, the authorising officer by delegation had reasonable assurance of the legality and regularity of the payment made in 2021 under the Recovery and Resilience Facility.

The Director-General for Economic and Financial Affairs has been designated the authorising officer by delegation for the facility. In January 2021, he created a new unit for control and evaluation to support the overall assurance. The audit strategy was approved in December 2021. The objective is to assess whether the national authorities have set up the required management and control systems for the implementation of their recovery and resilience plans so as to ensure the legality and regularity of the payment requests submitted to the Commission, that any cases of fraud, corruption, conflict of interest and double funding that are discovered are adequately corrected and, when necessary, that corrective measures are taken to address significant breaches of the financing agreement.

The authorising officer by delegation for the facility confirmed that he had reasonable assurance

The Commission’s qualitative assessment will be based on a combination of the results from (1) the Member States’ audits, provided in the summary of audits that has to accompany each payment request; (2) the Commission’s audits; (3) the assessment of the payment requests; and (4) other checks carried out by the Commission at the Member State level in the context of other funding programmes such as cohesion policy funds.

The Commission will make a qualitative assessment of the control results and the level of risk associated with the operations. Unlike other EU programmes (see also Annex 5), this assessment will not be quantified with an error rate. Error rates reflect a quantitative assessment, which is pertinent when the expenditure can be directly attributed to a quantitative criterion (). Payments in the context of the facility are based on a qualitative assessment of the fulfilment of milestones and targets, which is difficult to translate into quantitative terms. Even when milestones and targets have not been satisfactorily fulfilled, and a reduction will be made, this reduction cannot correspond to an amount of ineligible expenditure. In addition, the investments and reforms included in the recovery and resilience plans are very diverse, both within a Member State and between Member States, which prevents any statistical extrapolation. In this context, a meaningful error rate cannot be determined.

In addition, the operational arrangements provide for regular exchanges between the Commission and the Member States, with at least quarterly exchanges to take stock of progress on the implementation of the recovery and resilience plans.

After disbursements are made to the Member States, the Commission may perform ex post controls and audits () to check the achievement of milestones and targets. The Commission may also carry out ad hoc audits in case of suspicion of serious irregularities. If necessary, the Commission will recover proportionate amounts or require early repayment of the loans. In the case of serious irregularities that have not already been recovered by the Member States themselves, the Commission will recover proportionate amounts from the Member States.

The Commission will also carry out system audits on the reliability of the systems in place to collect, aggregate and store reliable data relating to the milestones and targets. Additionally, at least once per Member State, it will carry out system audits of the measures implemented by the Member States to ensure the protection of the financial interest of the Union, more particularly the measures to prevent, detect and correct cases of fraud, corruption, conflicts of interest and double funding and to avoid serious breaches of the financing agreement. This also includes the functioning of the systems to collect and store data concerning Article 22(2)(d) of the Recovery and Resilience Facility regulation, i.e. concerning final recipients and their contractors, subcontractors and beneficial owners.

The Commission may ask for additional information and may decide to carry out additional controls in order to obtain the necessary complementary assurance on the achievement of the milestones and targets before making the payment. If one or more milestones or targets have not been satisfactorily fulfilled, payments may be proportionally suspended and, ultimately, reduced.

·a summary of the audits carried out, including any weaknesses identified and corrective actions taken.

·a management declaration confirming that the funds were used for their intended purpose, that the information provided is correct and that the control systems in place give the necessary assurance that the funds were used in accordance with applicable rules; and

During the implementation of the facility, once Member States submit their payment requests, the Commission assesses whether the milestones and targets have been satisfactorily achieved and all other conditions for disbursement have been met. In particular, Member States must accompany each payment request with:

During its assessment of the Member States’ recovery and resilience plans, the Commission checked whether the control systems outlined by the Member States in the plans met the requirements set out in the regulation. This includes an explanation of how they will demonstrate to the Commission that the predefined milestones or targets have been satisfactorily fulfilled and how they will ensure that the related data are reliable, including the control mechanisms to ensure such reliability. Moreover, Member States had to describe the control system to be used to prevent, detect and correct fraud, corruption, conflicts of interest and double funding. Where the Commission considered that a Member State’s control system was adequate overall, but that small gaps remained that could be corrected, additional milestones and targets were introduced to ensure the gaps would be closed prior to the first regular disbursement.

Overall, in order to build its assurance, the Commission relies on the Member States’ controls This implies obtaining the assurance that the control systems of the Member States are effective in preventing and detecting serious irregularities or breaches of obligation of the financing agreements. Also, where necessary, the Commission will complement the Member State controls with its own controls at three stages.

The Commission is responsible for ensuring the legality and regularity of its payments to the Member States. Since the facility is a performance-based instrument, the legality and regularity of the payments depends on the actual achievement of the milestones and targets set out in the Council implementing decisions. Consequently, the Commission’s controls focus on achieving the milestones and targets, whereas the costs actually incurred by the beneficiary are not subject to controls by the Commission. According to the Recovery and Resilience Facility regulation, the Commission nonetheless has the right to correct serious irregularities, i.e. fraud, corruption and conflicts of interest that have not been corrected by the Member States themselves, along with double funding or serious breaches of the financing and loan agreements.

Each Member State described the national control system for the implementation of the proposed measures as part of its national plan, and the Commission analysed the systems as set out in the plans as part of its assessment. If a control system was deemed insufficient, the plan could not be approved. Where the Commission assessed that the control systems were adequate overall but that further improvements were needed, it required that milestones on audits and controls be included in the Council implementing decisions. Such deficiencies in the Member States’ control systems included, for example: the repository system for collecting and storing data, as required by the Recovery and Resilience Facility regulation, not being fully in place at the time of the assessment; the absence of formal legal mandates for the various bodies in charge of implementing and auditing the funds; insufficient administrative capacity on the part of the implementing and audit bodies in charge of implementing the plan; and the lack of a clear audit strategy or anti-fraud measures. Payments to the Member States can only take place once these milestones have been achieved.

The Member States are primarily responsible for ensuring that the funds received are implemented in compliance with relevant EU and national law, in particular regarding the prevention, detection and correction of fraud, corruption and conflicts of interest and avoiding double funding. Member States put in place appropriate control and monitoring frameworks at the national level to ensure the effective monitoring of the recovery and resilience plans and the collection of evidence on the achievement of milestones and targets, and ultimately to ensure the protection of the EU’s financial interests. This is further reflected in the financing and loan agreements.

In 2021, in parallel to assessing the plans, the Commission worked on putting in place the relevant internal control processes and control strategies tailored to the fact that the facility is a performance-based instrument and that the Member States are the beneficiaries. In addition, the regulation stipulates that the Member States bear the responsibility for ensuring that the facility is implemented in compliance with EU and national rules and with the principles of sound financial management.

Control systems are tailored to the performance-based nature of the Recovery and Resilience Facility

The overall state of play of the implementation of the Recovery and Resilience Facility, as of 31 December 2021, is summarised below.

The Commission disbursed a first payment, of EUR 10 billion, to Spain before the end of 2021, after receiving the payment request in November 2021. Given the type and implementation time of the relevant milestones, and as Spain had shared most of the information required for the assessment prior to the official submission of the payment request, the Commission was able to process the payment request expeditiously.

As a performance-based facility, payments by the Commission to Member States, other than pre-financing, are based on the satisfactory fulfilment of the milestones and targets defined in the Council implementing decisions endorsing the recovery and resilience plans. The total amount of the financial contribution is to be paid in instalments to the Member State, corresponding to a set of milestones and targets as established in the annexes to these decisions. The verification mechanisms for each milestone and target and the methods for monitoring and covering the essential aspects of the implementation of the plans are described in the operational arrangements, which must be signed between the Commission and the Member State before the Member State can submit its first payment request. As of the end of 2021, five operational arrangements had been concluded, with Greece, Spain, France, Italy and Slovakia, and four Member States had submitted their first regular payment requests. In 2022, around 30 more requests are expected.

The Recovery and Resilience Scoreboard (), a public online platform set up by the Commission, displays in an easily accessible way EU Member States’ progress in implementing their recovery and resilience plans – as demonstrated by milestones and targets assessed by the Commission to be fulfilled – and the disbursements made. It also shows common indicators to report on progress and to evaluate the Recovery and Resilience Facility and the national plans.

Apart from the pre-financing, funding will be disbursed in several instalments, each of which depends on the achievement of a specific set of milestones and targets relating to the reforms and investments the Member States have committed to implement. The disbursement profile and specific milestones and targets to be achieved have been agreed in each case between the Commission and the relevant Member States, and have ultimately been endorsed by the Council. In 2021, the Commission disbursed EUR 54 billion in pre-financing payments to those Member States for which the plan had been positively assessed by the Commission and endorsed by the Council. One of the 22 Member States in this group did not request pre-financing, therefore 21 Member States have benefited from pre-financing. For these, the pre-financing helped ensure the fast implementation of the investment and reform measures outlined in the recovery and resilience plans. The pre-financing payments were all executed within 5 business days after the signing of the financing agreement (and/or loan agreements where relevant) between the Commission and the Member State, well ahead of the 2‑month payment deadline. A retroactivity clause, which ensured that measures taken since the start of the COVID-19 pandemic (i.e. starting from February 2020) were eligible to be included in the plans, provided further certainty and ensured that Member States were able to start implementation even before their plans were formally adopted.

Following the adoption of the plans, the Commission concluded a financing agreement (and, where relevant, a loan agreement) with the Member State concerned, which defines the rights and obligations of the parties, including with regard to the protection of the financial interests of the EU and the requirements for Member States’ control systems. The financing agreements also involve the amount of pre-financing to be paid immediately to the Member States and the conditions for submitting a payment request. In total, 22 financing agreements and four loan agreements were signed by the end of 2021.

Overall, the assessment and eventual endorsement of the first 22 recovery and resilience plans in 2021 followed a smooth process. Following intense discussions between the Commission and the Member States during the preparation phase of the plans, the Commission assessed each plan in close coordination with the Member States, ensuring a consistent and transparent approach – explained through staff working documents published on each plan that has been positively assessed. By the end of 2021, the Commission had positively concluded its assessment of 22 plans (), all of which have been endorsed by the Council through implementing decisions (). These plans account for a total allocation of EUR 291 billion in non-repayable financing and EUR 154 billion in loans to Greece, Italy, Cyprus, Poland, Portugal, Romania and Slovenia. The plans include a total of 3 742 measures (around one third relating to reforms and two thirds relating to investments) and a total of 5 155 milestones and targets to be fulfilled by 2026. At the end of 2021, the Commission was assessing plans for Bulgaria, Hungary, Poland and Sweden.

The Commission ensured an efficient process for all phases of the preparation, negotiation and assessment of plans. In addition to intense exchanges with each specific Member State, the Commission provided written guidance on the preparation of recovery and resilience plans, on the technical implementation of the ‘do no significant harm’ principle and on various specific issues, such as a checklist on control systems. The Commission supported Member States in putting forward ambitious plans with clear and realistic milestones and targets to monitor implementation, while taking into account the national context and the financial contribution available.

Twenty-two recovery and resilience plans were assessed positively by the Commission and adopted by the Council in 2021. In 2021, the Commission worked closely together with all Member States to help them prepare their national recovery and resilience plans, setting out a national agenda of reforms and investments to be implemented by 31 August 2026, in line with the requirements of the regulation. To support Member States in preparing their plans, the Commission established informal contacts as early as October 2020, and published updated guidance () in January 2021 on the information to be provided. By the end of December 2021, the Commission had officially received 26 () recovery and resilience plans and had put forward a positive assessment for 22 of them ().

Major progress has been made in setting up the Recovery and Resilience Facility and its implementation is firmly on its way

Contribution of Recovery and Resilience Facility funds to the respective policy pillars. The green parts of the columns represent those measures that have been assigned to the policy pillar as primary policy areas, while the blue parts represent measures assigned as secondary policy areas. These assignments reflect the fact that reforms and investments can contribute to multiple policy pillars. Therefore, the total contribution to all pillars is double the estimated cost of the approved recovery and resilience plans.

The share of funding contributing to each pillar is presented in the graph below.

The reforms and investments included in these plans should contribute to the six policy pillars defining the scope of the facility, while taking into account the specific situation and challenges of the relevant Member State.

In order to receive support from the Recovery and Resilience Facility, by the end of 2021, 26 () EU Member States submitted national recovery and resilience plans to the Commission. The plans must pass 11 assessment criteria established by the regulation, including that no measure included in the plan can do significant harm to environmental objectives (the ‘do no significant harm’ principle) and that at least 37% of the plan’s total allocation contributes to climate objectives and at least 20% to digital objectives.

·It is financed through funds raised on the capital markets by the Commission on behalf of the European Union.

·Financed by the European recovery instrument NextGenerationEU, the facility is an exceptional and temporary instrument.

·Funds are disbursed upon the achievement of predefined milestones and targets measuring the implementation, by 2026, of reforms and investments designed to respond to the challenges faced by Member States.

·Member States are the beneficiaries of the facility. They receive support from it to implement their national recovery and resilience plans. The funds, once disbursed, therefore enter the national budget.

The Recovery and Resilience Facility is a new performance-based instrument at the service of the EU recovery. The facility is designed to mitigate the economic and social impact of the COVID-19 pandemic and make European economies and societies more sustainable, more resilient and better prepared for the challenges and opportunities of the green and digital transitions. Proposed in May 2020 by the Commission, and in place since early 2021 (), it makes available EUR 723.8 billion (in current prices) – EUR 385.8 billion in loans and EUR 338 billion in grants – for that purpose. It supports Member States in implementing ambitious reforms and investments that are in line with the EU’s priorities and that address the challenges identified in country-specific recommendations under the European semester framework of economic and social policy coordination.

An innovative, performance-based instrument to help emerge stronger from the COVID-19 crisis

Annex 3 – The Recovery and Resilience Facility: a new performance-based instrument at the service of EU recovery

In March 2022, the Commission adopted guidelines on the application of the regulation. Following the work carried out throughout 2021, in April the Commission sent a first notification to Hungary under the general regime of conditionality. This triggered a procedure that may lead to the imposition of measures against a Member State for breaches of the principles of the rule of law that affect or seriously risk affecting the EU’s financial interests in a sufficiently direct way. The Commission constantly monitors the situation across Member States. It will trigger the procedure under the conditionality regulation if the conditions are fulfilled.

On 16 February 2022, the Court of Justice upheld the validity of Regulation (EU, Euratom) 2020/2092 on a general regime of conditionality for the protection of the EU budget, which had been contested by two Member States, Hungary and Poland.

Under the new multiannual financial framework, along with the Resilience and Recovery Facility and the Brexit Adjustment Reserve, the Commission committed to make a single data-mining and risk-scoring tool available to Member States to improve their management and control systems, with a view to its generalised application by Member States. The Commission is adapting the tool put at the disposal of Member States under the previous multiannual financial framework (Arachne) to take into account the new multiannual financial framework period and related requirements, along with the Resilience and Recovery Facility. The Commission will continue to offer support to Member States to allow for its effective use. This includes giving presentations, training sessions and workshops and providing technical support and advice to interested authorities, including on how to integrate the risk-scoring tool in their daily processes. In the ongoing revision of the financial regulation, the Commission proposed to reinforce the use of this single data-mining and risk-scoring tool.

After a major revision in 2018, the Commission has proposed a targeted amendment of the financial regulation (). Given that the changes brought about by the 2018 revision need time to produce their full effect, this revision will focus on alignment with the new long-term budget, certain improvements on crisis management following lessons learned during the COVID-19 crisis and enhanced protection of the EU’s financial interests.

The European Parliament granted discharge to the Commission for the 2020 financial year by a clear majority on 4 May 2022, after having examined the reports of the European Court of Auditors, the Commission’s integrated financial and accountability reporting package and the Council’s discharge recommendation. The European Parliament’s Committee on Budgetary Control also invited selected commissioners and directors-general for exchanges of views during the discharge procedure. During the procedure, the key stakeholders – the European Parliament, the Council of the European Union and the European Court of Auditors – focused on how to improve the results delivered by the EU budget and how to further reduce the level of error. The debate also touched upon issues such as the rule of law and fundamental rights, smoother implementation and absorption of EU funds, information on beneficiaries of EU funds, including by making greater use of interoperable information systems, and traditional own resources. This year, the discharge authority was especially interested in seeking reassurance that the EU budget remained well protected during the pandemic. As usual, the Commission is taking appropriate action to implement these recommendations and report on the follow-up in a dedicated report.

The European Court of Auditors also monitors the Commission’s implementation of its recommendations and provides feedback, helping the Commission to enhance its follow-up activities. In the Report of the European Court of Auditors on the performance of the EU budget – Status at the end of 2020, the Court reviewed the extent to which the Commission had pursued the implementation of 149 audit recommendations addressed to it in 18 special reports published in 2016. The Court noted that the Commission had implemented close to 80% of the recommendations either fully (67%) or in most respects (12%), and another 9% in some respects. Of the 16 recommendations the Court considered not to have been implemented, the Commission had initially not accepted 11. These results are in line with previous years.

The Commission follows up on the Court’s recommendations, stemming both from the annual reports and from special reports. It reports on the measures taken in the annual activity reports. Moreover, it reports on a regular basis on the implementation of the Court’s recommendations to the Commission’s Audit Progress Committee. The latter performs certain monitoring activities in this respect under its updated mandate ().

As regards the two biggest areas of EU expenditure, the Court’s estimated level of error remained close to the level of materiality in the case of natural resources (), accounting for 40.8% of the audited population. In the case of cohesion policy, accounting for 32.8% of the audited population, the Court’s estimated level of error decreased from 4.4% in 2019 to 3.5% for 2020. Administrative expenditure remained free from material error.

The Court’s adverse opinion is mainly explained by the share of what it considers to be high-risk expenditure. High-risk expenditure, which is often subject to complex rules and is mainly based on reimbursement of costs, covers in particular cohesion, research expenditure, rural development, market measures under the European Agricultural Guarantee Fund and some parts of external actions. High-risk expenditure represented 59% of the audited population for 2020, which is logical with the acceleration in cohesion payments at this stage of the 2014-2020 multiannual financial framework cycle.

While revenue also continues to be free from material error, the Court of Auditors maintained an adverse opinion on the legality and regularity of 2020 expenditure. The overall level of error for the EU budget (2.7%) estimated by the Court remained at the same level as for 2019 expenditure, comparable to the years 2017 and 2018 (respectively 2.4% and 2.6%) and significantly lower than in 2016 and before.

The European Court of Auditors’ Annual report on the implementation of the EU budget for the 2020 financial year, published in October 2021, once again gave a clean opinion on the EU accounts, for the 14th year in a row.

28.The opinions of the European Court of Auditors on the 2020 accounts and on the legality and regularity of transactions

Annex 8 in Volume III includes more information on the work and conclusions of the committee.

The committee was satisfied with the independence and quality of the internal audit work. It welcomed the positive result of the external quality assessment of the Internal Audit Service for 2017-2021, which is an important factor relating to assurance about the quality of the internal audit work. The committee was also satisfied that the internal auditor’s planning adequately covers the audit universe and continues to cover the key risk areas. The effective implementation rate of the internal auditor’s recommendations remained very high (i.e. covering 94% of recommendations issued and followed up on during the 2017-2021 period), and only eight very important audit recommendations were overdue by more than 6 months as of January 2022. The committee also continued to monitor the progress in implementing the Court of Auditors’ recommendations, and was satisfied when, for the 14th time in a row, the Court gave a clean opinion on the reliability of the EU’s consolidated accounts.

The committee followed up on the European Court of Auditors’ request to be more systematically involved in its work. It invited the Director of the Presidency of the Court of Auditors to two of its preparatory group meetings to present the external auditor’s multiannual strategy and annual work programmes for 2021 and 2022. The committee held a planned thematic discussion on information technology security, which took place shortly after the outbreak of the Russian war of aggression in Ukraine and was especially timely in view of the expected increase in the number of cyber threats.

During the 2021 reporting year, which was marked by the continuation of the COVID-19 pandemic, and following Russia’s unjustified and unprovoked invasion of Ukraine at the beginning of 2022, the committee continued to play an important role in enhancing governance, organisational performance and accountability across the entire organisation. It held four rounds of meetings, focusing on the key objectives set out in the 2021 and 2022 work programmes. It also continued to monitor the COVID-19 situation in connection with its areas of responsibility, in order to obtain further reassurance about the effective mitigation and appropriate audit coverage of high risks relating to COVID-19 response and recovery measures.

The Audit Progress Committee oversees audit matters within the Commission and reports annually to the College of Commissioners. It ensures the independence of the Internal Audit Service, monitors the quality of internal audit work and ensures that internal and external (i.e. from the European Court of Auditors) audit recommendations are properly taken into account by the Commission directorates-general and services and that they receive appropriate follow-up.

With a view to contributing to the Commission’s performance-based culture and greater focus on value for money, the Internal Audit Service also carried out performance audits in 2021 as part of its strategic audit plan. The resulting recommendations, all but one () accepted by the auditees, concern the preparedness for the implementation of the 2021-2027 multiannual financial framework, supervision strategies for the implementation of programmes by third parties, internal control systems in relation to legality and regularity and compliance, EU law implementation and information technology security. For all recommendations, the auditees drafted action plans, which were submitted to and assessed as satisfactory by the Internal Audit Service. Finally, the Internal Audit Service pursued its strict follow-up policy and assessed the actual implementation of its recommendations by the Commission’s departments on a regular basis. The audit work confirmed that 94% of the recommendations issued between 2017 and 2021 and followed up by the Internal Audit Service were adequately and effectively implemented by the auditees. This result indicates that the Commission services are diligent in implementing the recommendations and mitigating the risks identified by the Internal Audit Service. Annex 6 includes more information on the assurance provided by the Internal Audit Service. In addition, a report on the internal auditor’s work is forwarded by the Commission to the discharge authority in accordance with Article 118(8) of the financial regulation, as part of the integrated financial and accountability reporting package.

·the implementation of the EU budget in the context of the crisis related to the COVID-19 pandemic;

Without further qualifying the opinion, the internal auditor added three ‘emphases of matter’, which are described in Annex 6 to this report, regarding:

Based on this audit information, the internal auditor considered that, in 2021, the Commission had put in place governance, risk management and internal control procedures that, taken as a whole, are adequate to give reasonable assurance on the achievement of its financial objectives. However, the overall opinion is qualified with regard to the reservations the authorising officers by delegation made in their declarations of assurance, issued in their respective annual activity reports. As regards the overall opinion, the internal auditor also considered the combined impact of all amounts estimated to be at risk at payment as these go beyond the amounts put under reservation. Given these elements, the Internal Audit Service considers that the EU budget is adequately protected in total and over time.

The Commission directorates-general and services also base their assurance on the work done by the Internal Audit Service. The Internal Audit Service audits the management and control systems within the Commission and the executive agencies, providing independent and objective assurance on their adequacy and effectiveness. As required by its mission charter (), the Internal Audit Service issued an annual overall opinion on the Commission’s financial management, based on the audit work it had carried out in the area of financial management in the Commission covering the previous 3 years (2019-2021). The overall opinion also takes into account information from other sources, namely the reports from the European Court of Auditors.

Annex 5 in Volume III provides a complete list of the reservations for 2021, along with further explanations and details.

The total financial impact of all reservations is EUR 987 million for 2021, i.e. 19% lower than the EUR 1 219 million in 2020. This decrease is related to the decrease in the error rates found in agriculture. For each reservation, mitigating actions are put in place to address the underlying weaknesses and mitigate the resulting risks (for details, see Section 2.2.2).

·Sixteen reservations were lifted (two) or not issued by virtue of the de minimis rule (14), whereby reservations are not considered meaningful where limited expenditure is involved (less than 5% of the payments of the directorate-general or service) and the resulting financial impact is low (less than EUR 5 million). The total financial impact of these cases, EUR 4.8 million, is very limited.

·Four reservations that were present in 2020 were lifted in 2021 because the underlying issues had been resolved.

·Three reservations are new in 2021. They are due to a material level of error, or serious weaknesses found in the control systems of the implementing partners (Member States or agencies).

·A total of 13 reservations have been maintained from previous years, 12 of which relate to the spending programmes, with the other relating to the revenue side of the EU budget. These reservations have been maintained mainly because the root causes of the material level of error can be partially mitigated but not fully eradicated under the current programmes’ legal frameworks.

For 2021, 10 authorising officers issued a qualified declaration, resulting in a total of 16 reservations (this is slightly fewer than in 2020, when 19 reservations were reported by 11 departments) as follows.

Within the context of their overall assurance-building processes and from their management perspectives, the authorising officers also perform a more detailed analysis for each programme or segment of their portfolio. They use all available information, especially the results of their controls, to spot any potential significant weakness in quantitative or qualitative terms. At the end of each financial year, they determine whether the financial impact of such a weakness is likely to be above the materiality threshold of 2% and/or whether the reputational impact is significant. If so, they qualify their declaration of assurance with a reservation for the specific portfolio segment affected.

In their 2021 declarations of assurance (), all 51 authorising officers by delegation () declared they had reasonable assurance that (1) the information contained in their reports presents a ‘true and fair view’ (i.e. reliable, complete and correct) of the state of affairs in their departments; (2) the resources assigned to their activities were used for their intended purpose and in accordance with the principle of sound financial management; and (3) the control procedures put in place give the necessary guarantees concerning the legality and regularity of the underlying transactions, taking into account the multiannual character of some programmes and the nature of the payments concerned.

For the sake of transparency and completeness, in their annual activity reports, those departments dealing with shared and/or indirect management have also reported on the cost of controls in Member States and entrusted entities separately from the Commission’s own cost of controls.

·The type of management. Under indirect and shared management, the cost of controls is shared between the Commission and its implementing partners, while for direct management the burden is entirely borne by the Commission.

·The volumes and amounts to be processed. A high number of low-value payments will generate higher control costs than recurrent mass payments, while the regulatory framework requires certain incompressible controls. This results in diseconomies of scale.

·The complexity of the environment in which the programmes are implemented. The cost of controls is likely to be higher in the case of a multi-site organisational structure or when partners and/or beneficiaries are located outside the EU’s jurisdiction.

·The intrinsic complexity of the programmes managed. Grants based on the reimbursement of real costs imply labour-intensive controls as opposed to financing based on lump sums or simplified cost options.

The resources allocated to controls are aligned with the risks relating to the nature of the programmes and/or the context in which they are implemented. The cost of controls remains generally stable over time. However, some departments reported a slight increase in relative terms, which is not due to higher control costs per se, but rather to a reduced volume of payments in 2021. This can be explained by the continuation of the COVID-19 crisis and/or by delays in the adoption of new programmes. The variety of spending programmes and their different features do not allow for a meaningful comparison of their control costs. However, some common cost drivers can be identified, as shown in the box below.

In 2021, following the combined assessment of their effectiveness, efficiency and economy, all Commission departments concluded that, overall, their controls were cost-effective.

In 2021, 98% of payments (in terms of amounts) were made within the legal payment deadline (see graph), despite the fact that the working environment was still strongly impacted by the COVID-19 pandemic, and thanks to the abovementioned initiatives. This is of paramount importance, as many beneficiaries rely on these payments to carry out their activities and projects, which, in turn, contribute to the Commission’s objectives.

·The Commission also made good progress in migrating new funding programmes to eGrants. Of the 39 EU funding programmes expected to use the new system in the 2021-2027 period, 33 had been fully migrated by the end of 2021.

·The new corporate financial information technology platform, SUMMA, started to gradually replace the ABAC system. The aim of the SUMMA project is to contribute to the modernisation and digitalisation of EU administration. It will standardise and simplify the treasury, financial and accounting processes of the Commission and 55 other EU institutions and entities, and will facilitate the decision-making process through integrated reporting and enhanced analytics capabilities. Three pilot agencies moved to SUMMA at the end of 2021, as scheduled.

·The official launch of Microsoft 365 represents a key contribution to the Commission’s efficiency by providing a new set of corporate integrated collaborative solutions, which will enhance internal cooperation, individual productivity and broader internal and external communication opportunities.

In 2021, the Commission also continued to develop more efficient corporate information technology tools.

The mutualisation of processes is another source of efficiency gains. Further initiatives taken in 2021 in this sense included the extension by the Commission of its treasury services to a further seven agencies and the creation of the new joint audit directorate for cohesion encompassing all audit activities for cohesion expenditure.

By the end of 2021, more than 2 500 users had obtained qualified electronic signatures by using EU Sign to sign documents digitally. Since the end of 2020, the service has offered digitised, streamlined enrolment processes so users can save time and have a better user experience. In addition, the roll-out of such signatures is ongoing and gaining more ground in EU delegations.

Across modern public administrations, the use of electronic signatures is becoming a norm. In this context, qualified electronic signatures are becoming widely used across the European Commission, as they are considered a highly efficient solution that allows users easily and securely to sign documents electronically. Qualified electronic signatures comply with the highest legal requirements, as defined by the electronic identification, authentication and trust services regulation, to ensure a document’s origin and integrity.

In line with the EU digital strategy, the European Commission is moving towards a paperless administration

The COVID-19 pandemic has accelerated the Commission’s digital transformation and the implementation of paperless workflows, resulting in efficiency gains.

The Commission is continuously striving to improve the efficiency of its operations in order to deliver on its objectives under tight budgetary constraints. Processes are being streamlined to ensure the most efficient use of limited resources.

From the revenue side, following the loss of traditional own resources due to undervalued imports of textiles and footwear from China into the United Kingdom – which led to a reservation – the quantification process on the inaccuracy of the traditional own resources amounts transferred to the EU budget is ongoing. The European Court of Justice delivered its judgment on 8 March 2022, confirming the position of the Commission. While the Court endorsed the statistical approach developed by the Commission to quantify the losses, it requested a review of the actual amount claimed. The corresponding quantified reservation for the 2011-2017 period is therefore maintained. Additional inspections in all Member States confirmed further cases of undervaluation fraud for amounts that cannot yet be quantified but will be estimated in the course of 2022.

Finally, the heading ‘European public administration’ groups together the services and departments managing the Commission’s administrative expenditure under the direct management mode, such as the Office for the Administration and Payment of Individual Entitlements, which represents more than 80% of the relevant expenditure under this heading. The risk at payment is prudently set at 0.5% for this low-risk type of expenditure. As most of the corresponding control systems involve predominantly ex ante controls, the estimated future corrections are often set at a conservative 0.0%. Thus, the risk at closure is equal to the risk at payment, and remains very low, at 0.5%. In 2021, the Commission’s preventive measures amounted to EUR 4 million , slightly below the amount in 2020 (EUR 6 million).

DG Neighbourhood and Enlargement Negotiations maintained its reservation concerning projects in Libya and Syria. In these countries, the delegations cannot implement standard monitoring and evaluation activities due to the impossibility of sending staff to conduct on-site project visits or other similar verifications due to security and political constraints. Several measures have been put in place, such as remote monitoring, contracts with independent experts to monitor projects in the field, a risk-based review of the contract portfolio and cross-checking of information from different sources. This has improved the understanding of local dynamics and has allowed quicker and better reactions to address a very unstable and erratic environment. However, the countries both remain active conflict zones and the main elements justifying the reservation are still valid.

Following the considerable efforts made in 2021 and in previous years to address the causes of errors, the Directorate-General for Neighbourhood and Enlargement Negotiations lifted its reservation relating to grants under direct management at the end of 2021. These efforts are continuing to have a positive impact in 2022. In particular, DG Neighbourhood and Enlargement Negotiations has enhanced the analysis and increased awareness of the types of errors. A guidebook on additional measures to reduce the errors on grants was prepared, with recommendations such as requesting supporting documents on a sample basis during the implementation period of grant contracts or performing reinforced controls (e.g. increased monitoring and/or on-the-spot checks) on actions/contracts or beneficiaries. A detailed analysis of the types of errors was sent to all authorising officers by sub-delegation who were asked to monitor and enhance the controls on the implementation of grants. Other remedial actions included information sessions with (new) grantees to explain their contractual obligations and provide clear information on the most frequent sources of errors in grant management.

One specific challenge for 2021 was the completion of additional ex ante checks on implementing partners’ management and control systems () – also called pillar assessments – by 31 December 2021. This has not always been the case. The pillar assessments of the main partners are expected to be completed within the first half of 2022, as the large majority of the final reports have been received and are currently under analysis to assess whether additional supervisory measures are needed. Although new contribution agreements cannot be concluded before the pillar assessments are finalised, and a few financial framework partnership agreements are still being negotiated, mitigating measures were put in place to minimise the impact on the implementation of indirect management interventions. Such measures include a substantial increase in contact with the entities (mostly United Nations agencies) to accelerate the process, with the result that, as of March 2022, all pillar assessments with major partners have been finalised or are at an advanced stage. In addition, specific conditions (supervisory measures) for signing contracts with these entities in duly justified and exceptional cases have been set out to ensure compliance with the Commission rules. The implementation of ongoing contracts continued as normal, and amendments were still possible.

Issues identified in previous years continued to affect a few segments, namely a lack of adequate supporting documents, errors in the calculation of costs claimed, non-budgeted costs claimed and non-compliance with procurement rules. The actions taken to address these weaknesses include simplifying and clarifying procedures and contractual conditions for grants, promoting the use of results-based financing and sharing information on frequently occurring errors with relevant control stakeholders.

Within this policy area, the programmes are implemented almost equally under direct and indirect management. Notwithstanding the complex environment in which these programmes are implemented, most of the expenditure segments, such as procurement under direct management and budget support, are low risk. This is due to the inherent risk profile of the operations and the performance of the related control systems.

In 2021, for ‘Neighbourhood and the world’, both the risk at payment (1.1%) and the risk at closure (0.9%) are similar to 2020, and are well below 2%. In 2021, the Commission’s preventive and corrective measures amounted to EUR 131 million – EUR 110 million preventive and EUR 21 million corrective, which is also similar to 2020 at EUR 110 million and EUR 16 million respectively.

To achieve its objective, the Commission largely relies on entrusted entities and regulatory agencies, and on close cooperation with various partners and international organisations.

In 2021, most of the disbursements under this heading consisted of pre-financing payments, under the European Defence Industrial Development Programme, amounting to around EUR 200 million. These are not included in the relevant expenditure as they are advanced payments that are still under the Commission’s ownership. The relevant expenditure of EUR 13.8 million corresponds to the contribution to the European Defence Agency and procurements that have a low risk at payment, of 0.5%.

For ‘Security and defence’, the risk at payment and the risk at closure, which are both at 0.5%, are very low, and well below 2%. Since the types of payments for this activity are very low risk (mostly payments to agencies) there are no amounts for the preventive and corrective measures. This is in line with the level of error reported in 2020.

The non-quantifiable reservation relating to the shared management instruments under the 2007-2013 programming period has been lifted for 2021, since the implementation of corrective actions has been finalised for almost all Member States under reservation (for more details, see Volume III, Annex 5).

·In addition, the Directorate-General for Migration and Home Affairs has issued a reservation on reputational grounds relating to weaknesses identified in the effective implementation of the European Border and Coast Guard Agency’s new mandate. The responsibility for the corrective actions essentially lies with the agency. However, as a member of the Management Board, the Commission is actively involved in the monitoring of their implementation.

·A second reservation was issued for the EU actions and emergency assistance grants, where the residual error rate reached 2.85%. Management action has been taken to address these weaknesses, and the implementation rules for the direct management of grants have been greatly simplified with the progressive departure from specific eligibility conditions at the programme level and alignment at the corporate level.

·One reservation was issued for shared management in the 2014-2020 programming period concerning the Asylum, Migration and Integration Fund and the Internal Security Fund, quantified for one Member State.

At the end of 2021, three reservations were issued.

This policy area consists of low-risk expenditure. Contributions to decentralised agencies and delegation agreements represented 40% of the relevant expenditure for 2021, with an error rate close to 0.5%, while shared management and the implementation of the Internal Security Fund and the Asylum, Migration and Integration Fund represent 44% of the relevant expenditure, with a risk at payment of 1.12%. For this segment, reservations are issued when, at the Member State level, the residual error rate is above 2% or serious deficiencies in management and control systems have been identified.

For ‘Migration and border management’, both the risk at payment (1.9%) and the risk at closure (1.3%) have decreased slightly compared to 2020, remaining once again below 2%. In 2021, the preventive and corrective measures amounted to EUR 17 million – EUR 8 million preventive and EUR 9 million corrective.

In all cases where the deficiencies identified have led to reservations, there are follow-ups: conformity clearance procedures to ultimately protect the EU budget, monitoring of the implementation of remedial actions taken by Member States and, where necessary, interruption or reduction/suspension of payments to the Member States. This systematic and precisely targeted approach ultimately enables the protection of the EU budget (for more details, see Volume III, Annex 5).

The reservation for control weaknesses in one Member State in relation to the European Maritime and Fisheries Fund, issued in 2020, was lifted in 2021 as the underlying issue had been resolved.

·One new reservation for control weaknesses in one Member State in relation to the European Maritime and Fisheries Fund.

·Three reservations for agriculture, on European Agricultural Guarantee Fund market measures (affecting six Member States), direct payments (affecting 14 paying agencies in seven Member States) and European Agricultural Fund for Rural Development measures (affecting 26 paying agencies in 17 Member States that (temporarily) experienced control weaknesses and/or high error rates).

At the end of 2021, there were five reservations for segments of expenditure or programmes where control weaknesses and/or error rates above 2% had been identified.

Expenditure relating to fisheries and the environment and climate actions continue to be inherently low risk. The decrease in the risk at payment of the LIFE programme grants over the last several years is to be highlighted.

For the common agricultural policy, the risk at payment continued the downward trend observed over the past several years. Direct payments under the European Agricultural Guarantee Fund, which account for almost 70% of payments, saw a progressive decline in the risk at payment from 1.8% in 2018 to 1.4% in 2021. Due to complex eligibility rules, the risk at payment remains above the materiality threshold for rural development and market measures. There too the risk at payment has further decreased, to 2.9% and 2.1% respectively, as a result of the continuous improvements to the management and control systems in the Member States, in which the Integrated Administration and Control Systems, including the Land Parcel Identification System, play a significant role also for the Rural Development Fund and animal-related measures.

Both the Commission and the Member States continue to protect the EU’s financial interests. In 2021, the Commission executed financial corrections to the amount of EUR 631 million. Member States implemented corrections for a total amount of EUR 794 million, including EUR 528 million for errors detected and corrected on an ex ante basis and EUR 266 million for those recovered ex post.

For ‘Natural resources and environment’, the risk at payment remains below the materiality threshold of 2% and, at 1.8%, has decreased compared to 2020 (1.9%). The estimated future corrections have slightly increased to 1.5% of 2021 expenditure (1.4% in 2020), which leads to a risk at closure () estimated at 0.3% (0.5% in 2020). This also corresponds to the control results for expenditure for agriculture, which represents the bulk of the expenditure in this policy area (98%), the rest being dedicated to maritime and fisheries (), environment and climate expenditure.

In relation to previous accounting years, after the finalisation of strict contradictory procedures, additional financial corrections have been implemented by the Member States. This has led to a risk at closure of under 2% for each of the past several accounting years, and confirms the corrective capacity for cohesion policy funds. This percentage will continue to drop until the closure of the programmes.

·Promoting simplified cost options, which are less error prone, by providing assistance and support to national authorities to prepare and assess the simplified cost options schemes for 2021-2027 programmes. The Commission has worked relentlessly on designing and implementing appropriate processes to support these new features, including measures to enhance the uptake of simplified cost options and financing not linked to costs schemes, more proportionate control and audits, more compliance-based reporting and enhanced flexibility to adapt programmes to new socioeconomic and territorial contexts.

·Providing online guidance, examples of good practice and explanations, and promoting peer-to-peer exchanges to support contracting and programme authorities.

·Capacity-building action to improve the administrative capacity of the Member States’ managing and audit authorities and better equip them to deal with the most complex parts of fund implementation. This includes, for instance, the provision, free of charge, of the Arachne data-mining tool to help detect irregularities, fraud and possible conflicts of interest, along with the professionalisation of procurers.

·Continuous monitoring, analysis and addressing of the root causes of errors that remained undetected at the Member State level.

In 2021, the Commission, in close collaboration with the Member States, took various types of action to further improve the effectiveness of the management and control systems and to boost the prevention, detection and correction of errors, including the following.

The Commission continues to take action to support programme authorities in improving their management and control systems and to bring the risk at closure for cohesion below 2%.

The number of programmes under reservation for the 2014-2020 period (68) is similar to the number of programmes under reservation in 2020 (61). The financial impact has increased from EUR 341 million to EUR 423 million, which is in line with the increase in total payments. Reservations are only lifted once sufficient corrective measures have been taken. Usually, the reasons for the reservations are not structural, and it takes 1 to 2 years for a reservation to be lifted (). For more details on reservations, see Volume III, Annex 5.

·Two reservations relate to the 2007-2013 period, in relation to which a few programmes still need to be closed. The reservations are not quantified because no payments were made in 2021.

·Two reservations relate to the 2014-2020 period and include all the programmes that, during the year, presented significant weaknesses in their management and control systems or for which the error rate was above the materiality threshold, or, less frequently, for which the audit work at the Member State level was deemed insufficient or unsatisfactory.

At the end of 2021, four reservations were issued in relation to cohesion policy funds.

The main categories of irregularities identified by the Member States’ audit authorities and the Commission are similar to those identified by the Court of Auditors: ineligible expenditure, public procurement errors, deficient audit trails and the absence of essential supporting documents. This shows that most audit authorities detect appropriately, but not always entirely, the various types of irregularities contributing to the risk at payment (). There are inherent risks of error due to complex projects and rules. In most cases the weaknesses detected are however not systemic, and with the remedial action put in place the situation of the relevant system usually becomes satisfactory again within a year or maximum two. In addition, errors or weaknesses found in one programme do not mean that similar errors or weaknesses are present everywhere in the Member State concerned. Thanks to the Member States’ and the Commission’s control results, a nuanced and differentiated picture by programme and by authority is obtained. This allows the Commission to conclude that most programmes function well or sufficiently well (), and that a limited number of programmes present systemic and recurrent deficiencies over several years, on which the Commission then focuses its actions. In the latter category of programmes, these are transparently reported in the reser