REPLIES OF THE COMMISSION TO THE SPECIAL REPORT TO THE EUROPEAN COURT OF AUDITORS

"ERRORS IN RURAL DEVELOPMENT SPENDING: WHAT ARE THE CAUSES, AND HOW ARE THEY BEING ADDRESSED?"

Executive summary

II. The Commission welcomes the Court's report on the analysis of the root causes of errors which summarizes the results of the last three years of Statement of Assurance exercise and largely confirms the main conclusions already drawn by the Commission in its Staff Working Document on the assessment of root causes of errors in the implementation of rural development policy and corrective actions presented to the European Parliament and Council in June 2013[1].

The Court reports an average error rate 2011-2013 for rural development of 8.2%. Nevertheless, the Commission notes the slight downward development in the error rate for EAFRD (8.4% in 2011 to 7.9% in 2013).

This error rate is higher than the individual rates published annually by the ECA in chapter 4 of the annual report. The reason is that the present analysis covers 461 transactions out of 532 in total for the three years (which include health, environment and fishery policies). The 71 transactions not concerned by this report have a lower average error rate. The Commission also notes that the Court defines the sample and calculates on a yearly basis the error rate at policy level (rural development, environment, fisheries and health).

The rural development represents 90% of the policy expenditure and it is generally more prone to errors than other areas in the policy group. The complexity of some eligibility requirements in the rural development measures played an important role in the high level of error rates.

III. Since 2012, the Commission has been addressing the issue of high error rate by requesting national action plans from the Member States (MS) and monitoring their implementation. Based on experience gained and on recommendations from the Court of Auditors, these action plans have been improved over time.

The expected results of all the actions will not always be evident in the short-term, especially for measures implemented through multiannual commitments. Nevertheless, the first results of the joint efforts to reduce error rates through the implementation of the action plans can already be seen in a lower error rate for rural development in 2013.

The Commission will keep on monitoring the implementation of the action plans, both from the audit and operational perspectives, through bilateral meetings, monitoring committees and annual review meetings.

V. The Commission has also found weaknesses regarding the public procurement in its own audits. Substantial financial corrections have already been made in this respect.

Public procurement is one of the central elements in the action plans for rural development.

Nevertheless, it should be noted that the non-compliance with procurement rules does not necessarily mean that 100% of the expenses involved are ineligible. The project as such may well achieve its goal and provide real added value.

For the period 2014-2020, the Commission has already presented guidance for practitioners on the avoidance of common errors in European Structural and Investment Funds projects. These guidelines were presented to the Managing Authorities and Paying Agencies at the Seminar on Error Rate that took place in October 2014.

VI. Substantial shortcomings regarding the measure supporting the processing of agricultural products are followed-up in the audit conformity procedures.

As regards intentional infringements, the Commission is implementing an Anti-Fraud Strategy, organising dedicated seminars in several Member States.

The Commission shares this conclusion.

The Commission will continue providing the Member States with the recommendations and guidelines, as well as disseminating best practices to improve the control system in order to avoid errors.

Furthermore, the Paying Agencies must comply with the accreditation criteria laid down in Annex I of Regulation 907/2014 (programme 2014-2020) before any payments are made. Commission services reviews the accreditation through ex-post audits.

VIII. As regards limited incentives for beneficiaries to comply with farming commitments, agri-environmental schemes reflect voluntary commitments by farmers to provide environmental benefits and public goods which go beyond the mandatory requirements. The compensatory nature of agri-environment payments (covering costs incurred and income foregone) does not imply immediate economic benefits for the farmers, although these are not excluded in the longer run.

As regards the "low" control rate for commitments, according to the legislation in force, where on-the-spot checks reveal a significant non-compliance, the Member State is obliged to increase the percentage of beneficiaries to be checked on-the-spot. The correct application of this is verified during the Commission conformity audits.

The control rate for farming commitments is established at 100% for the administrative checks and 5% for the on-the-spot checks. The costs of management and controls published in the 2013 AAR amount to EUR 4 billion for the whole CAP. Therefore, the emphasis should be put on the improvement of effectiveness of the controls and not on their increase.

As regards the sanctions, the Commission considers that while sanctions for non-compliance have to be proportionate they shall remain a dissuasive tool.

IX. The establishment of the action plans was conceived as a preventive process based on the Staff Working Document (2013) 244, built on the self-assessment of the Member States of the root causes that had an impact on the error rates. This process has progressively incorporated the reactive perspective, systematically taking into account the audit findings and proposing specific corrective actions. The double perspective (preventive and reactive) is still part of the exercise. The last update of the action plans shows that almost 50% of the actions were triggered by concrete audit findings of the Court or the Commission, whilst the other half were based on self-assessment of the Member States.

Furthermore, the ex-ante assessment on the verifiability and controllability of all measures included in the RDPs 2014-2020 also address the risk of error rate from a preventive perspective.

X. The Commission shares the view that it is important to strike an appropriate balance between the number and complexity of rules on the one hand, while guaranteeing the legality and regularity of expenditure.

XI.

(a) The Commission accepts the recommendation. The specific issues raised by the Court should only be dealt with in the action plans if shortcomings have been identified. The Commission recognises the importance of guidance related to the three root causes of errors and dissemination of best practices. This will be dealt with through the European Network for Rural Development and the seminars.

Furthermore, the Commission has already presented to Member States specific guidance on public procurement and Agro-Environment-Climate measure, including double financing.

Intentional circumvention of rules is part of the Anti-fraud strategy and the seminars organised thereof in several Member States.

(b) The Commission accepts this recommendation. The Commission is currently assessing the controllability and verifiability of the new programmes and will raise any shortcoming in the framework of the Monitoring Committees and Annual Review meetings with the Managing Authorities.

Moreover, audit findings will be closely followed in order to detect and correct any source of error attributable to the national implementing rules, requesting immediate modifications if needed.

Lessons drawn from the implementation of the programmes and national rules thereof, will be shared through the ENRD and dedicated seminars on error rates.

(c) The Commission partially accepts the recommendation as it cannot prejudge the scope and the result of such analysis or future policy choices by the legislators for the next programming period.

In 2017 the Commission will prepare a strategic report of the Fund, summarizing the annual progress reports submitted by Member States (Article 53 Regulation 1303/2013). Furthermore, the Commission and the Member States will assess the performance of the RDPs during the review process foreseen under Article 21 Regulation 1303/2013. In the light of these and other evidences (e.g. audit findings), the Commission will assess the policy conception and the eventual need to make proposals for the following programming period.

At the end of the programming period, the Commission will make a thorough analysis of the continued need for each support measure before making a proposal for the following programming period as has been done for the present period.

The Commission agrees that administrative checks should be used when possible, although it notes that in most cases this is not feasible for agro-environment operations.

Introduction

1. The EU allocated 96 billion and contribution of the MS is expected at 55bn.

4. The Court reports an average error rate 2011-2013 for rural development of 8.2%. Nevertheless, the Commission notes the slight downward development in the error rate for EAFRD (8.4% in 2011 to 7.9% in 2013).

This error rate is higher than the individual rates published annually by the ECA in chapter 4 of the annual report. The reason is that the present analysis covers 461 transactions out of 532 in total for the three years (which include health, environment and fishery policies). The 71 transactions not concerned by this report have a lower average error rate. The Commission also notes that the Court defines the sample and calculates on a yearly basis the error rate at policy level (rural development, environment, fisheries and health).

The rural development represents 90% of the policy expenditure and it is generally more prone to errors than other areas in the policy group. The complexity of some eligibility requirements in the rural development measures played an important role in the high level of error rates.

5. Error rates do not necessarily imply that policy objectives are not attained, which could only be stated by assessing the performance of the operations supported. To achieve the policy goals of the rural development policy a certain degree of complexity in the implementation of the policy is unavoidable taking into account the ambitious objectives of rural development (RD). In view of this, it has to be recognised that it will be very difficult to reach a 2% or lower error rate without deploying unreasonable control resources at a prohibitive cost.

Types and prevalence of errors found

12. As regards the types of errors indicated by the Court, it should be noted that during its own audits of investment measures and area-related schemes the Commission found shortcomings similar to those detected by the Court of Auditors. Financial corrections have been imposed on the Member States concerned (or conformity clearance procedures are underway with a view to making such corrections) in order to protect the EU budget. Furthermore, where the shortcomings were found, Member States concerned were required to take remedial actions.

14. The rural development policy is implemented through a national or regional rural development programme. The majority of errors relates to the specific conditions laid down in the programmes and other national rules. These are necessary for the implementation of the policy, but the challenge for the Member States is to limit these national rules to the strict necessary for achieving the policy goals.

For the programming period 2014-2020 all rural development programmes are required to include an ex-ante assessment on the verifiability and controllability of the measures, conducted jointly by the Managing Authority and the Paying Agency.

26. During its own audits the Commission also found shortcomings regarding the public procurement procedures. Financial corrections have already been made in this respect.

Public procurement is one of the central elements in the action plans for rural development.

Nevertheless, it should be noted that the non-compliance of procurement does not necessarily mean that 100% of the expenses involved are ineligible. The project as such may well achieve its goal and provide real added value.

Moreover, on 19/12/2013, the Commission adopted new guidelines for determining financial corrections to be made to expenditure financed under the shared management, for non-compliance with the rules on public procurement[2]. According to these guidelines, the non-respect of procurement rules is to be judged based on the principle of proportionality.

A guidance document on most common irregularities in the management of European Structural and Investment Funds has already been presented to Member States (4th Seminar Error Rate, Oct 2014).

27. As regards Table 1:

Romania: the reported error was detected by ECA in the DAS 2012. The RO Error Rate Action Plan includes measures to address weaknesses in public procurement procedures.

The Netherlands: procurement rules were retroactively withdrawn by the province in 2012 with effect from 1 January 2010. However, this should not have been applied in this case. The Commission is following it up with the Member State.

Germany (Brandenburg-Berlin): As the last commitments for broadband could be made in 2012, no further preventive and corrective actions could be implemented. Support for broadband is no longer foreseen for the period 2014-2020.

Box 2 ‑ Contracts awarded directly to existing suppliers

Sweden has included "public procurement" as root cause of errors and corrective and preventive actions in its error rate action plan.

32. The weaknesses listed in Table 2 are covered in the respective action plans aiming at improving the administrative control system.

35. The Commission shares the view that simplification should not hamper the principles of sound financial management.

The new legal framework for CAP 2014-2020 contains simplification factors which do not adversely impact the sound financial management (e.g., lump sum payments, standard costs). Art 60 of R1305/2013 establishes that only expenditure for investments that has been incurred after the application for support shall be eligible.

Box 3 ‑ Example of withdrawing an effective eligibility criterion

These weaknesses are covered in the respective action plans aiming at improving the administrative control system.

This is no longer possible under the new legal framework. See reply to point 35.

38. The lump sum payment, as in the case of young farmers support, may not respond to other measures' policy objectives. Therefore, simplification in the implementation must ensure an adequate balance with the achievement of the policy objectives and sound financial balance. The benefit on the reduction of the error rate should not be the only factor to be taken into account.

40. The Commission would like to point out that the fraudulent expenditure for rural development detected and reported by Member States amounts to 0.11%[3].

43. During its own audits the Commission also found weaknesses in the verification of Small and Medium Enterprises (SME) criterion and non-respect of appropriate private procurement procedures. Where shortcomings were found, net financial corrections have been imposed on the Member States concerned (or conformity clearance procedures are underway with a view to making such corrections) in order to protect the EU budget. Furthermore, Member States concerned were required to take remedial actions.

In the current legal framework 2014-2020, there are no limits for the size of the company in order to become beneficiary of support under investment for physical assets. Member States can target the support to specific beneficiaries following conclusions of the SWOT and needs assessment. These further requirements will have to be controllable and verifiable.

46. Similar provisions will be applicable during the period 2014-2020.

48. The Commission shares the view that the national authorities could potentially have detected many of the errors found by the Court. The CAP rules provide the Member States with all necessary instruments to mitigate most of the risks of errors.

The Commission will continue providing the Member States with the recommendations and guidelines, as well as disseminating best practices to improve the control system in order to avoid errors.

Box 5 ‑ Examples of insufficient quality of Member State authorities' checks

These weaknesses are covered in the respective action plans aiming at improving the administrative control system.

51. During its own audits the Commission also found weaknesses on the conduct of administrative checks. Member States concerned were required to take remedial actions and financial corrections have been imposed, when appropriate.

57. During its own audits the Commission also found weaknesses in the verification of agri-environment commitments and Member States concerned were required to take remedial actions. In addition financial corrections have been imposed to the Member States concerned, when appropriate.

Box 7 ‑ Examples of non-respect of simple agri-environment commitments

The deficiencies in Malta are largely due to the fact that beneficiaries of agri-environment measure support do not respect the commitments. Maltese administration has undertaken many targeted information actions and has provided one-on-one trainings for certain beneficiaries.

59. Agri-environmental schemes reflect voluntary commitments by farmers to provide environmental benefits and environmental public goods which go beyond the mandatory requirements. The compensatory nature of agri-environment payments (covering costs incurred and income foregone) does not imply immediate economic benefits for the farmers, although these are not excluded in the longer run.

62. As regards the "low" control rate for agri-environment commitments, according to the applicable legal acts, when on-the-spot checks reveal a significant non-compliance in the context of a given aid scheme or support measure or in a region or part of a region, the Member State is obliged to increase the percentage of beneficiaries to be checked on-the-spot.

Depending on the Member State and the individual measure, the actual on-the-spot check rate could be higher than 5 %. The correct application of this is verified during the conformity audits carried out by the Commission.

All eligibility criteria, commitments and other obligations must be checked during the on-the-spot check. If any of these can't be checked at the moment of the on-the-spot check, a second visit shall be organised.

63. According to the applicable legal acts, administrative checks shall cover all elements that are possible and appropriate to control by administrative means (including the respect of agri-environment commitments).

During its conformity audits the Commission also verifies whether the checks could be done in an administrative way in addition to the on-the-spot. Where appropriate, recommendations to the Member States are issued and financial corrections are applied.

Moreover, a new legal framework for CAP 2014-2020 contains provisions requiring the Member States to ensure that all the rural development measures that they intend to implement are verifiable and controllable. An ex-ante assessment of the verifiability and controllability of the measures has to be included in the rural development programme.

64. The Commission considers that while sanctions for non-compliance have to be proportionate, they shall remain a dissuasive tool.

Under the new legal framework, the re-occurrence must be also taken into account when calculating the reduction. It is up to the Member States to define the actual application of the criteria included in the legal texts, as well as the concrete rates and amounts thereof.

65. In case of serious non compliances with the commitments, the beneficiary shall be excluded from support during the year of the finding and the next one.

Box 10 ‑ Additional eligibility conditions imposed by Member States for LFA payments

These weaknesses are covered in the respective action plans aiming at improving the administrative control system.

74. Since 2012, the Commission has been addressing the issue of the high error rate by requesting national action plans from the Member States and monitoring their implementation. Based on the experiences gained and recommendations from the Court of Auditors, these action plans have been improved over time.

The expected results of all the actions will not always be evident in the short-term, especially for measures implemented through multiannual commitments. Nevertheless, the first results of the joint efforts of the Commission and the Member States to reduce error rates through the implementation of the action plans can already be seen in a lower error rate for rural development in 2013.

The Commission will keep on monitoring the implementation of the action plans, both from the audit and operational perspective, through bilateral meetings, monitoring committees and annual review meetings.

75. Commission's powers have been strengthened with the new CAP Regulation (EU) No 1306/2013. Article 41 (2) provides that interim payments to the Member State may be suspended or reduced when it is found that key components of the national control system are not effective or when the necessary remedial measures have not been implemented. Article 36 (7) provides for the interruption of interim payments as a first quick and reactive tool in case of concerns on the legality and regularity of payments.

Furthermore, in order to avoid financial corrections, each paying agency for which reservations have been made in DG AGRI's annual activity report, will have to act promptly.

The Commission considers that while sanctions for non-compliance have to be proportionate, they shall remain a dissuasive tool.

76. Audit findings were more systematically followed-up in the latest updates of action plans (September 2014). The Member States had to take into account the Court's and the Commission’s audit findings to a much larger extent. Indeed, 46% of the actions presented by Member States addressed concrete audit findings, 50% of which came from the Court's reports.

It should also be noted that all material cases reported by the Court are followed-up by the Commission, including through conformity procedure, if appropriate.

77. In the framework of the third update of the action plans in September 2014, the Member States were requested to provide monitoring indicators and latest known results in order to improve the efficiency of the actions.

78. The 4 joint Committee meetings for Rural Development and Agricultural Funds dedicated exclusively to the Error Rates (the Seminars) organised so far, have been a systematic process by which the sharing of good and innovative practices has taken place. In addition, it should be noted that outside the framework of the seminars and the ENDR activities, an exchange of best practices also takes place in the formal meetings of the Rural Development Committee and during the three annual meetings of the directors of the paying agencies of all the Member States

As from 2015, the European Network for Rural Development (ENRD) will be another means by which best practices will be disseminated during the 2014-2020 period. The ENRD will organise specific events, share relevant information and involve the stakeholders in aware raising initiatives.

79. The Commission ensures regular exchanges with the Member States on error-rate related issues and has provided a comprehensive set of guidance documents on rural development measures and other relevant horizontal topics (e.g. simplified cost options, public procurement rules).

In particular, the SWD (2013) 244 on error rates in rural development included a common set of root causes that could eventually be relevant in all Member States, who ultimately should define by which ones they are affected, establishing the adequate mitigating actions.

80. Deficiencies evidenced through audit findings are being followed-up by the Commission and the Member States are systematically requested to address them in the action plans.

81. The fact that Member States have carried out an ex-ante assessment on the verifiability and controllability of the measures (preventive), together with a closer follow-up of the audit findings, will allow to improve the effectiveness of the action plans, as shown in the October 2014 update.

90. The change referred to by the Court was introduced because the cost of application of administrative penalties for small amounts could be disproportionate compared to the benefits, jeopardising therefore the sound financial management.

91. The Commission is fully aware of the importance of the subsequent steps of the regulatory process. In this respect the responsibilities of the Member States have been enhanced by requiring an ex-ante assessment by both Managing Authorities and Paying Agencies of the verifiability and controllability of the measures programmed. Moreover, the Commission disposes now of reinforced preventive tools such as suspensions and interruptions, which should have a deterrent effect on errors.

As confirmed by the Court in this Special Report, gold-plating (additional and unjustified national/regional rules) has only a marginal impact to the error rate.

93. Since 2012, the Commission has been addressing the issue of the high error rate by requesting national action plans from the Member States and monitoring their implementation. Based on the experiences gained and recommendations from the Court of Auditors, these action plans have been improved over time.

The expected results of all the actions will not always be evident in the short-term, especially for measures implemented through multiannual commitments. Nevertheless, the first results of the joint efforts of the Commission and the Member States to reduce error rates through the implementation of the action plans can already be seen in a lower error rate for rural development in 2013.

The Commission will keep on monitoring the implementation of the action plans, both from the audit and operational perspectives, through bilateral meetings, monitoring committees and annual review meetings.

95.

First indent:

The Commission has also found weaknesses regarding these issues in its own audits. Substantial financial corrections have already been made in this respect.

Public procurement and non-respect of commitments are central elements in the action plans for rural development.

Nevertheless, it should be noted that the non-compliance with procurement rules does not necessarily mean that 100% of the expenses involved are ineligible. The project as such may well achieve its goal and provide real added value.

Second indent:

The Commission shares this conclusion.

The Commission will continue providing the Member States with the recommendations and guidelines, as well as disseminating best practices to improve the control system in order to avoid errors.

Furthermore, the Paying Agencies must comply with the accreditation criteria laid down in Annex I of Regulation 907/2014 (programme 2014-2020) before any payments are made. Commission services reviews the accreditation through ex-post audits.

96. As regards limited incentives for beneficiaries to comply with farming commitments, agri-environmental schemes reflect voluntary commitments by farmers to provide environmental benefits and public goods which go beyond the mandatory requirements. The compensatory nature of agri-environment payments (covering costs incurred and income foregone) does not imply immediate economic benefits for the farmers, although these are not excluded in the longer run.

As regards the "low" control rate for commitments, according to the legislation in force, where on-the-spot checks reveal a significant non-compliance, the Member State is obliged to increase the percentage of beneficiaries to be checked on-the-spot. The correct application of this is verified during the Commission conformity audits.

The control rate for farming commitments is established at 100% for the administrative checks and 5% for the on-the-spot checks. The costs of management and controls published in the 2013 AAR amount to EUR 4 billion for the whole CAP. Therefore, the emphasis should be put on the improvement of effectiveness of the controls and not on their increase.

As regards the sanctions, the Commission considers that while sanctions for non-compliance have to be proportionate they shall remain a dissuasive tool.

97. The establishment of the action plans was conceived as a preventive process based on SWD (2013) 244, built on the self-assessment of the Member States of the root causes that had an impact on the error rates. This process has progressively incorporated the reactive perspective, systematically taking into account the audit findings and proposing specific corrective actions. The double perspective (preventive and reactive) is still part of the exercise. The last update of the action plans shows that almost 50% of the actions were triggered by concrete audit findings of the Court or the Commission, whilst the other half were based on self-assessment of the Member States.

Furthermore, the ex-ante assessment on the verifiability and controllability of all measures included in the RDPs 2014-2020 also address the risk of error rate from a preventive perspective.

Recommendation 1

The Commission accepts the recommendation. The specific issues raised by the Court should only be dealt with in the action plans if shortcomings have been identified.

The Commission recognises the importance of guidance related to the three root causes of errors and dissemination of best practices. This will be dealt with through the European Network for Rural Development and the seminars.

Furthermore, the Commission has already presented to Member States specific guidance on public procurement and Agro-Environment-Climate measure, including double financing.

Intentional circumvention of rules is part of the Anti-fraud strategy and the seminars organised thereof in several Member States.

Public procurement

The recommendation is addressed to the Member States.

Nevertheless the Commission would like to underline that for the 2014-2020 period, it has already presented guidance for practitioners on the avoidance of common errors in European Structural and Investment Funds projects. These guidelines were presented to Managing Authorities and Paying Agencies in the Seminar on Error Rate that took place in October 2014.

Intentional circumvention of rules

The Commission agrees with the recommendation which is addressed to the Member States.

Agri-environment payments

The Commission agrees with the recommendation which is addressed to the Member States and would like to underline that during its conformity audits it systematically verifies whether administrative checks could be carried out in addition to the on-the-spot ones. If that is the case, recommendations to the Member States are issued to increase the scope of administrative checks and financial corrections are applied.

Moreover, the legal framework for 2014-2020 CAP contains provisions requiring the Member States to ensure that all the rural development measures to be implemented are verifiable and controllable.

All RDPs must include an ex-ante assessment on the verifiability and controllability of the measures, including Agro-Environment-Climate measures, operations and concrete commitments. If these controls are not satisfactory, the RDP must be modified accordingly (Art 62 R1305/2013). Furthermore, full reduction of support is foreseen in case of serious non-compliance with commitments or breach of eligibility criteria as well as exclusion of the beneficiary from receiving support during the year of the finding and the following one.

As regards the sanctions, the Commission shares the view that while sanctions for non-compliance have to be proportionate they shall remain a dissuasive tool.

Recommendation 2

The Commission accepts this recommendation. The Commission is currently assessing the controllability and verifiability of the new programmes and will raise any shortcoming in the framework of the Monitoring Committees and Annual Review meetings with the Managing Authorities.

Moreover, audit findings will be closely followed in order to detect and correct any source of error attributable to the national implementing rules, requesting immediate modifications if needed.

Lessons drawn from the implementation of the programmes and national rules thereof, will be shared through the ENRD and dedicated seminars on error rates.

Recommendation 3

The Commission partially accepts the recommendation as it cannot prejudge the scope and the result of such analysis or future policy choices by the legislators for the next programming period.

In 2017 the Commission will prepare a strategic report of the Fund, summarizing the annual progress reports submitted by Member States (Article 53 Regulation 1303/2013). Furthermore, the Commission and the Member States will assess the performance of the RDPs during the review process foreseen under Article 21 Regulation 1303/2013. In the light of these and other evidences (e.g. audit findings), the Commission will assess the policy conception and the eventual need to make proposals for the following programming period.

At the end of the programming period, the Commission will make a thorough analysis of the continued need for each support measure before making a proposal for the following programming period as has been done for the present period.

Last bullet:

The Commission agrees that administrative checks should be used when possible, although it notes that in most cases this is not feasible for agro-environment operations.

[1] SWD(2013) 244 of 27.06.2013

[2] Commission Decision C(2013)9527

[3] Report from the Commission to the European Parliament and the Council: Protection of the European Union's financial interests – Fight against fraud 2013 Annual Report COM(2014) 474 final