REPLIES OF THE COMMISSION TO THE SPECIAL REPORT OF THE EUROPEAN COURT OF AUDITORS "ACHIEVING ECONOMY: KEEPING THE COSTS OF EU-FINANCED RURAL DEVELOPMENT PROJECT GRANTS UNDER CONTROL"
Date: 2015-01-21
Institutions: European Commission
Subjects: EU financing arrangements, audit, cost analysis, development plan, economic support, management audit, rural development, validation of expenditure







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EUR-Lex - 52015DC0031 - EN











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52015DC0031

REPLIES OF THE COMMISSION TO THE SPECIAL REPORT OF THE EUROPEAN COURT OF AUDITORS "ACHIEVING ECONOMY: KEEPING THE COSTS OF EU-FINANCED RURAL DEVELOPMENT PROJECT GRANTS UNDER CONTROL" /* COM/2015/031 final - 2014/ () */









REPLIES OF
THE COMMISSION TO THE SPECIAL REPORT OF THE EUROPEAN COURT OF AUDITORS
"ACHIEVING
ECONOMY: KEEPING THE COSTS OF EU-FINANCED RURAL DEVELOPMENT PROJECT GRANTS
UNDER CONTROL"

Executive summary

II. The Commission is
fully committed to achieving better economy and efficiency in rural development
expenditure, in particular when awarding grants for investment operations to
private  and public beneficiaries (reasonableness of costs). To this end, the
Commission has adopted a more active and coordinated approach, with greater
focus on economy, which it expects will lead to better financial management in
the next MFF, as shown in the replies below.
III. The Commission
carries out conformity audits in the Member States to verify that the
expenditure paid is in compliance with the rules. In these audits the
Commission has also found weaknesses regarding the reasonableness of costs.
Financial corrections have already been made in this respect and a number of
conformity clearance procedures are currently ongoing and should lead to
further financial corrections. 
IV. Paying agencies
must comply with the accreditation criteria laid down in Annex I of Regulation
907/2014 (programme 2014-2020) before any payments may be made. Article
24(2)(d) of Commission Regulation (EU) No 65/2011 required Member States to
assess the reasonableness of costs during administrative checks using a
suitable evaluation system, such as reference costs, comparison of offers or
evaluation committee. This provision has been maintained for the 2014-2020
period.
V. Initially, the
provisions on the evaluation of the reasonableness of costs submitted were
regarded as self-explanatory.[1]
Indeed, at the time of recasting the previous legal framework which took place
in spring 2010[2],
no major difficulties had been brought to the attention of the Commission on
this point. In the approval process of the recast, only one question (whether
maximum costs were a suitable method) was presented and answered.
VI. Reply
to VI (a)-(d)
During its
own audits, the Commission has found similar weaknesses to those indicated by
the Court and financial corrections have been applied to cover the risk to the
fund. Some conformity clearance procedures are still ongoing and are likely to
lead to further financial corrections.
The action
plans developed by the Member States in the exercise of reducing the errors in
the implementation of the rural development measures include better methods for
assessing the reasonableness of costs.
For the
2014-2020 programming period the enhanced use of standard costs should reduce
the risk of errors in this respect.
VIII. The ENRD will
disseminate good practices through dedicated seminars and webpages. 
IX. The Commission
accepts the Court's recommendation that Member States should have an effective
and efficient control system in place up front.  It will encourage the Member
States to use the check-list and the criteria developed by the Court and
contained in Annex I. 
By January
2015, the Commission will also provide guidance on controls and penalties under
rural development, including a specific section on reasonableness of costs and
the checklist for Managing Authorities annexed in the Special Report. 
Furthermore, training
and sharing of experiences will be part of the European Network for Rural
Development (ENRD) activities in the 2014-2020 period.

Introduction

3. As mentioned by
the Court, the Commission carries out conformity audits in the Member States to
verify that the expenditure paid is in compliance with the rules. In these audits
the Commission has also found weaknesses regarding the reasonableness of costs.
Financial corrections have already been made in this respect (e.g. 19 million
euros for Bulgaria) and a number of conformity clearance procedures are
currently ongoing and should lead to further financial corrections.
On 19/12/2013 the
Commission adopted guidelines for determining financial corrections to be made
by the Commission to expenditure financed by the Union under shared management,
for non-compliance with the rules on public procurement. According to these
guidelines, the non-respect of procurement rules is to be judged based on the
principle of proportionality.
4. The Commission
agrees that additional savings could be made and will take the Court’s
observations into account. 
5. For the 2014-2020
programming period the possibility of using standard costs will be generalised
and encouraged. This should reduce the risk for the Fund and also reduce the
administrative burden for the Member States.
15. In its own
audits, the Commission always assesses the reasonableness of costs for
investment measures and the respect of public procurement procedures. 
Almost all audits
conducted by the Commission identified weaknesses with regard to the
reasonableness of cost. These weaknesses should be addressed by the Member
States and they are followed up in subsequent audits.
DG AGRI's system- and
risk-based audit strategy takes into account the findings from previous DG AGRI
audits, from the European Court of Auditors, from OLAF and from the national
certification bodies in order to identify the most risky areas where future
audits shall focus. In addition, the audit strategy for the period 2014 – 2020
will ensure a better coverage of the overall expenditure and intensive audit
activities will continue to cover the most risky areas.
The action plans on
"error rates" include preventive and corrective actions to address
weaknesses related to the reasonableness of costs if such weaknesses have been
detected by the Commission or the European Court of Auditors' audits.
The new CAP
Regulation (EU) No 1306/2013 provides that the Commission may reduce or suspend
interim payments to Member States if control systems are not effective or when
remedial measures have not been implemented. A fast tool will be the possible
interruption of interim payments in case of concerns on the legality and
regularity of payments. 
Considering the
above, the Commission is confident that deficiencies will be revealed earlier,
and that this will lead to a better mitigation of risks and a faster
implementation of the necessary corrective actions.
21. The EAFRD is
implemented under shared management. The Commission implements the budget and
implementation tasks are shared with the Member States. The latter are required
to take the necessary measures to ensure that the actions are financed
correctly and in accordance with EU rules. While DG AGRI is fully assuming its
responsibilities, the detection and correction of errors are first and foremost
in the hands of the Member States. 
The Commission
carries out conformity audits in the Member States to verify that the
expenditure paid is in compliance with the rules. These conformity audits could
lead to financial corrections and a list of recommendations on how to improve
the management and control system. 
When Member States do
not implement proposed actions, they may be subject to suspension of payments
and financial corrections.
22. In addition, the
Commission now also has the right to suspend payments under certain conditions,
i.e. if there is a serious deficiency in the effective functioning of the
management and control system and the Member State has failed to take the
necessary action to remedy the situation.
24. Joint reply to
paragraphs 24-28: 
Financial corrections
have already been made in this respect and a number of conformity clearance
procedures are currently ongoing and should lead to further financial
corrections.
In almost none of the
audits performed by the Commission the reasonableness of costs could be considered
as totally satisfactory. When such weaknesses were found, apart from the
financial consequences, recommendations were issued. In some cases this led to
corrective actions. 
In its 2013 annual
report, the European Court of Auditors observed that the Member States had
enough information to detect and correct the majority of the errors found in
the area of rural development. For investment measures, the Court observed that
Member States could have detected and corrected all quantifiable errors in the
transactions reviewed.[3]
It should be noted
that the weaknesses identified by the Court in its audits for its annual
reports are followed up by the Commission through desk audits or conformity
audits or by the certifying body. 
29. As described by
the Court in paragraph 33, following the analysis, four seminars were organised
with the Member State authorities. During the seminars the issues linked to the
reasonableness of costs and public procurement were discussed and good
practises shared. Member States are also implementing action plans on error
rates, which in some cases include actions to improve the assessment of
reasonableness of costs.
In the particular
case of public procurement, a guidance document on most common irregularities
in the management of ESI Funds has already been presented to Member States (4th
Seminar Error Rate, Oct 2014).
30. For the new
programming period 2014-2020, the Commission put forward simplified cost
options (Flat rate financing, Standard scales of unit costs, Lump sums) as an efficient
means to ensuring reasonableness of costs.
Regulation (EU) No
1303/2013 includes options for the European Structural and Investment Funds to
calculate eligible expenditure of grants and repayable assistance on the basis
of real costs, but also on the basis of flat rate financing, standard scales of
unit costs and lump sums.
Guidance on
Simplified Cost Options (SCOs) has been prepared by the Commission in order to
provide technical guidance on the three kinds of simplified costs applicable
and to share the best practices with a view to encouraging Member States to use
simplified costs. However, it is up to the Member States to decide whether to
use the simplified cost options.
In a seminar on error
rate organised in October 2014, guidance on how to prevent irregularities under
public procurement procedures was presented to managing authorities and paying
agencies of all Member States. Finally, guidance on controls and penalties
under rural development will be made available before the end of 2014.
In addition, on
19/12/2013 the Commission adopted guidelines for determining financial
corrections to be made by the Commission to expenditure financed by the Union under shared management, for non-compliance with the rules on public procurement. 
As regards the
assessment of the control systems in place, the Commission has found that well
designed control systems were not always well implemented in practice. 
32. The action plans
were introduced following the Court of Auditors' findings in its annual report
2011. This has been a substantial task for the Member States. 
The Commission has
developed detailed tools to improve the quality of the action plans to address
the root causes of error. These included the preparation of guidelines on
topics such as simplified costs, public procurement, verifiability and
controllability of the measures in the rural development plans as well as
organising specific anti-fraud strategies.
In the latest update
(September 2014) of the action plans, Member States had to take into account
the Court and the Commission’s audit findings to a much larger extent. Indeed,
46% of the actions presented by Member States addressed concrete audit
findings, 50% of which came from the Court's reports. 
It should be noted
that the Commission's powers have been strengthened with the new CAP
Regulation (EU) No 1306/2013. Article 41 (2) provides that interim
payments to the Member State may be suspended or reduced when it is found that
key components of the national control system are not effective or when the
necessary remedial measures have not been implemented. Article 36 (7) provides
for the interruption of interim payments as a first quick and reactive tool in
case of concerns on the legality and regularity of payments.
Furthermore, in order
to avoid financial corrections, each paying agency for which reservations have
been made in DG AGRI's annual activity report, will have to act promptly.
33. In addition, the
Commission provides anti-fraud seminars to the Paying Agencies in the Member States (and Candidate Countries). The seminars aim at sharing information on areas
with a high risk of fraud and how to detect and prevent it. By the end of 2014,
the following Member States will have been covered by these seminars: Austria,
Belgium (Flanders), Cyprus, Czech Republic, Denmark, Estonia, Finland, France,
Germany, Greece, Ireland, Latvia, Netherland, Poland, Portugal, Romania, Slovak
Republic, Slovenia, Spain and Sweden. Seminars in the remaining Member States
are under preparation.
34. In the 2007-2013
period for the majority of the rural development investment measures, there was
no specific legal basis for the use of simplified cost options. Regulation (EU)
No 1303/2013 (Article 67-68) has included the possibility for all European
Structural and Investment Funds to implement these options and, therefore, it
is expected that, with the help of enhanced guidance by the Commission, a
bigger share of the expenditure will be based on simplified cost options in the
new programming period. Of course it is ultimately up to Member States to
decide whether they want to make use of simplified cost options.
35. The action plans
are focused on identification and correction of main sources of irregularities
in the expenditure, including weaknesses in checking the reasonableness of
costs. In fact, the Staff Working Document presented in June 2013 by the
Commission[4]
included the poor assessment of the reasonableness of costs as one of the main
roots of errors (RC10). Since then, Member States have progressively identified
shortcomings in this field and have launched preventive and corrective actions.
42. See reply to
paragraph 34.
Replies 44-49:
The monitoring and
evaluation systems set up by Member States following Annex IV of R. 808/2014
(RD Implementing Act) could be a useful tool to assess the reasonableness of
costs in the light of the outputs, results and impacts achieved and/or planned.
The Commission will recommend Member States to improve the cost-efficiency and
cost-effectiveness assessment of individual projects and operations. 
52. Specific
workshops on anti-fraud strategies are being organised in almost all Member
States by DG AGRI. 
See reply to
paragraph 33 for further details.
54. Good practices in
this field will be shared through the ENRD during the 2014-2020 period.
61. There are
different methodologies that can be applied in order to determine the
simplified cost options, as spelt out under Art 67(5) of Regulation (EU) No
1303/2013. Furthermore, according to Art 62(2) of Regulation (EU) No 1305/2013,
the managing authorities shall include in their rural development programmes a
statement confirming the adequacy and accuracy of the calculations. This
statement must be carried out by a functionally independent body.
62. Under the current
legal framework, the Commission cannot oblige Member States to update or
periodically review the simplified cost options' methodology put in place by
the managing authorities following Art 67 of Regulation (EU) No 1303/2013,
although the Commission encourages that the systems in place reflect the
development of market prices over the time. 
Box
  7 - Standard unit costs based
on theoretical calculations can overstate the available market prices,
resulting in overpayments
For the coming 2014-2020 period, such a system should be based on
a fair, equitable and verifiable calculation, taking into account, inter
alia, statistical data, historical data or usual cost accounting practices.
Specifically for the investment measures: the Commission will
encourage the Members States periodically review the simplified costs option
methodologies to be in line with the market developments.
71. The Commission
encourages Member States to ensure that the systems in place reflect the
development of market prices over the time.
Common Commission reply
to paragraphs 78 and 79
There may be
circumstances when the use of a higher cost supplier can be justified, as the
Court describes in paragraphs 47 to 52, but the Commission agrees that
manipulation is not acceptable.
80. The extreme cases
are indeed cases that have often been seen in OLAF investigations.
81. The
implementation of Commission Delegated Regulation (EU) No 907/2014 will help in
the prevention and detection of fraud. Annex 1 of this Regulation provides that
the Paying Agency has to ensure that staff training includes fraud awareness.
Under the new
Regulation (EU) No 1306/2013, Commission Delegated Regulation (EU) No 907/2014
and Commission Implementing Regulation (EU) No 908/2014, Member States are
obliged to more specifically address fraud as a risk for the funds. This
subject is also specifically addressed in the anti-fraud seminars (cf. reply to
paragraph 33).
86. Good practices in
this field will be shared through the ENRD during the 2014-2020 period.
90. Article 48(3) of
Commission Implementing Regulation (EU) No 809/2014 obliges Member States to
verify the completed operation compared with the operation for which the
application for support was submitted and granted. This provision should allow
Member States to detect cases where the final output is not the same as the one
the beneficiary initially committed to. 
103. Initially, the
provisions on the evaluation of the reasonableness of costs submitted were
regarded as self-explanatory.[5]
Indeed, at the time of recasting the previous legal framework which took place
in spring 2010[6],
no major difficulties had been brought to the attention of the Commission on
this point. In the approval process of the recast, only one question (whether
maximum costs were a suitable method) was presented and answered.
In the meantime, the
Commission has prepared guidance on Simplified Cost Options (SCOs) in order to
provide technical guidance on the three kinds of simplified costs applicable
and to share the best practices with a view to encouraging Member States to use
simplified costs. However, it is up to the Member States to decide whether to
use the simplified cost options.
In a seminar on error
rate organised in October 2014, guidance on how to prevent irregularities under
public procurement procedures was presented to managing authorities and paying
agencies of all Member States. Finally, guidance on controls and penalties
under rural development will be made available before the end of 2014.
In addition, on
19/12/2013 the Commission adopted guidelines for determining financial
corrections to be made by the Commission to expenditure financed by the Union under shared management, for non-compliance with the rules on public procurement.
For the programme
2014-2020, the Commission put forward simplified cost options (Flat rate
financing, Standard scales of unit costs, Lump sums) as an efficient means to
ensuring reasonableness of costs.
Regulation (EU) No
1303/2013 includes options for the European Structural and Investment Funds to
calculate eligible expenditure of grants and repayable assistance on the basis
of real costs, but also on the basis of flat rate financing, standard scales of
unit costs and lump sums.
As regards the
assessment of the control systems in place, the Commission has found that well
designed control systems were not always implemented well in practice. 
110. The Commission
accepts this recommendation. Member States should ensure up-front that they
have efficient control systems in place. The Commission will encourage the
Member States to use the check-list and the criteria developed by the Court and
contained in Annex I.
By January
2015, the Commission will also provide guidance on controls and penalties under
rural development, including a specific section on reasonableness of costs and
the checklist for Managing Authorities annexed in the Special Report. 
Furthermore, training
and sharing of experiences will be part of the European Network for Rural
Development (ENRD) activities in the 2014-2020 period.
111. The Commission
accepts this recommendation and will follow-up with the Member States the
actions taken. 
As regards the
performance risks, the Commission will encourage Member States in the framework
of regular meetings to share experiences and good practices. 
In relation to
compliance risks, in March 2014 DG AGRI adopted a new multi-annual audit
strategy for 2014-2020. This audit strategy continues to be risk-based; in
order to achieve optimal audit coverage, it now features a rolling three-year
audit programme applicable as from July 2014. This programme is supported by a
Central Risk Analysis (CRA) and will be reviewed annually.
Financial corrections
deriving from these audits are based on identified weaknesses in the
implementation of the control systems and on an estimation of the financial
risk that these weaknesses entail for the EU budget. On the basis of its
audits, the Commission can also identify the actual sources and causes of the
errors found and request the Member States to elaborate specific and targeted
remedial actions.
[1]
Article 24(2)(d) of Commission Regulation (EU) No 65/2011
[2]
Regulation (EC) No 1975/2006
[3]         European Court of
Auditors' Annual Report 2013, paragraph 4.8
[4]
Commission Staff Working document on the assessment of root causes of errors
and corrective and preventive actions in the rural development policy
(SWD(2013) 244 final).
[5]
Article 24(2)(d) of Commission Regulation (EU) No 65/2011
[6]
Regulation (EC) No 1975/2006