Special Report No 1/2004

on the management of indirect RTD actions under the fifth framework programme (FP5) for research and technological development (1998 to 2002), together with the Commission's replies

(pursuant to Article 248(4) second subparagraph EC)

(2004/C 99/01)

CONTENTS

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SUMMARY

I. The European Community (EC) fifth framework programme covering research, technological development and demonstration activities (FP5) was adopted by the European Parliament and Council in December 1998 with a total budget of 13700 million euro. The annual funding provided for the seven thematic and horizontal programmes in the period up to 2002 accounts for approximately a quarter of the public funding for research projects in the European Union (paragraphs 1 to 5).

II. Research activities financed under FP5 are carried out through contracts with third parties and partly financed by the Community budget. Both the implementing regulation and the model contracts were adopted late. The large number of different model contracts unnecessarily increased the complexity of the contract management processes (paragraphs 9 to 20).

III. Financial contributions from the Community budget are based on the reimbursement of costs actually incurred and duly justified. The complexity of the rules for fixing the financial participation of the Community hinders the effective management of financial and administrative aspects by the Commission and is an unnecessary complication for participants. The introduction of the flat rate cost reimbursement system in FP5, which aimed at simplification, provided an incentive for participants to change to a more advantageous funding mechanism (paragraphs 21 to 35).

IV. A Commission proposal to simplify cost systems for FP6 (2002 to 2006) in line with previous recommendations by the Court was rejected by the Council and the Parliament. The rules for setting the financial contribution of the Community, that were subsequently adopted by the Council and the European Parliament, only partially address the Court's concerns. The Court welcomes the introduction of visible and dissuasive sanctions and the requirement for the certification of financial statements by an external auditor in FP6 (paragraphs 36 to 45).

V. The seven specific programmes of FP5 are managed jointly by five Directorates-General. The fragmentation of programmes results in dilution of responsibilities, duplication of functions and increased need for coordination and consultation. Moreover the basic concept of programmes composed of key actions is not adequately reflected in the Commission's organisational structure (paragraphs 46 to 57).

VI. FP5 experienced significant organisational problems and delays in the starting phase, beginning with the late adoption of the Decision by the Council and Parliament. Because of legal requirements, the Commission's internal rules and certain administrative practices, it took eight to nine months from the reception of proposals to the Commission's signing of a contract for indirect RTD actions. The Commission continued to face difficulties in employing staff with the required profiles as well as problems in recruiting permanent officials. By the end of 2001 approximately 2000 staff members were employed on FP5-related activities, about a third of them for the administration of proposals, contracts and projects for indirect RTD actions. On average only four to five working days per year were available for the scientific monitoring of each indirect RTD action. The procedures and administrative practices for the selection of indirect RTD actions, together with the cyclical nature of the submission of project deliverables defined in the model contracts, led to an uneven caseload at Commission level. The resulting bottlenecks were not conducive to an efficient operation of the management system and also contributed to administrative delays and deficiencies in internal controls (paragraphs 58 to 77).

VII. The Council Decisions adopting the specific programmes set upper ceilings for administrative expenditure between 6,5 % and 9,8 % of the total expenditure for each specific programme. These ceilings were respected for all programmes. An alternative method of measurement, comparing the expenditure devoted to indirect RTD actions to the total budget, indicates that 837,4 million euro (6,4 % of the total expenditure for FP5) was spent for the management of RTD Framework Programmes over the entire duration of FP5. The Commission monitors its resource allocation through the Activity Based Budgeting (ABB) system. Both for methodological reasons and due to the Commission's implementation of the Activity Based Budgeting system this is not the most appropriate way of measuring the operating cost of the RTD framework programmes (paragraphs 78 to 81).

VIII. The Commission did not develop a common or integrated IT system despite the management system being essentially the same for all the services implementing indirect RTD actions. The IT systems deployed by the Commission for the proposal, contract and project management were inadequate, not least because of insufficient investment. Improvements were noted towards the end of the FP5 programme period, but technical and operational problems persisted in most Directorates-General (paragraphs 82 to 86).

IX. Whilst the RTD Framework Programmes need to be implemented using a common set of principles and procedures, the Commission's administrative reform aims at the decentralisation and empowerment of services. The contradictions between these approaches lie at the root of many of the difficulties experienced by the Directorates-General in their joint management of FP5. The complexity of the intervention mechanisms and rules for the Community's financial participation makes efficient coordination within the Framework Programme even more important. The tests of the most important controls for a sample of contracts for indirect RTD actions showed that not all had been operated effectively. Other controls were found to be lacking. Overall the level of control differed considerably between the different Directorates-General operating FP5 (paragraphs 87 to 95).

X. The testing of the legality and regularity of cost claim based payments for FP5 indirect RTD actions at beneficiary level revealed a significant incidence of errors, mainly due to an overdeclaration of costs by final beneficiaries. No overall improvement was noted as compared with audit work related to previous framework programmes (paragraphs 96 to 100).

XI. The management information systems and reporting to Directors and (deputy) Directors-General still need to be improved. In none of the five Research Directorates-General were there procedures and practices to ensure that management-level information was prepared on time or accessible in a standardised format. In 2002 the management reporting for the framework programmes did not yet fully comply with the requirements defined in the Commission's internal control standards (paragraphs 101 to 110).

INTRODUCTION

FP5 comprises four thematic and three horizontal programmes

1. The fifth framework programme covering research, technological development and demonstration activities (FP5) was adopted by Decision No 182/1999/EC of the European Parliament and of the Council of 22 December 1998 for the period 1998 to 2002(1).

2. FP5 consists of seven programmes, all of which were adopted by the Council on 25 January 1999(2). It comprises the following four thematic programmes:

- "Quality of life and management of living resources" (QoL),

- "User-friendly information society" (IST),

- "Competitive and sustainable growth" (Growth),

- "Environment, energy and sustainable development" (EESD): Environment (EESD-ENV) and non-nuclear energy (EESD-NNE);

and three horizontal programmes for activities involving all research areas:

- "Confirming the International role of Community research" (INCO),

- "Promotion of innovation and encouragement of small and medium-sized enterprises participation" (SME),

- "Improving the human research potential and the socioeconomic knowledge base" (IHP).

3. Research activities financed under FP5 consist of:

- indirect actions within the thematic and horizontal programmes carried out through contracts with third parties and co-financed by the Community budget, and

- direct actions financed entirely from the Community budget and carried out by the Commission's Joint Research Centre.

The European Community (EC) section of FP5 is jointly managed by five Directorates-General, namely Directorates-General for Research, Information Society, Energy and Transport, Enterprise and Fisheries.

Increasing importance of a European research policy in budgetary terms

4. Community research policy has been implemented through framework programmes since the early 1980s. The growing importance of these programmes is reflected in the successive budgets allocated to them. FP5, with a total budget of 14960 million euro, is 13 % bigger in monetary terms than its predecessor FP4 (1994 to 1998). 13700 million euro of the total budget was allocated to the EC section, with 12961 million (95 %) earmarked for indirect RTD actions (see Annex 1)(3). As of the end of 2002, 99 % of the commitment appropriations available for FP5 had been utilised (see Annex 2A). FP6, which covers the period 2002 to 2006, has seen a further increase of 17 %.

5. FP5 represents only 6 % of the non-military governmental RTD expenditure of 61809 million euro per year in the 15 Member States of the European Union. However, if institutional funding is deducted, the budget for FP5 indirect RTD actions amounts to approximately a quarter of total funding for publicly financed research projects in the European Union(4). Overall annual FP5 expenditure amounts to less than 10 euro per citizen in the European Union.

AUDIT OBJECTIVES AND APPROACH

6. The Court's audit assessed the design of the administration and control system, evaluated its contribution to the economic, efficient and effective implementation of FP5 and verified the consistent, continuous and effective operation of internal controls(5). The audit paid particular attention to the consistent application of these internal controls throughout the services examined. Account was thereby taken of the Commission's 24 Standards for Internal Control, adopted in December 2000, which must be followed by all Commission services in the management of their resources(6).

7. The specific audit objectives were to ascertain:

- whether the intervention mechanisms and the rules applicable to the financial participation of the Community permit an economic and efficient implementation of FP5,

- whether, and to what extent, recommendations made by the Court, in its Annual Reports 2000 and 2001 and in its Special Reports on specific programmes of FP4 (1994 to 1998) were taken into account when defining the rules applicable to the Community's financial participation in FP6 (2002 to 2006)(7),

- whether the management structure, procedures and methods for FP5 are conceived in a way which ensures the economic, efficient and effective administration of indirect RTD actions,

- whether the information technology (IT) systems deployed by the Commission adequately support the administration of FP5 proposals, contracts and projects,

- on the basis of tests of control, for a sample of contracts for FP5 indirect RTD actions, whether a sufficient level of assurance on the legality and regularity of transactions can be obtained from the Commission's internal controls, also as regards the reality and eligibility of costs claimed by final beneficiaries, and

- whether management reporting allows an appropriate monitoring of the overall programme implementation for FP5 and the effective and efficient functioning of internal controls.

8. The audit covered all procedures, from the submission of the proposal to the submission of project deliverables and, where applicable, the closure of the contract. A total of 53 contracts for FP5 indirect RTD actions were sampled by the Court for compliance and conformity testing of the internal controls operated by the Commission, identified on the basis of a comprehensive description of the FP5 management system. This sample provided coverage of all five Directorates-General as well as all thematic and horizontal programmes and was intended to allow broad conclusions to be drawn. The audit also comprised the review of the FP5 legal bases and model contracts adopted by the Commission. Furthermore the Court carried out surveys of staff resources employed by the Commission services operating FP5 and analysed statistics on contracts for indirect RTD actions. Additional surveys were carried out for IT-related aspects and management reporting for FP5.

AUDIT OBSERVATIONS

Intervention mechanisms and rules for the Community's financial participation

Intervention mechanisms for FP5 indirect RTD actions

9. FP5 offers five different types of action for thematic and horizontal programmes(8): shared-cost actions (type 1); training fellowships (type 2); support to (research training and thematic) networks (type 3); concerted actions (type 4); and accompanying measures (type 5). All action types are implemented by means of contracts, signed by the Commission with third parties. Proposals for indirect RTD actions are submitted by a participant, or a consortium of participants, in response to calls for proposals published in the Official Journal of the European Union. These proposals are evaluated and ranked by external experts according to the criteria defined in the legal bases. The highest ranked proposals are then retained for negotiation by the Commission subject to the availability of funds specified in the call for proposals. During the negotiations the scientific and financial aspects of the proposals are discussed between the services of the Commission and the consortium of participants, based on the results of the evaluations. The successfully negotiated proposals are then selected by Commission Decision and contracts for indirect RTD actions are signed by the participants and the Commission.

10. Figure 1 and Annex 3A show that during the period 1999 to 2003, 15223 contracts for indirect RTD actions were signed by the Commission. Shared-cost actions (type 1), with 7212 signed contracts, represent 47 % of all contracts, followed by training fellowships (type 2) and accompanying measures (type 5), with 3698 and 3286 contracts respectively. In addition, 857 contracts were signed for support to networks (type 3) and 170 contracts for concerted actions (type 4). With the exception of the programme "Improving the human research potential and the socioeconomic knowledge base" and the programme "Promotion of innovation and encouragement of small and medium sized enterprises participation", all programmes have signed contracts of all the action types.

Figure 1

Number of contracts and European Union financial contribution per action type

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Source:

European Commission, January 1999 to July 2003 (unaudited).

Implementing regulation and model contracts adopted late

11. Council Decision 1999/65/EC and the implementing Commission Regulation (EC) No 996/1999 lay down the general principles governing contracts for indirect RTD actions(9). With the implementing regulation being adopted only in May 1999, these general principles became available only after the publication of the first FP5 calls for proposals in April 1999.

12. As in previous framework programmes, more specific rules for the different RTD actions were defined at a later stage in standardised model contracts. Whereas FP5 officially started in December 1998, model contracts were adopted by Commission decision as late as September 1999. Subsequently, further "derived" model contracts were agreed at a working level, and some of them only became available in October 1999. As a consequence, the exact wording of the contractual provisions, specifying in further detail the general principles laid down in the rules for participation and in the implementing Commission Regulation, were not known in time for the June 1999 submission deadline for the first calls for proposals and only became available during the negotiation phase for the first FP5 contracts. This caused additional difficulties for participants when preparing and negotiating the budget of estimated costs for their proposals for indirect RTD actions in the first year of FP5.

13. Unlike for FP4, the Commission defined model contracts for all types of indirect RTD actions. In total the Commission has deployed twenty different model contracts for the five types of FP5 indirect RTD actions, not taking into account different sub-types of scientific conferences or distinct versions for single or multi-partner actions and for one or several contractors (see Figure 2). The model contracts are drafted in a precise, clear and unambiguous manner. With the exception of the Commission-wide model contract for the type-5 "Grant agreements", the main structure and content of FP5 model contracts is similar. The main differences are in the general conditions which define the provisions applicable to the respective financial contributions.

Figure 2

Types of model contracts for FP5 indirect RTD actions

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Source:

Cordis.

(10)

14. However, not all FP5 model contracts were available in all official languages, some being published only in French, English and German. In addition, the bulk of the information material, in particular the material published on the Commission's website Cordis (www.cordis.lu), is available only in English. Due to the specialised nature of many technical and financial terms employed in the contractual provisions this could have created an additional difficulty for non-English speakers, especially for participants without previous exposure to the European RTD framework programmes (see paragraph 29).

15. Some model contracts and their derivatives were only seldom used (see Annex 3A). As regards the contract for type-1 "Combined RTD and demonstration projects", its implementation was considered difficult, due to different rates of co-financing for activities related to research and demonstration, which led in some cases to separate contracts being signed for each strand of activities. The large number of model contracts unnecessarily increased the complexity of the contract management processes and entailed additional costs for their integration in the Commission's central and local IT systems (see paragraph 82).

Increase in participants in shared-cost actions

16. Between 1999 and 2003, the Commission signed contracts with more than 77000 contractors(11). An entity participating in several indirect RTD actions is hereby counted separately for each contract signed(12). Approximately 67 % of all contractors were participating in shared-cost actions (type 1). Type-1 "RTD projects", which account for the major part of the total European Union financial contribution contractually agreed, feature an average of 7,2 contractors per contract (see Annex 3A).

17. Unlike in previous framework programmes, an FP5 contract is signed not only by the principal contractors, but by the associated contractors as well. This modification generated a significantly higher administrative burden both for the Commission and within the consortium. For instance, activities related to the negotiation and contract signature procedure and amendments to the contract, such as the reallocation of budgets (which requires the signature of all contractors) or the termination of the participation for a given contractor, became more complex and cumbersome due to the de facto veto right of all the members of any consortium carrying out an indirect RTD action. For future framework programmes, a simplified set-up could be envisaged, with the Commission concluding contracts with the coordinators of indirect RTD actions only. The contract signed with the Commission would then oblige the coordinator to carry out the indirect RTD action with the research partners stated in the proposal (or entities with an equivalent scientific or technical profile). This would considerably strengthen the coordinator's role and responsibility also in the scientific management of indirect RTD actions.

Accompanying Measures can be both indirect RTD actions and public procurement

18. During the period 1999 to 2003, Accompanying Measures (type 5) accounted for a European Union financial contribution of 1080 million euro (9 % of the total)(13). Compared to other types of indirect RTD actions, accompanying measures follow different procedures for submission, evaluation and selection. Proposals for accompanying measures are the subject of calls for proposals or calls for tender, but in certain cases they may also be submitted spontaneously in the form of applications for subsidies, mostly not evaluated by external experts. Accompanying Measures provide for a reimbursement of 100 % of eligible additional costs plus a flat rate reimbursement of indirect costs of up to 80 % of direct personnel costs(14). They are often used for measures that are on the borderline between indirect RTD actions and public procurement by the Commission. This may carry the risk that normal public procurement procedures are circumvented by the use of indirect RTD actions. This, in turn, could also make it difficult to verify the Commission's compliance with the ceiling imposed on the administrative expenditure for each programme (see paragraph 78).

19. The legal basis specifies that the Community financial participation consists of the reimbursement, in part or in whole, of the costs incurred for the indirect RTD action (see paragraph 22). However, all mechanisms which provide for a reimbursement of 100 % of eligible additional costs plus a flat rate reimbursement of indirect costs allow the possibility of profit being made on overheads if the flat rate exceeds actual costs. Apart from accompanying measures (type 5) such provisions can be found for support to networks (type 3) or concerted actions (type 4). The predominant use of these contract types by a participant may lead to situations where participants become financially dependent on the Commission.

Subsidies granted to associations in which the Commission participates

20. Accompanying Measures were also employed to award grants to associations in which the Commission actively participates. One example is the International Association for the Promotion of Cooperation with Scientists from the newly independent States of the former Soviet Union (INTAS), which was set up in June 1993 as an independent international association under Belgian law(15). Although it was requested by the Council to do so, the Commission did not, in fact, have the authority to set up an external entity and to participate as a member in its operation. The Commission's delegation of responsibilities to INTAS also went beyond the limits set out in the Treaties. Furthermore the Commission did not comply with key aspects of its administrative procedures for Accompanying Measures when awarding the grant to INTAS and authorising payments(16).

Rules for the Community's financial participation

International agreements on State aid limit public aid in the research domain

21. The Community framework for State aid for research and development establishes that, as a general rule, the gross aid intensity for industrial research must not exceed 50 % of the eligible costs of the project(17). Annex IV to Decision No 182/1999/EC of the European Parliament and the Council stipulates that in general the Community will reimburse up to 50 % of the eligible cost for shared cost actions (type 1)(18).

22. Council Decision 1999/65/EC and Commission Regulation (EC) No 996/1999 define the rules applicable to the financial participation of the Community and the definition of eligible costs in FP5. Financial contributions are based on costs actually incurred which are necessary and provided for in the contract. The costs actually incurred must be substantiated by the final beneficiary.

Three systems for substantiation of costs incurred

23. For shared-cost RTD projects, demonstration projects and combined RTD and demonstration projects, contractors can choose between three different cost reimbursement systems(19):

- the additional cost (AC) system, providing for a 100 % reimbursement of costs additional to the recurring costs,

- the full cost (FC) system, providing for a 50 % reimbursement of total eligible costs, and

- the full cost flat rate (FF) system, providing for a 50 % reimbursement of total eligible direct costs with a flat rate for indirect costs corresponding to 80 % of the eligible personnel costs (see paragraphs 30 to 32).

24. Additional complexity arises from the fact that FP5 provides for other types of additional cost systems, the detailed specification of which depends on the action types and model contracts used(20). For support to networks (type 3) and concerted actions (type 4), all participants have to use additional cost systems, irrespective of their accounting methods. For the contract for type-1 "Support to trans-national access to major research infrastructures" two different regimes, namely additional costs and user fees, are proposed. In all these cases, the definition of eligible costs is not the same as the definition used for the Additional Cost (AC) system for type-1 "RTD projects".

Additional cost systems do not permit verification of beneficiaries' share of co-financing

25. For all additional cost systems, including the Additional Cost (AC) system for type-1 "RTD projects", only costs additional to the recurring costs have to be substantiated and justified to the Commission. In the case of contractors applying this cost reimbursement system (mostly universities and public research institutes) a verification of the reality and the extent of their co-financing of indirect RTD actions is therefore, by definition, not possible(21).

26. Council Decision 1999/65/EC specifies that the cost reimbursement system used should be in line with the accounting capabilities of the contractor. In particular only if, in the Commission's view, the accounting system does not enable the full costs of an indirect RTD action to be established with sufficient precision or does not permit the share of direct and indirect costs related to the project to be distinguished can the Additional Cost (AC) system be used(22). The Commission however does not systematically verify the capacity of each participant's accounting system, despite relevant information being collected in the negotiation phase in some cases(23) (see paragraph 92).

Detailed conditions for eligibility of costs complicate administration of indirect RTD actions

27. Based on Articles 12 to 14 of Commission Regulation (EC) No 996/1999, contracts for FP5 indirect RTD actions specify both eligible and ineligible costs. There are eight different cost categories for direct costs(24), one cost category for indirect costs (overheads) and a specific category for "coordination cost" for the declaration of eligible costs incurred. These ten categories compare to eight categories in FP4, with the categories "protection of knowledge" and "coordination" being newly introduced for FP5. The cost category "coordination" which is reserved for financial and administrative coordinators includes all cost categories mentioned above, other than subcontracting(25). Overall, the large number of different cost categories did not increase the transparency of financial reporting to the Commission. It did, however, complicate the administration of FP5 indirect RTD actions.

28. Contracts for indirect RTD actions define in the table "Indicative breakdown of eligible costs" ceilings on cost categories for each contractor. No costs can be reimbursed in excess of the overall amount allocated to the beneficiaries and the transfer of budget between contractors and cost categories needs to be approved by the Commission if above certain thresholds. Given the difficulties of correctly forecasting the estimated costs per category, per year and per contractor for an indirect RTD action running over several years, the strict ceilings stated in the "Indicative breakdown of eligible costs" require contract amendments for budget transfers in a significant number of cases, generating additional caseload both for contractors and the Commission services.

29. Participants were often uncertain about the interpretation of the financial and administrative obligations defined in the contracts. For example many contractors incorrectly thought that budgeted rates (for personnel costs or indirect costs), negotiated when defining the maximum Community financial contribution, should or could also be charged in subsequent periods. Similarly, contractors applying average rates, e.g. for hourly personnel rates, did not understand that these rates have to be substantiated as being in line with actual costs incurred. In these circumstances more detailed guidance from the Commission would have been useful.

Full cost flat rate (FF) system provides an incentive for all participants to change to a more advantageous funding mechanism

30. One of the main initiatives for simplification in FP5 was the introduction of a flat rate option under the full cost system for shared cost actions (type 1). Flat rates such as the overhead rate of 20 % on direct costs (excluding subcontracting) for the traditional additional cost system, or the overhead rate of (a maximum of) 7 % on direct costs for type 5 "grant agreements" had already been used in previous framework programmes. In FP5, the Commission introduced in addition the option of a full cost flat rate (FF) system which allows for a flat rate for indirect costs at a rate of 80 % of direct personnel costs (see paragraph 23)(26). Although the Commission attempted to establish an objective basis to support the flat rate for overheads under the new cost reimbursement system, the methodology used by the Commission justified neither the 70 % rate initially proposed by a working group preparing FP5 nor the 80 % finally retained. This was implicitly recognised by the Commission when defining the flat rate for FP6 (see paragraph 38).

31. While the stated intention of the Commission was to offer the full cost flat rate (FF) system as an alternative for entities participating under the additional cost (AC) system, the former was in practice available to all entities participating in shared cost actions. By opening the full cost flat rate (FF) system to all types of participants, the Commission allowed entities which had previously participated under the full cost (FC) system with an actual overhead rate lower than 80 % to obtain an increased Community financial participation for the same underlying costs. As of the end of 2002, the Commission had not carried out any detailed analysis of the type of entity opting for the full cost flat rate (FF) system (see paragraph 40).

32. When negotiating contracts for indirect RTD actions, some Commission services agreed rates below the 80 % of direct eligible personnel costs for participants using the full cost flat rate (FF) system. Under the FP5 implementing regulation, such an approach was only acceptable if the lower rates had been requested by the participants on the basis of their internal rules(27). A more efficient use of Community funds would have been achieved had the legal base provided for a general practice whereby rates were negotiated (up to a certain threshold) on the basis of the substantiated average rates of the participating entity (see paragraph 36).

33. Similarly for Accompanying Measures (type 5), the flat rates for indirect cost, which can go up to 80 % of eligible personnel costs (except for type-5 "grant agreements") were generally negotiated at lower levels. These flat rates were, however, mostly average rates set for the consortium, independent of the actual cost structure of individual participants. Furthermore the rate setting appeared to be driven mainly by the availability of budgetary appropriations, rather than by an assessment of the underlying cost structure. In general, no justification was provided by the Commission about the reason why a certain level had been retained as an outcome of the negotiation process.

Additional administrative burden and operational problems due to overlap of different framework programmes

34. It is in the nature of the RTD framework programmes that there will inevitably be overlap between implementation phases of subsequent framework programmes. Most of the contracts for indirect RTD actions cover a period of 36 to 48 months. Other contracts have a duration of up to 60 months or even longer. Indirect RTD actions signed in the last year of the FP5 programme period (1998 to 2002) may therefore run until 2007. Up to the end of 2002 only 51,5 % of the total appropriations committed were actually paid (see Annexes 2A and 2B). As a consequence the contract management of FP5 indirect RTD actions will continue during the FP6 programme period (2002 to 2006). This also occurred with FP4 (1994 to 1998), which had to be managed alongside FP5 and is still not fully completed. One of the main implications of this overlap of framework programmes is that both the Commission and those participants concerned have to operate parallel systems regarding administrative and financial provisions and contractual obligations. Thus, when changing the underlying rules from one programme period to the next, the legislator and the Commission should give more consideration to the impact of those changes for the Commission's management of indirect RTD actions and the participant's administrative burden (see paragraph 50).

Continued divergences in legal interpretation of provisions contained in implementing regulation throughout FP5

35. The Commission has already recognised deficiencies regarding the management and control of indirect RTD actions under FP5 in its Annual Activity Reports(28). Procedures and provisions defined in the implementing regulation and in the model contracts, for instance on the contractual obligation to keep certified time records, the handling of contract amendments, the use of cost reimbursement systems and the reimbursement of value added tax, were applied inconsistently by the Commission services (see also paragraphs 32 and 51). This inconsistent application persisted throughout the FP5 programme period. The divergences in the legal interpretation of contractual obligations and eligibility rules were exacerbated by the absence of a centralised support function "Procedural and legal advice" (see paragraph 122).

Changes introduced for FP6 (2002 to 2006)

Proposals for simplifying cost systems rejected by Council and Parliament

36. In order to reduce the risk of ineligible expenditure being unintentionally or intentionally declared by final beneficiaries, and to allow for a more accurate and effective financial management of indirect RTD actions, the Court, in its Annual Report 2001, recommended fundamental simplification of the cost systems. The three main types of cost reimbursement systems (AC, FC, and FF) should be replaced by a single system and the ten cost categories reduced to three (i.e. personnel costs, coordination costs and specific costs), making more extensive use of flat rates(29). Subject to an upper ceiling, those rates should be negotiated on the basis of the substantiated average rates of the participating entity (see paragraph 32).

37. The Commission confirmed in its reply that such a drastically simplified cost reimbursement system would have had "[...] the merit of genuinely simplifying procedures and at the same time offering greater legal and financial certainty to the Community and to contractors alike". Such a system was proposed by the Commission to the legislator when preparing the rules on participation and dissemination of results for FP6 (2002 to 2006), but the proposal was rejected by the Council and the European Parliament.

38. Based on the provisions contained in Annex III of Decision No 1513/2002/EC of the European Parliament and of the Council concerning FP6, the Commission in the end retained as in FP5 three models for reporting costs: full cost with actual indirect costs (FC) reporting model, full cost with indirect flat rate costs (FCF) reporting model and additional costs with indirect flat rate costs (AC) reporting model(30). Compared to FP5, the main change is the reduction of the flat rate for indirect costs under the full cost with indirect flat rate costs (FCF) reporting model from 80 % of eligible personnel costs to 20 % of all direct costs excluding subcontracting. Furthermore the model contract now imposes conditions on which type of entity may or must use specific cost reporting models(31). In terms of the number of different systems, however, no major simplification has been achieved for FP6.

Elimination of cost categories reduces potential for an effective protection of the Community's financial interests

39. Apart from a differentiation between direct and indirect costs, the FP6 model contract eliminates individual cost categories(32). As a result direct costs are no longer justified by nature (i.e. "personnel", "subcontracting", "durable equipment", etc.)(33). Although this appears to be a simplification, the complete suppression of cost categories has in the Court's view the following drawbacks:

- it makes the presentation of financial information by the contractor less clear and comparable, and thereby complicates the verification work by the external auditor required for the provision of an audit certificate accompanying financial statements (see also paragraphs 44 and 45),

- it significantly reduces the scope for effective plausibility checks on the completeness and accuracy of data when processing financial statements and payments. Since the key information on personnel costs or hours spent is no longer reported, it further complicates the reconciliation and monitoring of scientific progress achieved by the project in relation to costs incurred, for scientific coordinators, external experts and the Commission.

Compared to the simplified cost reimbursement model initially proposed, the complete elimination of categories thus reduces the scope for the effective protection of the financial interests of the Community as required by Article 20 of Regulation (EC) No 2321/2002.

Reimbursement of costs already financed by public authorities

40. The legal bases for FP5, its implementing regulation and its model contracts do not explicitly state that recurrent costs already financed through national budgets are ineligible. This contrasts for instance with the provisions applicable to the Structural Funds(34). The Commission reimbursed for a number of indirect RTD actions costs already covered by a Member State or one of its public bodies. This problem has been aggravated with the Commission opening the full cost (FC) and full cost flat rate (FF) systems to public bodies and actively promoting their application during FP5 (see also paragraph 31). Under these systems it was possible for public entities to claim personnel costs for civil servants or public officials, even in cases where the people concerned had not been explicitly seconded to the project, which is what would have been required by national law. Those costs were not directly borne by the participant and therefore should not be eligible for Community support.

41. In FP6 costs already financed through national budgets may be reimbursed as eligible costs if these resources are at the free disposal of the participating legal entity(35). In the long term the risk of reimbursing costs already funded by a Member State is that the Community financial contribution replaces rather than complements national research funding.

Principle of joint and several liability as initially proposed by the Commission limited by Council and Parliament

42. The Court also recommended that each participant in a consortium should bear joint and several liability for the use made of the Community financial contribution to the indirect RTD action (with the exception of participants such as public universities, which cannot for legal reasons be held jointly and severally liable)(36). The principle of joint and several liability of participants was explicitly contained in Article 13 of the Commission's amended proposal for rules on participation and dissemination of results for FP6. The liability was then limited at the request of the Council and Parliament. As in FP5, the technical implementation of the indirect RTD action remains the collective responsibility of the participants under FP6 and the financial liability is limited to each participant's share up to a maximum of the total payments received(37).

Court's recommendation on sanctions retained by Council and Parliament

43. FP6 fully implements the Court's recommendation for strengthening the protection of the Community's financial interests by providing for the possibility of imposing sanctions according to Council Regulation No 2988/95(38). Article 20 of Regulation (EC) No 2321/2002 entitles the Commission to recover the amount unduly paid, and, in addition, to fine a contractor who is found to have overstated costs and who has consequently received an unjustified financial contribution.

Key problems related to audit certificates remain to be solved

44. Article 14 of Regulation (EC) No 2321/2002 follows previous Court recommendations by requiring the certification of financial statements for FP6 indirect RTD actions by an external auditor or, in the case of public bodies, by a competent public officer(39). The model contract for FP6 defines the scope of this audit as the certification that "[...] the costs incurred during that period meet the conditions required by the contract". The auditors are selected and paid for by the contractor, and the resulting audit certificate is subsequently submitted to the Commission. The cost of these audit certificates is entirely reimbursed by the Community (within the limits established by the contract). The Commission carried out two pilot actions on audit certificates during FP5. However, the effectiveness and reliability of audit certificates were not assessed in time for the Commission to identify lessons to be learnt in preparation for FP6.

45. Unlike in FP5, participants in FP6 indirect RTD actions are only required to report total costs incurred by activity, without giving any further details on the nature of the expenditure (for instance on personnel costs and hours spent). As a consequence, the Commission will need to rely almost exclusively on audit certificates for assessing the reality, eligibility and accuracy of costs claimed under FP6. However, this reliance is currently compromised as several essential conditions have not yet been met:

- the FP6 model contract only specifies the basic level of qualification of the auditor(40). However, the Commission has not yet clearly defined the scope and extent of the audit work to be done(41). Without the definition of those essential aspects by the Commission there remains a considerable risk that the audit certificates will be insufficient to ensure effective control over payments based on financial statements,

- for audit certificates to become an effective control mechanism, the Commission must also assure itself that external auditors are carrying out their verifications in an independent manner. In particular the Commission should define a strategy on how to verify, on a case-by-case basis, that the audit certificates submitted were produced in compliance with these minimum requirements and generally applicable professional standards.

Management structure, procedures and methods for the implementation of FP5

Coherence of programme and organisational structure

Joint management of the seven FP5 programmes by five Directorates-General

46. Indirect actions of FP5 are administered by five Directorates-General, excluding the Commission's Joint Research Centre (see paragraph 3). These five Directorates-General report to four Members of the Commission, with the Commissioner in charge of Directorate-General for Information Society also being in charge of Directorate-General for Enterprise. This compares to seven Directorates-General co-managing indirect RTD actions under FP4(42). Historically this joint management reflects the aim of supporting the Commission's policy objectives within the different areas and generating input from the research activities for future Community initiatives.

47. Except for the programme "User-friendly information society" and the environment part of the programme "Environment, energy and sustainable development", all thematic programmes are operated by more than one Directorate-General(43). When preparing FP5, the Commission intended that two Directorates-General, Research and Information Society, should be in charge of FP5 implementation, but with parts of the thematic programmes being co-managed by other Directorates-General. Thematic programmes were thus fragmented across Commission services. While the partition of contract and project administration for a programme between Directorates-General resulted in a multiplication of support functions, no evidence was found that this organisational structure added value to the management of the scientific aspects of these programmes.

48. The Commission justified the creation of a second, largely independent "pole" at Directorate-General for Information Society by the rapid evolution of information and communication technologies and their linkage to associated norms, standards and regulations which are also dealt with by this department. However the argument of scientific specificity and link to a specific regulatory framework also applies to other research fields, such as life sciences. Furthermore, the management requirements of research programmes are largely independent of the scientific area covered.

Split of programmes goes against the intended design of single research programmes

49. Each thematic programme was designed as a single entity around which appropriate management structures were to be constructed. However, as pointed out above, almost all thematic programmes were co-managed by different Directorates-General, thus effectively creating separate management structures. Moreover, at Directorates-General for Research(44), Information Society(45) and Energy and Transport(46), specific programmes were also split between directorates.

50. The split of programmes goes against the intended design of single research programmes. Its main drawback is inefficiencies caused by duplication of effort. For instance, the reorganisation of Directorate-General for Research in 2001, by creating largely autonomous directorates operating parts of specific programmes increased the number of administrative and financial units from five to nine. This meant that available officials at Directorate-General for Research with the necessary capacities in administrative and financial matters were spread between nearly twice the number of units. In addition the partition of programmes created an additional need for coordinating common areas of interest for the programme as a whole (such as programme committees, external advisory groups or work programmes). This problem was compounded by the additional need to carry out the activities related to the completion of previous framework programmes within these directorates(47) (see paragraph 34).

51. The joint management of FP5 by five Directorates-General and the split of programmes between largely autonomous directorates make the Commission's communication with the entities participating in the RTD framework programmes more difficult and less coherent. Within the same programme participants have to communicate on similar issues with officials from different units or directorates. Several examples were found, where Commission services gave diverging interpretations and unclear (or even contradictory) instructions to participants. This demonstrates the insufficiencies of internal guidelines and highlights the need for additional training on the administrative and financial aspects of management of indirect RTD actions (see paragraph 35). This problem is aggravated by the high dependency on non-permanent staff in the research area and the resulting turnover (see paragraphs 72 and 73).

Key actions are not sufficiently reflected in the Commission's organisational structure

52. Compared to FP4, a major innovation in FP5 was the structuring of the thematic (and to a more limited extent of the horizontal) programmes in key actions (see Figure 3)(48). These key actions are targeted at RTD priorities and the Community's policy objectives, whereas activities of a generic nature and support to research infrastructures aim to build up knowledge in specific areas in the longer term. This concentration of effort was intended to maximise the impact of the resources deployed within each area where RTD activities were initiated(49). However, with the exception of the "User-friendly information society" operated by Directorate-General for Information Society, the management responsibility for key actions was not clearly assigned to an organisational entity such as a directorate or a specific unit within a directorate. For jointly managed programmes, some key actions were even split between Directorates-General.

Figure 3

Structuring of thematic and horizontal programmes in key actions

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Source:

Decision No 182/1999/EC, Annex II.

53. Other research activities which focus on specific socio-economic issues and target groups, such as the programmes "Confirming the International role of Community research" and "Promotion of innovation and encouragement of small and medium sized enterprises participation", could be integrated into the thematic programmes, further streamlining the framework programme. In fact, actions regarding small and medium sized enterprises were part of the "User-friendly information society" programme from the start of FP5. Moreover, in the reorganisation of Directorate-General for Research in January 2001, the scientific aspects of the programme "Confirming the International role of Community research" were given to the operational directorates implementing the thematic programmes closest to the scientific area of the indirect RTD actions concerned.

Insufficient coordination mechanisms in place for FP5

54. The Commission had originally intended to implement a horizontal consultation forum and coordination structure through a "Board of Directors", bringing together representatives of all five Directorates-General(50). However, no such group was set up until the end of the FP5 programme period (1998 to 2002). Consultation and coordination of management aspects, such as the common evaluation platform, the handling of contract amendments or the audit strategy followed for FP5, were dealt with on an ad hoc basis mainly at a technical level that lacked the necessary authority for these kinds of arrangements.

55. For all programmes, including those managed jointly by different Directorates-General, specific "Groups of Directors" were set up as an additional coordination mechanism. Some of these groups, for example the group of directors for the programme "Competitive and sustainable growth", met for the first time as late as the end of 2001, the third year of the FP5 programme period. These groups were convened in addition to the regular management meetings of directors within each of the Directorates-General. It was foreseen by the Commission that the meetings of these groups would replace the interdepartmental consultations(51). However, the interdepartmental consultation remained in place, resulting in a duplication of consultation procedures.

56. A review of the minutes of the management meetings of directors at Directorate-General for Research showed that these weekly meetings largely addressed issues other than those of the day-to-day management problems of the operational programmes, except for budget planning and follow-up of its implementation. In particular from mid-2000 onwards, the planning and preparation of FP6 gained in importance. For no meeting did the minutes refer to any discussions on activities related to the completion of previous programmes or the scientific results of indirect RTD actions co-funded by the Commission.

57. The deficiencies in the coordination of FP5 activities, even within Directorates-General, were recognised by the Commission. In 2001, Directorate-General for Research centralised the management responsibility for the (parts of) programmes under its control with the deputy Director-General, following a recommendation made by the Court. The same year, the corresponding post at Directorate-General for Information Society, which until then had been vacant, was filled.

Contract caseload, duration of procedures and resources allocated to FP5

Large majority of contracts administered by Directorates-General for Research and Information Society

58. Of the 15223 contracts for FP5 indirect RTD actions (representing approximately 91 % of the financial participation of the Community), 92 % are managed by Directorates-General for Research and Information Society, the remainder being managed by Directorates-General for Energy and Transport, Enterprise and Fisheries (see Figure 4).

Figure 4

Number of contracts signed and European Union financial contribution per Directorate-General

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Source:

European Commission, January 1999 to July 2003 (unaudited).

59. The most important programme, in terms of the contractually agreed European Union financial contribution, is the programme "User-friendly information society" with 3428 million euro, followed by the programme "Competitive and sustainable growth" with 2673 million euro and the programme "Quality of life and management of living resources" with 2339 million euro. The programme "Environment, energy and sustainable development" accounts for 944 million euro in its non-nuclear energy section and for 1046 million euro in the environment section. The horizontal programmes "Improving the human research potential and the socioeconomic knowledge base", "Confirming the International role of the Community research" and "Promotion of innovation and encouragement of small and medium sized enterprises participation" account for 1235 million euro, 403 million euro and 236 million euro respectively (see Annex 3A and 3B and Figure 5).

Figure 5

European Union financial contribution committed per programme

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Note:

Size of circle corresponds to total EU-contribution committed for indirect RTD actions under each programme.

Source:

European Commission, January 1999 to July 2003 (unaudited).

Nearly twelve months for contract signature as a result of FP5 procedures

60. Based on the sample of contracts for indirect RTD actions audited, the "time-to-contract" from the publication of a call for proposal to the signature of a contract by the Commission averaged 348 calendar days. The average duration between the reception of a proposal to the signature of a contract by the Commission for the indirect RTD actions was 263 calendar days(52) (see Figure 6).

61. The lengthy duration of the procedures leading up to contract signature is partly a consequence of requirements imposed by the legal bases of FP5 (e.g. fixed date for submission of proposals, mandatory consultation of Programme Committees), the Commission's Rules of Procedure (e.g. the time limit of 10 working days for interdepartmental consultation prior to the submission of the selected and negotiated proposals to the Secretariat-General) or the Financial Regulation (e.g. annuality of the budget). Others are due to administrative practices that are at the discretion of the Commission's services (such as selection and adoption by batches of proposals(53) or frequency of interdepartmental consultation). For the "User-friendly information society" programme, Directorate-General for Information Society succeeded in decreasing (subject to the same procedures) the average "time-to-contract" from 274 calendar days after the closure of the call (for the first to the fifth call) to 138 calendar days (for the sixth to the eighth call in 2001 and 2002). This demonstrates that the scope for improvement for other programmes remains significant(54).

Figure 6

"Time to contract" duration

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Note:

Based on sample of indirect RTD actions audited.

Source:

Court of Auditors.

62. When preparing FP5, the Commission initially proposed that the consultation of Programme Committees should be limited to strategic matters, such as drawing up work programmes, calls for proposals or approving adjustments to the indicative breakdown of funding within each programme(55). However, the legislator gave a more prominent role to the Programme Committees since the Commission is required to obtain a positive opinion before each Commission Decision on the selection of indirect RTD actions proposed for funding (subject to programme specific thresholds)(56). Cutting out programme committees could reduce the average "time-to-contract" duration for indirect RTD actions by up to one month, without compromising the quality of the selection procedure.

Delays in setting up the common evaluation platform

63. The Commission also attempted in various ways to enhance the efficiency and effectiveness of the FP5 management structure, namely by setting up jointly used support functions, such as a common evaluation platform and outsourcing administrative and logistical services for evaluating the proposals submitted for consideration under the thematic and horizontal programmes of FP5. The external service provider operating the evaluation platform supplied assistance with the evaluation of proposals. This took the form of document receipt, registration and handling, facility management and logistical organisation. Conflicting views between different Commission services resulted in significant delays in setting-up the evaluation platform. These delays contributed to organisational problems throughout the first year of the FP5 programme period(57). Despite these weaknesses in the initial phase, the common evaluation platform significantly improved the efficiency and effectiveness of FP5 management.

64. Apart from the common evaluation platform and Cordis (www.cordis.lu), an externalised information service managed by Directorate-General for Enterprise, no other common service functions were deployed by the Commission for FP5, despite there being significant potential for doing so. The Court identified four main areas where existing support functions could be centralised and so allow more efficient and effective management of the framework programme as a whole (see paragraph 122).

Redesign and streamlining of procedures for FP5

65. Unlike in previous framework programmes, scientific, administrative and financial aspects of indirect RTD actions were negotiated, on the basis of the results of an evaluation by external experts, before the Commission's formal adoption(58). This modification of procedures made it possible to agree on a definite estimate of necessary costs and the Community's maximum financial contribution for a project before the Commission decision, thereby strengthening significantly the negotiating position of the Commission services (see paragraph 92).

66. The Commission has started to streamline its procedures in line with recommendations made by the Court. In the first three years of FP5 proposals for indirect RTD actions were adopted by written procedure. In 2002, the Commission started to take its decisions by delegating the necessary powers to the Member of the Commission, with further subdelegation to the Director-General in line with Article 13 of the Rules of Procedure of the Commission(59). This change in procedures potentially allows more frequent selections of proposals, thus further reducing the duration of procedures.

Late start of FP5 and highly fluctuating case load revealed by contract statistics

67. The Decisions establishing the legal basis of FP5 were approved with significant delay. The European Parliament and Council Decision on FP5 was delayed until December 1998 and the Council Decisions on the specific programmes were only adopted at the end of February 1999. Nevertheless, the political commitment was made by the Commission to implement the budget for 1999 as planned. Hence the first calls for proposals were launched in April 1999, with the great majority having a deadline of June 1999. Given the average "time-to-contract" duration, the signature procedure could only be completed in the following year (see Figure 7).

68. In addition to the late start of FP5, the statistics on contract signature also show a cyclical pattern where a large proportion of contracts are signed in the fourth quarter of each year. In 2001, for instance, the last quarter represented 47 % of all contracts signed in that year and 49 % of the European Union financial contribution contractually agreed (see Figure 7). This cyclical pattern, with peaks of contract signature towards the end of the year, is similar for all seven programmes of FP5.

Figure 7

Contract signature and committed European Union financial contribution per quarter (1999 to 2003)

>PIC FILE= "C_2004099EN.002201.TIF">

Source:

European Commission, January 1999 to July 2003 (unaudited).

69. The procedures for the selection of indirect RTD actions, together with the cyclical pattern of the work planning, give rise to peaks of activity for the evaluation and negotiation of proposal(60). In addition, the yearly pattern of the contracts, with regard to the submission for approval of project deliverables (in particular cost statements and periodic reports containing information about the progress of scientific work), prolongs these activity peaks after contract signature(61). Thus, unless projects are delayed, a peak in contract signature always causes a peak in the reception and verification of project deliverables, as well as in payments, in subsequent years. These peaks for specific functions result in bottlenecks and increase the risk of error and irregularity as the time spent on each transaction reduces. In the Court's view excessive caseloads in peak times contributed to administrative delays and to the deficiencies detected in the Court's tests of the Commission's operation of its internal controls (see paragraphs 90 to 95).

Above average vacancy rates and high dependency on non-permanent staff

70. Since the early 1970s the human resources allocated to the management of research activities have been financed from both the administrative part (part A) and the research part (part B) of the general budget(62). Due to the limited duration of RTD framework programmes, staff employed on research appropriations are usually given fixed term contracts(63). The Commission communications of 1994 and 1996 aimed to rebalance the structure of research personnel over the period 1996 to 2005, so as to achieve a ratio of 40 % civil servants, 35 % temporary staff and 25 % other staff(64). Six years after this decision the corresponding rates are 28 %, 50 % and 22 % respectively; indicating that further efforts are necessary to achieve this objective(65).

71. As at November 2001, the equivalent of 1935 full-time staff carried out activities related to FP5 within the Directorates-General implementing RTD framework programmes(66). This figure does not include those staff allocated to the management of previous framework programmes, the preparation of FP6 (2002 to 2006) or, at Directorates-General for Energy and Transport, Enterprise and Fisheries in particular, other non-research activities.

72. During FP5 the five Directorates-General operating the RTD Framework Programmes continued to face difficulties in finding staff with specific profiles (for instance in IT or general management) as well as problems in recruiting permanent officials (i.e. people who had passed open competitions) to temporary research posts. In 2001 vacancy rates were 8 % to 12 % of total posts. This is nearly double the Commission-wide average vacancy rate of 5 % to 6 % of total posts and four to six times higher than the 2 % target stated by the Commission. The audit also found that vacancy rates have increased slightly compared to 1999(67). In order to improve the situation, the Commission in December 2001 adopted a new personnel policy for research staff, in line with recommendations made in the White Paper on Commission Reform(68).

73. More than one in four staff members employed were interim staff, auxiliaries, experts seconded from national administrations or contract staff providing IT-related support. A high dependency on non-permanent staff, especially in administrative and financial units and in the IT departments, is detrimental to the quality and continuity of operations, due to the regular changes in staff and the corresponding loss of knowledge. In contrast, for those staff managing the scientific aspects of research programmes, the Court considers that fixed-term contracts are appropriate. This form of contract provides the Commission with the necessary flexibility in its use of staff resources in a constantly evolving domain.

One third of staff employed on administration of proposals, contracts and projects

74. Out of the equivalent of 1935 full-time staff members, 35 % of staff resources were allocated to proposal, contract and project management (see Figure 8)(69). Some differences in distribution can be observed between Commission departments and programmes, notably in Directorate-General for Research, which allocated significantly less staff resources to the administration of proposals, contracts and projects.

Figure 8

FP5 - distribution of staff resources by administrative activities

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Source:

European Commission, statistics on staff resources, November 2001 (unaudited).

Heavy caseload in terms of number of contracts managed per member of staff

75. Across FP5 a total of 15223 contracts had been signed up to July 2003 (see Annex 3A and 3B). Given the equivalent of 1935 full-time staff members employed on FP5, this implied an overall ratio of 7,9 contracts per member of staff. Taking the figure for the number of staff directly allocated to the proposal, contract and project management function, however, increases the average ratio to 20 to 25 contracts per member of staff.

76. Assuming that scientific follow-up and project management account for half of the staff resources related to these activities, scientific project officers will have to manage on average some 40 to 50 projects simultaneously. With 200 working days per year, this leaves on average a maximum of four to five working days per project per year. In the Court's view this is insufficient for adequate scientific monitoring of highly complex multinational research and demonstration projects.

77. There was also an unbalanced distribution of staff between programmes, comparison being made on the basis of number of contracts signed. For the "User-friendly information society" programme, for example, total staff numbers allocated to the programme are significantly higher than for other FP5 programmes, despite the project's being no more complex. The Court found that internal controls performed more effectively in those Commission services which allocated a comparatively higher share of staff resources to the administration of proposals, contracts, and projects (see paragraphs 90 to 95).

Ceilings on administrative expenditure respected

78. The Commission's management of the RTD framework programmes is financed from both the administrative (part A) and the operating parts (part B) of the general budget(70). For the resources coming from part B of the budget, Article 2 of each Council Decision adopting a specific programme imposed a ceiling on the Commission's administrative expenditure as a proportion of the total budget(71). These ceilings are set to cover the administrative expenditure for both current and previous framework programmes. They are set at 9,8 % of the total expenditure for the horizontal programmes "Confirming the International role of Community research" and "Improving the human research potential and the socioeconomic knowledge base", 7,5 % for the thematic programme "User-friendly information society", 7,4 % for the horizontal programme "Promotion of innovation and encouragement of small and medium sized enterprises participation" and 6,5 % for the thematic programmes "Quality of life and management of living resources", "Competitive and sustainable growth" and "Environment, energy and sustainable development". The ceilings were respected for each programme. The Court notes, however, that these ceilings were set without an independent external analysis of the actual resources needed by the Commission to manage the RTD framework programmes.

79. An alternative measure of the proportion of the budget that went to the administration of the RTD framework programmes between 1999 and 2002 is to look at the percentage of the total budget which was allocated to indirect RTD actions. Given that the contracts for indirect RTD actions signed between 1999 and 2002 covered a maximum financial contribution of 12 303,6 million euro, and a total amount of 13 141,0 million euro was committed (see Annexes 2A and 3A), 837,4 million euro (6,4 % of the total budget) went to the administration of the RTD framework programmes. However, this figure does not take into account the administrative expenditure allocated to the management of the RTD framework programmes that was financed from part A of the general budget.

Inadequate tools to monitor actual resource allocation

80. The Commission monitors the allocation of resources, including staff resources, in its Activity Based Budgeting (ABB) system. The general budget for the financial year 2004 will be the first budget officially based on this structure. For monitoring the real cost of implementing specific programmes, or an RTD Framework Programme as a whole, the Activity Based Budgeting system has, however, the following deficiencies:

- it measures budgetary expenditure rather than actual costs incurred for the Commission's operation of a programme,

- staff resources allocated to the programme, but financed from the administrative part of the budget (part A), are not included in this measure, but are recorded separately,

- Activity Based Budgeting records budgetary expenditure for activities which, in the case of the RTD framework programmes, do not necessarily relate to specific programmes. In addition, costs incurred for the completion of a programme after the end of the official programme period are accounted for under the subsequent framework programme (see paragraph 34). With the current specifications these activities cannot be used to identify the expenditure related to the complete life cycle of a specific programme or a framework programme as a whole.

81. The Commission does not yet operate an analytical cost accounting system sufficient to determine the actual cost for the management of a specific programme or RTD framework programme. Such a system would require, inter alia, a time recording system to register the staff resources employed on specific administrative activities. It could help the Commission to identify where staff resources could be used more efficiently. As currently used, the Activity Based Budgeting system can measure the expenditure from the part B of the general budget for RTD framework programmes as a whole, but it cannot measure the operating cost of a thematic or horizontal programme or a specific RTD Framework Programme.

IT support for proposal, contract and project management

FP5 IT systems: integration, availability of functions, quality and costs

No integration of management information systems across FP5

82. The inadequacy of IT support for the RTD framework programmes has been repeatedly criticised by the Court, and also by external experts(72). The main structural weakness of the FP5 IT architecture is the insufficient integration of management information systems with each other and with the SINCOM accounting system. This lack of integration between the IT systems operated by the five Directorates-General prevents automatic and efficient consolidation of information, for example on the financial and legal situation of participants, cost reimbursement systems used by one contractor under different contracts, hourly rates stated in the contract preparation forms or the audit history of the contractors. As a consequence the efficiency and effectiveness of internal controls were reduced when negotiating contracts for indirect RTD actions, verifying cost statements or authorising payments (see paragraphs 92, 93 and 95).

Inadequate IT support also due to insufficient investment

83. The level and quality of the IT support for the administration of FP5 proposals, contracts and projects showed inadequacies throughout the period covered by this audit. While the details differ from system to system and from component to component, the large majority of IT problems encountered in FP5 were due to the unavailability or unreliability of certain functions. The central management information systems in most Directorates-General were either made available late or, if available at the start of FP5, were incomplete or considered inadequate by users. In 1999 operational directorates at Directorate-General for Research started local IT development projects to compensate for the lack of an efficient and reliable central IT system for proposal and contract management. Such IT development activities, addressing specific weaknesses of central systems as well as the development of additional local applications, continued throughout FP5. Up until the end of the FP5 programme period the central IT systems in some Directorates-General were still only being partly used (e.g. contract and project management in the Directorate-General for Enterprise), incomplete (e.g. support for all model contracts), duplicated by local applications without interface to central IT systems or lacking important functions (e.g. the recording of project deliverables).

84. The Commission indicated that the late adoption of the legal bases (Decision No 182/1999/EC, Council decisions adopting specific programmes and rules for participation) left insufficient time for the development of adequate IT systems, since the detailed requirements specific to each programme could not be determined before the formal adoption by the Council and the Parliament(73). The weaknesses identified were, however, also due to the absence of an overall IT strategy for FP5 and insufficient coordination between Directorates-General in IT planning, acquisitions, systems development and data management. These problems were compounded by the additional need to maintain different IT systems for the management of indirect RTD actions relating to previous framework programmes (see paragraph 34).

85. The Commission estimated the total cost related to IT support for the period 1999 to 2002 at less than 0,2 % of the total budget of FP5, excluding the costs related to the Commission's website CORDIS. This level of investment is insufficient, given the size and complexity of FP5. The reformed Financial Regulation promotes a more extensive use of electronic exchange and storage of data(74). An IT system based on electronic data exchange at all stages of the procedure would offer the potential for significantly increasing the cost efficiency of the framework programme management.

Development of an integrated IT system for FP6

86. In line with recommendations made by the Court, the Commission committed itself to implementing a common IT system for electronic proposal submission, identification and selection of experts, proposal evaluation and the selection of proposals for funding from the start of FP6 (2002-2006)(75). According to the Commission, this new IT system will allow computerised transaction processing at every stage of the procedure, including contract negotiation, the transmission of contracts, the receipt of project deliverables (such as reports and financial statements) and communication with participants. In the Court's view there should also be a centralised support function "Information technology" operating this common IT system (see paragraph 122).

Internal control procedures

Control procedures at Commission level

Lack of documentation of operational procedures

87. The Commission's administrative reform launched in 1999 aims at decentralisation and giving increased responsibility to managing departments. On the other hand, implementation of a framework programme must be based on a common set of principles and procedures. The tension between these orientations is at the root of the difficulties experienced by the Directorates-General in their joint management of FP5.

88. The need for a harmonised set of procedures for all Directorates-General operating FP5 was addressed by the Council and the European Parliament in their Decision 182/1999/EC requiring the Commission to establish and publish a detailed manual of operational procedures from the submission of a proposal to the selection of indirect RTD actions. In response the Commission adopted an Evaluation Manual at the beginning of FP5. This Evaluation Manual was however insufficiently detailed for use as a manual of operational procedures. Furthermore the manual was incomplete in that some procedures leading to the selection of RTD actions, especially the procedure for the negotiation of proposals, were only partially covered(76). The inadequate coverage of the negotiation phase was partly due to the redesign of procedures in FP5 which resulted in the negotiation phase being moved to precede the formal adoption by Commission decision (see paragraph 65).

89. In some instances more detailed manuals or comprehensive guidelines were prepared and used at the level of operational units and programmes or within a Directorate-General. For example Directorates-General for Information Society and Energy and Transport started their documentation of financial circuits and procedures as early as 2000. The development of manuals was continued in 2001 or, as in the case of Directorate-General for Research, only started in that year(77). For Directorate-General for Research, with the exception of the financial circuits, the operational manual was still largely incomplete as at December 2002. Moreover, no initiative was taken by the Commission to standardise the form and content of these manuals as recommended by the Court(78). As a result, for FP5 as a whole, the documentation of operational procedures was still insufficient to comply with the minimum requirement of the Commission's Internal Control Standards(79). This deficiency contributed to continued differences in procedures and working practices between the Commission services (see paragraph 51).

Differences in the extent of internal control across FP5

90. Based on the sample of indirect RTD actions audited by the Court, differences in the type and extent of controls operated by the different Commission services implementing FP5 were found. Some of the deficiencies in internal control can be attributed to differences in the procedures applied, the absence of certain controls or inconsistent interpretations given to procedures in place and controls foreseen (see paragraph 35).

91. The tests of the most important controls for the sample of 53 contracts for indirect RTD actions revealed that some were not being operated effectively and consistently. For example, not all of the controls explicitly provided for in the Evaluation Manual, such as the verification of formal administrative eligibility of proposals received, the prior authorisation of the experts carrying out evaluations, the participation rule for evaluators or the verification of no conflict of interest for all experts, were being fully implemented across FP5. In several cases the controls carried out were not evidenced in the form of a document or a record indicating what controls had been carried out, and by whom.

92. There were specific weaknesses in internal control for the negotiation of the scientific, administrative and financial aspects of indirect RTD actions (see paragraph 65):

- for most of the audited proposals, the scientific, administrative and financial aspects to be modified as a result of the evaluation by external experts were not sufficiently well documented when the selected proposals were adopted after the evaluation. At the end of the negotiation phase most Commission services neither documented its outcome (except for the contract itself), with details of the extent to which the negotiation mandate was respected, nor subjected the negotiation outcome to formal authorisation by the official responsible for the programme in advance of its adoption by Commission decision. In one case an indirect RTD action was included in a draft Commission decision despite the contract negotiation not being adequately completed,

- the Commission services did not check the adequacy of contractors' accounting systems during the negotiation. Such a control could have provided additional assurance of the participant's compliance with the contractual requirements regarding the recording of time actually spent. Nor did the Commission services verify whether participants used a uniform cost reimbursement system (see paragraph 26). Similarly the legal and financial viability of contractors was not verified for all participants in FP5 indirect RTD actions. At Directorate-General for Research, a preliminary check of contractors' legal and financial viability was implemented only from the end of 2001 onwards. When this control was carried out, it was not based on standardised rules and criteria. Similarly actions aiming to protect the Community's financial interest were not harmonised across FP5. These controls could have been facilitated by a centralised "registration and clearing" support function for registering proposals and verifying the legal and financial viability of contractors (see paragraph 122).

93. There were other deficiencies with regard to the commitment procedure and contract signature as well as the authorisation of advance payments. In particular persistent difficulties were encountered in the management of contract amendments, from the timely identification of contracts where amendments were required to the excessive duration of the amendment procedure. In several instances this resulted in a build-up of modifications in the set-up of the consortium and the project before the contract had finally been amended.

94. In some cases the Commission did not terminate contracts, although the original scientific objectives could clearly not be attained by the consortium at all or could not be attained within the period defined in the contract. It would be easier to avoid such cases, and the Commission's scientific monitoring of indirect RTD actions could be significantly enhanced, if periodic (or at least mid-term) evaluations, where appropriate with the support of external experts, were to be carried out for ongoing projects within all programmes. For FP5 only the programme "User-friendly information society" systematically required these periodic evaluations during the project duration.

95. As regards the verification of the eligibility and accuracy of costs claimed by final beneficiaries and the processing of cost claim based payments, there were various cases where the scope and rigour of the controls carried out by the Commission were insufficient, leading to overpayments by the Commission, although not of a material level. Examples include the acceptance of cost statements that used cost reimbursement systems other than those stated in the contract, the processing of cost statements containing insufficient details of the costs incurred or prepared in unacceptable formats (for instance not detailing all the information required by the standard model) as well as cost statements containing clearly ineligible costs. In one case the Commission continued to accept the budgeted hourly rates for personnel claimed by a participant, although the Commission had previously been informed that a financial audit of the same contractor by the Court had found these rates to be overcharged (see paragraph 98). This indicates that procedures for following-up of audit findings are not yet sufficiently well developed (see paragraph 100).

Compliance with contractual provisions at beneficiary level

Prevalence of irregularities at final beneficiary level

96. Up to September 2001, the Commission services authorised payments related to project deliverables received and accepted for a total of 28 out of the 53 indirect RTD actions sampled by the Court. All these contracts were audited by the Court at the final beneficiary level. The objective of these financial audits was to verify that costs declared by the beneficiary and accepted by the Commission were incurred in reality, eligible and claimed in compliance with the contractual obligations.

97. In a significant number of cases beneficiaries did not comply with the contractual provisions, particularly in respect of the calculation methodology applied to determine the costs declared or the justification of the costs incurred. In other cases claims for costs outside the eligibility period or for ineligible expenditure were submitted to and reimbursed by the Commission. In some cases agreements (for example on average employment costs or hourly overhead rates) with national administrations in charge of public research funding were not offered to the Commission. Similarly, cases were found where procedures that were applied within the participating organisations (and which would have resulted in a lower financial contribution by the Community) were not applied to projects funded by the Commission.

Impact of errors found by the Court

98. When evaluating the impact of its audit findings the Court applied a strict interpretation of the legal base and the contractual provisions for determining the Community's financial contribution. Within the sample of contracts audited at final beneficiary level there were two cases where the contractor was not eligible for co-financing. In all but one of the remaining 26 contracts for FP5 indirect RTD actions, relating to 33 cost statements, the beneficiaries had overstated the eligible costs. The rate of overdeclaration for this sample of 26 contracts was material. For 25 out of the 26 audits considered as closed by the Directorates-General as of January 2004, the Commission services proceeded with financial adjustments averaging 21,6 % of the costs declared by the beneficiaries. This adjustment rate is an average for the sample of indirect RTD actions audited by the Court. In the Court's view, this rate cannot be extrapolated to the total budget of FP5. Although most of the irregularities could only be detected during on-the-spot audits, there were a number of errors which could and should have been detected by the Commission services when verifying cost statements before the authorisation of payments. The errors were not detected because checks were either non-existent or inadequate (see paragraph 95).

Late payments caused by coordinators and the Commission

99. The contract for FP5 indirect RTD actions specifies maximum periods for payments, both for the Commission (60 days after contract signature for advance payments and, for periodic payments, after approval of project deliverables) and for the coordinator who distributes the Community contribution to all participants (30 days after receipt of the funds paid by the Commission). In several cases the coordinator had delayed the transfer of the European Union contribution to the other participants in the consortium. In addition there were some instances of late payments by the Commission.

Inadequacies in the follow-up of audit findings by the Commission

100. For a significant number of contracts audited by the Court, the Commission had accepted the factual findings but not taken the appropriate corrective action in due time(80). Also, in many cases where corrective action was taken, the recovery of funds unduly paid was delayed. Moreover, in the case of system related audit findings (such as incorrect calculation methodology used by a beneficiary), the Commission's follow-up procedures should provide for verification of the extent to which other contracts with the participant are subject to similar problems.

Reporting on programme implementation and internal controls

Adequacy and appropriateness of FP5 reporting

Reporting as a tool for monitoring programme implementation and internal controls still under development

101. Reporting should support Directors and Directors-General as (sub-delegated) authorising officers in their tasks of monitoring programme implementation and ensuring that internal controls are functioning effectively and efficiently. To be of use in day-to-day programme management reports should cover all relevant operational, financial and compliance-related information. Information should also be presented on time and managers must have confidence in its accuracy.

102. Although there are a large number of different reports, shortcomings remain as regards the reports on programme implementation and the internal control system. In 2002 many programmes and directorates were still developing reporting tools for FP5, and other Commission services had yet to provide reports containing anything more than statistics on budgetary implementation.

103. In most cases the reports were statistical tables without any explanation, comment or analysis. Evidence that the reports were regularly submitted to, and used by, management was provided for only a small number of reports. No report brought together management information for FP5 as a whole. The form, but also the content, of reports to management varied between parts of programmes jointly operated by different Commission services.

104. Organisational responsibilities for reporting within the Commission are unclear and the absence of a centralised "controlling and reporting" support function for FP5 leads to a duplication of reports for the same aspects (see paragraph 122). In none of the five Research Directorates-General were there procedures and practices to ensure that management-level information is prepared and communicated on time, and is accessible in a standardised format. With the exception of Internal Control Standard 12 "Adequate Management Information", there are no guidelines that define minimum requirements for management reports in terms of form, frequency, content or level of detail. Many of the Court's findings in this area are supported by external experts(81).

FP5 reporting is mainly oriented towards operational and financial aspects

105. The main elements of budgetary and financial monitoring were adequately covered in the reporting to management for FP5. In particular, nearly all targets and performance indicators defined up until the end of 2002 related to budgetary execution or financial management.

106. As far as reporting on operational aspects of FP5 is concerned, more than half of the reports cover the procedures up to the signature of the contract for an indirect RTD action. However no report is generated on the actual implementation of projects after contract signature, in terms of project deliverables received, project status against objectives and previously defined milestones or results of scientific evaluations of ongoing projects.

107. Only a limited number of reports cover compliance-related aspects of programme implementation. Except for those indicators suggested by the Internal Control Standards or specific "White Paper" actions, such as the reduction of payment times, the five Directorates-General have not agreed any performance indicators for monitoring the non-financial aspects of FP5. Innovative operational, financial and compliance-related targets or indicators, such as the "time-to-contract" indicator used by Directorate-General for Information Society, are limited to some parts of FP5 only. Due to the absence of such information, comprehensive monitoring of programme implementation is hindered.

108. The audit did not identify any report that brought together information on the input into FP5 programmes and their deliverables. Such a report would be very useful for assessing the efficiency and effectiveness of Community financing. It appeared that the assessment of scientific results and of the impact of indirect RTD actions is not yet covered by formal reporting to management.

Reporting affected by weaknesses of IT systems

109. The central IT systems did not provide sufficiently reliable statistics, mainly because of differences in data structure and level of detail in local applications, encoding errors and the absence of reconciliation procedures verifying the consistency and integrity of data following up-loads from local applications or IT systems used under previous framework programmes. Most reports were produced on the basis of data contained in the different, often local, IT applications. Since reporting relies on information from a large variety of different sources there is a significant risk of inconsistencies in the data reported (see paragraph 82).

Compliance of reporting with Internal Control Standards

110. The key principles of the Commission's administrative reform are decentralisation and the taking of responsibility by management departments, accompanied by increased transparency and accountability of the Commission services(82). Reporting to senior management on programme implementation and the efficient and effective functioning of internal controls are essential in creating this transparency and accountability. Four of the Commission's internal control standards, adopted in 2001, are of particular relevance for management reporting(83):

- Standard 7: "Objective setting": each Directorate-General has to identify and, since 2001, publish general policy objectives in its mission statement and its Annual Activity Report. In addition, the Directorates-General operating the RTD framework programmes have defined specific objectives within the framework of Activity Based Management (ABM). In respect of FP5, the objectives for 2002 documented in their annual management plans or work plans, were, however, neither uniform nor comparable(84). Perhaps surprisingly, the five Directorates-General did not all refer explicitly to the RTD framework programmes when setting their objectives. Unless the Directorates-General jointly agree on harmonised objectives, it is unlikely that common performance indicators can be defined for the RTD framework programmes,

- Standard 10: "Monitoring performance against objectives and indicators": except for the indicators provided for in the legal bases, or those which are mandatory according to the internal control standards, no indicators have been agreed, neither by the five Directorates-General operating the RTD framework programmes, nor within the individual Directorates-General. Efficient and effective programme supervision for the RTD framework programmes would require the definition of such indicators (see paragraph 107),

- Standard 12: "Adequate management information": none of the five Directorates-General operating the RTD framework programmes compiled a "scoreboard" report, as required in this standard, by December 2001, the deadline set by the Commission. The "scoreboard" reports introduced in 2002 still did not comply fully with the requirement of the standard,

- Standard 18 "Recording of exceptions": none of the reports examined by the Court provides for compliance-related information on management intervention involving potential deviations from established policies, procedures or controls. The lack of centralised recording and standardised reporting makes it difficult for the Directors-General and their internal audit capabilities to monitor whether internal controls are functioning.

CONCLUSIONS AND RECOMMENDATIONS

Intervention mechanisms and rules for the Community's financial contribution

111. In the Court's view, the large number of different model contracts deployed by the Commission for the five types of indirect RTD actions unnecessarily increased the complexity of the administrative processes and entailed additional costs for the implementation of FP5. Both the implementing regulation and the model contracts were adopted late. Accompanying measures were found to be a particular risk area, due to their being used for measures that are on the borderline between subsidies and public procurement (see paragraphs 9 to 20).

112. The high level of detail and the complexity resulting from the rules for the Community's financial participation require an excessive administrative effort from both contractors and Commission in their management of proposals, contracts and projects. The newly introduced full cost flat rate (FF) system was aimed at simplification, but in fact provided an incentive for participants to change to a more advantageous funding mechanism. Differences between Commission services in the legal interpretation of the provisions contained in the implementing regulation persisted throughout the FP5 programme period (see paragraphs 21 to 35).

113. The Court considers that the cost reimbursement systems provided for FP6 constitute an improvement compared with FP5, especially as regards the correction of the excessive flat rate for indirect costs under the full cost with indirect flat rate costs (FCF) reporting model. However, since there are still three different cost reporting models, there has been no major simplification. Furthermore, the complete elimination of cost categories in FP6 reduces the transparency of the financial statements required for the declaration of eligible costs incurred and reduces the potential for analytical checks (see paragraphs 36 to 41).

114. The Court welcomes the introduction of visible and dissuasive sanctions for FP6, which should provide an additional deterrent to participants overclaiming costs. The new requirement for the certification of financial statements for indirect RTD actions by an external auditor is a further positive development. However additional clarification of the audit scope, reporting obligations and the Commission's role in verifying the adequacy of audit certificates is required (see paragraphs 42 to 45).

115. The European RTD framework programmes are becoming ever more complex, both for participants and for the Commission services in charge of their administration. For future framework programmes, a simplified set-up could be envisaged, with the Commission concluding contracts with the coordinators of indi