Special Report No 15/2000 on the Cohesion Fund, together with the Commission's replies
Date: 2000-07-06
Institutions: European Court of Auditors
Subjects: Cohesion Fund, co-financing, environmental policy, implementation of the budget, public expenditure, transport policy

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Official Journal of the European Communities

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I

(Information)

COURT OF AUDITORS

SPECIAL REPORT No 15/2000

on the Cohesion Fund, together with the Commission’s replies

(submitted pursuant to Article 248(4), second subparagraph, of the EC Treaty)

(2000/C 279/01)

CONTENTS

Paragraph

Page

SUMMARY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Description of the Cohesion Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Scope of the audit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

IMPLEMENTATION OF THE BUDGET . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Financial development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Distribution of finance by sector . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

OBSERVATIONS ON THE MANAGEMENT OF THE COHESION FUND . . . . . . . . . . . . . . . . . . .

Programming the projects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Deficiencies in the guidelines relating to applications for assistance . . . . . . . . . . . . . . . . .

Coordination between the Cohesion Fund and the ERDF . . . . . . . . . . . . . . . . . . . . . . . . .

Budgetary and sectoral constraints . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Geographical distribution of the projects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Slowness of the approval procedure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

The definition of project and project financing. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Calculation of estimates of net receipts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Approval of projects already virtually completed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Conditionality. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Project development cycle . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Monitoring committees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1-5

1-4

5

6-13

6-11

12-13

14-58

14-48

16-20

21-24

25-30

31-32

33-37

38-41

42-47

48

49-50

51-55

56

Controls carried out by the Commission . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

57-58

OBSERVATIONS RELATING TO THE FINANCIAL MANAGEMENT OF THE PROJECTS
EXAMINED ON THE SPOT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Eligibility of expenditure. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

The finalisation of projects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Adequate accounting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

59-70

60-62

63-66

67-70

3

5

5

5

5

5

7

9

9

9

10

10

10

11

12

12

13

13

14

15

15

18

18

18

18

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Paragraph

Page

EVALUATION IN THE COHESION FUND DOMAIN. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Macroeconomic models . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Models developed at the Commission’s instigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Reference framework and contract management . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Conformity with the evaluation objectives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Models developed on Member States’ initiative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Cost-benefit analysis (CBA). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Indicators . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Evaluation of closed projects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Commission . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

71-98

71-84

71-82

71-76

77-82

83-84

85-92

93-95

96-98

96

Member States. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

97-98

IMPACT OF THE COHESION FUND . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

99-108

Qualitative impact . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

99-102

Quantitative evaluation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

103-108

Impact of projects on the region concerned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

104

Impact of projects on other regions and on the Member State’s economy . . . . . . . . . . . .

105-106

Impact of projects on cohesion and convergence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

107-108

CONCLUSIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

109-117

ANNEX . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

The Commission’s replies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

19

19

19

19

19

20

20

21

22

22

22

22

22

22

24

24

24

24

26

30

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SUMMARY

For the period 1993 to 1999 a total budget of EUR 15 150 million (1992 prices) was allocated to the Cohe-
sion Fund (CF) in order to co-finance, at the rate of between 80 % and 85 % of the public expenditure involved,
projects in the field of the environment and in the area of transport infrastructure in Spain, Greece, Ireland
and Portugal. The Court examined the Commission’s management of the CF and its implementation in the
Member States, both from the point of view of the legality/regularity of the transactions and of the measures
taken to evaluate the effectiveness of these transactions (see paragraphs 1 to 5).

An even spread of appropriations between the environmental and transport infrastructure fields was achieved,
overall, by the end of the period, mainly in favour of road projects and projects concerning water. The financial
implementation tended to concentrate on the clearance of projects approved at the beginning of the period
(see paragraphs 6 to 13).

The project approach, devised to enable the Commission to retain tight control over the management of the
CF, does not always ensure that the projects proposed are the most productive before the Commission can
authorise them. Even though the administration of the CF and the ERDF respectively is carried out within the
same ministries, which in practice promotes coordination between the two instruments, priority is given to
making the best use of the appropriations allocated (see paragraphs 21 to 24). The selection of projects within
the framework of the CF, while generally taking into account how far advanced the projects are, is influenced
by the chronological order in which the applications for assistance to projects are submitted with no provi-
sion for any real programming in partnership with the national authorities concerned (see paragraphs 29 and
30). Although the examination of project applications by the Commission led, in some cases, to lengthy delays,
some files revealed deficiencies as they did not contain essential information or this information was unreli-
able (see paragraphs 31 to 37). The term ‘project’ was applied in the cohesion countries in different ways.
Likewise, in the case of projects which generate revenue, the basis of assessment of the amount eligible for CF
financing may vary according to the components included and the latter are neither homogeneous nor exhaus-
tive. Occasionally, projects in the process of completion and finalisation were entered as new projects which
qualified for CF assistance (see paragraphs 38 to 48).

In contrast to Structural Fund aid, CF assistance is subject to a conditionality clause. The application of this
principle makes CF co-financing dependent on an examination of the budgetary position of those beneficiary
countries which have excessive government deficits. The results of this review did not call CF financing into
question. In the short term, however, conditionality can make the achievement of investment goals and those
of reducing government debt and government deficits difficult (see paragraphs 49 and 50).

The development of a project financed by the CF occurs in several stages and the Commission intervenes
mainly in the initial and final phases. The intermediate stages and their financial consequences would merit
more rigorous management, in partnership. The Court’s checks revealed a number of anomalies in respect of
eligibility and accounting for expenditure and also the finalisation of projects. The Commission should devote
more resources to on-the-spot checks in order to detect weaknesses in the management systems (see para-
graphs 51 to 70).

For the evaluation of the CF, the Commission called in a consultant who developed an approach which used
various macroeconomic models. In spite of certain limitations, these produce useful results. The Commission
should develop this tool further and apply it more fully so that general conclusions can be drawn. At the level
of the cohesion countries only Spain and Portugal attempted to evaluate the national impact of, firstly, the CF
and, secondly, certain projects (see paragraphs 71 to 84).

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The cost-benefit analyses (CBA) performed before approval of the projects are not always prepared with equal
rigour and the calculation methods used may vary greatly depending on the managers involved. The indica-
tors are sometimes too broadly defined to evaluate the real impact of the projects, to draw comparisons and
to enable reliable measurements to be taken (see paragraphs 85 to 98).

The improvement of the transport infrastructure and of the environment in the beneficiary countries under-
lines the impact, in terms of quality, of the CF as an instrument of greater economic and social cohesion in the
EU. As regards the quantitative aspect, the models used show a positive impact by projects, in terms of jobs,
output, income and investment, on the regions concerned and on other regions and on the economy of the
beneficiary Member State. They also show, albeit less clearly, a positive impact on cohesion and convergence
(see paragraphs 99 to 108).

In view of these encouraging results, the Commission should attempt to concentrate its management on a
medium-term planning perspective which would offer more guidance and continuity, and should endeavour
to perfect the tools for the macroeconomic evaluation of the projects and of the CF as a whole (see para-
graphs 109 to 117).

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INTRODUCTION

Description of the Cohesion Fund

1. The Cohesion Fund (CF), provided for in Article 130d of the
Maastricht Treaty and preceded, on a provisional basis, by the
Cohesion Financial Instrument, was established in May 1994 by
Council Regulation (EC) No 1164/94 (1). The objective of this
Regulation is to strengthen the economic and social cohesion of
the European Union and its beneficiaries are those Member States
in which the gross national product (GNP) per inhabitant is less
than 90 % of the Community average and which have set up a
convergence programme, i.e. Spain, Greece, Ireland and Portugal.
The CF contribution is linked, in accordance with Article 6 of the
Regulation, to the macroeconomic conditions stipulated in
Article 104 of the Treaty and is designed to avoid excessive gov-
ernment deficits.

2. Following the decision by the Edinburgh European Council in
December 1992, the CF received financial support totalling EUR
15 150 million at 1992 prices for the 1993 to 1999 period, which
was to provide financial support to the beneficiary countries for
the implementation of two types of individual investment project:

(a) projects in the field of the environment which contribute, on
the one hand, to achieving the goals of Community environ-
mental policy as defined in the EC Treaty, in particular in
accordance with the Directives now in force concerning the
environment and, on the other hand, to meeting the priori-
ties set out in the action programme on the environment and
sustainable development;

(b) transport infrastructure projects designed to put in place or
extend transport infrastructure as part of the trans-European
transport network (TEN) or to provide access to the TEN.

3. An appropriate balance (2) must be found, for the whole of
the period 1993 to 1999, between the financing of transport
infrastructure projects and the financing of environmental projects.
An indicative allocation of the resources available from the CF for
each beneficiary Member State is set out in the Annex to the
Regulation. The principle of co-financing by the EU and the ben-
eficiary Member State applies, with the CF financing as much as
80 to 85 % of the total public expenditure relating to each of the
projects.

(1) Council Regulation (EC) No 1164/94 of 16 May 1994 (OJ L 130,

(2)

25.5.1994).
In a communication addressed to the Council, the European Parlia-
ment, the Economic and Social Committee and the Committee of the
Regions in 1995 (COM(95) 509 final), the Commission clarified its
position on this balance. The Commission considers that a 50/50 dis-
tribution must be sought, in partnership with the Member States,
between environmental and transport projects for the whole of the
period. This objective must not, however, be seen in too rigid a light,
as a certain flexibility must be maintained in order to make allow-
ance for special situations.

4. The CF is characterised by a project approach based on three
main principles:

(a) the Commission alone is responsible for the approval of
projects and their implementing provisions and also for the
evaluation of the potential and real impact of their implemen-
tation and, once they have been completed, it is also the Com-
mission which is responsible for approving the final imple-
mentation report. Within this framework, the Commission
may draw upon the assistance of experts should it not dispose
of such expertise;

(b) with regard to monitoring and controls, a monitoring com-
mittee has been set up for each beneficiary Member State to
allow discussion, once or twice a year, of technical questions
relating to any amendments to the projects’ financing plans or
various other matters concerning, amongst other things, inter-
mediate payments;

(c) eligibility, as defined under Article 3 of the CF Regulation, was
also the subject of ‘principles governing the eligibility of
expenditure within the framework of projects supported by
the Cohesion Fund’. The beneficiary Member States were noti-
fied of these principles, which take the distinctive features of
this instrument into consideration, in May 1998.

Scope of the audit

5. The overall objective of the Court’s audit was to examine the
management by the Commission of the CF, on the one hand, and
its implementation in the Member States, on the other. Apart
from the legality and regularity of the operations co-financed by
the CF, the investigation also included an evaluation of the effi-
ciency and effectiveness of the projects involved and also of the
complementarity of CF projects with other structural actions such
as the European Regional Development Fund (ERDF). Although
it was not the goal of the inquiry to make a direct evaluation of
the CF’s impact, certain findings are reported which have been
noted by experts with regard to the results obtained and the
impact produced by the CF. The inquiries were carried out in the
Commission’s offices and in the four beneficiary Member States.
They covered a selection of 37 of the 181 projects which had been
closed at the beginning of the year 1998 or were in the process of
completion.

IMPLEMENTATION OF THE BUDGET

Financial development

6. An initial budget of EUR 1 500 million was adopted in 1993.
The budget increases every year in step with the rate of inflation
so that the CF retains its value in real terms. In 1999 it amounted
to EUR 2 600 million. Taking the budgetary resources carried
over from previous financial years into account, a total budget of

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EUR 2 800 million was available to the CF in 1998 for commit-
ment appropriations.

7. The implementing provisions featured in the CF Regulation
emphasise that payments in support of approved projects of a
duration of two years or more are to be made in accordance with
the following rules:

(a) an advance of up to 50 % of the amount of the first annual
instalment committed must be paid following the adoption of
the decision granting Community assistance;

(b) intermediate payments may be paid provided that the project
is progressing satisfactorily towards completion and that at
least two-thirds of the expenditure relating to the previous
payment has been made. None of these payments may exceed
50 % of the amount of each annual instalment committed.
Furthermore, the total amount of the intermediate payments
for all the instalments may not exceed 80 % of the total assis-
tance granted. In the case of large projects and in justified
cases this percentage may be increased to 90 %;

(c) the balance of the Community assistance is paid, provided:

— the project, stage of the project or group of projects, has
been carried out in accordance with the objectives,

— the final application for payment is submitted to the Com-
mission within six months of the physical completion of
the project, stage of project or group of projects,

— the final report is submitted to the Commission,

— the Member State certifies to the Commission that the
information given in the application for payment and in
the report is correct.

The Commission’s payments are made to the authority or body
designated by the Member State and are made, as a general rule,
not later than two months after receipt of an admissible applica-
tion for payment.

8. Financial assistance began on 1 April 1993, the date on which
Instrument came into effect (1) and
the Cohesion Financial

remained in force until 26 May 1994, the date on which the Regu-
lation setting up the CF came into effect. The analysis of financial
implementation within the framework of the CF does not apply
in full until the year 1995 which is actually the first complete year
in which the mechanisms provided for in the CF Regulation were
applied in their entirety.

9. The expenditure charged by the Commission to the CF budget
heading, which is managed by the Commission’s Regional Policy
Directorate-General, is characterised by a systematic concentra-
tion of commitments and payments at the end of the financial
year and by a very low level of financial activity during the first
quarter. In the course of the period 1995 to 1998 an average of
38,9 % of the amounts committed and 47,7 % of the amounts
paid in respect of the financial year were committed or paid in the
two last months of the year, while the first quarter shows an aver-
age of 18,3 % for commitment appropriations and 4,8 % for pay-
ment appropriations.

10. The utilisation of the CF appropriations also shows great
variations between the numerous approvals of projects at the
beginning of the period and a smaller number of new projects
adopted at the end of the period. Thus, in 1998, commitments for
new CF projects fell considerably in favour of allocations to
projects approved in the course of the preceding years.

11. As Table 1 shows, there are still substantial amounts await-
ing settlement and these cause uncertainty about the use of pay-
ment appropriations within the framework of the financial year
concerned. In fact, as future financial movements in respect of
these amounts cannot be estimated with any certainty, the Com-
mission cannot identify sufficiently early in the year the amount
of payment appropriations available for new projects. There is a
risk that these amounts to be settled could momentarily hinder
the payment of advances for new projects. Although, in principle,
Annex II to the CF Regulation, as amended by Regulation (EC)
No 1265/1999, is designed to allow an improvement in the man-
agement of the use of annual appropriations in respect of the
period 2000 to 2006, it will not entirely resolve the above prob-
lem for the budget years in which the period 1994 to 1999 will
be closed.

(1) A Special Report on the Cohesion Financial Instrument, published in
OJ C 59 of 8 March.1995, has already reported numerous shortcom-
ings in the implementation of this instrument.

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Summary of the implementation of the budget for the Cohesion Fund

Table 1

Appropriations available

Outturn

Total at 1 Janu-
ary (year n) of
amounts remain-
ing to be settled
against commit-
ments from
previous years

Financial year
in question

Commitment
appropriations

Payment
appropriations

New commit-
ments

Payments

Of which:

Total

Against com-
mitments for
the financial
year

Against com-
mitments still
to be settled

1993

1994

1995

1996

1997

1998

1999

—

834,1

1 760,7

2 199,8

2 670,9

3 085,4

3 505,2

1 565,0

1 564,6

800,0

730,6

1 853,1

1 853,1

1 743,4

916,0

2 151,7

2 151,7

1 749,7

1 699,1

2 443,7

2 443,6

1 919,0

1 872,0

2 748,7

2 748,7

2 325,7

2 322,9

2 870,7

2 870,7

2 448,5

2 448,5

3 129,1

3 129,1

1 876,7

1 715,9

730,6

545,9

948,6

1 110,2

1 361,7

—

370,1

750,6

761,8

961,2

1 339,4

1 109,1

615,2

1 100,7

Totals 1993 to 1999

16 762,0

16 761,5

12 863,0

11 705,0

Source: Commission.

(Mio EUR)

Ratio of outturn
to appropriations
available

99,98 %
91,32 %
91,32 %
—

100,00 %
52,54 %

100,00 %
97,11 %

100,00 %
97,55 %

100,00 %
99,88 %

100,00 %
100,00 %

100,00 %
91,43 %

100,00 %
91,00 %

Distribution of finance by sector

12. The provisions of Article 10(2) of the Regulation establish-
ing the CF stipulate an appropriate balance of Community finance
between projects relating to the environment and those relating
to transport infrastructure over the entire period between 1993
and 1999. Table 2, which covers the entire period 1993 to 1998,
shows that, overall, an even distribution of appropriations between

sectors has been achieved, even if the distribution of resources
between these two fields was very uneven over each financial year
and varied according to the beneficiary Member State. This unequal
distribution of appropriations between the two fields can be
explained by some very large projects in a particular sector, by dif-
ficulties encountered in respect of public contracts, by the some-
what slow integration of the environmental dimension in the pro-
gramming of sustainable development and by the small scale of
the environment projects.

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Balance between transport projects and environmental projects (1)

Table 2

Beneficiary State

Greece

Spain

Ireland

Portugal

Total

Transport

Environment

(% of commitment appropriations)

1998

59,4

44,7

45,0

39,9

46,5

1993 to 1998

48,6

50,2

51,3

49,7

49,9

1998

40,6

55,3

55,0

60,1

53,5

1993 to 1998

51,4

49,8

48,7

50,3

50,1

(1) Does not inlcude technical assistance.
Source: Commission.

In addition, Table 3 ‘Cohesion Fund assistance by sector’ —
13.
shows that the distribution of investments favours certain types
of intervention, such as road projects and those concerning

drinking-water supply and the treatment of urban waste water, to
the detriment of others such as rail and maritime infrastructures
or the conservation of natural resources.

Cohesion Fund assistance by sector — Commitments for the period 1993 to 99 in total by field

Table 3

Field

Greece

Spain

Ireland

Portugal

Total

Environment

Drinking water
Sewage
Waste
Erosion and reafforestation
Other

%

42,90
47,57
0,50
4,42
4,60

951,6
1 500,1
419,7
529,6
328,1

%

25,52
40,23
11,25
14,20
8,80

539,6
598,3
6,3
55,6
57,9

%

35,92
61,37
1,57
0,00
1,14

%

35,39
33,72
25,88
0,00
5,01

437,1
416,5
319,7
0
61,9

214,4
366,3
9,4
0
6,8

2 142,7
2 881,2
755,1
585,2
454,7

%

31,42
42,25
11,07
8,58
6,67

Total environment

1 257,7

100,00

3 729,1

100,00

596,9

100,00

1 235,2

100,00

6 818,9

100,00

(Mio EUR)

Transport

Roads
Railways
Airports
Ports
Traffic management system (VTS)

587,8
342,8
159,9
67,9
32,4

49,36
28,79
13,43
5,70
2,72

2 531,8
1 134,1
73,2
25,3
0

67,26
30,13
1,94
0,67
0,00

462,7
118,8
3,3
38,5
5,5

73,58
18,89
0,52
6,12
0,87

779,7
266,2
115,0
59,6
0

63,88
21,81
9,42
4,88
0,00

0,0

4 362,0
1 861,9
351,4
191,3
37,9

64,10
27,36
5,16
2,81
0,56

Total transport

Total assistance

Source: Commission.

1 190,8

100,00

3 764,4

100,00

628,8

100,00

1 220,5

100,00

6 804,5

100,00

2 448,5

100,00

7 493,5

100,00

1 225,7

100,00

2 455,7

100,00

13 623,4

100,00

2.10.2000

EN

Official Journal of the European Communities

C 279/9

OBSERVATIONS ON THE MANAGEMENT OF THE COHESION
FUND

Programming the projects

14. Before the final decision to grant assistance from the CF, the
Commission must carry out an in-depth evaluation in order to
guarantee that the projects selected are of high quality and, in par-
ticular, in accordance with the criteria in Article 10(5) of the CF
Regulation which sets out the essential elements on which the
Commission’s decisions are based, namely:

— the medium-term economic and social benefits of the project

concerned,

— the priorities established by the beneficiary Member States,

— the contribution which projects can make to the implementa-
tion of Community policies on the environment and trans-
European networks,

— the compatibility of projects with Community policies and
their consistency with other Community structural measures,

In Portugal, analysis of the costs and benefits associated with
18.
an infrastructure project did not produce any insight into the eco-
nomic and social returns. In the case of another application for
assistance in the field of the environment the potential receipts
were not taken into account as the Commission concluded, with-
out conducting a financial analysis, that it was impossible to
establish a link between the receipts collected by the beneficiary
company, a commercial water company, and its investment,
financed by the CF, which mainly consisted of replacing worn and
sometimes leaking water pipes in the network. Although there are
no provisions on this in the current Regulation (792/93), on the
basis of which the project was financed, in certain cases the Com-
mission could usefully have taken potential revenue into account
in its analysis.

19.
In Greece, in the field of the environment, the consultants
draw up files on applications for assistance and, in particular,
compile socioeconomic studies (cost-benefit analyses, calculation
of the economic and financial internal rate of return (IRR) and
estimation of the project’s impact in terms of job creation), often
without making visits to the final beneficiary concerned. Within
the framework of the checks carried out inconsistencies were dis-
covered, in particular:

— the establishment of an appropriate balance between the field
of the environment and that of transport infrastructure.

— the existence of potential revenue generated by a project
included in the socioeconomic analysis which was not taken
into account when fixing the maximum rate of CF assistance,

15.
In addition, under a framework agreement signed on
15 December 1994 covering the entire duration of the CF Regula-
tion, the Commission may, if necessary, invite the EIB to assist in
the evaluation at the technical and financial level, in order to assist
the Commission in the examination of projects and help to
achieve the best combination of sources of finance.

— different types of cost are considered to be acceptable by the
Commission, in the CBAs, in respect of sectoral projects of
the same type. Some allow for handling charges, others do
not, without any explanation. Indirect staff costs and operat-
ing costs such as electricity may be included in some projects
but not in others. For the most part, these data are often over-
estimated or incorrect,

Deficiencies in the guidelines relating to applications for
assistance

16. Desk audits of the case files in the relevant Commission
offices showed that the essential elements stipulated by the Regu-
lation (on which the individual decisions were based) were not
always on file and that the cost-effectiveness, cost/performance
and impact analyses in respect of the project had not been drawn
up systematically since no precise instructions concerning the
methods to be followed had been included in the form provided
for this purpose. Likewise, alternatives to the project had not
always been studied and taken into consideration.

17. For this reason, in the case of some actions within the frame-
work of the four groups of projects audited in Spain, the Com-
mission was not always aware of the details (as far as the locality
and the amounts involved were concerned).

— for a project in Kalamata (Greece), the socio-economic study
used data from a similar project in Rhodes and at no time was
this queried by the parties involved,

— job-creation estimates submitted in the project applications
had sometimes been overestimated or were unrealistic.

20. Considering the fact that the explanatory and analytical
documents included with a project application are not always
exhaustive and reliable, the Commission is not always in a posi-
tion to ensure that the projects proposed are the most effective
before authorising them. On the other hand, it was not possible,
in the context of the controls carried out, to identify the projects
rejected by the Commission or to draw up a list of the main
motives for the rejection of projects submitted by the beneficiary
Member States.

C 279/10

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Official Journal of the European Communities

2.10.2000

Coordination between the Cohesion Fund and the ERDF

In all the cohesion Member States the national system for the
21.
implementation of the CF has been fully integrated with the exist-
ing structures for the administration of the ERDF. Often, as in the
case of Portugal and Ireland, it is the same national administra-
tors that are responsible both for the sectoral OP of the ERDF and
the CF projects in the same field. In practice, this concentration
of responsibilities on the same administrators and ministries
favours coordination between the CF and the ERDF, even if the
two instruments obey different administrative logics, one based
on programming and the other on the management of projects.

subsequently, in the course of implementation, allowance had to
be made for an even distribution between the sectors. The fact
that projects are submitted individually and at different times
makes it difficult to compare them with each other and is not
conducive to their selection for approval.

27. Within the framework of a multiannual budget, the Com-
mission notifies the responsible national authorities of the indica-
tive annual budget with a balanced distribution between transport
infrastructure and the environment. The actions to be carried out
are determined both on the basis of general guidelines as set out,
in particular, in the Treaty, and on the basis of a national strategy
with its own priorities in the two sectors concerned.

22. Generally, the management and organisational systems work
in such a way that there is no more than a slight risk of non-
compliance with Article 9 of the CF Regulation concerning the
cumulating and overlapping of sources of Community finance,
i.e. no item of expenditure may benefit simultaneously from CF
and Structural Fund assistance.

23.
It is useful for the Commission to know the possible links
and synergies between the projects financed by the CF or the
ERDF. For this reason the CF application forms explicitly provide
for mention of the potential links with other projects financed by
the European Community. It was found, however, that the forms
were not always filled out correctly by the national authorities.

24. Even if the management of the CF and of the ERDF is car-
ried out in the same ministries, priority is nevertheless given to
optimising the appropriations allocated to the two instruments,
rather than to the overall coherence of the structural policies
which they support.

Budgetary and sectoral constraints

25. The aim of the project approach was to enable the Commis-
sion to apply more rigorous project selection criteria, to gain a
better understanding of the impact on economic and social cohe-
sion of the projects approved, to improve, as a consequence, con-
trols and to increase transparency and the quality of CF actions.
The Commission is thus able to play a more active role in the con-
struction of trans-European transport networks and in the protec-
tion of the environment.

26. However, this project approach was difficult to implement.
At its launch projects were sometimes prepared in haste then,

28. The programming for the two sectors concerned was, in
general, carried out at different rates. Generally, the transport
infrastructure sector can draw on long experience of program-
ming and had sufficient well-designed projects, whereas in the
environmental field the experience acquired is of more recent
date. In most cohesion countries, therefore, the environmental
projects were approved late in comparison with those in the field
of transport infrastructure.

29. Generally, at national level, the project selection procedure
takes into account how well-developed, in terms of quantity and
quality, the project plans are, in particular how far advanced the
projects are; it is also influenced by the chronological order in
which projects for which assistance has been requested are sub-
mitted.

30. Even if the Regulation made no provision for any real pro-
gramming for the CF with the goal of achieving a coherent overall
view, in the medium term, of the actions to be implemented, its
implementation on the part of the Commission, in partnership
with the national authorities concerned, would have allowed the
beneficiary Member States to improve the quality of the manage-
ment of their applications for assistance in terms of impact and
strategy.

Geographical distribution of the projects

31. Community financial assistance within the CF framework is
given to the beneficiary Member States and not to the regions.
There is no provision for a regional breakdown of the assistance
granted and, in accordance with the principle of subsidiarity, it is
the responsibility of the national government to select the appli-
cations for financing the projects which are to be implemented in
the regions concerned and, after their approval by the Commis-
sion, to transfer the appropriations to the said regions.

2.10.2000

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Official Journal of the European Communities

C 279/11

32. Although the centralised administrative structures respon-
sible for the CF files facilitate the implementation of the applica-
tion, monitoring and control procedures, there may be differences
between the treatment of the projects managed at central and
those managed at regional level. Thus, in Spain, following a deci-
the rate of Community
sion by the national authorities,
co-financing for projects submitted by central government is set
at 85 %, whereas those managed by the regional administrations
only receive 80 %.

Slowness of the approval procedures

33.
In accordance with Article 10 of the Regulation, the Com-
mission must take a decision concerning the granting of CF assis-
tance within three months of receipt of the application submit-
ted by the Member State. In practice this deadline is not always
adhered to by the Commission, as shown by Table 4, which high-
lights the longest delays found.

Time taken for approval of project applications at the Commission

Table 4

Member State/Cohesion Fund project

Project No

Date application
sent

Date of Commis-
sion approval

Cohesion Fund
amount
(in EUR)

Time in months

Portugal
Port of Setubal integrated information system

Enxoé dam and supply system

D’Alqueva hydroelectric plant

Santa Apolonia waterfront development

94/10/65/001

93/10/61/007

94/10/61/028

95/10/65/002

Ireland

The Burren and North Clare water supply scheme

94/07/61/010

Waterford City and Environs water supply scheme

94/07/61/013

Dublin region waste-water treatment scheme

Cork container terminal development

97/07/61/002

93/07/65/016

Greece

Sewage and biological treatment — Chlos

Sewage and biological treatment — Preveza

Sewage and biological treatment — Lavlron

Capacity augmentation of Mornos Aquaduct

Sewage and biological treatment — Souffli

Spain

Madrid-Barcelona high-speed rail link

Valencia — Tarragona

Balearic Islands waste-water treatment

Water supply to Guadiana basin

Source: Court of Auditors.

93/09/61/020

93/09/61/023

93/09/61/044

94/09/61/011

94/09/61/021

95/11/65/007

93/11/65/025

97/11/61/051

91/11/61/053

11.2.1994

1.1.1993

5.9.1995

7.3.1995

22.11.1994

22.11.1994

13.1.1997

1.1.1993

1.1.1993

2.7.1993

2.7.1993

1.9.1994

27.7.1994

7.4.1995

22.7.1994

25.6.1997

8.7.1997

18.11.1997

8.12.1995

15.12.1997

24.7.1997

15.12.1997

15.12.1997

21.10.1998

29.7.1996

18.3.1996

5.11.1996

12.12.1996

28.7.1997

13.7.1998

1 445 850

21 698 045

64 553 443

29 892 885

9 619 099

12 637 752

5 760 000

5 364 600

4 980 000

7 420 000

4 533 360

26 484 300

2 122 910

12.12.1997

291 765 875

10.1.1995

1.12.1998

1.12.1998

24 387 730

22 674 085

17 500 041

45

31

38

28

37

37

21

36

32

40

41

34

48

32

19

18

17

C 279/12

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Official Journal of the European Communities

2.10.2000

34. Analysis of the system shows that a project application must
be examined by the Ministry responsible for the environment or
by the Ministry responsible for the transport infrastructure, as
appropriate, and then sent to the national office responsible for
the CF, which, in turn, forwards it to the Commission after final
verification, so that an individual decision of approval can be
taken by the Commission. The various stages of the national
application procedure are not subject to any intermediate deci-
sional criteria that could be applied at an intermediate stage and
so ensure that all the conditions for CF financing have been ful-
filled. At no time during the national procedure, therefore, are the
responsible national, sectoral or regional offices in a position to
verify the facts submitted in the project application with regard
to their possible financing by the Community.

35. At the national level, the duration of the examination of
each application is, in general, quite short on account, in particu-
lar, of the following aspects:

(a) progress from one level to another, as described in the preced-
ing paragraph, is all the more rapid because no responsibility
has been delegated by the Commission to the Member State
concerned to enable it to approve, even partially, a project
application;

(b) on-the-spot verifications of the constituent parts of the project
can be carried out rapidly within the national framework;

(c) since the date on which the project application is forwarded
by the Member State concerned to the Commission is taken
as the mark for the beginning of the period of eligibility, it is
in the Member State’s interest to speed up the entry of the
application.

36. At Commission level every project application is subjected
to a thorough examination which takes into account the essential
elements on which the decision is to be based and the evaluation
carried out, in the majority of cases, by the EIB (see paragraphs
14 and 15).

37. The period of time found to have elapsed between the date
on which the Member State concerned forwarded the project
application and the date of its approval by the Commission may
be more than three years and requests for additional information
are often the explanation. The likely effect of these approval times,
the causes of which may also lie with the Member States, is uncer-
tainty on the part of the national administrators both in the
project’s initial approval stage and in respect of any amendments
which may be required.

and sometimes more complex in conception than those in the
field of transport infrastructure. In the field of the environment,
the Commission gave general approval to groups of projects in
Spain and Greece but did not always first identify all the compo-
nents of the subprojects. These components, and sometimes the
more specific provisions linked to the project, such as the time-
table or the estimated costs as well, subsequently had to be clari-
fied by the national authorities responsible.

39.
In Ireland, some projects (Dublin ring Road, N3-N1 section
of the Northern Cross, Belview harbour, etc.) had already received
Community finance, within the Structural Funds framework, for
preliminary studies, work or previously completed parts of
projects, before receiving CF assistance in the field of infrastruc-
ture, even though the project or stage of the project was not
clearly identified. The Irish Belview harbour project was split into
four independent projects, each of them below the EUR 10 million
threshold stipulated in Article 10(3) of the Regulation and each
of them therefore required a separate cost-benefit study whereas
an ex ante evaluation covering the four projects would have been
appropriate.

40.
In Greece and Portugal certain projects first received Com-
munity financing from the Structural Funds, especially Envireg,
then received CF assistance even though it was not possible to
identify the stages of the project concerned clearly on the finan-
cial and technical level. Often the expenditure co-financed by
Envireg and by the CF was based on the same contract and the
same schedule for its physical and financial completion had been
laid down in the specifications, which made no distinction between
the sources of Community finance.

41. There is no working definition of the terms ‘project’ and
‘stages of a project which are technically and financially indepen-
dent’ as stipulated in Article A of Annex II to the CF Regulation
and, in those cases where there is a definition, it was merely drawn
up by the Member States concerned according to their own inter-
pretation, because the Commission had not given precise instruc-
tions or guidelines on this point. This lack of a working defini-
tion of the term project mentioned in Article 1(3) of the CF
Regulation sometimes results in the CF financing whole catego-
ries of expenditure, individual parts of projects or a combination
of heterogeneous projects, and this makes any subsequent evalu-
ation of the impact difficult.

The definition of project and project financing

Calculation of estimates of net receipts

38. The CF may contribute to the financing of projects or stages
of projects which are technically and financially independent or
groups of projects linked to a visible strategy which form a coher-
ent whole. In any event, the total cost of a project or group of
projects may not, in principle, be less than EUR 10 million. This
definition of a project has met with difficulties with regard to its
interpretation and application, especially in the field of the envi-
ronment where the projects are traditionally on a smaller scale

42. The Court’s checks on the expenditure included in the basis
for assessment of the amount eligible for financing under the CF
revealed that no methodological framework existed which would
permit a standardised calculation, in particular for similar projects,
of the estimates of net receipts which must be deducted from the
total expenditure eligible for co-financing by the CF.

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In Ireland, the calculation of net receipts may depend on the
43.
intended use of the project: if it is a project for commercial use,
the amount of revenue will be estimated. If, on the other hand, it
is destined for use by private households or for public use, the
potential receipts relating to it are not taken into consideration.
For example, the CF financing for the construction of a motorway
should be revised if a toll were subsequently introduced. Likewise,
a project concerning the treatment of waste water for the benefit
of local populations rarely includes identifiable receipts, while the
same project for the benefit of commercial companies or factories
will receive less finance from the CF after allowance has been
made for the possibility of identifying the receipts generated.

In Portugal a revenue-generating project in the field of trans-
44.
port was based on a somewhat limited cost-benefit analysis pre-
sented by the promoter. Furthermore, at the time when the project
was approved, the Commission concluded, without conducting a
detailed financial analysis, that the traffic generated by the exten-
sions of the motorway in question and the revenue arising from
it would be only marginal and difficult to quantify.

information makes the calculation of the working capital (1) and
of the related working capital requirement (2) difficult and makes
it impossible to verify the financial viability of the project.

Approval of projects already virtually completed

48. The inspections demonstrated that, in certain cases, at the
time of the Commission’s approval the project was already virtu-
ally finished. The submission and approval of projects in the
course of completion, or completed, is not consistent with the
principle of partnership. This principle involves consultation
between the Commission and the authorities responsible at
national, regional and local level, which should cover the entire
course of the project, or stage of project, including its planning,
implementation, any amendments, the completion of the work
and its becoming operational. In addition, the Court has already
drawn attention to (3) the various repercussions of the two
approaches which consist in submitting either new projects or
projects in the course of completion; in the first case the time
required to complete the projects is greater whereas the second
approach allows Community financing to be put to use more rap-
idly; the two approaches also have different effects in respect of
the impact of Community financing, which is less direct in the
case of projects already being implemented or completed.

45.
In the case of the ‘Pathe motorway — sections A and B —
Kastro-Martino’ project in Greece, net receipts were estimated at
34 % of the cost of the investment, which includes the interest on
an EIB loan and is based on a flat amount of GRD 12 million
(approximately EUR 36 400) per kilometre for running costs,
without any justifying documentation.

Conditionality

46. The choice of which elements of the financial analysis are
used to calculate the net revenue therefore varies according to the
persons in charge. Some will apply a longer estimated deprecia-
tion period than others for a project of the same kind, while oth-
ers will include the estimated banking charges as additional cash
costs and will not take Community financing into account, which
would have the effect of reducing the expenses of the project. The
technical presentation of similar projects also varies according to
the managers. In this respect the Commission has not yet drawn
up guidelines highlighting the best practice in this area with a
view to encouraging a certain degree of harmonisation and stan-
dardisation of the technical and financial analysis.

47. Even if a project is in the public sector, it must show a bal-
ance between financial inputs and outputs for each year, other-
wise it risks finding itself short of cash. Few of the applications
for assistance and implementation reports submit a financial plan
with estimates of receipts and expenditure per year. This lack of

49.
In contrast to Structural Fund aid, financial assistance from
the CF is subject to a conditionality clause. Article 6 of the CF
Regulation 1164/94 of 16 May 1994 makes the co-financing of
new projects or of new stages of projects in countries with exces-
sive deficits dependent on the achievement of targets set by Coun-
cil recommendations in compliance with Article 104C of the

(1) Working capital (FR) is used to assess the risk of failure and to tell
whether an enterprise can meet its obligations. It can be calculated in
two ways:
FR = short-term current assets (less than one year) - short-term cur-
rent liabilities (less than one year);
or
FR = fixed capital - long-term assets (more than one year).
It serves to show the extent to which the resources that fund the
assets remain available to the enterprise over a term at least equal to
that of the asset funded.

(2) Working capital requirement (BFR) is usually calculated as follows:

BFR = current assets - current liabilities, where:
current assets include inventories, debtors and other short-term assets
current liabilities include creditors and other short-term liabilities.
If the cash position is positive and the position is favourable, FR cov-
ers BFR. If the cash position is negative, BFR exceeds FR.

(3) The Annual Report concerning financial year 1998, paragraphs 3.50

and 3.51.

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Official Journal of the European Communities

2.10.2000

Treaty. Application of this principle of conditionality resulted in
an examination by the Commission of the budgetary position of
CF beneficiary Member States which had excessive deficits. Each
of these examinations (in spring in respect of the preceding year,
in autumn for the current year) showed that the annual target rec-
ommended by the Council in respect of the budget deficit had
been achieved. As a result, co-financing from the Cohesion Fund
was continued.

In the short term, however, conditionality can make the
50.
achievement by the less prosperous Member States of the various
macroeconomic objectives difficult. On the one hand, these coun-
tries are committed to substantial government investment, as
shown in Table 5, in order to reduce the lag in their development
and to increase their capacity for growth and prosperity. On the
other hand, they must, at the same time, reduce their budget defi-
cit and retain control over their government debt.

Project development cycle

51. The development of a project can be seen in terms of stages
of a cycle and this allows tighter control over its management. In
CF projects, the Commission is mainly involved at the beginning
and end of the cycle. At the beginning, during the phase leading
up to the approval decision, the Commission must evaluate a cer-
tain number of factors that are internal (planning, cost estimates,
IRR, feasibility, performance forecasts, etc.) or external (cost-
benefit analysis, desired global strategy, synergies with other
projects, national or regional priorities,
location, etc., to the
project). At the end of the cycle the Commission must ensure that
the project has been closed, approve the final implementation
report and release the final balance.

Public investment expenditure
(Gross fixed capital formation by general government as a percentage of GDP) (1)

Table 5

Outturn

Projections in the new stability and convergence programmes

Member State

1997

1998

1999

2000

2001

2002

B
DK (b)
D (c)
EL
E
F
IRL
I
L
NL
A
P
FIN
S
UK (d)

EU-11 (1)
EU-15 (1)

1,4
2
1,8
3,4
2,9
2,8
2,4
2,3
4,5
2,5
2
4,3
3
2,5
1,1

2,3
2,1

1,4
1,8
1,7
3,7
3,3
2,7
2,4
2,4
4,4
2,5
2
4,2
2,8
1,2
1

2,3
2,1

1,7

4,3
3,3
(e)
3,8
(f)

2,5
2,1
4,3
2,3

1,3

2,4
2,2

1,6

4,8
3,4
(e)
3,8
(f)

2
4,3
2,3

1,5

2,4
2,3

1,6

5,2
3,6
(e)
3,7
(f)

2
4,3
2,4

1,7

2,4
2,3

(a)
1,5

3,8
(e)

(f)

2,7
2
4,3
2,4

1,7

2,4
2,3

(1) The information supplied by the Member States in the stability and convergence programmes was not always complete and comparable
and certain assumptions therefore had to be made in order to estimate the aggregates: 1. the Commission’s spring 1999 estimates were
used where the figures had been omitted in the programme; 2. where the adjustment path was not specified, it was assumed that the adjust-
ment was linear towards the figure given at the end of the projection period; 3. the figure for 2001 was taken in the absence of a projec-
tion for 2002. ‘Fixed capital formation of general government’ means investment in buildings, construction, mechanical engineering,
machinery and plant by central and local government and social security funds.

(a) 1,5 % of projected GDP for 2005.
(b) National definition.
(c) Germany predicts that its public investment expenditure by general government will remain stable with approximately 1,5 % of GDP in

2002.

(d) The figures for the United Kingdom are by financial year; the gross value was calculated by adding 0,6 % to the net figures specified in the

programme.

(e) France predicts that its public investment expenditure by general government will increase by 2 % in real terms on average per year from

2000 to 2002. This would result in figures of 2,8 % in 1999 to 2,9 % in 2002.

(f) Italy expects its public investment expenditure by general government to grow to 10 % per year in nominal terms between 1999 and 2001.

This would result in figures of 2,6 % in 1999 to approximately 3 % in 2002.

Source: Eurostat.

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C 279/15

52. Between these two stages a number of events may substan-
tially alter a project’s development (unforeseen events, budget
overruns, delays, incomplete initial design, unrealistic planning,
etc.). These lead to amendments to the initial decision without the
possibility of the Commission’s intervening on a precautionary
basis to correct any change of direction. The Commission finds
itself obliged to accept developments that have taken place at the
investment level, whereas it could have detected them at an earlier
stage if it had had a better understanding of the factors influenc-
ing project costs and had subjected them to adequate controls. In
addition, apart from their consequences for the extent of the out-
come and impact of projects, the budget and timetable overruns
ratified by the Commission absorb appropriations to the detri-
ment of approvals of new projects. Furthermore, once the Com-
mission has decided to approve a project, subsequent amend-
ments to its decision are often accepted without the initial rigour
and without the necessary in-depth analysis of the causes which
triggered them. Examination of the documents justifying the
amendments that had been requested and adopted did not always
enable the factors that brought them about to be identified, or the
set of solutions found.

53. Numerous amendments were found in several cases, and the
projects concerned nevertheless achieved the same objectives as
those initially approved. For a project at Argos in Greece, for
example, the initial Commission decision made provision for a
total cost of EUR 751 000 for the laying of 20 km of water mains,
i.e. an average cost per metre of EUR 38. A subsequent amend-
ment to the initial decision introduced an additional investment
of EUR 130 000 for the construction of a reservoir and reduced
the mains to 10 km, i.e. an average cost per metre of EUR 62; a
third amendment to the decision increased the length of the mains
to 72 km at a cost of EUR 993 000, which took the average cost
to EUR 14 and, finally, the cost of the investment made for the
mains came to EUR 1 377 000, which brought the average cost to
EUR 19 per metre.

54. At the monitoring level, the implementation reports on CF
projects, which are attached to payment applications, usually pro-
vide very little information on the state of progress, the synergies
or the aspect of coordination between these projects and other
structural operations, even when this information is available in
the Member States concerned.

In respect of the approval of the final reports, which allows
55.
the final balance to be paid and the projects closed, there are also
delays in the Commission departments but they are significantly
shorter than those occurring in the initial phase of projects. The
time between the submission of the final report and the related
payment can be as much as approximately one year. The closure

procedure sometimes produces several versions of the final imple-
mentation reports, as well as several successive applications for
final payment, but the reasons for this are not immediately appar-
ent from the case files.

Monitoring committees

56. Provision for the monitoring committees is made in Article
F of Annex II to the Regulation establishing the CF, and they were
set up as of 1994. Representatives of the Commission, the EIB, the
responsible national authorities and, sometimes, of regional or
local authorities, attend the meetings. They use physical and
financial indicators to examine the state of progress of the cur-
rent projects, and check whether the financing plans are adequate
to ensure the projects’ continued physical progress. Where there
are significant divergences in relation to the initial estimates they
propose amendments to the Commission. In addition, the deci-
sions to grant aid are taken outside the monitoring committees
and the latter are not all informed of the situation of the project
applications under examination at the Commission.

Controls carried out by the Commission

57. The main objective of the missions carried out by the Regional
Policy Directorate-General, which is responsible for management
of the CF under Article 13 of, and Article F, Annex II, to Regula-
tion (EC) No 1164/94, was to establish contact with the national
and regional authorities responsible for the submission and imple-
mentation of projects and to discuss unresolved questions con-
cerning certain projects. These missions, however, do not deal
with these matters in sufficient depth to evaluate the implementa-
tion of the various projects, their physical execution or whether
the observations made previously are actually taken into account.
The checks carried out in 1996 on the management and internal
control systems currently applied in the Member States, which
revealed certain weaknesses, were followed up with only a limited
number of checks on relatively large projects and, in these cases,
on the financial control systems concerned, the declarations of
revenue and physical implementation.

58. The audits carried out by the Financial Control Directorate-
General, on the other hand, reveal a certain number of irregulari-
ties, as shown in Tables 6 and 7, some of which were subsequently
rectified. The classification of the types of irregularities detected
(see Table 6) was also confirmed by the Court’s audit visits. These
audit findings show that there are still weaknesses in the internal
control systems. The responsibility for guaranteeing that Com-
munity funds for CF projects are used for the purposes intended
falls, in the main, to the Commission. The Commission, however,
does not devote sufficient resources to audits of CF projects for it
to be in a position to meet this obligation in full.

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Types of irregularity detected by Commission checks in the Cohesion Fund context

Table 6

Type of error

Member State

Project reference

Break in the audit trail

Ineligible expenditure

Ineligible claims

No CBA

No publicity

Cost overrun

No control reports

Bad EUR rate of conversion applied

Ineligible projects

Defficient accounting system

Ineligible VAT

Lack of financing plan

Project completion dates overrun
Delay in construction
Commission decision
Grouping of projects inadequate
Application for CF not available
Physical description inaccurate
No studies
No respect of financing plan

Weak evaluation

Environmental requirements
Source: Commission.

Ireland

Ireland
Greece
Ireland
Ireland
Ireland
Ireland
Ireland
Ireland
Ireland
Greece
Greece
Greece
Spain
Spain
Spain
Ireland
Ireland
Spain
Spain
Spain
Spain
Spain
Ireland
Ireland
Spain
Spain
Spain
Spain
Spain
Spain
Spain
Ireland

Ireland
Spain
Spain
Portugal
Portugal
Portugal
Ireland
Ireland
Greece
Greece
Greece
Greece
Spain
Portugal
Portugal
Greece
Greece
Ireland
Ireland
Ireland
Ireland
Greece
Greece
Greece
Greece
Greece
Greece
Spain
Spain
Greece

93/07/65/008
93/07/61/018
96/07/61/003
93/09/65/003
93/07/65/008
96/07/61/015
93/07/61/012-015
93/07/65/013
93/07/65/015
93/07/65/019-023-024-025
93/07/61/021
94/09/61/028
93/09/61/053-5
93/09/65/009
95/11/61/024-3
96/11/61/022
95/11/61/004
93/07/65/008
93/07/61/021
95/11/61/033
95/11/61/036
93/10/65/011
95/11/65/009
95/11/65/010
93/07/65/002
93/07/65/002
95/11/65/009
95/11/65/010
95/11/65/009
95/11/65/010
95/11/61/004-1
95/11/61/033
95/11/61/036
96/07/61/015
93/07/61/018
96/07/61/003
93/11/65/018
95/11/61/004-1
93/10/61/012
93-4-5/10/61/022
93-6/10/65/001
94/07/65/007
93/07/65/013
93/09/61/063
93/09/61/008
94/09/61/062-1
94/09/61/028
93/11/65/018
93/10/61/012
93-4-5/10/61/022
93/09/61/053-5
94/09/65/004
96/07/61/015
93/07/65/013
93/07/65/013
93/07/61/014
93/09/65/003
93/09/61/053-5
94/09/15/001
93/09/65/004
94/09/65/004
93/09/61/001
95/11/61/033
93/11/65/018
93/09/65/009

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Official Journal of the European Communities

C 279/17

Incomplete list of irregularities detected by the Commission during audit visits in connection with the Cohesion Fund

Table 7

Member State

Year

Project No

Date of report

Date of audit visit

Type of error

93/07/65/008
96/07/61/015

1998

Ireland

1997

1996

1999

1998

1996

1995

1994

Greece

93/07/61/018-96/07/61/003
93/07/61012-015
94/07/65/007
93/07/65/013

93/07/65/015
93/07/65/002
93/07/65/019-023-024-025
93/07/65/002
93/07/61/021

93/07/61/014

95/09/61/062
94/09/61/042
94/09/61/062-1
96/09/61/085
94/09/61/028

93/09/65/003
93/09/65/001
93/09/61/032
94/09/61/032
93/09/61/058
93/09/61/053-5
94/09/15/001
94/09/65/005
93/09/65/009

93-94/09/65/006
94/09/65/004

95/09/65/034
93/09/61/063
93/09/61/008
93/09/65/001
93/09/65/009
93/09/61/001
93/09/61/002-007
93/09/61/008
93/09/61/012-014
93/09/65/004

95/11/65/009

95/11/65/010

1999

95/11/61/024-3
96/11/61/022
95/11/61/0004-1

95/11/61/021E
95/11/61/033
95/11/61/036
93/11/65/018

93/11/65/002
93/11/61/97

93/10/61/012
93-4-5/10/61/022
93-6/10/65/001
93/10/65/011
93/10/61/012
93/10/61/001

Spain

1998

1996

Portugal

1999

Source: Commission.

5.1.1999
5.1.1999

5.1.1999
10.2.1997
10.2.1997
16.1.1997

16.1.1997
16.1.1997
16.1.1997
16.3.1995
16.3.1995

16.3.1995

31.5.1999
31.5.1999
31.5.1999
31.5.1999
31.5.1999

31.5.1999
31.5.1999
1.8.1997
1.8.1997
1.8.1997
1.8.1997
16.11.1996
16.11.1996
16.11.1996

18-20.3.1998-DGXX
18-20.3.1998-DGXX

18-20.3.1998-DGXX
23-27.9.1996-DGXX
23-27.9.1996-DGXX
7-10.5.1996-DGXX

7-10.5.1996-DGXX
7-10.5.1996-DGXX
7-10.5.1996-DGXX
8-11.11.1994-DGXX
8-11.11.1994-DGXX

8-11.11.1994-DGXX

17-18.2.1999-DGXX
17-18.2.1999-DGXX
17-18.2.1999-DGXX
17-18.2.1999-DGXX
15-18.3.1999-DGXX

15-18.3.1999-DGXX
15-18.3.1999-DGXX
25-29.11.1996-DGXX
25-29.11.1996-DGXX
25-29.11.1996-DGXX
25-29.11.1996-DGXX
23-27.10.1995-DGXX
23-27.10.1995-DGXX
23-27.10.1995-DGXX

16.11.1996
16.11.1996

23-27.10.1995-DGXX
23-27.10.1995-DGXX

16.11.1996
26.7.1995
7.9.1995
10.5.1994
10.5.1994
29.6.1994
29.6.1994
29.6.1994
29.6.1994
18.1.1995

23-27.10.1995-DGXX
12-13.7.1995-DGXX
17.8.1995-DGXVI
18-21.4.1994-DGXVI
18-21.4.1994-DGXVI
13-16.6.1994-DGXVI
13-16.6.1994-DGXVI
13-16.6.1994-DGXVI
13-16.6.1994-DGXVI
19-20.12.1994-DGXVI

1.5.1998

30.6-4.7.1997-DGXX

1.5.1998

30.6-4.7.1997-DGXX

1.5.1998
1.5.1998
7.2.1997

1.8.1997
1.8.1997
1.8.1997
8.9.1995

8.9.1995
8.9.1995

1.12.1998
1.12.1998
1.12.1998
23.2.1996
23.2.1996
23.2.1996

30.6-4.7.1997-DGXX
30.6-4.7.1997-DGXX
4-6.11.1996-DGXX

10-14.2.1997-DGXX
10-14.2.1997-DGXX
10-14.2.1997-DGXX
13-17.2.1995-DGXX

13-17.2.1995-DGXX
13-17.2.1995-DGXX

13-17.2.1995-DGXX
13-17.2.1995-DGXX
13-17.2.1995-DGXX
29.5-2.6.1995-DGXX
29.5-2.6.1995-DGXX
29.5-2.6.1995-DGXX

Audit trail, ineligible claims, Miscellaneous expenditure
Project completion dates, ineligible expenditure, cost over-
run
Audit trail, cost overrun
Overdeclaration of expenditure
ECU rate not consistently applied
Delay in construction, Commission Decision, Ineligible
expenditure, ECU conversion
Ineligible expenditure
No CBA
Ineligible expenditure
No CBA performed
Claimed expenditure dating from 1960s, ineligible
expenditure
Grouping of projects

No errors
No errors
Deficient accounting system
No errors
Deficient accounting system, difficulty in reconciling the
declared expenditure
Audit trail, application form for CF not available
No errors
None
None
None
Ineligible expenditure, physical description, financing plan
No studies had taken place at the time of the audit
None
Exceeded expenditure covered by Commission Decision,
Miscellaneous expenditure
Internal salary costs ineligible
Non-respect of financing plan, budgeted value of contract
lower than cost
None
Ineligible projects not in Commission Decision
Ineligible project
None
Typing error, Environmental requirements
Rebate of 67 % on the total project cost
None
None
None
No project progress after 18 months

Ineligible claims, no reference to CF in brochure, CBA
included only half of project
Ineligible claims, no reference to CF in brochure, CBA
included only half of project
Unclear notion of ‘incurred expenditure’
Unclear notion of ‘incurred expenditure’
No spot checks performed by Ministerio de Economia y
Hacienda (M. E.y. H.). Unclear notion of ‘incurred
expenditure’
None
Ineligible costs, publicity insufficient, revenue undetermined
Ineligible costs, publicity insufficient
Insufficient back-up of accounting entries, cost overrun
undetermined, over-optimistic costs evaluation, weak evalua-
tion
None
None

VAT, no control reports
VAT, no control reports
No written reports were available
Non-eligible labour costs
None
None

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OBSERVATIONS RELATING TO THE FINANCIAL
MANAGEMENT OF THE PROJECTS EXAMINED ON THE SPOT

Finalisation of projects

59. The Commission, albeit belatedly, in its concern for trans-
parency and clarification of the methods used to evaluate state-
ments of expenditure, informed the beneficiary Member States on
19 May 1998 of the principles governing the eligibility of expen-
diture within the framework of the projects supported by the CF.
These are based on the rules set out in the forms on eligibility for
Structural Funds assistance, but make allowance for the special
features of the CF. Even if they have not led to new rules, these
principles have made the eligibility criteria on which expenditure
declarations are based more transparent. The late notification of
these eligibility criteria may explain some of the anomalies found
during the audit visits.

Eligibility of expenditure

60.
In Greece, in the case of a project in Argos the expenditure
incurred by the beneficiary enterprise for its own account was not
to an amount of
recoverable VAT,
documented. The
GRD 145 million (around EUR 433 000), was considered to be
eligible expenditure in a project at Thessaloniki. The qualifying
expenditure included an amount of GRD 87 million (around
EUR 260 000) for a number of expenditure items not provided
for in the decision approving a project at Nafplio. In the case of
the project to improve access to Athens airport, expenditure total-
ling EUR 765 000 incurred after the deadline laid down in the ini-
tial project decision should be considered ineligible.

In Greece, the final technical report on a project in Argos
63.
stated that 72 km of old water mains had been replaced, whereas
the on-the-spot check revealed a smaller quantity, i.e. 60 km. For
another project involving a water pumping station the final report
mentioned its completion, although on-the-spot checks revealed
that it was neither completed nor operational.

64.
In Ireland, the results of the technical controls carried out by
the units responsible were not checked against the statement of
financial implementation. There was no systematic reconciliation
to verify that the pattern of eligible expenditure was matched by
corresponding progress in physical implementation.

65.
In Spain, in the case of a group of projects concerning reaf-
forestation on the Balearic Islands, the eligible costs approved by
the Commission in its decision of 28 July 1997 (1) amounted to
EUR 3,68 million, which is significantly below the EUR 10 million
threshold mentioned in Article 10(3) of the CF regulation. In the
case of another project concerning sewage treatment plants on
the Balearic Islands, the on-the-spot audit revealed that the work
was already well advanced at the time of the application for assis-
tance dated 11 April 1995 and that two of the five plants entered
had already been completed on the date of the Commission’s
approval of financing for them.

In Portugal, a project completed and closed in the transport

66.
infrastructure sector still revealed constructional faults.

61.
In Ireland, within the framework of a water-supply project in
Limerick, expenditure totalling IEP 395 324, 51 (approximately
EUR 494 155) incurred respectively before and after the period of
eligibility from 1981 to 1992, was declared to the Commission as
eligible expenditure.

Adequate accounting

62.
In Spain, recoverable VAT expenditure in connection with a
water-supply project in Palma de Mallorca, amounting to approxi-
mately ESP 101 million (approximately EUR 0,6 million), was
included in the total of expenditure eligible for CF financing. For
another project in the Balearic Islands supplementary work total-
ling ESP 13,2 million (approximately EUR 77 500) in connection
with the inclusion of sand-removing equipment was added to the
expenditure eligible for CF financing, although no provision had
been made for it in the Commission’s decision nor in any subse-
quent amendment submitted to the Commission by the Member
State. The amount involved in this additional work had no reper-
cussions on Community financing.

67.
In Ireland, expenditure declared eligible within the frame-
work of the CF is often expenditure for which provision has been
made or which has been committed but not yet paid. This situa-
tion is then regularised in subsequent declarations, which makes
later reconciliations of the accounts difficult. There is not always
a perfect match, therefore, between the expenditure really incurred
and paid by the final beneficiary and the expenditure declared to
the Commission for co-financing. These discrepancies when
encountered during audits make identification of the audit trail
difficult.

(1) C(97) 2582 final, project FC 961161042.

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In Greece, during checks on a project in the transport sec-
68.
tor, not all the eligible expenditure declared could be verified on
the basis of the relevant supporting accounting documents.

69.
In Portugal, in the case of a project in the environment sec-
tor co-financed by Envireg and the CF, it was not possible, during
the on-the-spot check, to clearly distinguish between expenditure
covered by the one or the other intervention; the was also the case
in respect of the physical work.

70.
In Spain, for a VTS (vessel traffic system) project in Tenerife,
no documentary evidence could be found, on the spot, to sup-
port the issue, by the financial beneficiary, of a payment order for
an amount of ESP 17 698 662 (approximately EUR 100 000) there
in spite of the fact that it was entered in the accounts by the Gen-
eral Directorate for Economic Planning at the Ministry of Public
Works.

EVALUATION IN THE COHESION FUND DOMAIN

Macroeconomic models

Models developed at the Commission’s instigation

Reference framework and contract management

71. The Regulation establishing the CF provides that the Com-
mission is to report regularly on the economic and social impact
of the CF in beneficiary Member States. This provision implies
that the project-based approach is to be supplemented by a more
general analysis of the impact of CF-financed projects on certain
variables, such as growth, employment and trade, in the econo-
mies concerned. This analysis should take into account the short-
term incidence of the measures in question on demand, which is
felt mainly during the execution phase, and the medium and
long-term effects on supply, which first become apparent during
the operational phase.

73. The specifications for the first contract were based on a fea-
sibility study carried out in 1994 by the same consultant on the
same subject and took over the same proposed structure and the
same evaluation criteria. The Commission did not consider that
this unusual situation posed any problems. Most of the modelling
approaches proposed by the various applicants in connection
with the call for tenders were already familiar and were all con-
sidered by the Commission to be suitable for evaluating project
impact, as the Commission had not adopted any special criteria
for appraising these approaches. In the end the Commission took
the consultant who submitted one of the highest bids and whose
approach excelled by virtue of its originality, but had still not been
tested in practice as far as its applicability was concerned. A sub-
sequent modification of the first contract is signed, but not dated,
and extends by three months the time allowed for performance,
so extending the total duration to 15 months. This extension
devalues de facto the initial criteria for the awarding of the con-
tract, given that the tender selection procedure had included con-
sideration of tenderers’ ability to complete the study within the
time allowed and, in addition, there was no provision for penal-
ties in case of overruns. This should have led to an amendment
of the contract.

74. The second contract signed by the Commission was in
response to a proposal from the same consultant, suggesting that
the use of the models created under the first contract should be
extended to all the CF measures, so that the consultant would be
able to estimate the short, medium and long-term impact of
projects on key economic variables such as income, regional
growth, private investment and employment.

75. This extension to the contract ought not to have been neces-
sary, since the first contract had already provided that the Com-
mission was to be supplied with an adequate, operational tool
(models and database), so that it could ascertain the impact of the
CF for itself. In fact, the contracts specify on each occasion that
all the results obtained by the contractor, as well as the software
needed for the application and the database created for that pur-
pose, are the property of the Commission.

76. The expenditure associated with the first contract amounted
to EUR 674 403,98. Examination of the service providers’ travel
expenses showed that in many cases the Commission refunded
the cost of travel by air in business class, whereas Annex IV to the
contract stipulated in Article 1(a) that travel expenses would be
refunded up to the price of economy-class tickets. In the case of
the second contract, which was signed on 1 April 1997 and set a
time limit of 31 March 2000 for performance, there were no pay-
ments until 31 January 2000.

72.
In order to be able to satisfy these requirements of the Regu-
lation, the Commission signed two contracts with a consultant.
The first, dated 3 July 1995, for an amount of EUR 675 965, was
for the development of methods of evaluating the macroeconomic
impact of CF projects. The second, dated 1 April 1997, for an
amount of EUR 283 500, essentially concerned the collection of
new data to allow new project evaluations.

Conformity with the evaluation objectives

77.
In order to establish a coherent framework for analysing the
impact of CF expenditure in the four countries concerned the
consultant referred to in paragraph 72 adopted an innovative

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2.10.2000

approach, using three complementary methods vector autore-
gression models (VAR), regional computable general equilibrium
models (CGE) and models of explicit distribution dynamics
(MEDD). The models are described in more detail in the Annex.

78. The analysis required by the models was, amongst other
things, to provide answers to the following three questions. How
do the measures assisted under the Fund, together or individually,
influence the economies of the four cohesion countries? What
effect does this have on adjacent economies and on the Commu-
nity in general? What is the impact of the measures on the eco-
nomic and social cohesion of the Union?

79. The MDRF models were not, in fact, used to evaluate the
impact of CF projects directly. They are concerned with the
dynamics of growth and convergence of all the regions of the four
cohesion countries, as well as of other countries like France, the
United Kingdom and Italy, and are used to examine questions
such as the tendency of regional incomes to converge or diverge
over time and the dynamic in the regional distribution of income.
The analyses apply to the period 1980 to 1990. They show that
the increasing inequality can be explained by the fact that the
growth achieved by groups of neighbouring regions is different
from that of other adjacent groups and that the performance of
one region can be explained by neighbouring regions. Further-
more, the results concerning spillover from public and private
investment could be taken into account for an appraisal of the CF
projects carried out in the period 1993 to 1999.

82. Even though these models (VAR, CGE and MEDD) provide
useful and interesting results about the potential impact of CF
intervention and thus help towards a better understanding of the
related effects, there is no real coordination between the models
used. Furthermore, none of the models specifies, for the results
obtained, the level of imprecision that is due to the poor quality
or availability of the data collected or to the limits of the extrapo-
lation methods used. The Commission did not carry out any rec-
onciliation of the results obtained from these models and did not
carry out the necessary harmonisation of them in order to estab-
lish overall conclusions in terms of the CF’s impact on the econo-
mies of the four cohesion countries. The results produced by each
model separately are generally positive. It is recommended that
the Commission refine this resource for evaluating projects mac-
roeconomically and that it apply it more fully.

Models developed on Member States’ initiative

83. Only Spain has used CF financial support to carry out a
study of the overall macroeconomic impact of the CF on the
national economy. The approach that was adopted for this study,
which was presented in November 1995, was to use three models
(Input/output, Moisees and Hermin) (see the Annex).

84. Portugal carried out specific impact assessments for some
major projects, such as the new bridge over the Tagus, using what
is essentially an input/output model. The other cohesion coun-
tries have not produced any special studies at national or regional
level on the macroeconomic impact of projects, or of the CF itself.

80. The aim of the VAR and CGE models was to evaluate the
impacts of individual projects from a number of viewpoints,
including the effects on the region directly concerned, the spill-
over onto other regions and the whole economy and the impact
on cohesion and convergence. These models can provide addi-
tional answers and the results which they give, when they are
comparable, are usually consistent.

Cost-benefit analysis (CBA)

81. A more complete application of these models might have
been useful. For example, VAR2, which is more complete than
VAR1 from the modelling viewpoint, was applied only to the
Spanish regions, because they were able to provide more, detailed
information in terms of historical series. Likewise, the CGE model,
which takes a large regional breakdown into account, could be
used to analyse the implications of the CF for regional inequality
in the cohesion countries. These models have their limitations as
regards evaluating the impact of environmental projects and are
more suitable for transport infrastructure projects. Furthermore,
the selection of projects analysed by means of these models gave
preference to transport infrastructure projects.

85. When the projects submitted by the Member States con-
cerned are being examined, cost-benefit analysis is one of the
main criteria for the decision on whether to grant Community
assistance. The Commission can, if necessary, call on the Euro-
pean Investment Bank to assist in the project evaluation (see para-
graph 15). In the field of transport infrastructure the CBAs are
usually based on long experience and a well-established method-
ology which allows, amongst other things, quantification of all
the necessary parameters.

86.
In the environment field, on the other hand, the difficulty of
quantifying the expected benefits has often led Member States to
use methods of a more qualitative and less quantitative nature.

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C 279/21

If the Commission finds the CBA insufficient or unconvinc-
87.
ing it may ask the Member States to provide additional informa-
tion or to extend the analysis, and this may lead to a redefinition
of the projects in question or, even, ultimately to a refusal of
Community funding for certain projects. For example, projects
such as the Gran Porto drinking water supply or the Enxoé (Por-
tugal) dam were rescaled following the extension of the CBA.

88. Examination of the CBAs showed that despite the Commis-
sion’s efforts in the matter (notably the publication in June 1997
of a guide to the analysis of the costs and benefits of large-scale
projects within the Community regional framework), the treat-
ment and calculation of socioeconomic variables can differ widely
between promoters within the same sectoral field and the same
Member State.

89. Basic CBA concepts (net present value, internal rate of return,
discount rate, constant or current prices, tax aspects, sensitivity
analysis (1), etc.) are not always understood in the same way by
the parties concerned. External factors are often insufficiently
evaluated and quantified. Evaluating the feasibility, risks or alter-
native options is rarely considered. The socioeconomic costs or
benefits are sometimes incomplete and sometimes only the finan-
cial aspects are taken into account. Moreover the CBAs do not
always include precise and detailed information that would make
it possible to verify, amongst other things, their reliability.

91. The CBA for the Autoroute Pathe-F-Pont project estimated
an investment cost of around EUR 4 million, whereas the con-
struction contract
some
EUR 2,3 million.

for an amount of

signed was

92. This disparity between design and interpretation in relation
to the application of CBAs tends to produce results which differ
according to the hypotheses adopted and may distort the appraisal
of the benefits or drawbacks of a given project relative to others.
The Commission should be careful to draw up more precise
guidelines on this point in order to harmonise the methods
applied, particularly as regards the essential information that must
be submitted with CBAs so that their reliability can be verified
and they are comparable.

Indicators

93. The indicators submitted in support of CF projects by national
authorities are very often the same ones that are used for the
ERDF. Some of these indicators from the ERDF are part of a gen-
eral system of measures that are programme-based, located in a
specific context relative to an overall objective and are determined
by a number of specific objectives that give rise to operational
objectives within a cohesive set of priorities as part of the imple-
mentation of multiannual measures. The indicators were not
always improved and made more detailed in order to adapt them
to the particular nature of CF projects, especially in the context of
the two sectoral fields in question (transport infrastructure and
environment).

90. Thus in the case of the Lisbon water-distribution network
project it was not possible to establish any link between the rev-
enue received by the final beneficiary over all the networks and
the investment financed by the CF. For the drinking-water treat-
ment plants, the Ibiza-desalination plant project, the price of
water was calculated in 1994 as 95 ESP/m³ (approximately 0,48
EUR/m³) in the CBA, whereas the real price was, for 1997,
213,84 ESP/m³ (approximately 1,07 EUR/m³). The CBA for the
Limerick City Water Supply Project did not take into account
private-sector revenue, which amounted to around IEP 1,2 million
(approximately EUR 1,6 million) in 1997. For the same project the
IRT was calculated on the basis of a 25-year period, whereas the
lifetime of the associated buildings was assumed to be 50 years.
Only the financial aspects were considered in the CBA of the Tra-
lee landfill site project, which ignored the socioeconomic aspects.
The Belview rail crossing project does not contain an IRT calcula-
tion and states only that economic benefits are expected in terms
of time saving, without quantifying them.

(1) Sensitivity analysis: study of the possible effect of a change in crucial
estimates relating to costs and benefits on the profitability or actual
value of a project.

94. Furthermore, the indicators that are used in the CF frame-
work are sometimes too general, or lack the detail required for
proper verification of a project’s progress, or the quantification of
its impact and performance. Some of the cohesion Member States,
Portugal, for example, have, on their own initiative, developed
and introduced quarterly or six-monthly monitoring forms set-
ting out the data that is to be collected in order to provide the
requisite information on progress, physical implementation and
impact, together with the corresponding indicators. These attempts
to improve the indicators within the CF framework at national
level are the work of a few responsible authorities and are not
harmonised, nor are they generally used in the cohesion coun-
tries.

95. The Commission should develop more relevant indicators
that specifically apply to CF sectoral projects or it should improve
them, without making the monitoring method unnecessarily cum-
bersome, so that it is possible to represent the improvement of
the sector concerned quantitatively, to promote sustainable devel-
opment and to make sector-wide comparisons.

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Evaluation of closed projects

Commission

96. When the projects are closed the Commission and benefi-
ciary Member States must, in accordance with Article 13 of the
Regulation establishing the CF, evaluate the manner in which the
projects have been carried out and must also evaluate the poten-
tial and real impact of their implementation in order to assess
whether the initial objectives can be, or have been, achieved. The
Commission has accordingly selected two external consultants on
the basis of calls for tenders and these ex post evaluations of indi-
vidual closed projects, numbering around 120 projects evenly dis-
tributed over the two sectoral domains in question, are to be car-
ried out over a period of three years. The ex post evaluations that
have already been completed are proving to be very useful, espe-
cially for improving the definition of the performance indicators
in the two sectoral domains during implementation of the next
CF generation.

Member States

97. No Member State has yet completed the ex post evaluation of
closed projects. Portugal has essentially drawn up a first account
of jobs created, project by project, in 1997 and has begun an ex
post evaluation process, while in Greece an evaluation of the man-
agement of projects and the quality of the work took place in
1995 to 1996.

98. Although it is not a question of ex post evaluations, approxi-
mately 100 closed projects were examined in the cohesion coun-
tries, on the Commission’s initiative, with the aim of evaluating
their impact on the environment.

IMPACT OF THE COHESION FUND

gal the percentage of the population connected to a drinking-
water supply system rose from 61 % in 1989 to 95 % in 1999 and
the population having access to a sewerage system rose from
55 % in 1990 to 90 % in 1999. There has also been a substantial
effort to assist the development of strategic road networks in the
cohesion countries, mainly with the aim of reducing the impact
of traffic in residential areas, lowering the levels of noise and pol-
lution, reducing user transit times and improving road safety.

101. The numerous projects audited show that the CF is involved
in a very wide range of economic activities. For example, the VTS
maritime traffic surveillance and control project (CF assistance
EUR 8,3 million)
in Spain provides, amongst other things,
improved accident and marine pollution prevention. In Greece
the modernisation of drinking water supply systems and sewers,
particularly in Athens (CF assistance EUR 125 million), has
improved the quality of life for the inhabitants, as well as encour-
aging the development of tourist facilities. In Ireland the exten-
sion and modernisation of transport infrastructure, e.g. the Dub-
lin ring (CF assistance EUR 20 million), have, as a general rule,
brought increased safety, cut journey times and facilitated links
between Ireland, France and the United Kingdom. In Portugal the
Vasco da Gama bridge over the Tagus, which cost a total of
EUR 603 million, received EUR 311 million of CF assistance and
EIB loans of PTE 41 500 million (approximately EUR 207 million)
and DEM 24,8 million (approximately EUR 13 million). It is one
of the largest civil engineering projects to be undertaken in Europe
in recent years. The improvement of water supplies in the Algarve
(CF assistance EUR 45 million) has helped to satisfy the increas-
ing demand for drinking water brought about by tourist develop-
ment, as well as preventing over-depletion of the water-table.

102. The first report on cohesion in 1996 (1) also highlighted
the positive role of the CF as a means of fostering increased eco-
nomic and social cohesion within the EU.

Qualitative impact

Quantitative evaluation

99. Analysis of the trends in the four cohesion countries shows
encouraging results during the period (1994 to 1999) in transport
infrastructure and in the environment, the fields of CF interven-
tion where there has been notable progress towards reducing dis-
parities relative to the rest of the Union.

103. Macroeconomic impact evaluation results were obtained
using the models mentioned in paragraph 77 (see Table 8), as
regards the impact of the projects on the region concerned, on
the economy of the Member State and on cohesion and conver-
gence.

100.
In Greece the number of towns covered by water-treatment
systems doubled between 1993 and 1999, and by the latter year
71 % of the population’s requirements were covered. In Ireland
the proportion of urban waste water treated in accordance with
EU standards rose from 20 % in 1993 to 80 % in 1999. In Portu-

(1) Commission document. Etudes de développement régional — L’impact des
politiques structurelles sur la cohésion économique et sociale de l’Union
1989-1999.

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Main results according to the VAR1, VAR2 and EGC models

Table 8

Main results according to VAR1 model

Madrid ring road
Rias Bajas motorway
Evinos dam
Spata airport
Tagus crossing
North-south road link
North-south rail link

Cumulative project
expenditure as %
annual regional
public spending

Maximum %
change in annual
business invest-
ment

% change in
cumulative busi-
ness investment

Number of jobs
created

18,70
68,70
5,60
7,60
5,75
32,00
13,00

0,50
1,17
0,67
0,82
5,30
2,00
1,00

3,00
11,00
3,00
4,03
3,10
n.a.
n.a.

2 900
3 300
13 000
8 800
16 500
n.a.
n.a.

Impact of transport infrastructure projects in Spain for period 1993 to 1999 according to VAR2

Output
(% change)

Private capital
(% change)

Number of jobs
created

Unemployment
(% change)

Madrid ring road

1. Benefiting region.
— no fund diversion, no spillovers
— fund diversion, no spillovers
— fund diversion, spillovers

2. Whole economy

(fund diversion, spillovers)

Rias Bajas motorway
(fund diversion, spillovers)

1. Benefiting regions.
— Zamora
— Orense
— Pontevedra

2. Whole economy

3,69
1,91
1,6

0,77

6,36
7,4
3,68

0,66

1,36
0,87
0,46

0,63

- 0,45
- 0,64
- 0,09

0,39

54 470
26 180
12 760

56 130

2 690
7 590
6 530

60 480

- 1,83
- 0,83
- 0,58

- 0,32

- 2,49
- 2,76
- 1,22

- 0,30

Short, medium and long-term effects of Cohesion Fund projects (CGE models)

North-south road
Madrid ring road
Rias Bajas motorway
Tagus crossing
Egnatia motorway
Pathe motorway

Direct effect

Short term

Medium term

Long term

1
1
1
1
1
1

1,01
1,24
1,14
0,92
1,1
1,17

1,1
1,52
1,33
0,997
1,2
1,24

1,1
1,55
1,35
0,94
1,2
1,24

Source: London School of Economics (LSE) modelling report, p. 76.

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Impact of projects on the region concerned

Impact of projects on cohesion and convergence

104. The positive effects in terms of job creation and unemploy-
ment, output and real incomes must be emphasised. The gains in
real income that were shown by the CGE model were sometimes
substantially lower than those estimated by means of the VAR
models (Madrid ring road, Rias Bajas motorway). As regards the
investment of private capital, it may be that, depending on the
model used, the implementation of the CF project leads to a
reduction or an increase in such investment (Rias Bajas motorway
in Spain).

107. The VAR1 model does not permit direct calculation of the
extent to which CF projects reduce or accentuate regional inequali-
ties in the cohesion countries. In particular it shows that in Spain
increasing public investment leads to a strong expansion in pri-
vate investment in the richest and the poorest regions, whilst the
intermediate regions experience less growth. The effects on
employment, on the other hand, are concentrated in the richest
regions and the intermediate regions. In Greece, the gains in pri-
vate investment are more substantial in cases where the projects
concern the poorest regions, while in Portugal government invest-
ment in the richest regions gives rise to increased private invest-
ment.

Impact of projects on other regions and on the Member
State’s economy

105. For individual projects the VAR2 model, which was applied
only in Spain, gives the same type of effect for other regions and
the whole economy as for the region concerned, in terms of job
creation and unemployment, output, real income and investment
of private capital. The medium and long-term effects of individual
projects, which are estimated by means of the CGE models for the
whole economy of the Member State, are also found to be posi-
tive. The finding made in paragraph 104 about the consistency of
the VAR and CGE models as regards gains in real income also
applies as regards the whole economy.

106. The following are the main conclusions of the evaluation
of the overall impact of the CF on the Spanish economy, using the
models mentioned in paragraph 83:

(a) the Leontief input/output model highlights a positive impact
of CF investment of around 0,3 % on gross annual added value
and states that one job/year is created for ESP 4,23 million
(approximately EUR 0,02 million) invested in CF projects,
which would be equivalent, on average, to the creation of
40 000 jobs per year;

(b) the Moisees model in turn shows that investment within the
CF framework could generate an annual increase in GDP of
around 0,1 % which would create the conditions for the cre-
ation of approximately 20 000 jobs per year;

108. The VAR2 model contains the information needed for anal-
ysing the CF projects’ contribution to regional cohesion in Spain.
The results in terms of output, employment and unemployment
at the level of the regions and the whole economy can be used to
estimate regional convergence at the level of GDP and employ-
ment. However, that was not done. A simulation for a theoretical
project leads to the conclusion that the additional output gener-
ated by one euro is higher in the rich regions than in the poor
regions, mainly due to inter-regional differences at the level of the
capital invested/output ratio.

CONCLUSIONS

109. The CF is a financial instrument designed principally, accord-
ing to the Treaty, to promote economic and social cohesion. CF
assistance has undoubtedly had very positive effects in the ben-
eficiary Member States. It has improved the implementation of
the environmental directives and, in these countries, has improved
the situation in respect of the trans-European networks and access
to them.

110. However, in spite of these positive results, the Commission
should improve certain aspects of this framework, with a view to
greater efficiency: the financial management should be better
adapted to programming which encourages medium-term
projects; the Commission’s control over the project cycle should
be improved; the term ‘project’ requires a more precise definition;
the approval procedures should be simplified; programming and
monitoring should be more rigorous; impact evaluation more
exhaustive, and the partnership with the beneficiary Member
States further developed.

(c) the Hermin model shows an annual increase in GDP of around
1 % and estimates that in the framework of CF investment, job
creation could amount to some 130 000 jobs per year.

111. As regards the financial management of the CF projects, the
Commission should exercise stricter control over the build-up of

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amounts outstanding and awaiting clearance against commit-
ments from previous financial years, thus ensuring that these
amounts outstanding do not exceed the amount of payment
appropriations entered in the annual budget against the commit-
ments for the financial year, so that advance payments to the new
projects are not hindered in the course of the financial year.

112. Management of the project cycle should receive greater
attention at the stages where it is being implemented in partner-
ship with the Member States. At present, management is moni-
tored by the Commission mainly at the beginning and the end of
the cycle.

113. With regard to the terms ‘project’, ‘stages of projects’ and
‘group of projects’ the Commission should be careful to give an
operational definition of them so that they can be applied in a
uniform manner, without ambiguity, in all the cohesion coun-
tries.

114.
In order to speed up the approval procedure for some
projects, the Commission should set up simpler procedures, for
both the preliminary stages (project application) and the final
stages (final report) of the decisional framework. In particular it
should define its decisional criteria more precisely, so that they

can be applied and verified at the level of each of the administra-
tions in the Member State concerned.

115. Even though the CF has a project-based approach and
analyses the advantages and drawbacks of each project separately,
the set of projects approved by the Commission should, taken as
a whole, be part of a coherent, medium-term concept. An under-
lying planning philosophy of this kind would give greater trans-
parency to the CF’s coordination, synergy and complementarity
with the other Community instruments and programmes, espe-
cially with the ERDF, and make for more harmonious economic
and social development.

116. The Commission should increase its controls in the context
of the CF as they have proved to be inadequate in this field.

117. As regards impact, a qualitative evaluation of the projects
audited shows that the CF contributes to the strengthening of eco-
nomic and social cohesion. Some of the cohesion countries, for
example, have experienced very high growth rates. At the mac-
roeconomic level, the ‘project’ dimension makes complete global
evaluation of the CF difficult, even though it has been possible to
identify positive results in the case of certain large-scale projects.
The Commission should perfect the instrument for the macro-
economic evaluation of projects and apply it more fully.

This report was adopted by the Court of Auditors in Luxembourg at the Court meeting of 6 July 2000.

For the Court of Auditors

Jan O. KARLSSON

President

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ANNEX

PRESENTATION OF MODELS USED TO EVALUATE THE IMPACT OF THE COHESION FUND

Models developed at the Commission’s initiative (1)

The autoregressive vector models (VAR)

1. Whereas traditional econometric models basically express each endogenous variable only as a function of
exogenous variables and of all the time-shifted values of the endogenous variables, VAR models comprise only
endogenous variables and there is an explanatory equation corresponding to each endogenous variable and
linking that variable to the past achievement of all the endogenous variables in the model.

2.
In the context of the CF, VAR models are used to evaluate the dynamic impact of CF expenditure on trans-
port infrastructure and to study the spillover from one region to another. The reliability of the results obtained
is highly dependent on the availability and quality of the data collected in the four cohesion countries.

3. The VAR1 model provides results for the impact of projects on the region concerned in terms of annual
increase (as %) in cumulative private investment and in terms of job creation (see Table 8). It seeks to position
a region receiving CF assistance in relation to the mean for the country. For this model the equations used do
not always take account of information produced by some in order to consider it in the others, contrary to
traditional econometric systems. In consequence the information from the first equation of the VAR1 model,
which estimates the effects of public investment on private sector investment, are not included when the sec-
ond equation is calculated (the second equation evaluates the effects of public investment on employment),
even though, from an economic viewpoint, job creation can be indirectly stimulated by an increase in private
investment brought about by increased public spending. This model is not really suitable for measuring the
spillover onto other regions (2), as it does not contain any equations for the production function, increase in
regional GDP or spillover to adjacent regions.

4. The VAR2 model makes it possible to calculate the effects in terms of relative changes concerning output,
public investment and unemployment and evaluates the job-creation effect in absolute terms, for both the
region directly involved in the CF project and the whole economy, and having regard to the possibility that
part of the national funds initially earmarked for investment in transport infrastructure and the environment
may be assigned to other areas. This model was used only for the Spanish regions (see Table 8), because they
were able to provide far more detailed information in terms of historical series. It was used for both transport
infrastructure projects and environment projects.

(1) For the study of the models developed at the Commission’s initiative the Court called on an outside expert specialising

in the field of macroeconomic models and the European economy.

(2) Because of the approach (relative positioning of a region in relation to the mean for the Member State) and the fact that
the statistics are pooled without any other disaggregation, with the result that the regression coefficients refer to a
‘representative’ region.

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It is based on absolute-value variables and is more complete from the modelling point of view. Neverthe-
5.
less, given that there was no evidence of any significant statistical differentiation concerning the impact of the
different types of project in the public sector, the regression coefficients used are the same, whatever the
sectoral domain concerned. However, environmental objectives cannot be measured in terms of increased out-
put, private investment or job creation.

Computable general equilibrium models (CGE) on a regional scale

6. These models are based on the principles of general equilibrium theoretical models, namely, all markets
are in equilibrium, every agent acts in a way which maximises a specific function and expectations are assumed
to be rational.

7. The CGE models developed were used to apprehend the effects of investment in the domain of transport
infrastructure on a particular region or on the regions of a country as a whole, taking as starting point the
savings in distance and time and, therefore, in transport costs, resulting from road infrastructure projects.

8. The effects break down as follows:

— short-term effects: cost reductions, increased profits for enterprises in the region, lower prices for custom-

ers, increase in consumers’ real incomes,

— medium and long-term effects:

— enterprise relocation (installation of new enterprises and delocalisation of enterprises in the face of

increased competition),

— adjustments in the pattern of employment (net job supply associated with enterprise relocation, higher

wages),

— changes in inter-company relations (increased demand for intermediate products, increased profits for
the industries producing intermediate products, lower prices for intermediate products, increased prof-
its for enterprises using such products),

— increased mobility of workers between regions, tending towards wage equalisation.

It should be noted that the short-term effects essentially concern the region that is the direct beneficiary,
whereas the medium and long-term effects also affect other regions.

9. Three CGE models on a regional scale were developed: one for Spain and Portugal, one for Greece and one
for Ireland. The results of calculating the effects for a number of projects are given in Table 8.

10. The development of these models requires a substantial amount of data and the analysis of policies relat-
ing to them, both of which are subject to a high degree of regional fragmentation, to ensure that these policies
are able to deal with trade between places in a context of imperfect competition. Information relating to Input/
output tables, output disaggregated on the regional and sectoral side, added value, employment, or road, rail
or air transport is essential for an analysis of this type.

11. As regards the CGE models that were developed, difficulties appeared at the level of information. Any
incomplete or missing information gave rise to estimations, approximations or substitutions. For example,
technical coefficients from the Spanish input/output tables were used without adjustment for Ireland and for
Greece, even though the output structures are markedly different. The degree of sectoral fragmentation in
Greece and in Ireland was limited in the CGE models to agriculture, industry and services. Moreover the trans-
port costs used were usually taken from the initial cost-benefit analyses, whose reliability was not tested.

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12. This model shows that the medium and long-term effects are virtually identical (interregional mobility of
workers is disregarded). As the medium and long-term effects reflect regional interdependence the model
proves adequate for the analysis of spillover onto other regions.

13. The CGE model, which takes into account an extensive regional breakdown, could be used to analyse the
CF’s implications for regional inequality in the cohesion countries. This analysis is carried out only for the
changes which affect the income from employment in the different regions, and not for gains in real income,
nor for the regional levels of income per inhabitant and unemployment. It is thus not possible to obtain from
it any conclusions about convergence between the richest and the poorest regions in terms of GDP and
employment/unemployment.

Models of explicit distribution dynamics (MEDD)

14. These models are very innovative in as far as they rely on stochastic distributions and three-dimensional
graphic and statistical representations concerning changes in the regional distribution of income and are con-
cerned with the dynamics of growth and convergence of all the regions of the four cohesion countries, as well
as of other countries such as France, the United Kingdom and Italy. They are used to examine questions such
as the tendency of regional incomes to converge or diverge over time and the dynamics in the regional distribu-
tion of income. The analyses carried out were based on data for the period 1980 to 1990.

15. The results obtained with MEDD models show that some regions tend towards increased wealth, others,
on the contrary, remain or become poorer. In the cohesion countries it seems that increased convergence runs
parallel to the rate of growth of the economy. However, Portugal experienced both a substantial rate of growth
during the period under consideration and a significant disparity between regions. Greece and Spain, with a
lesser growth rate, over the same period, attained a higher degree of regional cohesion. As regards Ireland, no
information was available on this subject.

16. Modelling with the emphasis on the level of regional income in relation to neighbouring regions, and not
on the absolute level of regional income, also shows (where the measurement in absolute terms at the level of
incomes highlights increasing inequality but the measurement involving relative values, does not demonstrate
the same tendency) that increasing regional inequality can be explained by the fact that the growth achieved
by groups of neighbouring regions differs from that of other groups of adjacent regions.

17. This model similarly concludes that a region’s performance is explained by neighbouring regions. This
appears evident for the Spanish regions, whereas for Portugal there continues to be a dynamic of increasing
inequality between the regions.

18. Applying these models to data concerning public and private investment shows that, in Spain, public
investment is followed by repercussions for neighbouring regions and plays an important part in the further-
ance of regional cohesion. In Portugal, public and private investment both play this role. It is necessary to take
into account this result of analysis based on data for the period 1980 to 1990 in order to appraise CF projects.

19. The MEDD models could be further refined and would produce more useful results if they were accom-
panied by explanations based on confirmed statistical techniques, if they were concerned primarily with the
impact of CF projects on the trend of income throughout the period in question and, finally, if the period were
not confined to the period 1980 to 1990, before the Cohesion Fund existed.

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Models used by the Member States

20. The Input/output model seeks to depict the links between all the resources available to an economy and
all final consumption. It thus identifies any interdependence at the level of the different sectors of a country
that are interrelated on the basis of intermediate consumption.

Moisees (Modelos de Investigación y Simulación de la Economia Espanola) is an econometric model of 150 equa-
tions which provides a simulation of the macroeconomic effects of public policies in the medium term (five
years) over the whole economy.

The Hermin econometric model takes account of the specific characteristics of each Member State and aggre-
gates the effects at national level, starting from the hypothesis that economies do not operate at full output
and, in consequence, the multiplier and accelerator effects associated with increased investment create an
expansion of output and employment. The model appears to give satisfactory results in terms of the effects on
demand.

21. Use of these macroeconomic models is based on variables and hypotheses that may be incomplete or
partial. The Input/output model, for example, only considers the effects of demand and mainly analyses short-
term impacts in relation to Community intervention. Moisees does not consider long-term and sectoral effects.
Hermin is based, in particular, on complex assumptions about the pattern of national government expenditure
that may vary significantly and, in consequence, may lead to variation in the calculation of the impact of CF
investment. In view of the assumptions underlying the models, the results should be treated with caution.

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COMMISSION’S REPLIES

SUMMARY

Overall, the Cohesion Fund (CF) has had a positive impact. An analysis of trends in the four cohesion countries
shows encouraging results over the period 1994 to 1999 considerable progress has been made in narrowing
the gap with the rest of the Union.

The Commission agrees with the Court of Auditors that financing of the Cohesion Fund projects has proved
effective.

The Commission considers that coordination with the ERDF was ensured during discussions with the Member
States of the choice of projects to be submitted to the Cohesion Fund and during the interdepartmental con-
sultation exercise. This coordination is apparent in the concentration of Cohesion Fund operations on specific
sectors and corridors.

The Commission assessed each project in the light of the criteria laid down in the Regulation. The Cohesion
Fund generally finances large-scale projects playing a pivotal role in the economies of the countries concerned.
These projects form part of a planning process and require lengthy preparation.

The Commission has thus ensured that the projects financed by the Cohesion Fund are in accordance with the
sectoral priorities (concentration on water and waste management) or the priorities for strategic corridors or
nodes (concentration on a limited number of corridors and nodes). The 1994 to 1999 priorities emerged from
discussions between the Commission and the Member States. The changes introduced by Regulations (EC)
No 1264/1999 and (EC) No 1265/1999 require the Member States to provide the information needed to assess
projects for conformity with a sectoral or territorial strategy. For the period 2000 to 2006, the Commission
has therefore asked the Member States to draw up a reference framework for CF operations. This also figures
in the Community Support Framework (CSF) (2000 to2006).

The Commission also ensured that Member States provided the information required by the Regulation and
specified in the application form. The information and detail available to the Commission are of a fairly high
standard.

The Regulation requires revenue from projects to be taken into account only if substantial net revenue is gener-
ated for the promoters. The Member States were given guidance on the method and applied it according to
the particular nature of the projects submitted.

The Cohesion Fund Regulation mentions an eligibility date for expenditure but does not contain the concept
of ‘new projects’. It permits funding of projects which are already under way.

The linkage is set out in Article 6 of the Regulation in accordance with Article 104c of the Maastricht Treaty.
The Cohesion Fund is specifically intended to reconcile budgetary convergence and the public investment nec-
essary for the catching-up process by making the financing of such investment less of a burden on national
budgets. Even on the extreme assumption that national co-financing is additional, its impact on the budgetary
deficit would be marginal in the short term and positive in the medium and long term.

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At every monitoring committee meeting, the Commission routinely monitored the status of each project and
specified remedial action when necessary. This committee allowed a fairly close watch to be kept on the
progress of projects, including their financial management. The Commission also carried out audit missions
to supplement the committee’s work and checked projects’ physical and financial progress when processing
payment applications. Extending the Commission’s monitoring role would require a large increase in the staff
assigned to managing and monitoring CF projects.

The Cohesion Fund has had a clearly positive impact, trends in the four cohesion countries in the period 1994
to 1999 are encouraging and there has been appreciable progress in catching up with the rest of the Union.

The Commission will make every effort to refine the assessment tools in the light of experience.

IMPLEMENTATION OF THE BUDGET

Financial development

9. Commitments are concentrated at the end of the financial
year largely because of the dates on which the Member States sub-
mit their applications — usually towards the end of the first six
months of the year. The only commitments in the first six months
are those for budgetary instalments under decisions adopted in
previous years. Similarly, payments are concentrated at the end of
the year because of the dates on which Member States apply for
payment.

In order to correct this situation, Article C(2) of Annex II to the
new amended Regulation stipulates that the annual instalments
for projects should generally be committed no later than 30 April.
Article C(4a) requires applications for payment to be submitted
three times per year, at the latest on 1 March, 1 July and 1 Novem-
ber.

10. There have been fewer new project approvals in recent years
because of the increasing number of commitments under deci-
sions taken in previous years which involve the payment of annual
instalments. This reflects the priority given to large infrastructure
projects.

11. The amount awaiting settlement arises from the project
financing plans, which cover a period extending beyond 31 Decem-
ber 1999. It does not reflect delays in execution but results, as
already mentioned in the previous paragraph, from the fact that
the projects cover several years.

found itself short of payment appropriations. The Commission in
any case allows for the outstanding amounts in the budgetary
planning for each year.

Distribution of finance by sector

13. Article 10(5) requires the Commission to assess projects on
the basis of the contribution they can make to Community poli-
cies on the environment.

In applying this provision, and being mindful of the need to avoid
dissipating its efforts, the Commission decided to give priority to
investment in waste-water treatment, drinking-water supply and
waste management.

The Commission’s interpretation of the Article was already clearly
enunciated in the first report on the Cohesion Financial Instru-
ment and the CF produced in 1995. The Communication of
22 November 1995 from the Commission to the Council, the
European Parliament, the Economic and Social Committee and
the Committee of the Regions on cohesion policy and the envi-
ronment also stated that these were priority sectors.

This priority allowed substantial progress to be made in the ben-
eficiary Member States and was reaffirmed for the period 2000 to
2006 in the Commission Communication of 1 July 1999 on the
Structural Funds and their coordination with the Cohesion Fund
for programmes in the period 2000 to 2006.

The uncertainty to which the Court refers is linked to possible
variations in these financing plans. The Commission has never

However, the Cohesion Fund has also played a part, for example,
in combating erosion. Experience shows that, since such projects
make considerable administrative demands on the Community
and national authorities, this kind of operation is more appropri-
ate to programmes of the type financed by the ERDF.

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Commitments for rail transport showed an upward trend in the
last years of the period, when there was a substantial increase in
support for projects of this kind.

18. When Regulation (EC) No 1164/94 was adopted, it included
specific provisions for taking account of receipts.

As regards maritime infrastructures, the Commission considers
that maritime transport is a priority since it is less polluting. On
the other hand, detailed case studies have to be made for the
financing of port development projects, bearing in mind that
investment in ports often generates substantial revenue. These
studies must also address problems of competition and overca-
pacity affecting the other means of transport.

OBSERVATIONS ON THE MANAGEMENT OF THE COHESION
FUND

Programming the projects

Deficiencies in the guidelines relating to applications for
assistance

19. For most small environmental projects co-financed in Greece,
the Commission generally applied a rate of 80 % and not 85 %,
since the operations funded could potentially generate revenue
exceeding the operating costs.

Cost-benefit analyses are commissioned from consultants by the
project promoters. The methods used may vary (see reply to para-
graphs 91 to 94), especially as regards handling of operating costs
and financial charges.

20. As the Court mentions in paragraph 31, it is for the national
authorities to select applications, in accordance with the principle
of subsidiarity. However, the Commission has always asked the
Member States to submit more projects than can be funded so
that a better selection can be made.

16. Regulation (EC) No 1164/94 did not require the Commission
to consider the alternatives to a project. Moreover, this had been
suggested in the Commission’s proposal for a regulation but had
been rejected by the Council in 1994. However, the recent revi-
sion of this Regulation requires the Member States to provide
information on the alternatives considered.

The CF Regulation requires the Commission to check that every
project satisfies the eligibility and quality criteria of Article 10(5),
but it does not provide for any comparative analysis by the Com-
mission. When the Commission considers that a project does not
satisfy the Regulation’s eligibility and priority criteria, it informs
the Member State of its reasons. However, the Regulation makes
no provision for formal rejection decisions.

The Commission has usually received cost-benefit analyses or
other analyses of economic impact, albeit of uneven quality. When
the Commission felt that the material supplied did not provide a
sufficient basis for determining whether the project satisfied the
Regulation’s criteria, it made further enquiries, in particular by
seeking assistance from the EIB.

The Commission has produced a detailed form stating what infor-
mation the Member States must supply with applications for
assistance. Several workshops were held in the Member States to
brief the administrations concerned.

17. Generally, the Commission always has available information
on the nature, location and cost of groups of projects. This is con-
tained in the application or is at least supplied to the Commis-
sion while the project is being processed and is summarised in the
decisions granting assistance. The forms drawn up for each group
of projects are placed before the monitoring committees, with
information on location, cost and status of expenditure for each
project.

Coordination between the Cohesion Fund and the ERDF

23. The Commission has endeavoured to ensure that ERDF and
CF operations are compatible and mutually reinforcing. For the
period 2000 to 2006, the reference framework drawn up for the
transport and environment sectors should make it possible to
enhance such synergy and ensure coherence.

24. The Commission does not believe that the aim of optimising
appropriations allocated to the Financial Instruments and the
ERDF conflicts with the overall coherence of structural policies.
Its view is that the concentration of Cohesion Fund operations on
specific sectors and corridors makes it possible both to optimise
the use of funds and to ensure that policies are coherent.

Budgetary and sectoral constraints

The location and amounts for some small subprojects within the
four project groups mentioned by the Court were submitted in
summary form by the Member State concerned.

26. Comparability is not required by the CF Regulation. The
Commission checks that each project conforms to the specified
eligibility criteria.

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28. The CF rules do not require programming to proceed at the
same pace in the transport and environment sectors. The Com-
mission is required to ensure that resources are suitably allocated
between the fields, and this has been fully achieved.

— lack of information on compliance with Community policies,
especially as regards the environment and the award of public
contracts.

29. The Cohesion Fund’s resources are to a large extent devoted
to big projects which play a pivotal role in the economies of the
countries concerned. These form part of a planning process and
require lengthy preparation. Other projects are covered by sec-
toral plans drawn up at the appropriate territorial level (national,
regional, by catchment area). The standards of project prepara-
tion and project maturity are very important criteria for selection
at both national and Community level.

30. The Commission believes that inter-project coherence has
been ensured by concentrating operations on specific sectors and
transport corridors. This was achieved through partnership with
the Member State, covering programming and project prepara-
tion. The Commission also draws attention to the functional links
between many of the projects funded.

Geographical distribution of the projects

32. The Commission applies the same procedure and criteria in
preparing, adopting and monitoring all the projects financed from
the Cohesion Fund. At Commission level, there are thus no dif-
ferences in treatment.

The co-financing rate is determined on the basis of Article 7(1),
taking account of the assistance requested by the Member State.

Slowness of the approval procedures

33-37. The Regulation stipulates that the Commission should
generally decide within three months, provided the Member State
has supplied all the information which the Regulation requires.
This is conditional on the budget available each year, since some
projects will not be approved if the commitment appropriations
in a particular year are insufficient.

Delays in approval may be caused by:

— incomplete application forms, leading to requests from the CF

for further information,

— insufficient commitment appropriations, with too many
projects for the resources available (see also replies to para-
graphs 10 and 20-a),

The definition of project and project financing

38. As a general rule, applications for individual projects state
the location precisely (see reply to paragraph 17). In the monitor-
ing committee, the Member State provides detailed information
on the execution of each project within the group.

39.
In the framework of the Structural Funds in Ireland, ele-
ments of a number of projects had been funded prior to the intro-
duction of the Cohesion Fund. From 1993 further elements of
these projects were assisted from the Cohesion Fund in view of
the suitability of these projects for CF assistance. The Commis-
sion considers that the elements covered under the Cohesion Fund
were clearly identified and constituted project stages (see reply to
paragraphs 40 and 41).

The four project applications concerning Belview port, Waterford,
involved a new port access road, a new controlled rail crossing,
the extension of the port quay and the dredging of the harbour
approaches. The applications were submitted separately by the
Irish authorities on various dates between June 1993 and Febru-
ary 1994. CF assistance to each project was approved by decisions
on dates between November 1993 and July 1996.

The Commission accepted separate project applications in respect
of these four improvement projects principally for the following
reasons.

— The Commission saw an advantage in the treatment of sepa-
rate applications on grounds of ensuring transparency of CF
assistance between the various transport sectors (road, rail,
port, etc.)

— There were three separate implementing authorities respon-
sible for delivering these projects in view of their nature (road,
rail and port improvements) and the division of responsibil-
ity for such transport issue in the Irish administrative system.

— Separate applications allowed the early adoption of decisions
in cases where the Commission could quickly agree to assist
the project (e.g. the port access and rail crossing projects). The
examination of the Belview quay extension application was
significantly delayed while the Commission clarified with the
promoter important questions related to the project as ini-
tially proposed. In this case the separate applications allowed
budget allocations to be made more efficiently.

Finally, despite the relatively small size of the four projects, even
on a combined basis, Cohesion Fund support for port projects in
Ireland has been economically justified because of the dispropor-
tionately large effect of ports investments on the Irish economy
due to Ireland’s island nature.

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40 and 41. The Regulation provides for funding of projects,
project stages and groups of projects. During the negotiations on
Regulation (EC) No 1164/94, the Commission introduced the
concept of a project stage and subsequently made it clear to the
Member States that financially independent project stages are:

lead to a different rate of CF assistance for a motorway or for
industrial waste-water treatment projects to attract a lower rate of
assistance if the users pay charges which cover part of the invest-
ment cost.

— stages which correspond to a functional entity (e.g. sewage
treatment works) or which are defined in geographical terms
(e.g. successive sections of a motorway or clearly delimited
railway line), or

45. When taking the decisions on motorway widening in Por-
tugal, the Commission had available the EIB report on the finan-
cial and economic study for a broader project encompassing that
submitted to the CF.

— stages corresponding to a given period of project implemen-
tation and to certain works which are physically identified by
means of suitable quantified indicators and which are carried
out in the course of this period.

At the end of 1995, the Commission informed the Member States
of its interpretation of the ‘group of projects’ concept, according
to which a group of projects must satisfy the following criteria:

(a) they must be located in the same area or situated along the

same transport corridor;

(b) they must be carried out under an overall plan for the area or

corridor with clearly defined goals;

(c) they must be supervised by a body responsible for coordinat-
ing and monitoring the group of projects in cases where the
projects are carried out by different competent authorities.

This concept was subsequently incorporated into the revised CF
Regulation.

Calculation of estimates of net receipts

42. The Regulation requires receipts to be taken into account in
determining the basis for assessment of the amount eligible for
financing. The method used by the Commission requires the
assistance rate to be determined on the basis of the ratio of the
current value of net receipts to the current value of the invest-
ment. This method was formalised in February 2000 in a vade-
mecum 2000 to 2006 and applied by the Commission to all
revenue-generating projects on the basis of information supplied
by the Member States. The Commission does not think it essential
to lay down binding rules for the beneficiary Member States on
the main parameters entering into the calculation (life of the
investment, discount rate). Different parameters may be justified
in different circumstances.

These projects were adopted under the Regulation governing the
Cohesion Financial Instrument, which makes no provision for
adapting the rate of assistance to take account of receipts. How-
ever, the Commission took financial viability into account in
deciding on the rate of assistance and concluded that the traffic
generated by widening the motorway and the revenue accruing to
the promoter would be only marginal and difficult to quantify at
the time when the project was approved.

46. Where there is substantial net revenue, the Commission uses
information from the Member States to calculate the rate of assis-
tance to be applied.

The differences observed by the Court in Member States’ applica-
tions were largely eliminated when the data were recompiled by
the Commission. However, different parameters may be justified
in different circumstances (discount rate, residual value, etc.)

47. When submitting an application, the Member State under-
takes to ensure the project’s financial viability. As a minimum, the
Commission requires operating costs to be covered by receipts
when the Member State can apply a charging system.

Approval of projects already virtually completed

48. The CF Regulation specifies that the eligibility date for expen-
diture is the application date. It does not require CF assistance to
cover the entire project cycle. Moreover, Article 1(3) specifically
provides that the CF may finance project stages. Expenditure
incurred before the project approval date may thus be eligible.

Conditionality

44. The Regulation requires the receipts actually anticipated by
the promoter to be taken into account provided they give rise to
substantial net revenue. It is therefore natural for toll charges to

50. According to the political and economic rationale of the
Cohesion Fund and its conditionality, the basic idea of the

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Cohesion Fund was to reconcile, on the one hand, the achieve-
ment of the convergence criteria on the budgetary situation and,
on the other hand, the higher need for public investment with a
view to the process of catching-up by alleviating the impact of its
financing on the national budget through the Cohesion Fund.
Conditionality is to reinforce the commitment of Member States
eligible to the Cohesion Fund with regard to the public deficit cri-
terion. Most macroeconomic models simulating the impact of
Structural Funds and the related national co-financing, whose
magnitude is far more important than in the CF, give only a
slightly higher and then progressively diminishing public deficit
as a consequence of two opposite forces. On the one hand, the
extreme assumption of national public co-financing being fully
additional increases the public deficit. On the other hand, the
positive supply-side effects of investment in infrastructure and
human capital on growth and employment, which increase tax
revenues and reduce social transfers, tend to reduce the public
deficit in the long run.

Project development cycle

Monitoring committees

56. The CF Regulation does not provide for the Commission and
the Member State to discuss approval of new projects in this
forum. However, the Commission has occasionally provided infor-
mation in the monitoring committees on the progress of certain
applications which were pending when the projects were of direct
interest to the committee members.

Controls carried out by the Commission

57 and 58. CF-financed projects are monitored by the Member
States and the Commission in accordance with the CF Regulation.
Under the protocols signed with the national authorities, the
Commission also coordinates these activities by means of fre-
quent contacts with the national monitoring services.

52 and 53. The Commission has no way of knowing in advance
how costs may increase during the course of a project.

As far as resources allow, the monitoring services of the Regional
Policy Directorate-General carry out on-site and desk audits of CF
projects as part of the annual audit plans for the four beneficiary
Member States.

It was decided to change the amount of assistance originally
approved when this increase was considered justified, having
regard to the views of the monitoring committees, where the
progress of each project is discussed and the reasons for any
departures from the initial forecasts are examined. All requests for
changes were processed by the Commission in accordance with
the Regulation (EC) No 1164/94 criteria.

54. The approved form for payment applications does not include
information on synergies and coordination of the project with
other structural operations. The payment application is not the
appropriate stage for providing such information and it is difficult
to see how it could be supplied in this context.

However, the Member State is required to provide information on
the physical and financial progress of the project and on compli-
ance with any requirements laid down in the decision.

Article 3 of Regulation (EC) No 1831/94 requires the beneficiary
Member States to report to the Commission any irregularities
which have been the subject of initial administrative or judicial
investigations.

Since the entry into force of Regulation (EC) No 1831/94 and
Regulation (EC) No 1681/94 (the latter applying to the Cohesion
Financial Instrument), five cases have been reported by the national
authorities: one by the Greek authorities, two by the Spanish
authorities and two by the Irish authorities for non-compliance
with the rules on public contracts and non-eligible expenditure.

Not all the cases shown in Table 6 were reported by the authori-
ties under the above Regulation.

Irregularities discovered during an audit by the Community insti-
tutions are also covered by Regulation (EC) No 1831/94 and the
Member States have an obligation to bring them to the Commis-
sion’s attention and to ensure that they are followed up.

55. The Commission scrutinises the final report and may ask the
Member State for further information. Payment is generally made
within two months after receipt of the application. However, this
may take longer if the report is incomplete.

OBSERVATIONS RELATING TO THE FINANCIAL
MANAGEMENT OF THE PROJECTS EXAMINED ON THE SPOT

When several reports or payment applications have to be submit-
ted, this is because of questions raised in the monitoring commit-
tees or arising from scrutiny of the case files.

59. The eligibility criteria adopted by the Commission in 1998
reflect and confirm the practice followed since 1994 in defining
and analysing eligible expenditure.

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Eligibility of expenditure

66. The Commission regards it as very important that works
carried out by Member States should be of good quality, but it
cannot be responsible for any constructional faults.

60.
It is sometimes hard to define recoverable VAT when pro-
cessing a project. The VAT-related expenditure for the Thessal-
oniki project was regarded as eligible by the Member State. A let-
ter was sent in this connection and the Member State itself is
checking whether the expenditure declaration should be changed.

Adequate accounting

The Member State will deal with the Nafplio case in the same way.

The Commission will look into the Court’s findings with regard
to the Athens airport project and will take the necessary action.

61. A figure for ineligible expenditure pre-dating the eligibility
date was declared by the Irish authorities in the application for
the assistance and taken into account by the Commission in its
grant decision. The sum of this ineligible expenditure will be
re-examined in the light of the information provided by the Court
and appropriate action taken where required.

62. The Commission will look into the Court’s findings with
regard to the water-supply project in Palma de Mallorca and will
take the necessary action.

The finalisation of projects

63. The Argos project mentioned in paragraph 53 will be checked
before it is closed.

64. The Commission acknowledges that it is sometimes difficult
to see coherence between the various financial and physical indi-
cators. This is particularly the case where the cost of completing
a project has risen and the Commission has taken the decision
not to match these increases with an increase in the Cohesion
Fund grant. For monitoring purposes in such cases the Commis-
sion has focused on the comparison on the indicators of physical
completion and financial completion based on forecast final costs
(rather than absorption of grant and declaration of eligible expen-
diture).

65. The Regulation permits assistance for projects below
EUR 10 million when this is justified. In the case of the project on
the Balearic Islands mentioned by the Court, their island nature is
a factor which justifies approving the project.

No provision in Regulation (EC) No 1164/94 forbids the financ-
ing of projects which are at an advanced stage or even completed
on the date of the decision, since the eligible expenditure is that
incurred by the Member State as from the date of submission of
the application. However, the Commission tries to ensure that
this situation is truly exceptional.

67. The declaration of contractors’ invoices presented for pay-
ment as eligible expenditure before the invoice has been paid has
been identified as a problem in a number of Irish projects. The
Irish authorities have been made aware of this failing and have
entered into commitments to address the problem. Where such a
practice has been detected in individual projects the problem
appears to have been resolved, though the issue has unfortunately
arisen subsequently in other projects.

69. The project involves replacing an existing wastewater treat-
ment plant at Tavira (Portugal) whose capacity and treatment
standards were no longer adequate. The project was financed from
two sources: the Envireg programme and the Cohesion Fund.

The works to be financed from each fund were specified in the
grant decisions, the final report and the ex post evaluation report.

The Cohesion Fund was to finance the reconstruction and upgrad-
ing of the treatment plant, covering preliminary and primary
waste-water treatment, ancillary installations (buildings, pump-
ing stations) and connections between the primary and second-
ary treatment facilities, while the works to be financed by Envireg,
which were physically about 1 km distant from those financed by
the CF, covered secondary and tertiary treatment.

70. The amount mentioned by the Court is supported by cer-
tificate No 3 of 30 June 1995 in the accounts of the Ministry of
Public Works, Directorate-General of Economic Planning.

EVALUATION IN THE COHESION FUND DOMAIN

Macroeconomic models

Models developed at the Commission’s instigation

Reference fr amework and contr act management

73. As regards the Court’s comment on the applicability of the
method, the purpose of the work was to develop new methods of
evaluation: it was therefore impossible to have previous experi-
ence of their application.

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The main aim of the contract was to develop a model or set of
models for estimating the socioeconomic impact of projects at
regional or national level or on other Community countries. The
successful tender was indeed original and it was not known at the
outset how far it would prove applicable, but the tenderer’s expe-
rience gave the Commission a basis for judging the soundness of
the bid. The consultant selected is a highly specialised university
institute of high standing in the field of macroeconomic analysis.

The Commission does not regard the three-month extension as a
change in the award criteria.

74-75. The second contract is for quantified simulations of the
socioeconomic impact of individual projects using the models
developed under the first contract.

The models produced by the consultant under the first contract
are the property of the Commission. The Commission’s reasons
for contracting out application of the models produced to the
individual projects to be assessed were the complexity of innova-
tive macroeconomic models (which are not far short of applied
research) and its lack of staff with the necessary knowledge and
expertise in this field.

The contract is a framework contract with a total allocation for
various simulations which are not initially specified. Individual
simulations are subsequently called up as required and charged
against the overall estimate in the contract.

76. The first contact contains fixed costs (fees) and variable trav-
elling and subsistence costs, which were initially estimated at
EUR 56 160. Since it proved unnecessary to use all of this esti-
mated amount, there was a cancellation of EUR 1561,02. The esti-
mate was thus very close to actual travel and accommodation
expenses.

Cost-benefit analysis (CBA)

86-90. The Member States have made great efforts to improve
the quality of CBA but more remains to be done. The Commis-
sion notes the comments and will take them into account in
improving future cost-benefit analyses for the Cohesion Fund.

For the Lisbon project, see the reply to paragraph 18. With regard
to the Ibiza project, the water price used by the Spanish authori-
ties in the 1994 CBA was based on previous experience. It is per-
fectly acceptable and indeed greatly to be welcomed that this
indicative price should be revised three years later to take account,
inter alia, of updated operating costs. Before finally closing the
project, the Commission will in any case require a review of the
economic factors which may have affected the assumptions of the
initial CBA.

91. Construction costs are one of the elements entering into any
infrastructure investment. Investment costs also include other
types of expenditure such as the costs of land, studies, etc.

92. The Regulation requires the Commission to ensure that the
socioeconomic benefits are proportionate to the resources used.
Despite the different methods used, the Commission considers
that the reports available would justify drawing this conclusion.
The Commission also has at its disposal other means of appraisal,
in particular the reports produced by the EIB at its request.

The Commission shares the Court’s view that CBA methods can
be improved. In the new version of the guide, the Commission
will encourage the Member States to align their methods in the
interests of greater comparability, giving greater weight to the
EMU context. For reasons of subsidiarity, however, the Commis-
sion cannot impose a harmonised method for CBA.

Indicators

No payments were made on this contract until 31 January 2000
but the invoices received amount to EUR 60 600 for 21 simula-
tions carried out by that date and now being studied by the Com-
mission.

93. The indicators used by the CF are indicators of projects’
physical and financial progress and not indicators of the progress,
results and impact of programmes like those produced for the
ERDF.

Confor mity wit h t he evaluation objectives

94. The indicators are agreed between the Commission and the
Member State. Their purpose is to provide an overall picture of
project status. The Commission regards this approach as satisfac-
tory in view of the aims pursued.

82. The Commission considers that each of the models has
yielded positive results and it is making every effort to ensure that
they are refined and applied in future. As regards coordination
between models, the approach chosen was to use different mod-
els, each measuring different aspects of the investment.

95. The monitoring indicators used by the CF do not seek to
‘represent the improvement of the sector concerned quantita-
tively’ but rather to track physical and financial progress in execut-
ing the project.

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CONCLUSIONS

110. The Commission believes that, overall, the Cohesion Fund
has been effective. The new regulation amended by the Council
introduces improvements which should increase this effective-
ness.

111. The situation envisaged by the Court has not arisen in prac-
tice. The risk was rather that the payment appropriations would
not be fully used, since expenditure resulting from the projects
approved was lower than the pre-approval estimates in certain
years, including 1999. The outstanding amounts are smaller for
countries which make greater use of the annual instalment sys-
tem.

112. Monitoring of projects is a matter of particular concern to
the Commission. Intensifying the monitoring of CF projects as
the Court recommends would require a large increase in the num-
ber of Commission staff.

It takes a long time for certain projects to be approved
114.
because the information supplied is inadequate, because compli-
ance with Community rules is not demonstrated or because the
projects do not appear to have the highest priority given that
resources are limited.

With regard to its internal administrative procedures, the Com-
mission has instituted a new delegation procedure for project
approval which should speed the process up.

115. The Commission considers that the projects approved in
the period 1993 to 1999 fit into a coherent philosophy. However,
it hopes to strengthen the programming approach in the Com-
munity support framework III (2000 to 2006). It has therefore
asked the Member States to draw up a framework of reference set-
ting out the strategy and allowing CF and Structural Fund opera-
tions to be coordinated.

113. The Commission provided information on this matter at
the various monitoring committee meetings. The revised CF Regu-
lation gives more precise definitions of the various concepts.

117. The Commission will endeavour to improve the evaluation
tools in the light of experience.