Report on the annual accounts of the European Joint Undertaking for ITER and the Development of Fusion Energy for the financial year 2012, together with the Joint Undertaking’s replies
Date: 2013-10-22
Institutions: European Court of Auditors
Subjects: administration of the Institutions, auditing, budgetary control, financial control, joint venture, nuclear fusion, nuclear reactor, nuclear research, powers of the institutions (EU), research programme








C_2013369EN.01003501.xml










17.12.2013   


EN


Official Journal of the European Union


C 369/35





REPORT
on the annual accounts of the European Joint Undertaking for ITER and the Development of Fusion Energy for the financial year 2012, together with the Joint Undertaking’s replies
2013/C 369/05

CONTENTS








 



Paragraph




Page





Introduction …


1-3


36




Information in support of the statement of assurance …


4


36




Statement of assurance …


5-12


36




Opinion on the reliability of the accounts …


10


37




Opinion on the legality and the regularity of the transactions underlying the accounts …


11


37




Comments on budgetary and financial management …


13-14


37




Presentation of the accounts …


13


37




Implementation of the budget …


14


37




Comments on key controls of the Joint Undertaking’s supervisory and control systems …


15-23


37




Operational procurement and grants …


16-20


38




Overall control and monitoring of operational procurement contracts and grants …


21-23


39




Other matters …


24-33


39




Intellectual property rights and industrial policy …


24


39




Late payment of membership contributions …


25


39




Rules implementing the Staff Regulations …


26


40




EU contribution to ITER construction phase …


27-31


40




Annual activity report …


32


40




Follow-up of previous observations …


33


40




Host State agreement …


33


40





INTRODUCTION







1.


The European Joint Undertaking for ITER (1) and the Development of Fusion Energy (F4E) was set up in March 2007 (2) for a period of 35 years. While the main fusion facilities are to be developed at Cadarache in France, the Joint Undertaking is located in Barcelona.










2.


The tasks of the Joint Undertaking are (3):






(a)


to provide the contribution of Euratom to the ITER International Fusion Energy Organisation (4);










(b)


to provide the contribution of Euratom to ‘Broader Approach’ (complementary joint fusion research) activities with Japan for the rapid development of fusion energy;










(c)


to prepare and coordinate a programme of activities in preparation for the construction of a demonstration fusion reactor and related facilities, including the International Fusion Materials Irradiation Facility.














3.


The members of the Joint Undertaking are Euratom, represented by the European Commission, the Member States of Euratom and other countries which have concluded cooperation agreements with Euratom in the field of controlled nuclear fusion and have expressed their wish to become members (as at 31 December 2012: Switzerland).





INFORMATION IN SUPPORT OF THE STATEMENT OF ASSURANCE







4.


The audit approach taken by the Court comprises analytical audit procedures, testing of transactions at the level of the Joint Undertaking and an assessment of key controls of the supervisory and control systems. This is supplemented by evidence provided by the work of other auditors (where relevant) and an analysis of management representations.





STATEMENT OF ASSURANCE







5.


Pursuant to the provisions of Article 287 of the Treaty on the Functioning of the European Union (TFEU), the Court has audited:






(a)


the annual accounts of the Joint Undertaking for ITER and the Development of Fusion Energy, which comprise the financial statements (5) and the reports on the implementation of the budget (6) for the financial year ended 31 December 2012; and










(b)


the legality and regularity of the transactions underlying those accounts.









The management’s responsibility







6.


In accordance with Articles 33 and 43 of Commission Regulation (EC, Euratom) No 2343/2002 (7), the management is responsible for the preparation and fair presentation of the annual accounts of the Joint Undertaking and the legality and regularity of the underlying transactions.






(a)


The management’s responsibilities in respect of the Joint Undertaking's annual accounts include designing, implementing and maintaining an internal control system relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error, selecting and applying appropriate accounting policies on the basis of the accounting rules adopted by the Commission’s accounting officer (8), and making accounting estimates that are reasonable in the circumstances. The Director approves the annual accounts of the Joint Undertaking after its accounting officer has prepared them on the basis of all available information and established a note to accompany the accounts in which he declares, inter alia, that he has reasonable assurance that they present a true and fair view of the financial position of the Joint Undertaking in all material respects.










(b)


The management’s responsibilities in respect of the legality and regularity of the underlying transactions and compliance with the principle of sound financial management consist of designing, implementing and maintaining an effective and efficient internal control system comprising adequate supervision and appropriate measures to prevent irregularities and fraud and, if necessary, legal proceedings to recover funds wrongly paid or used.









The auditor’s responsibility







7.


The Court’s responsibility is, on the basis of its audit, to provide the European Parliament and the Council (9) with a statement of assurance as to the reliability of the annual accounts and the legality and regularity of the underlying transactions. The Court conducts its audit in accordance with the IFAC International Standards on Auditing and Codes of Ethics and the INTOSAI International Standards of Supreme Audit Institutions. These standards require the Court to plan and perform the audit to obtain reasonable assurance as to whether the annual accounts of the Joint Undertaking are free from material misstatement and the underlying transactions are legal and regular.










8.


The audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the accounts and the legality and regularity of the underlying transactions. The procedures selected depend on the auditor’s judgement, which is based on an assessment of the risks of material misstatement of the accounts and material non-compliance by the underlying transactions with the requirements in the legal framework of the European Union, whether due to fraud or error. In assessing these risks, the auditor considers any internal controls relevant to the preparation and fair presentation of the accounts, as well as the supervisory and control systems that are implemented to ensure the legality and regularity of underlying transactions, and designs audit procedures that are appropriate in the circumstances. The audit also entails evaluating the appropriateness of accounting policies, the reasonableness of accounting estimates and the overall presentation of the accounts.










9.


The Court considers that the audit evidence obtained is sufficient and appropriate to provide a basis for the opinions set out below.






Opinion on the reliability of the accounts








10.


In the Court’s opinion, the Joint Undertaking's annual accounts present fairly, in all material respects, its financial position as at 31 December 2012 and the results of its operations and its cash flows for the year then ended, in accordance with the provisions of its financial rules and the accounting rules adopted by the Commission’s accounting officer.






Opinion on the legality and regularity of the transactions underlying the accounts








11.


In the Court’s opinion, the transactions underlying the annual accounts for the l year ended 31 December 2012 are, in all material respects, legal and regular.










12.


The comments which follow do not call the Court’s opinion into question.





COMMENTS ON BUDGETARY AND FINANCIAL MANAGEMENT



Presentation of the accounts








13.


In the notes to the financial statements, the table and the information included under Heading 4.3.1.1 ‘ITER Procurement Arrangements with the ITER International Organization’ reflect the procurement arrangements signed (column 3) and the procurement arrangements credited so far (column 4). It does not show, however, the degree of advancement of the works in progress. This information is essential to reflect the status of the activities carried out so far by F4E as regards the procurement arrangements signed with the ITER International Organisation.






Implementation of the budget








14.


The utilisation rates for the available commitment and payment appropriations were 99,9 % and 94,5 %, respectively. However, the utilisation rate for the payment appropriations referred to in the 2012 initial budget was 71 % (10). Of the 1 440 million euro in commitment appropriations available for operational activities, only 55,4 % was implemented through direct individual commitments, while the remaining 44,6 % was implemented through global commitments.





COMMENTS ON KEY CONTROLS OF THE JOINT UNDERTAKING’S SUPERVISORY AND CONTROL SYSTEMS







15.


The Court of Auditors previously reported that the Joint Undertaking’s internal control systems had not been fully established and implemented. Although significant progress was made during 2012, a number of actions still need to be implemented:






—


a management system to regularly monitor the validity of project cost estimates and report on cost deviations (see paragraph 29),










—


the accounting officer’s validation of the underlying systems was initiated in 2012, but direct testing of the Joint Undertaking’s key controls at transaction level was still required at the end of the year. In 2013 the Joint Undertaking contracted a consulting firm (11) to complete the compliance validation work of the accounting system. While the overall conclusion is that F4E's accounting system is compliant with DG Budget Guidance, F4E's Financial Regulation, policies and procedures, several exceptions were reported (12),










—


further efforts are necessary with regard to the systematic verification, prior to payment, of technical acceptance reports and the audit certificates on financial statements (see paragraphs 16 to 20),










—


a comprehensive overall control and monitoring system for grants and operational contracts was presented to the Governing Board in December 2012 (see paragraph 23),










—


the action plans adopted by the Joint Undertaking in response to internal audits (13) have not been fully implemented. As regards the Commission’s Internal Audit Service report on the preparation of procurement arrangements (14), all ten recommendations are being implemented,










—


the corporate risk management system was presented to the F4E Audit Committee in July 2012. Ten areas of very high risk were identified. (15) Mitigating actions have yet to be implemented.










Operational procurement and grants








16.


Negotiated procedures constituted 40 % (16) of all operational tendering procedures launched in 2012 (17) (65 % in 2011). The Joint Undertaking still needs to increase the competitiveness of procurement procedures and further reduce the use of negotiated procedures (18). Regarding grants, the average number of proposals received was only one per call.










17.


Grant agreements concluded by the Joint Undertaking do not have a provision similar to Article II.25 of the European Commission’s model grant agreement (19), which stipulates financial penalties for beneficiaries that make false declarations or seriously fail to meet their obligations. In one grant agreement the Joint Undertaking accepted the whole amount of indirect costs as eligible despite a scope limitation in the audit certificate in respect of consumables (20).










18.


The Joint Undertaking has not developed an internal procedure to systematically assess the risk of a payment being made while a non-conformity report is under review. In one payment related to an operational contract, the Joint Undertaking validated an invoice as ready for payment despite a major situation of non-conformity noted in the technical acceptance report, which was still under review by the ITER Organisation at the date of payment.










19.


For joint procurement procedures, the Joint Undertaking has not yet established appropriate criteria to verify whether the procurement rules of the other contracting authority are equivalent to its own, as required by Article 83 of the Joint Undertaking’s implementing rules (21).










20.


As regards the five operational procurement procedures audited, the following weaknesses were identified:






—


in two procurement procedures, the Joint Undertaking did not advertise the contract by means of a pre-information notice, although the Commission Vademecum on public procurement advises that this be done in order to increase visibility and competition,










—


in one procurement procedure, the early warning system (indicating, inter alia, whether the natural or legal person concerned is in a situation of exclusion) was not consulted before the award because the Joint Undertaking had no access at that time to the system,










—


in one case, the Joint Undertaking made an advance payment of 10 % of the total amount although the bond provided to the Joint Undertaking was issued by a commercial bank that did not meet the BBB rating stipulated in the contract,










—


in two procedures, the cost estimates were greatly underestimated (22). This shows the difficulties faced by the Joint Undertaking in calculating the cost estimates of the EU contribution to the construction phase of the ITER project (see paragraphs 28 to 31).










Overall control and monitoring of operational procurement contracts and grants








21.


The Joint Undertaking has a system for performing audits (23) at the level of contractors with the aim of checking compliance with the quality assurance requirements (24).










22.


The Joint Undertaking visited six beneficiaries of grant agreements for ex post financial and compliance controls on grants. The errors detected during these controls amounted to 1,3 % of the total value of the cost claims audited (8,3 million euro).










23.


In response to previous Court observations (25), the Joint Undertaking presented, in November 2012 to the F4E Audit Committee and in December 2012 to the Governing Board, two documents on the overall control and monitoring strategy and the multiannual ex post control strategy, by which it extended its quality audits to include the verification of financial aspects of operational contracts.





OTHER MATTERS



Intellectual property rights and industrial policy








24.


On 28 March 2012 the Governing Board adopted the F4E policy on intellectual property rights and the dissemination of information, and on 29 June 2012 it adopted detailed rules for implementing this policy. The F4E industrial policy was adopted by the Governing Board on 10-11 December 2012. A plan to systematically monitor and report on the observance of the rules adopted on intellectual property rights and the dissemination of information, and on compliance with the F4E industrial policy, has not yet been implemented.






Late payment of membership contributions








25.


The 2012 contributions by eight members, totalling 1,2 million euro, were subject to delays ranging from 15 days to 4 months.






Rules implementing the Staff Regulations








26.


F4E has not yet adopted all the rules implementing (26) the Staff Regulations, as required by Article 10(2) of the Annex to the F4E Statutes.






EU contribution to ITER construction phase








27.


The Council conclusions adopted on 7 July 2010 (27) on the ITER status and the possible way forward approved a final figure of 6,6 billion euro.










28.


On 13 January 2012, the internal auditor’s report on pre-procurement activities for the ITER project pointed out that: (i) neither of the two cost estimating exercises carried out by that date had broken down the cost estimates of the EU contribution to the ITER construction phase by contract; (ii) the Joint Undertaking was exposed to significant financial risks linked to the evolution of commodity prices; and (iii) the Joint Undertaking did not yet have in place a tool for regularly monitoring the validity of the estimates and reporting on potential cost deviations.










29.


In its progress report of September 2012 to the European Competitiveness Council, the Joint Undertaking stressed that there was a risk of cost deviations in the range of 180-250 million euro, or 3 % of the latest estimated project cost of 6,6 billion euro.










30.


On 13 June 2013, the Joint Undertaking completed an exercise to update the cost estimate of the EU contribution to the construction phase of the project. As a result of this exercise, the current risk of increase is estimated at 290 million euro, or 4,4 % of the budget approved by the Council. According to the Joint Undertaking, there has been a significant escalation in the costs of the components to be provided to the ITER project. These are mainly attributed to the system engineering and configuration management processes at the overall ITER project level. The Joint Undertaking also considers the current ITER reference schedule to be unrealistic.










31.


In this regard, the cost estimates for two of the five operational procurement procedures selected for audit were significantly underestimated (see paragraph 20).






Annual activity report








32.


According to Article 43 of the F4E Financial Regulation the annual activity report shall indicate the results of the Joint Undertaking’s operations by reference to the objectives set, the risks associated with these operations, the use made of the resources provided and the efficiency and effectiveness of the internal control system. However, because of the date of availability of the revised cost estimation (see paragraph 30), the 2012 F4E annual report does not include up to date information on the risks associated with deviations from the approved 6,6 billion euro budget.






Follow-up of previous observations



Host State agreement







33.


According to the Host State Agreement signed with the Kingdom of Spain on 28 June 2007, permanent premises should have been made available to the Joint Undertaking by June 2010. At the time of the audit (April 2013), this had not occurred.





This Report was adopted by Chamber IV, headed by Dr Louis GALEA, Member of the Court of Auditors, in Luxembourg at its meeting of 22 October 2013.


For the Court of Auditors

Vítor Manuel da SILVA CALDEIRA

President





(1)  ITER: International Thermonuclear Experimental Reactor.

(2)  Council Decision 2007/198/Euratom of 27 March 2007 establishing the European Joint Undertaking for ITER and the Development of Fusion Energy and conferring advantages upon it (OJ L 90, 30.3.2007, p. 58).

(3)  The Annex summarises the Joint Undertaking’s competences, activities and available resources. It is presented for information purposes.

(4)  The ITER International Fusion Energy Organisation was set up in October 2007 for an initial period of 35 years to implement the ITER project, which aims to demonstrate the scientific and technological feasibility of fusion energy. The Members are Euratom, the People's Republic of China, the Republic of India, Japan, the Republic of Korea, the Russian Federation and the United States of America.

(5)  The Court received the annual accounts on 1 July 2013 and a corrigendum to these accounts on 8 October 2013. These include the balance sheet and the economic outturn account, the cash-flow table, the statement of changes in net assets, a summary of the significant accounting policies and other explanatory notes.

(6)  These comprise the reports on implementation of the budget, a summary of budgetary principles and other explanatory notes.

(7)  OJ L 357, 31.12.2002, p. 72.

(8)  The accounting rules adopted by the Commission’s accounting officer are derived from the International Public Sector Accounting Standards (IPSAS) issued by the International Federation of Accountants or, where relevant, the International Accounting Standards (IAS)/International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board.

(9)  Article 185(2) of Council Regulation (EC, Euratom) No 1605/2002 (OJ L 248, 16.9.2002, p. 1).

(10)  The original budget for payment appropriations was 503 million euro. It was then reduced to 377 million euro through the amending budgets of 28 March and 11 December 2012 (this amount includes the 2011 carry-over of 32,9 million euro in assigned revenue).

(11)  Notwithstanding the added value of the consulting firm report, the exercise of validating the accounting systems falls under the responsibility of the Accounting Officer as laid down in Article 46 of the JU's Financial Regulation.

(12)  Among other exceptions, the report points out that the deadlines adopted in the action plans in response to the Internal Auditor, the Commission Internal Audit Service and the Court's reports have expired for many of the actions without having achieved full implementation. It also points out that the local reporting portal (DWH) does not yet provide an effective reconciliation between the accounting and the project management system.

(13)  Action plans in response to the internal audits on financial circuits, grant management, expert contracts, operational pre-procurement activities and procurement in the area of ITER buildings were adopted by the Joint Undertaking on 30 June 2010, 14 February 2011, 19 November 2011, 1 March 2012 and 21 September 2012 respectively.

(14)  Commission IAS report of 7 November 2012 on procurement arrangements.

(15)  Among others: low budget implementation, lack of competition in operational procurement, delays in the reception of data from the ITER Organisation.

(16)  Out of this percentage, 25 % can be considered as exceptional negotiated procedures as the estimated contract value exceeded 250 000 euro.

(17)  20 negotiated procedures out of 50 tendering procedures launched for operational procurement in 2012.

(18)  According to the Commission Vademecum on public procurement, negotiated procedures should be the exception rather than the rule.

(19)  Article II.25, on financial penalties, states that: ‘1) A beneficiary that has been guilty of making false declarations or has been found to have seriously failed to meet its obligations under this grant agreement shall be liable to financial penalties of between 2 % and 10 % of the value of the financial contribution of [the Union] [Euratom] received by that beneficiary. The rate may be increased to between 4 % and 20 % in the event of a repeated offence within five years following the first infringement.’

(20)  The consumables item, which could not be quantified or verified, was part of the total 0,76 million euro in indirect costs submitted by the beneficiary.

(21)  According to Article 83(1) and (2) of the implementing rules to the F4E Financial Regulation, in the event of a joint procurement procedure between the Joint Undertaking and another contracting authority, the Joint Undertaking’s procurement procedures shall apply. Where the share pertaining to or managed by the other contracting authority in the total estimated value of the contract is equal to or above 50 %, or in other duly justified cases, the Director, with the prior approval of the Executive Committee, may decide that the procurement procedures applicable to the other contracting authority may apply, provided that they can be considered as equivalent to those of the Joint Undertaking.

(22)  In one of the procedures there was a difference of 9,3 million euro between the initial estimate of 2,8 million euro and the value of the contract resulting from the negotiated procedure, which was 12,1 million euro. In the other there was a difference of 3,7 million euro between the initial estimate of 2,3 million euro and the final estimate of 6 million euro.

(23)  Of the 25 quality audits carried out during 2012, 14 were closed by April 2013. The audits qualified two projects’ performance as below standard, identified 12 situations of non-conformity with the procedures and 168 areas for improvement.

(24)  The audits covered the quality plan, situations of non-conformity, purchase control and subcontracting management, documentation and data management, changes and deviations management, the civil works quality control plan, the detailed project schedule, contract risk management and the technical works quality control plan.

(25)  Paragraph 23 of the Court’s 2011 report.

(26)  Inter alia on recruitment of temporary agents, classification in grade and step upon engagement, part-time work, appraisal of the Director and modified provisions on family leave, parental leave and pension rights.

(27)  Council conclusion on ITER status of 7 July 2010 (Ref.11902/10).


ANNEX

European Joint Undertaking for ITER and the Development of Fusion Energy (Barcelona)


Competences and activities








Areas of Union competence deriving from the Treaty


(Articles 45 and 49 of the Treaty establishing the European Atomic Energy Community)



Chapter 5, on ‘Joint Undertakings’, of the Treaty establishing the European Atomic Energy Community, and in particular:






—


Article 45


‘Undertakings which are of fundamental importance to the development of the nuclear industry in the Community may be established as Joint Undertakings within the meaning of this Treaty, in accordance with the following Articles …’












—


Article 49


‘Joint Undertakings shall be established by Council decision. Each Joint Undertaking shall have legal personality.’











Competences of the Joint Undertaking


(Council Decision 2007/198/Euratom)




Objectives







—


To provide the contribution of the European Atomic Energy Community (Euratom) to the ITER International Fusion Energy Organisation.










—


To provide the contribution of Euratom to Broader Approach activities with Japan for the rapid realisation of fusion energy.










—


To prepare and coordinate a programme of activities in preparation for the construction of a demonstration fusion reactor and related facilities, including the International Fusion Materials Irradiation Facility (IFMIF).





Tasks







—


Oversee preparation of the ITER project site,










—


provide components, equipment, materials and other resources to the ITER Organisation,










—


manage procurement arrangements vis-à-vis the ITER Organisation and, in particular associated quality assurance procedures,










—


prepare and coordinate Euratom's participation in the scientific and technical exploitation of the ITER project,










—


coordinate scientific and technological research and development activities in support of Euratom's contribution to the ITER Organisation,










—


provide Euratom's financial contribution to the ITER Organisation,










—


arrange to make human resources available for the ITER Organisation,










—


interface with the ITER Organisation and carry out any other activities in furtherance of the ITER Agreement.









Governance




Governing Board, Director and other bodies

The Governing Board is responsible for the supervision of the Joint Undertaking in the pursuit of its objectives and ensures close collaboration between the Joint Undertaking and its members in the implementation of its activities. Together with the Governing Board and the Director, who is the chief executive officer responsible for the day-to-day management of the Joint Undertaking and its legal representative, the Joint Undertaking has several bodies:
Bureau, Technical Advisory Panel, Executive Committee, Administration & Finance Committee, Audit Committee.

Internal auditor: internal audit capability and the European Commission’s Internal Audit Service (IAS) since 1.1.2012.

External auditor: European Court of Auditors.

Discharge authority: the European Parliament, on a recommendation from the Council.





Resources available to the Joint Undertaking in 2012




Budget

379,5 million euro final revenue (payment appropriations), of which 76,5 % funded by Community contribution.

Staff at 31 December 2012







—


262 EU official and temporary agent posts provided for in the establishment plan, of which 218 posts were occupied,










—


125 contract agent posts occupied.









Activities and services provided in 2012



For detailed information concerning the activities and services provided in 2012, please consult the F4E website at http://www.fusionforenergy.europa.eu/





Source: European Joint Undertaking for ITER and the Development of Fusion Energy.







THE JOINT UNDERTAKING’S REPLIES






13.


As far as the ITER Procurement Arrangements are concerned, the official progress of the work is given, from the value point of view, by the Credit Allocation Scheme (CAS) milestones that F4E earn yearly on the way to the completion of the specific procurement. This is what ITER IO officially acknowledges as far as the progress is concerned. However, the value of the CAS milestones is peaked towards the end of the procurement and therefore the acknowledgment through credits is skewed. Therefore indeed the PA progress is directly monitored through the CAS milestones, but also indirectly through the achievement of the milestones of the associated contracts.










14.


It should be noted that the ratio of individual commitments has increased by 13 % since 2012 and that the plan for implementation of the 2013 budget indicates that the percentage of individual commitment should be up to 80 % at the end of 2013. F4E is therefore progressively recovering its delays in the actual implementation of the contracts linked to specific annual budget/work programme. In addition the forecast of implementation confirms the use in 2013 of the full amount available on 2012 Global commitments.










15.


F4E considers that the overall internal control system is in place and evolves with the organisational needs. The establishment and implementation of an internal control system evolves with the organisational changes and should be considered as a continuous ongoing process.
Since its establishment, F4E has taken the development of its overall control strategies as one of its key priorities. Various control systems have already been put in place and are providing management with the necessary assurance. In addition, in 2012, a team directly reporting to the Director was established dedicated to develop and implement the overall control strategy of F4E, to monitor the effectiveness of the internal control environment and to follow up all internal and external audit recommendations.
Aside from the overall conclusion and without significant impact on the validation, the independent consulting firm indeed identified several exceptions and/or areas for improvement. It needs to be noted that a number of these areas had been previously detected in other audits and/or assessments and have already been addressed in those action plans. The main issue addressed by the independent audit firm and requiring immediate action referred to operational asset. This recommendation has immediately been brought to the attention of F4E management and corrective measures have been formulated within an action plan.
Since its set up, the Joint Undertaking has placed extensive effort in the development of an integrated management and control Information System which allows the close monitoring of cost estimates and deviations (see paragraph 29).
In relation to the follow up of internal and external audits, it should be noted that despite the observation made by the ECA, the Audit Committee, in its meeting of 14 June 2013, recognised the improvements and expressed their appreciation for the progress made in the implementation of the action plans.
Risk Management has been established and is systematically embedded at project level. A Risk Manager has been assigned to follow up the risk register and its mitigating actions. The risk log is being updated for each GB meeting.










16.


Due to their low average value, negotiated procedures correspond to 40 % of yearly operational procurement procedures but only to less than 10 % of the JU's yearly commitment: in this respect the use of low-value negotiated procedures allows the JU to focus the limited internal resources on the high value/high risk procurements, with a beneficial risk mitigating effect.
In relation to the very low number of proposals received for the grant calls, the JU acknowledges the issue: so far all the attempts to improve and widen participation to the calls for proposals were unsuccessful. This is deemed to be due to the extremely specialist nature of F4E's grants, which are only of interest to a small number of applicants in Europe.
It should be noted that in its study ‘Potential for reorganization within the ITER project to improve cost-effectiveness’ ordered by the Budgetary Control Committee of the European Parliament, Ernst & Young agreed that the regulations imposed on F4E are not well adapted to F4E's very particular objectives and constrain F4E's capacity to innovatively approach cost-effectiveness.










17.


With respect to the first conclusion, F4E agrees with the statement that penalties are not foreseen in its Model Grant Agreement (MGA). The draft of the F4E Financial Regulation approved by the F4E Governing Board in 2007 foresaw the possibility for F4E to impose such penalties. This possibility has been removed from the text following a specific request from the European Commission submitted during a consultation process under Article 5 of the Statutes.
However F4E believes that absence of such provision in the MGA does not expose significantly F4E to the risk of not receiving essential deliverables in due course, or receiving deliverables which do not meet quality standards. Under the MGA F4E may always terminate the grant agreement and require in case of non-performance or poor performance, breach of substantial obligations and other circumstances specified in the MGA reimbursement of all or part of F4E's financial contribution.
With respect to the second conclusion, it should be pointed out that following the scope limitation of the Audit Certificate, F4E requested the beneficiary clarifications regarding indirect costs and subsequently requested the audit firm to present an amendment to the audit certificate. The payment was authorised based on the additional evidence received.










18.


F4E would like to confirm that in the reorganisation of its financial circuits in June 2013, it took into account the preliminary finding of the auditors. To this extent, additional controls have been put in place at the level of the Technical Acceptance Report (TAR) whereby request for payments can only be passed if there are no outstanding non-conformities. In addition, the financial agents now also perform a review of the TAR, ensuring that technical report and the invoice are in conformity with the contractual conditions.










19.


F4E verifies the equivalency of the other contracting party procurement rules with F4E procurement rules for each joint procurement for which the other party rules are used as required under Article 83 of F4E IR. F4E agrees with the Court that it may be appropriate to establish common standards upon which such equivalence will be verified by F4E on uniformed basis in the future joint procurements although it is not strictly required under Article 83 IR.










20.


In relation to the use of pre-information notices, it was not the intention of the JU to use the pre-information notice for shortening the minimum time limit for receipt of tenders therefore it was considered more useful for visibility and competition purposes to hold information days with European industry before the publication of the contract notice, giving to economic operator the possibility to raise questions on general technical and administrative aspect of the call and also to liaise with possible business partners.
In relation with the non-compliance with Article 85 FR, the JU agrees with the findings by the Court; it must be pointed out that in the meanwhile the JU has been granted access to the EWS and the check is now performed for all awards.
At the time of the signature of a contract in December 2012, F4E was provided with a guarantee from a bank) which did not fulfil the rating requirements of the contract (to be at least BBB rated). This situation was detected by the Finance Team, at the time of the validation of the pre-financing payment, and the guarantee was consequently rejected. The Contractor was requested to provide a valid guarantee from a bank with the required rating. However, closing of the accounts was approaching and the Contractor provided sufficient assurance concerning the ongoing negotiations with another bank, the AD decided to proceed and authorise the pre-financing payment. This decision was based on the assessment that the damages caused to F4E by the loss of the payment appropriations would be much bigger than the risk of not being provided with a new guarantee, taking into account that pre-financing payment was still guaranteed by the initial bond. Finally the new bank guarantee was provided in the first week of February.
For what concerns one of the referenced procedures the cost estimate was indeed not correct, as it was not properly updated during the evolution of the design (before the call publication).
However for what concerns the second procedure, the large difference between the initial estimate and the first offer received is understood to be the result of a monopoly situation existing at the time in the European market.
The JU cancelled the first call and republished the same scope breaking it up into lots to allow for a wider competition. This resulted in a total price much closer to the JU's original estimate, in particular considering that the division in lots had detrimental effects on economies of scale and caused an increase in the non-recurring costs.










21-23.


In 2013, F4E continued the further implementation of its overall control and monitoring strategy and the ex post and verification strategy which had been presented to its Governing Board in December 2012.
As regard the ex post, a pilot exercise was launched with an external audit firm to assess the eligibility of cost claimed by contractors in the frame of grant agreements. The outcome of the pilot exercise will permit F4E to fine-tune and further harmonise its ex post control processes.
Meanwhile, the annual planning of the Quality Assurance audits continues to be implemented as scheduled. Based on comments made by the Court of Auditors in previous annual reports, the scope of the QA audits is presently being re-assessed through a pilot exercise in order to extend with financially oriented checks on operational contracts, the so called ‘lion ex post financial verifications of procurement contracts’.
It needs to be mentioned however, that the Audit Committee of F4E's Governing Board formulated its opinion against the proposed actions in response to the Court's observations on ex post financial verifications of procurement contracts in its 2011 annual report, as it goes against the principle of contracts agreed upon price. The Audit Committee requested to the Court to reassess their position in that regard. As a result, F4E redesigned its financial verifications of operational contracts as mentioned by the Court.










24.


On 26 and 27 June 2013 the Governing Board adopted the document on the ‘Implementation of the Industrial Policy’ with the agreement of the European Commission. Such Policy together with the ones previously adopted establishes the policy and framework for the management of the Intellectual Property within Fusion for Energy.
The practical implementation of our obligations for the management of IP can be summarised as follows:






—


The Market Analysis Policy includes provisions on the treatment of Intellectual Property in advance of the procurement process to guarantee the compliance of the procurement strategy with the Intellectual Property guidelines of F4E's Industrial Policy.










—


The Contract Signature Checklist monitors the existence of the Background Declaration.










—


The final observance of the IP rules by the contractor is monitored through the Technical Assessment Report whereby Technical Project Officers confirm that the deliverables include a report on IP and that such report is in line with the subject matter of the contract and it is consistent with the technical reported results.




Finally, to guarantee the confidentiality of the IP related information managed in our contracts an Information Security Policy is being implemented. The policy, will foresee the electronic storage on a dedicated server of IP confidential information. The adoption of such policy is imminent and its implementation for the management of IP related information should be ready by January 2014.










25.


Although F4E agrees with the factual conclusion of the Court of Auditors, it would need to stress that since the observation was first made by the auditors in 2008, F4E has taken all necessary actions to redress the situation. The Governing Board has taken its responsibility to address the issue, while systematic reminders are sent to the late contributor and Member States that do not pay on time are requested to pay late interest according to Article 48 of the IR. Unfortunately, the internal procedures of some of the Member States make it sometimes impossible for them the respect the deadlines established by F4E's Financial Regulation.
As concerns the budgetary impact, it is important to underline that the membership contributions subject to the Court's observation represents 0,6 % of F4E's budget and in consequence; the delays a fraction of this percentage.
Finally, by the end of the budget year 2012, only an amount of 1 085 euro remained due.
Therefore late payments of membership contributions in 2012 had no measureable impact on the implementation of the budget and F4E.
Meanwhile, F4E will continue to ensure that the membership contributions will be paid within the shortest delay.










26.


F4E agrees with the comment. It is correct that at the time of the audit, the implementing rules mentioned had not been formally adopted. However, we would like to underline that in order to avoid legal vacuum, the Director of Fusion for Energy had adopted decisions stating that the model implementing rules applicable to agencies or the Commission rules were applying to the Joint Undertaking by analogy (except if otherwise mentioned). In this respect, Fusion for Energy provided itself with a proper and transparent reference framework, which was consistently applied by the organisation until the formal rules adopted by the Governing Board were in place.
Concerning this last point, significant progress was made since the audit took place. The following implementing provisions have indeed been formally adopted by the Governing Board in December 2012: criteria of classification in grade and step upon engagement, part-time work, appraisal of the Director, family leave, parental leave and transfer of pension rights.
In relation with the provisions on the engagement and use of temporary, on appraisal, on prevention of harassment, certification and attestation, the IRs were sent to the Commission for approval between January and February 2013 (after conclusion of the internal consultation process) and F4E is expecting the Commission's approval before it can be adopted by the GB. This is expected to take place in December 2013.
The consultation of the Staff Committee is currently ongoing for the Implementing Rules on leaves and absences, sickness absences, middle management and interim occupation of management positions. These will be submitted to the Commission's approval shortly.
For implementing Rules such as the ones on engagement and use of Contract Agents, F4E is waiting for the models to be finalised by the Commission and therefore cannot yet be submitted under Article 110 of the Staff Regulations.
Finally, we would like to reiterate Fusion for Energy's commitment to increase the number of implementing rules to be adopted in the course of 2013 and beyond. With this in view, an estimated adoption calendar has been approved and internal arrangements aiming at facilitating the adoption process have been implemented. We are confident that additional progress will therefore be made.










27-31.


In 2008 a working group at F4E, supported by experts from industry and public research organisations, estimated that the expected cost of delivering the then agreed European contribution to the construction of ITER was 5 940 million euro with a need for 663 million euro in contingency. The cost of the Broader Approach cooperation with Japan and administration of F4E, was estimated in 2008 to be 650 million euro, resulting in an overall cost estimate of 7 253 million euro in 2008 euro value including the abovementioned contingency.
The Council has made 6 600 million euro in 2008 euro value available in the period 2007-2020 for F4E to fulfil the European obligations in respect of ITER and the Broader Approach and requested F4E to make all possible savings to ensure that the capped budget would be respected.
Since 2008 the ITER project has evolved significantly in response to increased safety requirements in the aftermath of the Fukushima accident, new scientific insights and maturing of the design. While some requirements have been relaxed most changes have augmented the requirements and increased the scope of what Europe is required to deliver to ITER. Such changes are decided by the ITER Organisation (IO) and its governing bodies.
Recognising that the scope of the European deliverables to ITER has changed substantially and designs matured considerably since the 2008 cost estimation, a thorough revision of the entire cost estimation was conducted by F4E during the first 6 months of 2013.
Unlike the incremental updates of the cost estimate presented in previous reports to Council, this updated cost estimate also captures changes further in the future. The expected cost of the European deliverables to ITER, the SA and running F4E is now estimated at 6 890 million euro. When compared with the capped budget of 6 600 million euro for the budgeting period till 2020 this shows a negative contingency of 290 million euro.
The change in the contingency from – 165 million euro to – 290 million euro since the F4E report to Council last year is in large measure due to a significant escalation in the expected and realised costs of buildings resulting from increase in the scope of the buildings to be provided and from the schedule pressure on construction of the buildings.
As noted in an Ernst and Young study entitled ‘Potential for reorganization within the ITER project to improve cost-effectiveness’ launched in July 2012 by the Budgetary Control Committee of the European Parliament and concluded in February 2013, F4E has little or no control over such changes, this being the remit of the ITER Council and its subsidiary bodies.
Nevertheless and to ensure that the cap on the budget is respected F4E has developed and continues to develop and implement a broad range of cost containment measures including optimising procurement strategies and contractual conditions to reduce costs, and in cooperation with IO optimising designs for cost containment. The status of past measures and the collection of current measures together with the new cost estimation was presented to the GB on 26 June 2013 (paper F4E(13)-GB27-06). These measures do offer saving opportunities in excess of 300 million euro and thus provide the necessary tools to ensure that the cap on the budget for the period until 2020 will be respected.










32.


The auditee agrees with this observation and points out that the information about the cost risks referred to in paragraph 30 was neither determined in the period that the 2012 annual report covers nor available at the time that it was being prepared and hence could not have been included in the annual report 2012 approved by the GB in June 2013. Furthermore, it has to be noted that such information is reported by F4E to the European Council and Parliament at least once a year in the F4E Progress report which presented on (a) the progress achieved in implementing the cost containment and savings plan, (b) as well as the performance and management of the Agency and the ITER project, and (c) the fulfilment of the scheduled activities within its annual budget. The 2013 report contains all the related information.










33.


The Host Agreement signed between ‘Fusion and for Energy’ and the Kingdom of Spain in 2007 does indeed foresee that Spain will provide F4E with permanent premises no later than 3 years after the signature of the agreement. The Agreement also foresees that in the meantime, and before the final premises are made available, Spain will provide temporary premises.
While Spain has not yet provided permanent premises, the Joint Undertaking occupies temporary premises free of cost, as Spain pays for the full cost of the premises (rent and maintenance as foreseen by the Host Agreement, while F4E pays for the tenant's part of the temporary premises).
In order to provide the final premises, Spain launched an informal procedure to select an appropriate site and architectural project. The selection of the site and project is foreseen to take place before the end of 2013.