Source: EURLEX
Language: en
Format: md

**EUROPEAN COURT OF AUDITORS**
**12, rue Alcide De Gasperi**
**1615 Luxembourg**
**LUXEMBOURG**

**Tel. +352 4398-1**

**[E-mail: eca-info@eca.europa.eu](mailto:eca-info@eca.europa.eu)**
**[Internet: http://eca.europa.eu](http://eca.europa.eu)**

**Twitter: @EUAuditorsECA**
**YouTube: EUAuditorsECA**

**[More information on the European Union is available on the Internet (http://europa.eu).](http://europa.eu)**

**Luxembourg: Publications Office of the European Union, 2014**

**ISBN 978-92-872-1391-4**

**doi:10.2865/21745**

**© European Union, 2015**
**Reproduction is authorised provided the source is acknowledged.**

_Printed in Luxembourg_

### **EN 2014**

**Special Report**

# **NO 22**

##### **Achieving economy:** **keeping the costs** **of EU‑financed rural** **development project** **grants under control**

(pursuant to Article 287(4), second subparagraph, TFEU)

## **Contents 02**

**Paragraph**

**Glossary**

**I–IX**
**Executive summary**

**1–15** **Introduction**

**16–20** **Audit scope and approach**

**21–100** **Observations**

**21–35** **Part I — Guidance, supervision and correction: the European Commission’s responsibility for**
**ensuring that EU rural development funds are spent well**

**24–29** **Once audits showed weaknesses in checks of project costs, the Commission responded by proposing**
**financial corrections and by encouraging Member States to prepare action plans**

**30–31** **Costs could have been better managed had the Commission issued guidance and detected weaknesses**
**much earlier in the programming period**

**32–35** **While the Commission’s recent initiatives have produced some results, the action plans do not address in**
**sufficient depth the risks to the reasonableness of costs**

**36–55** **Part II — Guarding against overspecification: approaches to ensure that the items for which the**
**grant is approved are reasonable**

**38–42** **Restricting grants to the costs of a standard specification is simple and effective where there are many**
**similar projects or common types of expenditure**

**43–55** **For other measures, where justified by the risk, proposed costs should be evaluated to ensure that**
**specifications are reasonable**

**56–87** **Part III — Getting the best price: approaches to ensure that the prices of the items approved are**
**reasonable**

**58–63** **Where feasible, using simplified cost options (or using maximum costs in a similar way) effectively limits the**
**risks of excessive prices — as long as they are set at the right level**

**64–74** **Comparing the prices of the items applied for to independent price data can provide assurance that prices**
**are reasonable but this approach can be difficult to implement**

**75–85** **Comparison of offers received from different suppliers can be a straightforward method to establish market**
**prices but safeguards are needed to guard against manipulation and fraud**

**86–87** **Where judgement is required, an independent expert opinion or that of an evaluation panel can give**
**valuable assurance and can be particularly cost‑effective when targeted to higher‑risk cases**

## **Contents 03**

**88–92** **Part IV — Keeping the eye on the ball after project approval: approaches to ensure that the costs**
**actually reimbursed are reasonable**

**90–91** **Control systems should detect and check any material changes to the project made after the grant has been**
**approved to be sure that the costs to be reimbursed are still reasonable**

**92–94** **Clear rules, explicit declarations and checks on samples of payments can deter the concealment of**
**discounts, rebates or other advantages given by the supplier that lower the real cost**

**95–100** **Part V — Making it efficient: approaches to ensure that the level of requirements and checks is**
**commensurate with the level of risk**

**96–98** **Where the likelihood and potential impact of the risks is low, control systems can be designed that minimise**
**the administrative burden**

**99–100** **High‑value items, projects with high aid‑rates and other risk factors warrant an increased level of checks**

**101 – 111** **Conclusions and recommendations**

**Annex I** **— Checklist developed by the ECA to assess the design of control systems in relation to**

**the risks associated with rural development costs**

**Annex II** **— Rural development programmes selected for desk review**

**Annex III — Use of simplified cost options in the 88 rural development programmes**

**Annex IV — Overview of the approaches followed in the rural development programmes**

**selected for desk review**

**Reply of the Commission**

## **Glossary 04**

**Control systems** : The set of rules and procedures used to manage an organisation or a spending programme to
achieve its objectives.

**Gold‑plating** : Embellishment beyond what is necessary, or the incorporation of costly and unnecessary features or
refinements. In this report the term ‘gold‑plating’ refers to acquiring items (or services) that are of a higher quality
or specification than necessary: buying a luxury car rather than an inexpensive utilitarian vehicle, for example.

**Measure** : An aid scheme for implementing a policy. A measure defines the rules for the projects that can be
financed. **Investment measures** are those that provide financial support for the acquisition of machinery and
equipment, for construction or for works such as replanting forests.

**Member State authorities** : Member States or their regions designate a **managing authority** responsible for the
planning, implementation and evaluation of the rural development programme and a **paying agency**, which may
undertake some of these tasks and makes the payments to the grant beneficiaries.

**Outputs** : That which is produced or accomplished by implementing a ‘project’.

**Programming period** : Period covered by the rural development programmes. This audit concerns the 2007 to 2013
period. Payments for projects financed in this period may continue until December 2015. Rural development
programmes for the 2014 to 2020 period had not been adopted at the time of this audit.

**Project** : An investment, service or other activity for which grant finance is sought/obtained.

**Reference prices** : Prices for items of equipment, machinery, construction materials or building costs, labour costs,
etc. against which the Member State authorities evaluate the project costs proposed in grant applications.

**Results** : The direct effects or changes that occur by implementing a project.

**Rural development programme (RDP)** : A document prepared by a Member State and approved by
the Commission to plan and implement the EU’s rural development policy at regional or national level.

**Reimbursement of actual costs** : Grant based on eligible costs incurred. Usually, the beneficiary has to present paid
invoices as evidence of this.

## **05**

**Glossary**

**Simplified cost options:** Grants that are independent of the costs actually incurred. The main forms of simplified

costs are:

οο **Standard unit costs** : the grant amount is calculated on the basis of a unit cost defined in advance.
Example: A land‑owner is awarded a grant to establish a new wildlife-friendly hedge using native tree species.
The standard unit cost per metre of hedge is 50 euro. If the land‑owner creates a 100 m long hedge, the grant
paid will be 5 000 euro (50 euro x 100), regardless of the actual costs incurred in purchasing the plants and estab­
lishing the hedge.

οο **Flat rate financing** : the grant amount is determined for specific categories of eligible costs by applying a per­
centage to other categories of eligible costs.
Example: A farmer is awarded a grant to construct a new cattle shed at a cost of 100 000 euro. The flat rate for
architects’ and surveyors’ fees is 10 %. The farmer will receive, on top of the grant for the construction itself,
a grant of 10 000 euro for architects’ and surveyors’ costs, whatever the actual fees paid are.

οο **Lump sums** : a fixed amount of grant is paid on completion of specific activities/outputs or results.
Example: A municipality is awarded a grant for organising an event. The lump sum for such events is 10 000 euro.
The municipality will receive that amount, independently of the actual costs it incurs, provided it meets the
grant conditions for the number of people attending, and the duration of the event.

## **Executive
 06**

#### **summary**

###### **I**

This audit concerns the costs of the EU’s rural develop­
ment policy. It focuses on the grants given towards the
costs of investments and other projects undertaken
by farmers, businesses, local authorities and other
organisations in rural areas. These grants, which make
up around half of the 100 billion euro EU expendi­
ture programmed for the 2007–13 period, are man­
aged by Member State authorities under Commission
supervision.

###### **II**

With such large amounts at stake, the EU and the
Member States share an interest in ensuring that the
costs of rural development grants are kept under con­
trol. This is a key element of the ‘sound financial man­
agement’ required by the EU’s financial regulations,
whereby all managers of the EU budget are expected
to apply the principle of economy: giving support for
the _right things_ at the _best price_ .

###### **III**

The Court audits rural development expenditure every
year and presents the findings in its annual and spe­
cial reports. A recurring finding is that Member State
authorities do not sufficiently ensure that the costs
approved for rural development grants are reasonable.
The need for improving financial management in this
area is clear. This led the Court to examine in detail the
risks and the approaches followed by the Commission
and Member States to address these risks.

###### **IV**

The Court found that the approaches followed were
not the most effective for keeping rural development
costs under control. The Commission reacted after
problems emerged rather than ensuring that systems
were sound in the first place. Member States’ control
systems addressed only some of the risks to economy
or were flawed. More effective approaches were avail­
able but were not widely applied.

###### **V**

The Commission did not offer guidance or spread
good practice at the start of the 2007–13 program­
ming period: it did not ensure that Member States’
systems were effective before they started approving
large volumes of grants. By the time it took action, the
bulk of the project grants had already been approved.
But since 2012 the Commission has adopted a more
active and coordinated approach. If followed through
with a greater focus on economy, this should lead to
better financial management in the next program­
ming period.

###### **VI**

Regarding the Member States, by 2014 the 15 larg­
est rural development programmes (RDPs) all had
in place the basic systems required by the regulations
for checking rural development costs. However, all
had weaknesses in relation to the main risks such that
overall, the costs of rural development grants were
not well controlled. Analysis of information from all 88
RDPs indicates that a similar situation prevails across
the EU. In particular:

(a) Member States’ control systems focused on the

_prices_ of the items or works in the grant applica­
tions with much less attention to whether the
items themselves were reasonable or if the grant
was cost‑effective in relation to the policy objec­
tives. This leads to risks of gold‑plating and poor
value for money.

(b) The main methods used to check grant applica­

tions for reasonable prices were to compare offers
from different suppliers or to compare to refer­
ence prices. The Court found that the systems in
some Member States gave little assurance that
the costs were reasonable — using reference
prices that were 30 % above real market prices, for
example.

## **07**

**Executive summary**

(c) Grants are approved in advance and paid once the

applicant has purchased the items concerned or
undertaken the works. Where changes to a project
occurred after grant approval, loopholes in some
Member State systems allowed costs to be reim­
bursed for which the reasonableness had not been

checked.

(d) The level of requirements and checks gener­

ally did not take account of the different levels
of risk. Many Member State authorities had the
same approach to checking a 10 000 euro grant
as to a 1 million euro grant. Where the risks were
limited, the possibilities for simplification were not
widely followed.

###### **VII**

This leads the Court to conclude that there is consider­
able scope for making real savings in rural develop­
ment project grants in the 2014–20 programming
period by better approaches to controlling the costs.
These funds could be made available to finance addi­
tional projects leading to greater outputs and results
and achievement of objectives.

###### **VIII**

The Court also found that there were workable and
cost‑effective approaches to the weaknesses identi­
fied — most of which are already implemented in one
Member State or the other.

###### **IX**

Consequently, the Court recommends that before
expenditure is committed in the new programming
period, the Commission and Member States ensure
that the approaches followed for all RDPs address the
risks described in this report. Criteria for assessing this
are in the report’s annex. An _ex ante_ assessment by
Member State authorities should be part of this pro­
cess. The Court also recommends that the Commission
and Member States check early in the new program­
ming period that the systems operate efficiently and
are effective.

## **Introduction 08**

**Reasons for undertaking the audit:**
**better control of rural**
**development costs could generate**
**real savings**

###### **01**

This audit concerns the costs of the
EU’s rural development policy. It
focuses on the grants given towards
the costs of investments and other
projects undertaken by farmers, busi­
nesses, local authorities and other
organisations in rural areas. The grants
are managed by Member State author­
ities under the Commission’s supervi­
sion according to rules set in the EU
regulations [1] . In general, these grants
are approved on the basis of a project
specification and prices proposed by
the applicant and are paid once the
applicant has purchased the items
concerned or undertaken the works.

###### **02**

In the 2007–13 programming period,
the EU planned to spend almost
100 billion euro on rural develop­
ment. Member States also planned an
additional 55 billion euro contribution
from their own national and regional
budgets. With such large amounts at
stake, the EU and the Member States
share an interest in ensuring that the
costs of rural development grants are
kept under control. This is a key ele­
ment of the ‘sound financial manage­
ment’ required by the EU’s financial
regulations, whereby all managers of
the EU budget are expected to apply
the principles of economy, effective­
ness and efficiency.

###### **03**

However, in its audits of the 2007–13
rural development policy the Court
has found that the national and re­
gional authorities do not sufficiently
ensure that the project costs for which
these grants are given are reasonable.
The Commission has come to similar
conclusions following its own audit
work. More details are given in para­
graphs 24 to 26.

###### **04**

This indicates that a better control
of costs could generate significant
savings in rural development project
grants while still obtaining the same
outputs and results and achieving the
same objectives. In the Court’s opinion
substantial savings are achievable.
Just a few hundred euros saved on
each investment project could gener­
ate many millions of euros in savings.
Each 1 % saving would amount to
500 million euros saved from the EU
budget over the programming period [2] .
These funds could be made available
to finance additional projects, lead­
ing to greater outputs and results and
achievement of objectives.

1 Council Regulation (EC)
No 1698/2005 of 20
September 2005 on support
for rural development by the
European Agricultural Fund
for Rural Development
(EAFRD) (OJ L 277, 21.10.2005,
p. 1), Commission Regulation
(EC) No 1974/2006 of 15
December 2006 laying down
detailed rules for the
application of Council
Regulation (EC) No 1698/2005
on support for rural
development by the European
Agricultural Fund for Rural
Development (EAFRD) (OJ
L 368, 23.12.2006, p. 15) and
Commission Regulation (EU)
No 65/2011 of 27 January 2011
laying down detailed rules for
the implementation of Council
Regulation (EC) No 1698/2005,
as regards the implementation
of control procedures as well
as cross‑compliance in respect
of rural development support
measures (OJ L 25, 28.1.2011,
p. 8) apply for the 2007–13
programming period.
This arrangement is known as
‘shared management’. The
Commission retains overall
responsibility but does not
itself approve grants or make
payments to beneficiaries,
such tasks being undertaken
by the Member State
authorities.

2 The investment measures
make up approximately half of
the programmed rural
development expenditure.

## **Introduction 09**

###### **05**

A similar set of rural development
measures is due to be implemented in
the 2014–20 programming period, with
the approval of new grants expected
to start during 2015. The Commission
is working with the Member States
to improve the effectiveness of their
control systems to ensure that they
comply better with the regulations.
Given the prospects that improve­
ments in financial management in this
area could lead to real savings and
better use of the EU budget, the Court
decided to contribute to this process
with an in‑depth audit on the current
approaches for controlling the costs of
rural development [3] .

**The rural development policy:**
**over a million individual grants**
**paid out to farmers, small**
**businesses, local authorities and**
**other organisations in rural areas**

###### **06**

The 2007–13 rural development policy
was put into practice through 88
national or regional rural development
programmes across the EU. These
programmes consisted of a number
of ‘measures’ (aid schemes), each of
which targeted specific beneficiary
groups and project types through a set
of eligibility rules and project selection
criteria. The Member State authorities
decided the grant rates (within the
limits set by the regulations), which
varied from below 10 % up to 100 %
of the eligible project costs, depend­
ing on the measure. Through these
measures the EU aims to induce and
support activity that helps achieve the
objectives of the policy: improving the
competitiveness of agriculture and for­
estry; improving the environment and
countryside; and improving the quality
of life in rural areas and diversifying
the rural economy [4] . Examples of the
range of projects financed are shown
in _**Box 1**_ .

3 The Court’s mission is to
contribute to improving EU
financial management,
promote accountability and
transparency, and act as the
independent guardian of the
financial interests of the
citizens of the Union. The
Court’s role as the EU’s
independent external auditor
is to check that EU funds are
correctly accounted for, are
raised and spent in
accordance with the relevant
rules and regulations and have
achieved value for money.
[More at: http://www.eca.](http://www.eca.europa.eu/en/Pages/MissionObjectives.aspx)
[europa.eu/en/Pages/](http://www.eca.europa.eu/en/Pages/MissionObjectives.aspx)
[MissionObjectives.aspx](http://www.eca.europa.eu/en/Pages/MissionObjectives.aspx)

4 More information on the rural
development policy can be
found on the Commission’s
[website: http://ec.europa.eu/](http://ec.europa.eu/agriculture/rurdev/index_en.htm)
[agriculture/rurdev/](http://ec.europa.eu/agriculture/rurdev/index_en.htm)
[index_en.htm](http://ec.europa.eu/agriculture/rurdev/index_en.htm)

## **Introduction 10**

**Examples of projects financed by rural development programmes**

**Policy objective: improving the competitiveness of agriculture and forestry**

Training for farmers financed through the ‘Training

and information’ measure (Bulgaria)

Cattle shed with straw-spreading equipment financed
through the ‘Farm modernisation’ measure (Luxembourg)

**Policy objective: Improving the environment and countryside**

Drip irrigation system financed through the ‘Infrastructure

related to the development of agriculture and forestry’

measure (Greece)

Spraying machine financed through the ‘Farm

modernisation’ measure (Germany)

Grain drying and storage facilities financed through
the ‘Adding value to agricultural and forestry products’

measure (Lithuania)

Maritime pine trees planted through the ‘Restoring

forestry potential’ measure (France)

**Policy objective: Improving the quality of life in rural areas and diversifying the rural economy**

Flower shop financed through the ‘Support for the creation

and development of micro-enterprises’ measure (Sweden)

Café at wildlife park financed through the ‘Encouragement

of tourism activities’ measure (United Kingdom)

## **Introduction 11**

###### **07**

For most of the measures covered by
this audit (see ‘Audit scope’ in para­
graph 16), the applicant is reimbursed
for the approved expenditure incurred.
A typical process for obtaining a grant
on a reimbursement basis is shown in
_**Figure 1**_ .

###### **08**

The main methods Member State
­authorities use to check the project
costs in grant applications are illus­
trated in _**Box 2**_ .

**Typical steps for requesting and obtaining a grant**

Obtain offers from Check grant claim
Implement project
suppliers and estimate Check that costs
project costs are reasonable

Pay invoices

Make payment for
the agreed percentage
of the approved costs
incurred

Prepare project
Approve grant Claim grant
proposal and
payment
application for grant

Applicant Member State authorities

## **Introduction 12**

###### **09**

For the main investment measures,
the mean total project cost is around
125 000 euro. The amount of grant
payable towards the project costs
will depend on the aid rate but the
measures are characterised by large
numbers of relatively small grants —
some of which can be for less than

1 000 euro — and a smaller number of
large grants, which can exceed
1 million euro. Member State author­
ities expect to have approved around
1,4 million individual grants by the end
of the programming period.

**Analysis of the risks: grant**
**payments may be too high if given**
**for unnecessary costs or based on**
**uncompetitive prices**

###### **10**

As described above, the principle
of economy applies to all grants or
payments from the EU budget. Ac­
cording to this principle, subsidies
should be given for the _right things_ at
the _best price_ . In the context of rural
development projects, this means
that the items for which the grant is
given should be of the type, quality
and quantity needed to achieve the in­
tended outputs and results. The grant
for these items should be based on the
lowest available price for the required
specification.

###### **11**

In most cases, grants are given for only
a proportion of total project costs and
applicants must pay the balance from
their own resources, giving the ap­
plicant an incentive to limit the project
costs. Where aid rates are low, the
incentive can be strong — but as aid
rates increase the incentive diminishes.

###### **12**

Any subsidy distorts the real cost–­
benefit relationship, which may
encourage the applicant to specify
a higher‑cost solution than necessary,
from ‘gold‑plating’ (see _**Glossary)**_
through to investments that are dis­
proportionate to the outputs or results
expected to be achieved by undertak­
ing the project. Consequently there
is a risk that the quantity and quality
of the items financed may be greater
than appropriate (risk of ‘ _**overspecifi­**_
_**cation**_ ’) representing an unnecessary
cost to the EU and national budgets.

###### **13**

Subsidies also reduce the incentive for
the applicant to search for the best
prices. Applicants may prefer to favour
a higher‑cost supplier. At the extreme,
there is the possibility that they or the
suppliers may manipulate the process
thereby inflating the costs. These all
lead to the risk that the grant may be
based on prices that exceed the lowest
available in a competitive market for
items of the required specification (risk
of ‘ _**uncompetitive prices**_ ’).

## **Introduction 13**

###### **14**

It is important that the approaches
followed by Member State authorities
to address these risks are effective be­
cause poor value for money and fraud
not only increase costs to the budget,
they also tarnish the reputation of
the EU. However, a balance has to be
found between the costs of imple­
menting the control systems and the
benefits gained by mitigating the risks.
Applicants incur costs in providing the
information required to support their
grant applications. Member States
incur costs in checking and evaluating
this information. These costs should be
proportionate to the level of the risks:
a 1 million euro grant could warrant
several days of work if that was neces­
sary to establish that the costs were
reasonable. A 1 000 euro grant would

not.

###### **15**

Finally, there is a risk that the Commis­
sion may not detect any deficiencies in
Member States’ control systems or may
not take timely corrective action when
weaknesses are identified.

## **Audit scope and approach 14**

**Audit scope: the rural**
**development measures**
**implemented through grants**

###### **16**

The risks identified above apply
particularly to the rural development
measures implemented by way of
grants towards the costs incurred by
the beneficiary. These measures, which
represent around 50 % of the total
rural development costs programmed
for the 2007–13 period [5], are included in
the scope of this audit (see _**Figure 2)**_ .
The main measures concerned are:

οο modernisation of agricultural
holdings;

οο infrastructure related to the devel­
opment and adaptation of agricul­
ture and forestry;

οο training and other measures to
improve the competitiveness of
agriculture and forestry;

οο investment measures related
to land management and the
environment;

οο measures to diversify the rural
economy and improve quality of
life;

οο local development measures using
the LEADER approach.

5 The other 50 % of rural
development spending
mostly comprises
compensation payments to
land owners calculated on
a per hectare basis for
activities such as protecting
and enhancing the
environment. The amounts
payable are included in the
RDPs and approved in
advance by the Commission.
The Court’s Special Report No
7/2011 covered
‘agri‑environmental
payments’, which is the main
[area‑related measure (http://](http://eca.europa.eu)
[eca.europa.eu).](http://eca.europa.eu)

οο adding value to agricultural and
forestry products;

**Audit scope: the measures covered by this audit**

**–**
**Programmed expenditure 2007** **13 (billion euro)**

Local development measures
4,7

_Source:_ European Commission.

Modernisation of agricultural holdings
11,6

## **Audit scope and approach 15**

**Audit approach: focus on the**
**design of control systems,**
**obtaining a wide geographical**
**coverage through questionnaires**
**and desk reviews**

good approaches that other Member
States can apply, thereby raising the
general level of performance. To exam­
ine the scope for this, the Court set the
audit questions shown in _**Figure 3**_ .

6 Member States have to
comply with Article 24(2)(d) of
Commission Regulation (EU)
No 65/2011: ‘Administrative
checks on applications for
support shall in particular
include verification of … the
reasonableness of the costs
submitted, which shall be
evaluated using a suitable
evaluation system, such as
reference costs, a comparison
of different offers or an
evaluation committee.’

###### **17**

The Court’s audits of rural develop­
ment expenditure have repeatedly
found that Member State authorities
have not sufficiently ensured that the
project costs approved are reasonable [6]
(see paragraphs 24 and 25). The need
to improving financial management in
this area is clear. This led the Court to
question whether the approaches fol­
lowed by the Commission and Member
States were the most effective in rela­
tion to the main risks. The audit placed
a particular emphasis on identifying

**Audit questions and structure of the report**

Part I

Part II

Part III

Part IV

Part V

## **Audit scope and approach 16**

###### **18**

This report follows the same struc­
ture as the audit sub‑questions. Part I
covers the supervisory role of the
Commission. In Parts II to V, the Court
examines the different approaches fol­
lowed by the Member State authorities
to mitigate the key risks.

###### **19**

A focus group of officials from the
Commission and Member State au­
thorities supported the Court’s team in
identifying elements key to the design
of effective control systems. From this
the Court developed a checklist to
assess the design of control systems
in relation to the risks (see _**Annex I)**_ .
The Court’s evidence collection con­
sisted of a follow‑up of previous audit
findings [7], a questionnaire addressed to
the managers of all the EU’s 88 RDPs
and a desk review of the key proce­
dures applied in the 15 RDPs with the
greatest planned expenditure on the
measures within the scope of this audit
(see _**Annex II)**_ . These 15 represent 64 %
of the total planned expenditure on
these measures for the EU as a whole.

Short audit visits were made to four of
these Member States to complement
the desk reviews. Interviews were held

with Commission officials and relevant
documentation analysed. The audit
examined the systems in place from
the end of 2013 and was concluded in

mid-2014.

**Limits of the audit scope and**
**approach**

###### **20**

In this audit the Court has identified
and assessed the _design of the control_
_systems_ put in place by the managing
authorities that are intended to ensure
that rural development costs are
reasonable. Even the best‑designed
systems may not be effective if they
are not implemented well. It was not
the aim of this audit, however, to check
how well the control systems were
applied in practice. Such an approach
would have duplicated the work done
each year to prepare the Court’s an­
nual reports (see paragraphs 24 and
25).

7 Where weaknesses had
previously been identified, the
Court examined whether the
Member State authorities
concerned had changed their
approaches accordingly.

## **Observations 17**

**Part I — Guidance,**
**supervision and**
**correction: the European**
**Commission’s**
**responsibility for**
**ensuring that EU rural**
**development funds are**
**spent well**

###### **21**

While the rural development spending
programmes are managed by the 88
Member State authorities, the Com­
mission is ultimately responsible for
implementing the EU budget. Specifi­
cally, the Commission is required [8] to
check that management and control
systems exist and function properly in
the Member States, and that they ob­
serve the principles of ‘sound financial
management’: economy, effectiveness
and efficiency.

###### **22**

The legislation provides various means
by which the Commission can exercise
its supervisory functions: Member
States should inform the Commis­
sion of their management and control
measures; paying agencies must be ac­
credited and national ‘certifying bod­
ies’ report annually on issues including
the operation of control systems. The
Commission meets periodically with
Member State representatives and has
contacts and formal annual meetings
with the managing authority of each
RDP. It adopts legislation with the
detailed rules for implementing the
policy and issues guidance. It also has
its own audit department to check the
operation of Member States’ systems.
Finally, if it finds that the Member
State authorities are not complying
with the regulations, it can recover
improperly spent funds.

###### **23**

The Court assessed whether the Com­

mission used these means to ensure
that Member States’ systems for con­
trolling the costs of rural development
grants are effective.

**Once audits showed weak­**
**nesses in checks of pro­**
**ject costs, the Commission**
**responded by proposing**
**financial corrections and by**
**encouraging Member States**
**to prepare action plans**

###### **24**

The Court examines a large randomly
selected sample of payments each
year and checks the effectiveness of
selected control systems. In each an­
nual report since that for the year 2011
the Court has noted that the major­
ity of the systems for checking the
reasonableness of rural development
costs were not sufficiently effective
(see _**Figure 4).**_ In 2013 all four systems
audited were found to be ineffective in
this respect.

###### **25**

In the audits for the 2011,
2012 and 2013 annual reports, the
Court found for the measures con­
cerned by this audit that around
a third of the rural development pro­
jects had not been sufficiently checked
for the reasonableness of costs. Where
the beneficiaries were public bodies,
almost half of the payments were af­
fected by non‑compliance with public
procurement rules [9] .

8 This requirement is in
Article 9.2 of Council
Regulation (EC) No 1290/2005
of 21 June 2005 on the
financing of the common
agricultural policy (OJ L 209,
11.8.2005, p. 1).

9 Public procurement rules are
intended to ensure that public
bodies obtain the best prices
for the goods and services
they buy, as well as promote
fair competition and
transparency. Non‑compliance
with these rules makes it less
likely that the prices obtained
are the best available.

## **Observations 18**

**Effectiveness of the Member State or regional systems for**
**assessing the reasonableness of costs**

10 Special Reports No 5/2010

‘Implementation of the
LEADER approach for rural
development’; No 8/2012
‘Targeting of aid for the
modernisation of agricultural
holdings’; No 1/2013 ‘Has the
EU support to the food
processing industry been
effective and efficient in
adding value to agricultural
products?’; No 6/2013 ‘Have
the Member States and the
Commission achieved value
for money with the measures
for diversifying the rural
economy?’; and No 8/2013
‘Support for the improvement
of the economic value of
forests from the European

**Galicia**

_Source:_ ECA annual reports 2011, 2012, 2013.

###### **26**

The Commission also has its own
programme of audit enquiries, which
identified similar findings, as did the
Court’s performance audits of specific
rural development measures [10] . While
the Court and Commission audits are
not designed to quantify the savings
that could be made by better control
of the costs, flaws in the systems and
the high level of errors are strong
indications that the potential savings
could be considerable.

###### **27**

In response to the audit findings
mentioned above, the Commission
launched procedures for ‘financial cor­
rections’, whereby EU funding for the
Member State concerned is reduced
to compensate for the shortcomings
identified. Procedures under way with
eight Member States stem at least
partly from failings in their checking
of rural development costs or non‑­
compliance with public procurement
rules.

## **Observations 19**

###### **28**

Following the Court’s 2011 annual re­
port, the Commission asked the Mem­
ber States to develop action plans to
identify the causes of errors and define
remedial actions. In 2012, 14 Member
States set up such plans and all other
Member States did so in 2013.

###### **29**

In parallel, at the request of the Euro­
pean Parliament, the Commission
analysed the main reasons for the high
error rate and presented the results in
June 2013 [11] . Two of the main reasons
given were insufficient checks that
the costs were reasonable, and non‑­
compliance with public procurement
rules.

**Costs could have been bet­**
**ter managed had the Com­**
**mission issued guidance and**
**detected weaknesses much**
**earlier in the programming**
**period**

###### **30**

There was no guidance by the Com­
mission at the start of the 2007–13
programming period on the design
of control systems to verify costs or
on the risks to be addressed by those
systems. The managers of the 88 RDPs
were expected to develop their own
approaches without information from
the Commission on the standards
expected. The Commission did not suf­
ficiently check that Member States had
robust systems in place for checking
grant applications before they ap­
proved large volumes of expenditure
through the investment measures. The
processes of accreditation and reports
by certifying bodies did not alert the
Commission in good time to the risks
to the economy of the EU budget.

agricultural fund for rural
[development’ (http://eca.](http://eca.europa.eu)
[europa.eu).](http://eca.europa.eu)

11 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).

## **Observations 20**

###### **31**

By the time the first Member States
produced action plans towards the
end of 2012, only 1 year of the 7‑year
programming period remained. Conse­
quently, the action plans came too
late to have any effect on the bulk
of the expenditure. For example, by
that time the Polish authorities had
already approved grants representing
90 % of the budget for farm mod­
ernisation — the most important rural
development measure financially —
and several measures in other Member
States had already been closed for new
applications.

**While the Commission’s**
**recent initiatives have pro­**
**duced some results, the**
**action plans do not address**
**in sufficient depth the risks**
**to the reasonableness of**
**costs**

###### **32**

Audits and pressure from the Commis­
sion have already had some positive
results: several Member States in­
formed the Court that they introduced
new procedures in 2013 and 2014 for
checking rural development project
costs. But Member State action plans
did not cover all the regional RDPs
or all the relevant measures and did
not always propose changes even
where audits had found specific
weak­nesses [12] . Moreover, several of the
plans put off any action until the next
programming period.

###### **33**

Since the beginning of 2013, the Com­
mission has organised twice‑yearly
seminars to discuss some of the
key issues and asked Member State
authorities to further develop their
action plans. In February 2014 it issued
a guidance note on avoiding fraud
and, in September 2014, guidance on
the use of simplified costs. This guid­
ance is aimed at the 2014–20 program­
ming period in which the Commission
is encouraging Member States to make
more use of simplified costs, which,
it is hoped, will reduce the rate of
errors [13] .

###### **34**

However, for the measures within the
scope of this audit only around 5 % of
the expenditure is currently based on
simplified cost options. The Commis­
sion has not issued guidance on ap­
proaches applicable for the remaining
95 % of the expenditure, despite the
evidence of shortcomings. This leads
to the risk that, except for using simpli­
fied costs, the 88 managing authorities
may not all identify and implement ef­
fective approaches for controlling the
costs of rural development grants.

12 Examples are shown in the

Court’s annual report for 2013.

13 However, Member State

representatives have indicated
their concern that the diversity
of the rural development
measures makes the use of
simplified cost options
difficult; that the
administrative costs involved
in defining standard costs can
be high; that a lengthy
preparation time may be
needed to undertake studies;
and that the Member States
would run the risk of
systematic errors and large
financial corrections if auditors
found that the standard costs
had been set too high.

## **Observations 21**

###### **35**

The Commission and Member States
have focused the action plans on im­
proving compliance with the imple­
menting regulations, thereby reducing
the rate of errors. Clearly, this is impor­
tant and the Court has been calling for
such action for many years. But com­
pliance with the regulations is not an
end in itself — a focus is also needed
on the ‘sound financial management’
principle of economy that the leg­
islation is intended to achieve (see
paragraphs 2 and 10). In this respect
even the best of the plans examined
by the Court does not have a compre­
hensive response to the main risks to
econ­omy — grants based on higher­
‑than‑necessary specifications and
uncompetitive prices; post‑approval
variations; and checks not related to
the level of risk. The Court examines
these and the possible approaches to
them in Parts II to V of this report.

**Part II — Guarding**
**against overspecification:**
**approaches to ensure that**
**the items for which the**
**grant is approved are**
**reasonable**

###### **36**

Managers of EU spending programmes
are expected to apply the principle of
economy described in the introduction
to this report. According to this prin­
ciple, not only should project grants
be based on reasonable prices but
the project specification — the items
financed — should also be reasonable.
Subsidies change the cost–benefit
relationship, leading to a risk that ap­
plicants may specify higher‑cost pro­
ject proposals than necessary, ranging
from ‘gold‑plating’ (see _**Glossary)**_
through to investments that are dis­
proportionate to the expected results.
The Court assessed the approaches fol­
lowed by Member State authorities to
address this risk of overspecification.

###### **37**

While all Member State authorities
made checks of _prices_ (see Part III), few
made explicit documented checks that
project specifications were reason­
able [14] . Some made indirect, implicit
or undocumented checks, as shown
in paragraphs 46, 48 and 53. How­
ever, many Member State authorities
mitigated risks of overspecification
for some types of projects by restrict­
ing the maximum eligible costs or by
using simplified cost options, as shown
below.

14 One good example was in the

United Kingdom (England),
where an explicit check was
made that the proposed
building design or equipment
specification are justified as
being the most appropriate to
the project.

## **Observations 22**

**Restricting grants to the**
**costs of a standard specifica­**
**tion is simple and effective**
**where there are many similar**
**projects or common types of**
**expenditure**

###### **38**

The risk of overspecification occurs
where the grant is based on the costs
of the items chosen by the applicant.
The Court has observed that Member
State authorities can largely avoid this
risk by restricting the eligible costs
to those of a ‘standard’ specification.
With this approach the Member State
authorities estimate the costs neces­
sary for a typical project or category
of expenditure and limit all grants
to these typical costs. An example is
given in _**Box 3**_ .

###### **39**

This approach has the advantages of
being simple to implement and hav­
ing a predictable outcome: it gives
certainty. This allows Member State au­
thorities to dispense with burdensome
requirements and checks of whether
the specifications are reasonable for
individual project applications. It does
not prevent applicants from imple­
menting a higher‑cost solution — but
the grant payment will be based on
the standard, so the costs to the EU
budget will be reasonable.

###### **40**

However rural development projects
require varied and sometimes innova­
tive solutions, involving a wide range
of different types of expenditure. De­
fining a standard specification for all
possible situations is hardly feasible. It
is best applied where there are a large
number of straightforward projects
with similar types of expenditure.

###### **41**

Many Member State authorities fol­
lowed this approach to some extent by
applying ‘simplified costs’ or ‘maxi­
mum costs’. These approaches are de­
scribed in _**Box 2**_ . Simplified costs were
applied in 54 of the 88 RDPs, mostly
to investments in land‑management
measures designed to enhance the
environment, or for planting and
managing forests. A typical ex­ample
is a standard payment per metre
of hedge calculated on the basis of
a standard specification (e.g. three
hawthorn plants per metre). Several
Member State authorities also set
‘maximum costs’ in relation to project
outputs in a similar way. These differ
from ‘standard costs’ in that the ap­
plicant is reimbursed the actual costs
incurred. Examples of types of expend­
iture where Member State authorities
have restricted grants to standard or
maximum costs are shown in _**Box 4**_ .

###### **42**

While over half of the Member State
authorities make use of simplified
costs (and others use maximum unit
costs in a similar way), the Court found
that this is only for specific expend­
iture types within a limited number of
measures (see _**Annex III)**_ and amounts
to only around 5 % of the budget.
There is scope for wider application of
these methods in other measures and

in other RDPs.

## **Observations 23**

**Example of restricting eligible costs in a way that limits the risk of overspecification:**
**crop‑spraying equipment in France**

In France, farmers applying for grants towards the costs of crop‑sprayers frequently specified optional extra
equipment that could reach 85 % of the total costs. Considering this to be unreasonable, in 2012 the French
authorities placed a limit of 3 000 euro on the costs of such extras for which a grant would be payable.

**Types of expenditure where Member State authorities restricted grants to standard**
**or maximum costs in a way that limits the risk of overspecification**

**Standard unit costs**

— per metre of hedging (e.g. in France under the measure ‘Conservation and upgrading of the rural heritage’)

— per hectare of land improvement (e.g. in Hungary under the measure ‘First afforestation of agricultural

land’)

**Maximum costs per unit of output or result**

— per square metre of building constructed or renovated (e.g. in Bulgaria for buildings under the measure

‘Village renewal and development’)

— per animal place (e.g. in France for cattle sheds under the measure ‘Farm modernisation’)

**Maximum costs per category of expenditure**

— maximum amount for a type of agricultural equipment (e.g. in France for spraying equipment under the

measure ‘Farm modernisation’)

— maximum amount for technical or feasibility studies (e.g. in the Czech Republic for preparation of plans for

biogas projects under the measure ‘Farm modernisation’)

— maximum percentage for fees (e.g. in Spain (Andalucía) for architects’ fees under the measure ‘Adding

value to agricultural and forestry products’)

## **Observations 24**

**For other measures, where**
**justified by the risk, proposed**
**costs should be evaluated to**
**ensure that specifications are**
**reasonable**

###### **43**

Where the costs are not restricted to
those of a standard specification, the
risk of overspecification needs to be
addressed. Member State authorities
followed three main approaches to
this:

οο standard checks to compare the
proposed costs to benchmarks;

οο individual evaluation of project
specifications;

οο expert opinions.

**Standard calculations and**
**comparison to benchmarks can**
**quickly identify applications**
**that may be overspecified**

###### **44**

For all but the smaller projects, ap­
plicants have to provide physical and
financial data on their businesses
and on the project plans, which the
Member State authorities use to check
eligibility and select the best projects.
This information ranges from just a few
figures to full business plans. Member
State authorities can also make use of

this information to check that the costs
of the proposed project are reasonable
in relation to the expected outputs or
results: the contribution that the pro­
ject is likely to make towards achieving
the RDP objectives. Examples include
simple payback calculations or relating
the capacity of agricultural equipment
to the size and type of farm.

###### **45**

Member State authorities can establish
standard calculations and spread­
sheets that allow their staff to quickly
calculate financial ratios or other in­
dicators and compare them to bench­
marks or warning levels. This can be
done with little additional time or cost
using templates for application forms
to ensure the information is consistent.
Applications that fall within the normal
ranges can have a reduced level of
scrutiny and those outside the range
be investigated more thoroughly to
ensure that the costs are reasonable.

###### **46**

These benchmarks can also be used as
cost effectiveness or ‘value for money’
criteria for project selection. As an
example, in the United Kingdom (Eng­
land) the authorities set a target that,
on average, projects involving sup­
port for small rural businesses should
generate one new job per GBP 30 000
of subsidy. If they considered that
the proposed project costs were not
reasonable (i.e. too high) in relation
to that target, they did not approve
the grant. For the main investment
measures, only 4 of the 15 RDPs re­
viewed evaluated whether costs were
reason­able in relation to the expected
outputs or results (see _**Annex IV**_ and
_**Figure 5)**_ .

## **Observations 25**

**Member State authorities evaluating costs against the expected outputs or results** **[1]**

1 Excluding the measure for training and information.

_Source:_ ECA audit findings.

## **Observations 26**

**Evaluation of individual**
**project specifications can be**
**difficult for non‑technical**
**administrative staff but**
**common‑sense checks and**
**unambiguous rules can**
**help prevent and detect**
**overspecification**

###### **47**

In diverse programmes such as those
for rural development, projects will
not all have a standard set of outputs
and results that allow costs to be
readily evaluated through calculations
of ratios or comparison with bench­
marks. Furthermore, where specifica­
tions exceed the norm, Member State
authorities have to consider whether
the higher specifications are justified
by the individual circumstances of
the project or because they represent
better value for money. Such evalua­
tions of individual project specifica­
tions (including tender conditions and
award criteria) can be difficult without
specialist technical knowledge and can
be time-consuming but are worth­
while for larger amounts.

###### **48**

Some two thirds of Member State

authorities informed the Court that

their staff make common‑sense checks
of project specifications, often using
the experience they build up through
processing a large number of projects.
However, the Court has observed that
the value of these checks is dimin­
ished if a record is not kept of what
was checked and what standard was
applied.

###### **49**

Unambiguous rules help non‑technical
staff to make consistent and fair deci­
sions when evaluating project propos­
als. A particular — but common —
situation occurs where the applicant
presents several suppliers’ offers for
the project with differing specifica­
tions: different makes of equipment,
different construction methods or
materials, different time schedules
or different after‑sales service, etc.
Applicants will normally choose the
offer that represents the best value
for their business in terms of quality
and cost (although this choice will be
influenced by the subsidy). Where ap­
plicants do not choose the lowest‑cost
offer, the Member State authorities
have to evaluate if the additional
quality or features of the higher of­
fer also represent the best value for
money in terms of the policy objec­
tives, or whether it may be a case of
gold‑plating.

## **Observations 27**

###### **50**

For this, the staff evaluating the costs
of project proposals need clear criteria
that they can apply consistently to all
cases. Here, the Court has found a gen­
eral weakness as, instead of criteria,
Member State authorities have just
listed examples of the sort of justifica­
tions that _might_ be acceptable. One
example is in Germany, where almost
any conceivable reason — quality,
price, technical suitability, environ­
mental qualities, operating and main­
tenance costs, profitability, customer
service, technical assistance or delivery
dates — can be taken into considera­
tion. Others, such as the French and
English authorities, follow a similar ap­
proach. In its previous audits the Court
found that Member State authorities

were satisfied if one of these reasons
was given but rarely evaluated wheth­
er it was sufficient to justify the ad­
ditional costs. A degree of judgement
is required to assess the justifications
given by the applicant but the project
files lacked documentation to show
the basis on which staff evaluating the
application considered that the extra
costs involved were reasonable.

###### **51**

An alternative approach, followed by
around a quarter (21) of the 88 Mem­
ber State authorities, is to always base
the grant on the lowest valid offer. This
has the advantages of simplicity — as
it is unambiguous — and economy
as the cost to the EU budget is the
lowest. Such an approach does not
prevent the applicant from choosing
the ‘best value’ offer if that is higher —
but the _amount of grant_ will always
be determined on the lowest offer. In
effect, applicants pay for the ‘extras’
(such as higher quality or an extended
warranty) themselves without grant
support. The different approaches are
illustrated in _**Box 5**_ .

###### **52**

Of course, neither of the above
approaches will be effective if the
applicant manipulates the process of
obtaining and presenting offers, for
example by drafting the specifica­
tions in a way that excludes potential
suppliers. This risk is covered in Part III:
_Getting the best price_ .

## **Observations 28**

|Col1|Member State X:<br>grant based on lowest offer|Member State Y:<br>grant based on applicant’s choice|
|---|---|---|
|Lowest valid ofer|80 000|80 000|
|Applicant’s chosen ofer|100 000|100 000|
|Grant approved at 50 %|40 000|50 000|

**Expert opinions can give good**
**assurance that specifications**
**are reasonable, provided**
**that they are sufficiently**
**independent**

###### **53**

Many RDP projects involve similar
types of expenditure: agricultural
machinery, agricultural installations,
construction and rural infrastructure,
for example. Several Member State
authorities, including Hungary and
Italy (Campania), employ staff with
qualifications in these fields, such
as agricultural engineers or quantity
surveyors. These are able to under­
stand the technical specifications and
apply their professional qualifications
and experience to make sound judge­
ments on the project specifications
proposed. Provided that the purpose
and conclusion of the checks is clear
and the work done is documented,
the use of in‑house expertise can give

reliable, independent assurance that
the costs proposed are reasonable and
allows the Member State authorities
to identify any cases of gold‑plating.
The deterrent effect of this is also im­
portant: a farmer that knows that the
grant application will be evaluated by
an agricultural engineer, for example,
is less likely to apply for an excessive
specification.

## **Observations 29**

###### **54**

However, it is not always feasible
or cost‑effective for Member State
authorities to employ staff with such
expertise, particularly when there
are too few projects of a particular
type to justify it. Some Member State
authorities, such as those in Greece
and Lithuania, contract experts to give
opinions on the specifications and
costs of selected projects, particularly
for projects that present specific risks
because of their size or specificities, or
because they differ from the normal
ranges of costs.

###### **55**

Other Member State authorities,
such as those in Austria and Hungary,
require applicants to provide a cer­
tificate or statement by a recognised
expert such as a quantity surveyor on
the project specifications. However,
the reliance that can be placed on such
statements is limited in practice. Most
obviously, the experts will act in their
clients’ interest, which may conflict
with the Member States’ and the
EU’s interests of achieving the policy
objectives at the lowest possible cost.
Secondly, the purpose of the expert’s
statement may be to confirm that the
specification complies with building
regulations or other technical require­
ments. This is not relevant or useful for
identifying potential overspecification.

**Part III — Getting the best**
**price: approaches to**
**ensure that the prices of**
**the items approved are**
**reasonable**

###### **56**

Following the principle of economy
(see paragraphs 2 and 10), EU project
funding should be based on prices
that are the lowest available for the
required project specification. How­
ever, subsidies reduce the incentive
for the applicant to search for the best
prices and applicants may prefer to
favour a higher‑cost supplier, leading
to the risk that grant applications may
be based on uncompetitive prices. The
Court assessed the approaches fol­
lowed by Member State authorities to
address this risk.

###### **57**

By the end of 2013, all 15 of the Mem­
ber State authorities had formal sys­
tems in place for checking that prices
are reasonable. The main approaches
followed (which are described in
_**Box 2)**_ were:

οο comparing the costs applied for
with independent price informa­
tion (obtained through market
research or from price lists or
databases);

οο comparing different offers ob­
tained by the applicant (includ­
ing through public procurement
procedures);

οο consulting experts.

An alternative approach followed that
mitigated the risk was to use simplified
or maximum costs to establish or limit

project costs.

## **Observations 30**

**Where feasible, using simpli­**
**fied cost options (or using**
**maximum costs in a similar**
**way) effectively limits the**
**risks of excessive prices — as**
**long as they are set at the**
**right level**

###### **58**

As described in paragraphs 38 to 42,
grants can be based on simplified
costs determined by the Member State
authorities, an approach which limits
the risk of overspecification. Maximum
costs can be set for outputs, results or
categories of expenditure in a similar
way. Where these cost levels are set at
or below the level of the best available
market prices, it follows that the cost
to the EU budget will be reasonable. In
paragraphs 41 and 42, the Court found
that over half the Member State au­
thorities made some use of simplified
costs and there was scope for more
widespread use of these approaches.

###### **59**

Where a _maximum cost_ is set, the ap­
plicant is reimbursed the lowest of the
grant applied for, the amount actually
paid or the maximum amount. This
potentially gives the best economy
for the EU and national budgets. With
the _simplified cost_ methods, however,
the applicant can theoretically re­
ceive a grant for more than the costs
incurred. Provided that this occurs
infrequently and is only for small
amounts the extra cost can be justi­
fied by the gains from the additional
simplification.

###### **60**

If ‘maximum costs’ are set at a level

that exceeds the available market
prices they would have little effect. If
‘simplified costs’ are set too high this
would lead to unjustified costs being
incurred as described below. This is

illustrated in _**Box 6**_ .

## **Observations 31**

|Actual costs<br>incurred per hectare|Grant paid on basis of<br>4 000/ha maximum cost|Grant paid on basis of<br>4 000/ha standard cost|Grant paid on basis of<br>6 000/ha maximum cost|Grant paid on basis of<br>6 000/ha standard cost|
|---|---|---|---|---|
|3 000|3 000|4 000|3 000|6 000|
|4 000|4 000|4 000|4 000|6 000|
|5 000|4 000|4 000|5 000|6 000|

**If simplified cost levels are**
**set too high, they could affect**
**the economy of the whole**
**expenditure — for this reason**
**Member State authorities**
**should ensure they are soundly**
**based and periodically review**
**and adjust them**

###### **61**

Simplified costs have to be set in
advance as they are needed for pre­
paring applications and approving
the grant amount. Studies and pro­
jections are needed to establish the
amounts, which will entail a number of
assumptions.

The Commission has issued guidance
for Member State authorities to ensure

that these calculations are sound.

These authorities can obtain additional
assurance by having the calculations
audited.

## **Observations 32**

###### **62**

The resulting amounts will apply for
a standard situation and may under­
state the prices available to some
applicants and overstate others. This
could lead to overpayments, where the
grant exceeds the real costs incurred.
An example is shown in _**Box 7**_ . Con­
sequently, Member State authorities
should ensure that overpayments are
exceptional. To this end, Member State
authorities should periodically test
a sample of real cases to be sure that
the simplified costs are set at or below
the level of generally available market
prices.

###### **63**

The Court did not identify any Member
State authorities that kept simplified
costs under review in this way. How­
ever, some did have methods to ensure
that their _maximum unit costs_ were
reasonable, which could also be ap­
plied to simplified costs. For example,
in Germany (Brandenburg and Berlin),
the authorities adjusted each year the
maximum cost per hectare for planting
forests to 85 % of the average actual
costs observed in the preceding year.

**Standard unit costs based on theoretical calculations can overstate the available**
**market prices, resulting in overpayments**

The 2007 RDP for England included a standard cost of GBP 228 per hectare for management of scrub land un­
der the measure for ‘non‑productive investments’. The English authorities based this amount on estimates of
the typical costs of a farmer undertaking this work. A well‑respected agricultural college checked the calcula­
tion. The Court’s audit of a randomly selected 2012 payment found that the farmer concerned had employed
a contractor to do the work at a cost of GBP 95 per hectare.

The English authorities did not have a process in place to periodically compare the standard unit costs with
the actual costs incurred for a sample of projects, which could have detected that the standard costs were out
of line with real costs.

## **Observations 33**

**Comparing the prices of the**
**items applied for to inde­**
**pendent price data can pro­**
**vide assurance that prices**
**are reasonable but this**
**approach can be difficult to**
**implement**

**Market research can be used to**
**get independent comparative**
**price information for individual**
**projects**

###### **64**

In 11 of the 15 RDPs subject to desk
review (see _**Annex IV)**_, the Member
State authorities sometimes undertake
market research or compare with other
similar projects to verify that the prices
given in the application are reasonable
(this method is often combined with
the ‘comparison of offers’ described
in _**Box 2**_ for added assurance). For
example, in Poland, staff make Internet
searches for prices, confirm prices with
suppliers or ask for counter‑offers. As
this information is independent — i.e.
it is not provided by the applicant — it
can provide good‑quality evidence of
the available prices.

###### **65**

Market research is used successfully
in some Member States, in particular
where there is an indication of risk,
but it is time‑consuming and it can
be difficult to demonstrate that all
applications have been evaluated
consistently. This leads other Member
State authorities to set up systems of
reference prices instead (see below).

**Reference to price databases**
**or listings can be efficient but**
**an approach is needed that can**
**cope with the huge variety of**
**eligible items**

###### **66**

Most Member State authorities — 76
of the 88 — have established price
databases for at least some types
of expenditure (most commonly for
agricultural machinery) or refer to
commercial price databases or listings,
such as for unit prices for construction
materials or building costs. EU‑wide,
the costs of around a quarter of the
rural development grant applications
are evaluated against such reference
prices. Two different approaches are
followed. The majority — 63 of the
Member State authorities — consider
the reference prices as _ceilings_ and
limit the grant to the prices of the
individual items listed in the database.
In the second approach, the reference
prices are considered as _indications_, so
the authorities may approve grant ap­
plications with prices that exceed the
reference if they consider the higher
prices to be reasonable.

## **Observations 34**

###### **67**

With the great diversity of possible
expenditure on the wide range of po­
tential rural development projects —
which can range from basic inputs like
concrete or labour to sophisticated
computer‑controlled equipment —
comprehensive price databases can
become costly to set up and manage
and it can be difficult to ensure that
the data is reliable, consistent and up
to date. In Hungary, for example, the
price database for machinery alone
contains 230 000 items of different
makes, models, options and qualities
and has to be updated twice a year
(construction‑related costs are in an­
other database).

###### **68**

Nevertheless, for the larger RDPs
with sometimes thousands of similar
project applications to process, the use
of such databases can be an efficient
way of checking prices, subject to the
points made above. However, where
the prices are listed for component
items or inputs — such as construc­
tion materials — the work involved
to check the prices can be consider­
able (see _**Box 8)**_ . This can also lead the
Member State authority staff to focus
on the prices of some easy‑to‑check
items like the costs of concrete but
to ignore more specialised finishings,
for example, where the risks of exces­
sive prices may be greater. Member
States such as Bulgaria, France and
Greece avoid these problems by
establishing reference prices based on
outputs such as the size or capacity
of the construction as a whole (these
may be implemented as ‘maximum
costs’ — see paragraph 41).

**Comparison of approaches used to check the costs of construction projects for the**
**farm modernisation measure: checking costs of component items (Lithuania) and**
**checking costs of outputs (France)**

In Lithuania, the authorities subscribe to commercial listings of construction costs. These show, for a given
type of building, construction method and choice of materials, the typical costs per linear metre of founda­
tions, costs per square metre of roof and costs per square metre for walls, windows, decoration, tiling, etc. The
staff evaluating project proposals take details of the proposed construction from the grant application and
calculate the expected cost of each element using the price listings. The calculated costs of these elements
are then compared with those in the grant application.

In France, typical construction costs have been established per animal or per square or cubic metre based on
a study of past projects. For example, a shed for 40–60 cows is estimated at 2 920 euro per cow. A concrete
slurry pit of up to 100 m [3] is estimated at 157 euro per m [3] . The authorities can quickly calculate the cost per
cow or per m [3] of the project proposal and compare it with the expected cost.

## **Observations 35**

**These databases and listings**
**are only useful if the prices they**
**contain are sufficiently close to**
**the real market prices available**

###### **69**

In 6 of the 10 RDPs where reference
prices are used for machinery and
equipment (see _**Figure 6)**_, prices are
provided to the Member State author­
ities by the manufacturers and dis­
tributors or taken from their price lists
or catalogues. An example is shown
in _**Box 9**_ . However, it is normal com­
mercial practice to negotiate discounts
from list prices, which may be substan­
tial (it is unusual to pay full list price
for a new car, for example). This means
that list prices are likely to overstate
the real market prices available. Con­
sequently, these are of little value as
reference prices (or as ceilings) except
to identify the unusual situation of the
prices proposed in the grant applica­
tion being above those offered by the
manufacturer [15] .

Other Member State authorities com­
pile reference prices by market surveys
or collecting data from project approv­
als and payment claims.

15 It may, however, be easier to

compile and maintain price
databases from suppliers’ list
prices rather than market
prices. If this is the case,
Member State authorities can
apply a coefficient to the list
prices to obtain an
approximation of market
prices to be used as
a reference or ceiling.

**Reference prices (or price ceilings) based on suppliers’ list prices are of little use for**
**establishing that costs are reasonable**

In Hungary, a database is maintained of prices for agricultural and forestry machinery, which are provided by
distributors and manufacturers. The applicant does not have to provide offers from suppliers to support the
grant application if the items concerned are listed in the database, which simplifies the process. The Hun­
garian authorities approve grant applications if the costs are equal to or below the prices in the database.

The Court compared prices actually offered to applicants by suppliers to the prices in the database. Twelve
of the offers examined were for agricultural tractors. On average, these offers were 30 % lower than the price
listed in the database. The Hungarian authorities replied to the Court that a difference of 25–30 % below the
database prices was not unusual.

In this situation — which is not unique to Hungary — the comparison of the grant application to a price data­
base may comply with the letter of the implementing regulation (see paragraph 17) but it demonstrates only
that the prices do not exceed the distributors’ and manufacturers’ list prices. It does not show that the prices
are reasonable.

## **Observations 36**

**Sources used for establishing reference costs or price ceilings**

_Source:_ ECA audit findings.

## **Observations 37**

###### **70**

If reference prices (or ceilings) are too
high, this could also affect behaviour,
encouraging applicants to propose
prices up to the limit in order to max­
imise the amount of grant. This creates
a disincentive to reduce costs and an
incentive for collusion with suppli­
ers to artificially inflate prices — such
as by providing ineligible goods or
services hidden within the inflated
costs of the eligible item or by offer­
ing hidden rebates. It can also lead to
uncompetitive behaviour by suppliers.
To avoid this risk, Member States such
as Bulgaria do not display the prices
in the public version of their reference
price database.

###### **71**

As with simplified costs, reference or
maximum prices can go out of date
and if based on construction costs in
the capital city, for example, may not
reflect those available in rural areas.

Price databases should therefore
be updated periodically and should
reflect regional variations where these
are significant.

**Where the prices of the**
**items applied for exceed the**
**reference price, judgement**
**is needed to determine the**
**level of grant that should be**
**approved: clear rules and**
**criteria are needed to support**
**this**

###### **72**

By their nature, reference prices can­
not always reflect the market prices
available at the time and place of every
individual project. Some differences in
prices are inevitable — especially for
equipment if the reference price data­
base does not include the same make
and model as the item applied for.
Where the prices applied for exceed
the reference prices, unless Member
State authorities apply the reference as
a ceiling, staff have to make a judge­
ment on whether the higher prices
are reasonable. As this can be difficult
and time‑consuming, small differences
from reference prices can be accepted
without further investigation as the
potential cost saving would be low.

###### **73**

Where differences exceeded the toler­
ated variance from reference prices,
Member State authorities generally
required the applicants to provide
a justification. But there was a lack of
clarity on the criteria applied to evalu­
ate these justifications and of docu­
mentation to show the basis on which
costs above the reference prices were
considered reasonable.

## **Observations 38**

###### **74**

However, Member State authorities
such as France and Lithuania automati­
cally accepted differences of up to 30
or 40 % above the reference prices
without requiring any justification
from the applicant and without first
having established that differences of
such magnitude reflect the prices re­
ally paid in situations without subsidy.
The Court would question whether
a price 30 % above a reference price
can be automatically considered as
reasonable and whether this practice
accords with the principle of economy.
The costs of an average food‑process­
ing project, for example, are around
750 000 euro. If the reference price
corresponded to this amount, the ap­
proach outlined above could allow an
additional 300 000 euro of costs to be
accepted without question. Where the
reference prices themselves are based
on list prices rather than real market
prices (as is the case in Lithuania, for
example), the risk that excessive prices
may be approved is all the greater.

**Comparison of offers**
**received from different**
**suppliers can be a straight­**
**forward method to establish**
**market prices but safeguards**
**are needed to guard against**
**manipulation and fraud**

###### **75**

A method commonly used in ­rural
development, as in many other
grant‑based spending programmes,
is to require the applicant to provide
offers from suppliers to demonstrate
that the grant application is based on
reasonable prices. For larger amounts,
particularly where public bodies are
concerned, the offers may be obtained
through a formal tendering process.
The comparison of offers is a common
commercial practice and often does
not represent an additional burden for
the applicant. Where there is genu­
ine competition between suppliers,
a comparison of offers can be effective
in demonstrating that the best avail­
able price has been obtained. Member
State authorities evaluate the costs of
some two thirds of rural development
grant applications in this way.

## **Observations 39**

**The ‘comparative offers’**
**method relies on there being**
**genuine competition, so if**
**only one offer is provided**
**(or the offers provided are**
**not comparable), alternative**
**methods are needed to check**
**that the prices are reasonable**

###### **76**

Member State authorities typically
require the applicant to submit two or
three supplier offers in support of the
grant application. However, on occa­
sions applicants only provide a single
offer, which may be because an item
is unique (there is only one possible
supplier) or because other suppliers
chose not to make an offer. It may also
result from a manipulation of the call
for offers by the applicant to favour
a particular supplier.

###### **77**

A single offer does not demonstrate
that the best price has been obtained
for the item in question. However, the
Court has observed that Member State
authorities have accepted single offers
without making alternative checks to
establish that the prices are reason­
able, such as market research, com­
parison with other projects or expert
estimations.

Examples from France and England are
shown in _**Box 10)**_ . The English author­
ities have since introduced procedures
requiring such alternative checks to
be made in cases where only a single
offer is provided.

**Measures are needed to deter,**
**prevent, detect and correct any**
**manipulation of the process to**
**favour a particular supplier**

###### **78**

The vulnerability of the comparative
offers method is that the price infor­
mation is provided by the applicant,
not obtained independently by the
Member State authorities. This opens
up the possibility that the process
will be manipulated in order to favour
a higher‑cost supplier.

**Single offers accepted by the authorities without making additional checks**

In France, an applicant obtained two offers for the supply and installation of an automated fruit‑processing
line but presented only the most expensive offer to the authorities as this corresponded best to his needs. The
French authorities accepted the single offer without performing any check that the costs were reasonable.

In England, an applicant provided only one supplier offer for wine‑making equipment with the justification
that the equipment was specific to the production of sparkling wines and there was only one supplier. This
was accepted by the English authorities without question. However, the Court’s auditors were able to identify
other suppliers of the same equipment.

## **Observations 40**

###### **79**

This may be for motives that are
understandable: an applicant may
prefer a higher-cost local supplier or
contractor because the applicant has
worked successfully with them in the
past. Several Member State author­ities
explicitly accept such preferences as
justification for accepting a highercost offer, such as in Hungary, or for
one of the aid schemes in England. In
the Court’s view, such personal prefer­
ences are not sufficient justification for
basing the grant on a higher offer.

###### **80**

There is also a risk that the applicant
may manipulate the process by defin­
ing the specification in such a way
that only one supplier could easily
comply — or simply not asking other
potential suppliers to make offers. At
the extreme, an applicant may even
collude with the supplier to falsify of­
fers or be the victim of collusion and
fraud by consultants or suppliers.

###### **81**

While fraud is an exception, there
is sufficient evidence that it exists

from the Court and the Commission’s
audit work and from the European
­Anti‑Fraud Office (OLAF). Yet only 4
of the 15 RDPs reviewed for the audit

had introduced anti‑fraud measures
in their management of rural devel­
opment grants. The Commission’s
guidance suggests that training staff
be aware of fraud, sharing information
on cases detected, operating a sys­
tem of ‘red flags’ and using check­
lists designed to identify possible
manipulation.

One approach used in Member States
such as Romania is to increase trans­
parency and competition by requiring
private grant applicants to publish
their calls for offers to suppliers on
a website run by the paying agency.

**Public procurement rules**
**make manipulation and fraud**
**more difficult to conceal, but**
**do not eliminate these risks or**
**guarantee in all cases that costs**
**will be reasonable**

###### **82**

Public bodies are required to follow
procurement procedures designed
to obtain the best price while ensur­
ing fairness and transparency. Above
certain thresholds EU directives
apply [16] . Negotiated procedures with
a single supplier can be followed in
some situations but typically, for larger
contracts, public bodies will obtain
offers from different suppliers, which
may be through an open invitation
to tender. If properly applied, public
procurement rules should reduce the
opportunities for manipulation and
fraud — although, as shown in para­
graph 25, public procurement rules are
not always complied with.

###### **83**

In 9 of the 15 RDPs reviewed
(see ­ _**Annex IV)**_, the Member State
authorities did not make checks that
the costs applied for were reasonable
if a public procurement procedure
had been followed. However, such
procedures may not result in multiple
comparable offers being received —
which may be because of a genuine
lack of competition, because the call
for offers was not widely publicised or
because the tender specifications or
contract conditions excluded potential
suppliers. If only one offer is received
or the offers are not comparable, the
fact that the procurement procedures

[16 Details can be found at: http://](http://ec.europa.eu/internal_market/publicprocurement/index_en.htm)

[ec.europa.eu/internal_](http://ec.europa.eu/internal_market/publicprocurement/index_en.htm)
[market/publicprocurement/](http://ec.europa.eu/internal_market/publicprocurement/index_en.htm)
[index_en.htm](http://ec.europa.eu/internal_market/publicprocurement/index_en.htm)

## **Observations 41**

were followed does not demonstrate
that the price of the selected offer is
reasonable.

###### **84**

Moreover, a public procurement proce­
dure does not in itself do anything to
mitigate the risks of overspecification
described in Part I. Court and Commis­
sion audits have found cases of public
procurement where the specifications
in the invitation to tender were exces­
sive, or where the award criteria gave
undue weight to qualitative aspects
without taking proper account of the

costs.

###### **85**

Consequently, if only one offer is
received from a public procurement
procedure, if there are risks of over­
specification or if there are weaknesses
in the process followed, Member State
authorities should make additional

checks to establish that the costs
proposed are reasonable where this is
justified by the amounts at stake.

**Where judgement is**
**required, an independent**
**expert opinion or that of an**
**evaluation panel can give**
**valuable assurance and can**
**be particularly cost‑effective**
**when targeted to higher‑risk**
**cases**

###### **86**

Paragraphs 53 to 55 of this report
describe the use of experts for evalu­
ating project specifications. Experts
can give similar assurance that prices
are reasonable, and the same opinion
can cover both the specification and
the price. Using external experts can
be costly, so is particularly relevant
where there is a high financial risk or
suspicion of manipulation. The Lithu­
anian example in _**Box 11**_ shows that
well‑targeted use of experts can gen­
erate net savings to the national and
EU budgets.

###### **87**

In 10 of the 15 RDPs reviewed
(see ­ _**Annex IV)**_, Member State author­
ities referred at least the larger grant
applications to an evaluation panel
that may comprise technical experts
and/or other individuals with relevant
knowledge. Such panels can help re­
duce the subjectivity of assessments of
whether the prices (and the specifica­
tions) are reasonable.

## **Observations 42**

**Well‑targeted use of experts can generate net savings to the national and EU**
**budgets**

Where grant applications concern larger amounts, if only one offer is provided or there are other risk charac­
teristics, the Lithuanian authorities refer the project proposal to a firm of financial consultants for an expert
review of the proposed costs. The Lithuanian authorities referred 214 cases to the consultants in 2012/13. The
consultants concluded that the prices applied for exceeded the best available market prices in 27 cases. The
Lithuanian authorities have calculated that every euro paid to the consultants resulted in a saving of over
4 euro of EU and national funds.

**Part IV — Keeping the eye**
**on the ball after project**
**approval: approaches to**
**ensure that the costs**
**actually reimbursed are**
**reasonable**

###### **88**

As described above, Member State
authorities are required to check that
the grants they approve are based
on reasonable costs. But some costs
may still be uncertain at the grant ap­
plication stage, particularly for large
construction projects. It can take some
Member State authorities several
months to process applications, so the
prices obtained at the time of the ap­
plication may no longer be valid once
the project starts, or the applicant’s
business plans may have changed.
Consequently, it is not unusual that the
costs incurred will differ from the costs
approved: both the specification and
the prices may change.

###### **89**

Three types of risk appear when the
applicant presents a grant payment
claim for reimbursement of the costs

incurred:

(a) the costs are no longer reasonable

in terms of the actual outputs and
results: costs that were approved
for a 100-animal-capacity cattle
shed may not be reasonable if the
shed actually built has a capacity
of only 50;

(b) the project has been implemented

in a different way, so the specifica­
tions and prices checked in the ap­
plication are no longer applicable:
instead of a slate roof for the cattle
shed, for example, the farmer con­
structs a metal roof for the same

amount;

(c) savings made on elements of

the project have been used for
gold‑plating, as project promot­
ers tend to see the grant approval
as a budget available to spend: if
construction works come in under
budget, for example, the saving
may be spent on lavish fittings.

The Court assessed the approaches
followed by Member State authorities
to address these risks.

## **Observations 43**

**Control systems should**
**detect and check any**
**ma­terial changes to the pro­**
**ject made after the grant has**
**been approved to be sure**
**that the costs to be reim­**
**bursed are still reasonable**

###### **90**

Except where ‘simplified costs’ apply,
applicants must normally submit paid
invoices to support their grant pay­
ment claims. Member State authorities

check these invoices to ensure that

there is a correct basis for reimburse­
ment. Where the actual project costs
are exactly as detailed in the applica­
tion, no further checks are needed to
establish that the costs are reasonable.

But Member State authorities need
rules and control systems in place to
detect significant changes from the
approved project costs and check that
the costs are still reasonable.

###### **91**

The Court found that all of the 15
Member State authorities had pro­
cedures to deal with changes to the
approved project outputs or costs.
Two alternative approaches were
followed. In the first, the authorities
specified the project costs in the grant
agreement at the same level of detail
as those that they had checked in the
application: if the costs were checked
item by item, the grant agreement
specified the costs item by item. In
the second approach, grant agree­
ments were made for the total project
cost or for broad categories of cost
(such as construction, equipment and
fees) even where the costs had been
checked on an item-by-item basis. This
second approach did not generally
give good assurance that the three
risks mentioned above were addressed

and it allowed the reimbursement of

costs for which the reasonableness
had not been checked. An example is
shown in _**Box 12**_ .

**Measure for supporting small rural businesses in England: changes made to the**
**project allowed the reimbursement of costs for which the reasonableness had not**
**been checked**

An applicant requested a grant for a project to renovate its premises and purchase specialised equipment.
The applicant presented several offers for the building works, the equipment and other items including
a new staff kitchen. These were checked and approved by the English authorities. When the applicant came
to buy the specialised equipment it found a supplier offering a price well below the previous offers. It used
the savings made on the equipment to do some works on the car park and to purchase a more expensive
staff kitchen. As the total approved project costs were not exceeded, the English authorities did not check the
reasonableness of these extra costs.

## **Observations 44**

**Clear rules, explicit declara­**
**tions and checks on samples**
**of payments can deter the**
**concealment of discounts,**
**rebates or other advantages**
**given by the supplier that**
**lower the real cost**

###### **92**

In most RDPs, applicants are required
to present their payment claims net of
any discounts. This may be required
by the general administrative law of
the Member State or in the rules for
implementing the aid measure. In 3 of
the 15 RDPs examined (see ­ _**Annex IV)**_,
the Member State authorities also
required the applicant to make an ex­
plicit declaration in the payment claim
(for example by ticking a box yes/no).
Another good practice is to include
examples in the aid scheme guidance
to show how the applicant should deal
with various types of discounts, re­
bates or other advantages given by the
supplier that lower the real cost. While
these approaches would not pre­
vent intentional fraud, they can have
a deterrent effect. They also cover the
cases where applicants do not think
about whether a discount or rebate
should be deducted from the claim, or
where they are unsure.

###### **93**

Beyond having clear rules and dec­
larations, Member State authorities
should check the invoices provided
in support of the payment claims for
any indications of discounts, rebates
or other advantages and ensure that
these are deducted. As these may not
be shown on the invoice (for example,
a supplier may give a rebate at the end
of the year), Member State authorities
should also make further checks for
a sample of payments. Such checks are
time‑consuming and may require con­
tacting the suppliers and/or visits to
the applicant to check their account­
ing and bank records. An opportunity
for this is the ‘on-the-spot’ and ‘ _ex_
_post_ ’ checks on a sample of payments
required under the EU legislation [17] .
Six of the 15 Member State authorities
did this (see _**Annex IV).**_

###### **94**

Undertaking such checks cannot de­
tect and correct all instances of hidden
discounts or other advantages but it
serves two purposes. Firstly as a deter­
rent: applicants are less likely to hide
discounts if they know that there is
a chance it will be checked. Secondly,
it provides feedback to the Member
State authorities about the incidence
of such practices so they can adjust
their control systems appropriately.

17 Commission Regulation (EU)

No 65/2011.

## **Observations 45**

**Part V — Making it**
**efficient: approaches to**
**ensure that the level of**
**requirements and checks**
**is commensurate with the**
**level of risk**

###### **95**

The potential financial impact of
reimbursing unreasonable costs due
to overspecification or excess price
depends on how frequently it hap­
pens and the amounts involved. As the
potential financial impact increases, so
should the level of checks: they should
be proportionate to the level of risk
involved. To avoid an unnecessary ad­
ministrative burden, the requirements
applicants must comply with should
be the minimum necessary to permit
those checks. The Court assessed
the approaches followed by Member
State authorities to match the level of
requirements and checks to the level
of risks.

**Where the likelihood and**
**potential impact of the risks**
**is low, control systems can be**
**designed that minimise the**
**administrative burden**

###### **96**

The lower the grant as a proportion
of total project costs (the effective aid
rate), the greater the amount that the
applicant has to contribute from their
own resources. This increases the ap­
plicant’s incentive to get the best price
and reduces the incentive to inflate
the specification. However, none of the
15 Member State authorities reviewed
reduced their requirements or checks
to reflect the reduced risk associated

with low effective aid rates.

###### **97**

Where the Member State authorities
had independent information on the
prices, notably in databases of refer­
ence prices, or where they set maxi­
mum costs, they mostly reduced the
requirements on applicants to reflect
the lower risk. For items in the data­
base of machinery prices in Hungary,
for example, applicants did not have
to provide any offers to support their
grant applications. Use of simplified
costs removes the need to check costs,
but this approach was not widely used
(see paragraph 42).

###### **98**

Most Member State authorities re­
duced the requirements and checks
for very low‑cost items by requiring
a reduced number of offers, accept­
ing price lists or website screen prints
instead of offers, or excluding very
small individual items from the eligible
costs. They also reduced require­
ments for business plans and other
information.

## **Observations 46**

**High‑value items, projects**
**with high aid rates and**
**other risk factors warrant an**
**increased level of checks**

###### **99**

Across the EU, the average rural
development investment project
costs around 125 000 euro. For pro­
ject costs of this amount, all Member
State authorities require two or three
supplier offers or check the proposed
costs against price databases. Some
also check value for money, do market
research on prices or consult experts,
as described earlier in this report. But
where the eligible project costs (and
therefore the amount of grant) are
much higher than the average amount,
few authorities make additional or
more extensive checks, despite the
potential impact of the risks being
higher [18] .

###### **100**

However it is not only high‑value
projects that present higher risks.
In particular, the higher the aid rate,
the lower the applicant’s incentive to
limit the costs by searching for the
best price or by more economical
specifications. As aid rates approach
100 %, the risk of overspecification
and gold‑plating becomes very high,
whether the applicant is a public body
or in the private sector [19] . Yet none
of the 15 Member State authorities
reviewed increased their requirements
and checks to reflect the increased
risks associated with high aid rates.
This is a particular concern where the
Member State authorities made no

checks on the reasonableness of costs
if the applicant followed public pro­
curement procedures, as these do not
in themselves give assurance that the
project specifications are reasonable
(see paragraphs 83 to 85).

18 Where the applicant is a public

body, it is normally bound to
follow additional procurement
procedures for higher value
contracts and the Member
State authorities have to check
that the procedures are
correctly followed.

19 Public bodies and associations

are often given grants of up to
100 %. This is much less
frequent for private‑sector
projects but it does occur. For
example in Italy (Campania)
100 % grants were offered to
private businesses for farm
diversification and rural
business development
projects.

## **Conclusions and 47**

#### **recommendations**

###### **101**

In this audit the Court questioned
whether the approaches followed by
the Commission and Member States
were the most effective for keeping
the costs of rural development grants
under control.

###### **102**

The Court found that the approaches
followed were not the most effective.
The Commission reacted after prob­
lems emerged rather than ensuring
that systems were sound in the first
place. Member States’ control systems
addressed only some of the risks to
economy or were flawed. More effec­
tive approaches were available but
were not widely applied.

###### **103**

The Commission did not offer guid­
ance or spread good practice at the
start of the 2007–13 programming
period. It did not ensure that Member
States’ systems were effective before
they started approving large volumes
of grants. By the time it took action,
the bulk of the project grants had
already been approved. But since 2012
the Commission has adopted a more
active and coordinated approach. If
followed through with a greater focus
on economy, this should lead to bet­
ter financial management in the next
programming period.

###### **104**

Regarding the Member States, by
2014 the 15 largest rural development
programmes all had in place the basic
systems required by the regulations for
checking rural development costs. The
methods used varied, and the Court
identified some well‑designed ap­
proaches to address certain risks. But,
as shown by the overview in _**Annex IV**_,
all had weaknesses in relation to the
main risks such that overall, the costs
of rural development grants were not
well controlled. Analysis of information
from all 88 RDPs indicates that a simi­
lar situation prevails across the EU. In
particular:

(a) Member States’ control systems

focused on the prices of the items
or works in the grant applications
with much less attention to the
_specification_ : whether the items
themselves were reasonable or if
the grant was cost‑effective in rela­
tion to the policy objectives. This
leads to risks of gold‑plating and
poor value for money.

(b) The main methods used to check

the prices in grant applications
were to compare offers from differ­
ent suppliers or to compare them
to reference prices. The Court
found that the systems in some
Member States gave little assur­
ance that the costs were reason­
able — using reference prices
that were 30 % above real market
prices, for example.

## **Conclusions and recommendations 48**

(c) Grants are approved in advance

and paid once the applicant has
purchased the items or under­
taken the works concerned. Where
changes to a project occurred after
grant approval, loopholes in some
Member State systems allowed
costs to be reimbursed for which

the reasonableness had not been

checked.

(d) The level of requirements and

checks generally did not take
account of different levels of risk.
Many Member State authorities
had the same approach to check­
ing a 10 000 euro grant as to a
1 million euro grant. The possibili­
ties for simplification where the
risks were limited were not widely
followed.

###### **105**

The main flaws or gaps in the ap­
proaches followed are summarised in
_**Box 13**_ .

###### **106**

This leads the Court to conclude that
there is considerable scope for mak­
ing real savings in rural development
project grants in the 2014–20 program­
ming period by better approaches to
controlling the costs. These savings
could be made available to finance
additional projects, leading to greater
outputs and results and achievement
of objectives.

###### **107**

The Court also found that there were
workable and cost‑effective ap­
proaches to mitigate the risks identi­
fied — most of which are already
implemented in some RDPs. These are
described in the main body of the re­
port. Where sufficient evidence could
be obtained from the desk review of
the 15 largest RDPs, an overview of
some of these approaches is given in
_**Figure 7**_ below and summarised in
_**Annex IV**_ .

###### **108**

The Court welcomes the Commission’s
intention to issue guidance on simpli­
fied costs (although Member States
have indicated that simplified cost
options are unlikely to be widely ap­
plied due to the diverse nature of rural
development grants). The Court also
welcomes the Commission guidance
on tackling fraud and the ‘action plans’
developed by the Member States on
the initiative of the Commission. The
plans seen by the Court show improve­
ments in some of the basic systems
but do not address many of the design
weaknesses listed in paragraph 105
above.

## **Conclusions and recommendations 49**

**Main weaknesses observed in the design of control systems for rural development**
**costs**

**Risk of overspecification:**

οο other than for land‑management and training costs, limited use of the possibilities for restricting grants to
‘standard’ costs (see paragraphs 41 and 42);

οο little consideration of whether costs were reasonable in relation to the expected outputs and results —
few Member State authorities took into account the cost‑effectiveness or value for money of the grant
applications (see paragraph 46);

οο a lack of reliable approaches to the risk of gold‑plating (see paragraphs 48 to 50).

**Risk of grant approvals being based on prices that are too high:**

οο standard unit costs not checked to see if they resulted in overpayments in practice (see paragraphs 62 and
63);

οο reliance on checks against price databases containing list prices that were commonly 20–30 % above the
real market prices (see paragraphs 69 and 71);

οο acceptance of grant applications where the prices exceeded reference prices by as much as 30 or 40 %
without requiring justification (see paragraph 74);

οο insufficient safeguards when relying on the comparison of supplier offers (see paragraphs 77 to 81);

οο reliance on checking compliance with public procurement procedures (where applicable) without also
checking that the costs proposed were reasonable (see paragraphs 83 to 85).

**Risk that the costs actually reimbursed may not be reasonable:**

οο loopholes in the procedures after approval of grant applications, which mean that the costs actually reim­
bursed may be different from those that have been accepted as reasonable (see paragraphs 91 and 92).

**Risk that the level of requirements and checks is insufficiently related to the level of risks:**

οο requirements and checks not increased where aid rates are high (and the applicant has little incentive to
limit the costs) or for very large grants (see paragraphs 99 and 100).

## **Conclusions and recommendations 50**

**Overview of approaches in the 15 RDPs audited**

RDPs following the approach

RDPs not following the approach

Approach not applicable or not assessed

0 5 10 15

Assess whether costs are reasonable in terms of outputs or results

Check whether standard costs result in overpayments

Use real market prices as reference prices for equipment and
machinery rather than suppliers’ list prices
Check that costs are reasonable when public
procurement procedures followed

Take measures to mitigate the risks of fraud

Perform on-the-spot checks for a sample of payments that
claims reflect all financial benefits received or due from suppliers

Design higher requirements and/ or checks where aid rates are high

Design higher requirements and/ or checks for high-value projects

_Source:_ ECA audit findings.

## **Conclusions and recommendations 51**

###### **109**

In many cases, Member State author­
ities will develop the detail of their
control systems — the forms, the in­
structions, the procedures and check­
lists — once the RDPs for 2014–20
have been approved. But unless these
control systems address the risks iden­
tified in this report, the weaknesses
are likely to persist. Approaches are
available that do not involve adding
more and more requirements and
checks, but better target the effort to
where the risks are greatest. The best
control systems are not only effective
— designed to achieve economy —
but also efficient — appropriate to the
level of risk.

###### **110**

The ‘good design’ checklist presented
in _**Annex I**_ provides a comprehensive
set of criteria for assessing whether
control systems address the risks
described in this report. The Court
**recommends** that before expenditure
is committed in the new programming
period, the Commission and Member
States cooperate to ensure that the
approaches followed for all RDPs meet
these criteria and target the areas of
greatest risk. An _**ex ante**_ assessment of
the control systems by Member State
authorities’ internal audit services (or
by other inspection or audit bodies)
should be part of this process.

###### **111**

Good systems design is only the first
step. How the systems are imple­
mented in practice is also key. The
Court therefore **recommends** that the

Commission and Member States check
early in the new programming period
that the systems operate efficiently
and are effective in relation to the risks
highlighted in this report.

This Report was adopted by Chamber I, headed by Ms Rasa BUDBERGYTĖ, Member
of the Court of Auditors, in Luxembourg at its meeting of 26 November 2014.

_For the Court of Auditors_

Vítor Manuel da SILVA CALDEIRA

_President_

#### **Annexes**

## **52**

**Checklist developed by the ECA to assess the design of control systems in relation to**
**the risks associated with rural development costs**

|Risk|Design feature|See paragraphs|
|---|---|---|
|**Overspecifcation**|**1.**<br>**Restrict the eligibility to the costs of a standard specifcation where there are many similar**<br>**projects or common types of expenditures**<br>**2.	 Evaluate the proposed costs to ensure that specifcations are reasonable**<br>(a)	 Make standard calculations and compare to benchmarks to quickly identify applications that are<br>overspecifed.<br>(b)	 Evaluate if costs are reasonable against cost‑efectiveness or value‑for‑money criteria.<br>(c)	 Document assessments of whether specifcations are reasonable and the basis for this, whether com­<br>parison with other projects, technical evaluation or common‑sense judgement.<br>(d)	 If grants are not based on the lowest valid ofer, establish clear criteria for establishing whether the<br>costs of the higher ofers are reasonable; document the evaluation of the extra costs involved.<br>(e)	 Use independent expert opinions for assurance that specifcations are reasonable, particularly where<br>projects present risks because of their size, technical complexity or lack of comparative information.|38–42<br>44–45<br>46<br>47–48<br>49–51<br>53–55|
|**Uncompetitive prices**|**3.**<br>**Where feasible, set maximum costs or use simplifed cost options and periodically check that**<br>**they do not exceed generally available market prices**<br>**4.	 Compare the prices of the items applied for to independent data**<br>(a)	 Where justifed by the risk, use market research to get independent comparative price information for<br>individual projects.<br>(b)	 When using reference price databases, use real market prices (or apply a coefcient to suppliers’ list<br>prices); update prices periodically and ensure they refect any large regional diferences.<br>(c)	 Defne clear rules and criteria for when the price applied for exceeds the reference to establish whether<br>the higher costs are reasonable; document the evaluation of the extra costs involved. If a percentage<br>variation from reference prices is automatically accepted, ensure that the percentage used can be justi­<br>fed in relation to real market prices.<br>**5.**<br>**Design safeguards against manipulation and fraud when evaluating ofers from suppliers**<br>(a)	 If only one ofer is received or if the ofers received are not comparable, use alternative methods to check<br>that the prices are reasonable.<br>(b)	 Design measures to deter, prevent, detect and correct any manipulation to favour a particular supplier.<br>(c)	 Follow the Commission’s guidance to prevent and detect fraud.<br>(d)	 When public procurement does not result in several competitive ofers, or if the procedures followed are<br>fawed, take additional steps to ensure that the costs are reasonable.<br>**6.	 Use independent expert opinions to get valuable assurance where this is cost‑efective**<br>(a)	 When judgement on the reasonableness of costs is required, use expert opinion or that of an evaluation<br>panel to get additional certainty that the decision is well‑founded.<br>(b)	 Refer higher‑risk cases to internal or external experts.|58–63<br>64–65<br>66–71<br>72–74<br>75–77<br>78–80<br>81<br>82–85<br>86–87<br>86–87|

## **Annexes 53**

|Risk|Design feature|See paragraphs|
|---|---|---|
|**Project changes**|**7.**<br>**Design control systems to detect and check signifcant changes to the project made after the**<br>**grant has been approved to ensure that the costs are still reasonable**<br>(a)	 Require a clear breakdown of costs both in the grant application and payment claim; specify costs in the<br>grant agreement at the same level of detail at which they were checked.<br>(b)	 Set clear rules and procedures to check that the costs of material changes from the approved project<br>costs are reasonable and that any savings are not used for gold‑plating.<br>**8.	 Design rules to deter concealment of discounts, rebates or other advantages given by the sup­**<br>**plier that lower the real cost**<br>(a)	 Require explicit declaration in payment claims of discounts, rebates or other advantages.<br>(b)	 Make additional on‑the‑spot checks for a sample of payments to detect hidden discounts, rebates or<br>other advantages.|90–91<br>90 –91<br>92<br>93–94|
|**Relation­**<br>**ship to the**<br>**risks**|**9.**<br>**Where the likelihood and potential impact of risks is low, design control systems that minimise**<br>**the administrative burden**<br>**10.	 Increase the requirements and checks for high‑value items, projects with high aid rates and**<br>**other risk factors**|96–98<br>99–100|

## **Annexes 54**

**Rural development programmes selected for desk review**

**–** **¹**
**Programmed expenditure (2007** **13) for the 15 largest RDPs** **(million euro)**

Romania

Hungary

France, Mainland

Portugal, Mainland

Greece

Bulgaria

Spain, Andalusia

Czech Republic

Slovakia

United Kingdom, England

Lithuania

Austria

Germany, Brandenburg and Berlin

Italy, Campania

All other RDPs

15 677

64 % of total budget
for the measures in
the audit scope
(29,5 billion euro)

1 For the measures in the scope of this audit, as of 31 December 2013.

_Source:_ ENRD.

## **Annexes 55**

**Use of simplified cost options in the 88 rural development programmes**

**RDPs using standard unit costs or lump sums as one of the methods, by measure**

Standard unit costs

Lump sums

Reimbursement of actual costs

Number of RDPs

0 10 20 30 40 50 60 70 80 90

First afforestation- Agricultural land

Non-productive investments — Forest

Non-productive investments — Farm

Training and information (agriculture/forest)

First afforestation — Non-agricultural land

Restoring forestry potential

Conservation/ upgrading natural heritage

Improvement of economic value of forest

Advisory services

Infrastructure

Food quality schemes

Establishment of agro — forestry systems

Farm modernisation

Encouragement of tourism

Relief and advisory services

Diversification

Business creation and development

Basic services

Village renewal

Training and information (rural)

_Source:_ ECA questionnaire.

## **Annexes 56**

**Overview of the approaches followed in the rural development programmes**
**selected for desk review**

|Col1|Bulgaria|Czech Republic|Germany (Brandenbourg)|Greece|Spain (Andalucia)|France (Mainland)|Italy (Campania)|Lithuania|Hungary|Austria|Poland|Portugal (Mainland)|Romania|Slovakia|UK (England)|
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|Assess costs against the expected outputs or<br>results||√||√|||√||||||||√|
|Check whether standard costs result in<br>overpayments|N/A||N/A|N/A|||N/A|||||N/A||N/A||
|Use market research where necessary to get<br>independent comparative price information for<br>unusual or complex projects||√|||√|√||√|√|√|√|√|√|√|√|
|Use real market prices as reference prices for<br>equipment and machinery etc. and not suppli­<br>ers’ list prices||√|N/A|||√|√|||N/A|√||1||N/A|
|Take measures to mitigate the risks of fraud<br>regarding supplier ofers and procurement|√|||||||√|√||√||√|√|√|
|Check that the costs are reasonable even when<br>public procurement procedures have been<br>followed|√|√||||||√|||√|||√||
|Use evaluation committees or experts to assess<br>specifcations and/or prices|√|√|√|√|√||√|√|√|√|√||||√|
|Require applicants to explicitly declare in<br>their payment claims all fnancial benefts<br>(discounts, rebates, etc.) received or due from<br>suppliers|||√|||||||||||√|√|
|On-the-spot checks that all fnancial benefts<br>received or due from suppliers are taken into<br>account for the fnal payment|||√||√||||||√|√|√||√|
|Higher requirements and/or checks for meas­<br>ures with high aid rates||||||||||||||||
|Lower requirements and/or checks for low-<br>value items|√|√|√|√|√|√||√||√|√||√|√|√|
|Higher requirements and/or checks for very<br>large projects|√|√|√|√|√|√||√||√|√||√|√|√|

Key

√ Included in the procedures for the main measures where it is relevant

Not included in the procedures for the main measures

Not assessed

N/A Not applicable

1 The equipment price database has not been updated since 2006. The Romanian authorities informed the Court that a new database is
being established based on suppliers’ list prices.

#### **Reply of the** **Commission**

**Executive summary**

**II**
The Commission is fully committed to achieving
better economy and efficiency in rural develop­
ment 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 bet­
ter 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 num­
ber of conformity clearance procedures are cur­
rently ongoing and should lead to further financial
corrections.

**IV**
Paying agencies must comply with the accreditation
criteria laid down in Annex I of Commission Del­
egated Regulation (EU) No 907/2014 (programme
2014–20) before any payments may be made. Article
24(2)(d) of 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, compari­
son of offers or an evaluation committee. This provi­
sion has been maintained for the 2014–20 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 process of approving the recast, only one
question (whether maximum costs were a suitable
method) was presented and answered.

## **57**

## **58**

**Reply of the Commission**

**Introduction**

**03**
As mentioned by the Court, the Commission carries
out conformity audits in the Member States to ver­
ify 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 euro for Bulgaria) and
a number of conformity clearance procedures are
currently ongoing and should lead to further finan­
cial corrections.

On 19 December 2013 the Commission adopted
guidelines for determining financial corrections
to be made by the Commission to expenditure
financed by the Union under shared manage­
ment, 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.

**04**
The Commission agrees that additional savings
could be made and will take the Court’s observa­

tions into account.

**05**
For the 2014–20 programming period the possibil­
ity 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 identi­
fied 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 Agriculture and Rural Development's system- and
risk‑based audit strategy takes into account the findings
from previous DG Agriculture and Rural Development
audits, from the 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 2014–20 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 Court of Auditors’
audits.

The new common agricultural policy (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 confi­
dent 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.

## **59**

**Reply of the Commission**

**Observations**

**21**
The EAFRD is implemented under shared management.
The Commission implements the budget and imple­
mentation 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 Agriculture and
Rural Development is fully assuming its responsibili­
ties, 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 conform­
ity 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 pay­
ments and financial corrections.

## **60**

**Reply of the Commission**

**29**
As described by the Court in paragraph 33, follow­
ing 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 imple­
menting 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 guid­
ance document on the most common irregularities
in the management of ESI funds has already been
presented to Member States (Fourth seminar on
error rate, October 2014).

**30**
For the new programming period 2014–20, the
Commission put forward simplified cost options
(flat-rate financing, standard scales of unit costs,
lump sums) as an efficient means to ensuring rea­
sonableness of costs.

Regulation (EU) No 1303/2013 includes options for
the European Structural and Investment Funds to
calculate eligible expenditure of grants and repay­
able 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 pre­
sented to the 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 December 2013, the Commis­
sion adopted guidelines for determining finan­
cial corrections to be made by it to expenditure
financed by the Union under shared manage­
ment, for non‑compliance with the rules on public
procurement.

As regards the assessment of the control systems
in place, the Commission has found that welldesigned 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 for
2011. This has been a substantial task for the Mem­

ber 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 prepar­
ation of guidelines on topics such as simplified
costs, public procurement, verifiability and control­
lability 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’s and the Commission’s audit findings to
a much larger extent. Indeed, 46 % of the actions
presented by Member States addressed concrete
audit findings, 50 % of which came from the Court’s
reports.

It should 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 imple­
mented. 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 Agriculture and Rural Development's
annual activity report will have to act promptly.

## **61**

**Reply of the Commission**

**42**
See reply to paragraph 34.

**44–49**
The monitoring and evaluation systems set up by
Member States following Annex IV of Commission
Implementing Regulation (EU) No 808/2014 (the
rural development 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 that Member States 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
Agriculture and Rural Development.

See reply to paragraph 33 for further details.

**54**
Good practices in this field will be shared through
the ENRD during the 2014–20 period.

**61**
There are different methodologies that can be applied
in order to determine the simplified cost options, as
spelt out under Article 67(5) of Regulation (EU) No
1303/2013. Furthermore, according to Article 62(2) of
Regulation (EU) No 1305/2013, the managing author­
ities shall include in their rural development pro­
grammes a statement confirming the adequacy and
accuracy of the calculations. This statement must be
carried out by a functionally independent body.

## **62**

**Reply of the Commission**

**62**
Under the current legal framework, the Commission
cannot oblige Member States to update or period­
ically review the simplified cost options’ methodol­
ogy put in place by the managing authorities fol­
lowing Article 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**
For the coming 2014–20 period, such a system
should be based on a fair, equitable and verifiable
calculation, taking into account, inter alia, statist­
ical data, historical data or usual cost accounting
practices.

Specifically for the investment measures, the Com­
mission will encourage the Members States to per­i­
odically review the simplified costs option method­
ologies, to be in line with market developments.

**71**
The Commission encourages Member States to
ensure that the systems in place reflect the devel­
opment of market prices over time.

**78–79**
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 Commis­
sion agrees that manipulation is not acceptable.

**80**

The extreme cases are indeed cases that have often
been seen in OLAF investigations.

## **63**

**Reply of the Commission**

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 pre­
sented to the 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 December 2013, the Commis­
sion adopted guidelines for determining finan­
cial corrections to be made by it to expenditure
financed by the Union under shared manage­
ment, for non‑compliance with the rules on public
procurement.

For the programme 2014–20, the Commission put
forward simplified cost options (flat rate financing,
standard scales of unit costs, lump sums) as an effi­
cient means for 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 repay­
able 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 welldesigned control systems were not always imple­
mented well in practice.

**110**
The Commission accepts this recommendation.
Member States should ensure up front that they
have efficient control systems in place. The Com­
mission will encourage the Member States to use
the checklist 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 rea­
sonableness of costs and the checklist for managing
authorities annexed in the special report.

Furthermore, training and sharing of experiences
will be part of the ENRD activities in the 2014–20
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 to share experiences
and good practices in the framework of regular
meetings.

## **64**

**Reply of the Commission**

In relation to compliance risks, in March 2014 DG
Agriculutre and Rural Development adopted a new
multiannual audit strategy for 2014–20. This audit
strategy continues to be risk‑based; in order to
achieve optimal audit coverage, it now features
a rolling 3‑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 implementa­
tion 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.

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