Annual report of the Court of Auditors on the implementation of the budget concerning the financial year 2018, together with the institutions’ replies - Main contents

— The statement of assurance and supporting information

— Budgetary and financial management

— Getting results from the EU budget

— Revenue

— Competitiveness for growth and jobs

— Economic, social and territorial cohesion

— Natural resources

— Security and citizenship

— Global Europe

— Administration

0.1.

The European Court of Auditors (ECA) is an institution (1) of the European Union (EU) and the external auditor of the EU’s finances (2). In this capacity, we act as the independent guardian of the financial interests of all EU citizens, notably by helping to improve the EU’s financial management. More information on our work can be found in our annual activity reports, our special reports, our landscape reviews and our opinions on new or updated EU laws or other decisions with financial management implications (3).

0.2.

This annual report, our 42nd on the implementation of the EU budget, covers the 2018 financial year. A separate annual report covers the European Development Funds.

0.3.

The EU’s general budget is approved annually by the Council and the European Parliament. Our annual report, combined as appropriate with our special reports, provides a basis for the discharge procedure in which the Parliament, acting on a recommendation from the Council, decides whether the Commission has satisfactorily met its budgetary responsibilities. On publication, we forward the annual report to national parliaments, the European Parliament and the Council.

0.4.

The central part of our report is the statement of assurance on the reliability of the EU consolidated accounts and the legality and regularity of transactions. This statement is supplemented by specific assessments for each major area of EU activity.

0.5.

As in previous years, the report this year is structured as follows:

• — 

  chapter 1 contains the statement of assurance and a summary of the results of our audit on the reliability of accounts and the regularity of transactions;

• — 

  chapter 2 presents our analysis of budgetary and financial management;

• — 

  chapter 3 focuses on what the EU budget performance indicators tell us, presents significant results from our 2018 special reports on performance, and analyses the Commission’s implementation of the recommendations we made in special reports published in 2015;

• — 

  chapter 4 presents our findings on EU revenue;

• — 

  chapters 5 to 10 show, for the main headings of the current multiannual financial framework (MFF) (4), the results of our testing of the regularity of transactions and our examination of the Commission’s annual activity reports, other elements of its internal control systems and other governance arrangements.

0.6.

As there are no separate financial statements for individual MFF headings, the conclusions to each chapter do not constitute an audit opinion. Instead, the chapters describe significant issues specific to each MFF heading.

0.7.

We aim to present our observations in a clear and concise way. We cannot always avoid using terms specific to the EU, its policies and budget, or to accounting and auditing. On our website, we have published a glossary with definitions and explanations of most of these specific terms (5). The terms defined in the glossary appear in italics when they first appear in each chapter.

0.8.

The Commission’s replies to our observations (or, where appropriate, the replies of other EU institutions and bodies) are presented with this report. It is our responsibility, as external auditor, to report our audit findings and draw the necessary conclusions so as to provide an independent and impartial assessment of the reliability of the accounts and the regularity of transactions.

1.1.

We are the European Union’s independent auditor. In accordance with the Treaty on the Functioning of the European Union (TFEU), we:

• (a) 

  give our opinion on the EU’s accounts;

• (b) 

  check whether the EU budget is used in accordance with applicable laws and regulations;

• (c) 

  report on whether EU spending is economic, efficient and effective (9); and

• (d) 

  advise on proposed legislation with a financial impact.

1.2.

The work we do for the statement of assurance (explained in Annex 1.1 ) fulfils the first and second of these objectives. In most EU spending areas (10), the work we do for the annual report also addresses the economy, efficiency and effectiveness of spending. We report on different aspects of the system put in place by the Commission to ensure that EU funds are well spent (11). Taken together, our audit work also provides a key input into our opinions on proposed legislation.

1.3.

This chapter of the annual report:

• (a) 

  sets out the background to our statement of assurance and gives an overview of our findings and conclusions on the reliability of accounts and the regularity of transactions;

• (b) 

  includes information on cases of suspected fraud we report to OLAF;

• (c) 

  summarises our audit approach (see Annex 1.1 ).

1.4.

EU spending is an important – but not the only – tool for achieving policy objectives. Other important tools include the use of legislation and the freedom for goods, services, capital and people to move throughout the EU. In 2018, EU spending amounted to 156,7 billion euros (12), representing 2,2 % of EU Member States’ total general government spending and 1,0 % of EU gross national income (see Box 1.1 ).

1.5.

EU funds are disbursed to beneficiaries either through single payments/annual instalments or through a series of payments within multiannual spending schemes. Payments from the 2018 EU budget comprised 126,8 (13) billion euros in single, interim or final payments, plus 29,9 billion euros in pre-financing. As Box 1.2 shows, the largest share of the EU budget went to ‘Natural resources’ followed by ‘Cohesion’ and ‘Competitiveness’.

1.6.

Our observations concern the European Union’s consolidated accounts (14) (the ‘accounts’) for the 2018 financial year. We received them, together with the accounting officer’s letter of representation, on 26 June 2019, before the final date for presentation allowed under the Financial Regulation (15). The accounts are accompanied by a ‘Financial Statement Discussion and Analysis’ (16). This analysis is not covered by our audit opinion. In accordance with the auditing standards, however, we have assessed its consistency with the information in the accounts.

1.7.

The accounts published by the Commission show that, at 31 December 2018, total liabilities amounted to 235,9 billion euros, compared with 174,4 billion euros of total assets. The economic result for 2018 is 13,9 billion euros.

1.8.

Our audit found that the accounts were not affected by material misstatements. We present our observations on the financial and budgetary management of EU funds in Chapter 2.

1.9.

Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the financial statements of the current period. These matters were addressed in the context of our audit of the financial statements as a whole and in forming our opinion thereon, but we do not provide a separate opinion on these matters. In accordance with the International Standard of Supreme Audit Institutions (ISSAI) 1701, we report on key audit matters in our statement of assurance.

1.10.

We examine EU revenue and expenditure to assess whether it is in compliance with the applicable laws and regulations. We present our audit results for revenue in chapter 4 and for expenditure in chapters 5 to 10.

1.11.

To carry out our audit, we examined the transactions underlying the EU’s accounts. For expenditure, these comprised transfers of funds from the EU budget to final recipients of EU spending. We examine expenditure at the point when final recipients of EU funds have undertaken activities or incurred costs, and when the Commission has accepted the expenditure (‘accepted expenditure’). In practice, this means that our population of transactions covers interim and final payments. We did not examine pre-financed amounts unless they had been cleared in 2018.

1.12.

As highlighted in our 2017 annual report, the modifications to the 2014-2020 sectoral legislation for ‘Cohesion’ have had an impact on what the Commission considers ‘accepted expenditure’ in this area (17). Therefore, since 2017 our audit population for this MFF heading consists of final payments (including pre-financing which had been cleared) for the 2007-2013 period and expenditure included in the accounts accepted on an annual basis by the Commission, for the 2014-2020 period (see paragraphs 2 to 4 of Annex 1.1 and paragraphs 6.7-6.8). This means that we tested transactions for which Member States had implemented all relevant corrective actions arising from errors that they themselves had identified.

1.13.

Box 1.3 shows the breakdown of our 2018 audit population into single, interim (where accepted by the Commission) and final payments, clearings of pre-financing and annual decisions to accept the accounts. Our audit population for 2018, was worth a total of 120,6 billion euros. For ‘Cohesion’, interim payments made in 2018 for the 2014-2020 period will be included in our population in a later year once the accounts have been accepted by the Commission and cleared through an annual decision.

1.14.

Box 1.4 shows that ‘Natural resources’ makes up the largest share of our overall population (48,2 %), followed by ‘Cohesion’ (19,6 %) and ‘Competitiveness’ (14,8 %).

1.15.

For the regularity of EU revenue and expenditure, our key findings were:

• (a) 

  Revenue was free from material error. Overall, the revenue-related systems we examined were effective, but the key internal traditional own resources (TOR) controls we assessed at the Commission and in certain Member States were only partially effective (see paragraph 4.22);

• (b) 

  For expenditure, our overall audit evidence indicates that the level of error was material. We estimate the overall level of error in expenditure at 2,6 % (18), but material error was confined to expenditure subject to complex rules (mainly reimbursement-based) (see paragraphs 1.19 - 1.21), representing around 50,6 % of our audit population. Our overall estimated level of error increased slightly on last year (see Box 1.5 ).

   

  Box 1.5 The estimated level of error (2016 to 2018)     Source: ECA. An error is the amount of money that should not have been paid out from the EU budget, because it was not used in accordance with EU rules and thus does not comply either with what the Council and Parliament intended with the EU legislation concerned or with specific national rules in the Member States.

1.16.

Following a risk analysis based on past audit results, we have divided our audit population of underlying transactions into high-risk and low-risk expenditure. Our 2018 audit results confirm our findings from previous years: namely, that the way funds are disbursed has an impact on the risk of error.

• — 

  The risk of error is high for expenditure subject to complex rules. This is mainly the case for reimbursement-based payments where beneficiaries have to submit claims for eligible costs they have incurred. To this end, as well as demonstrating that they are engaged in an activity eligible for support, they must provide information showing the costs incurred for which they may claim reimbursement. In doing so, they must follow complex rules regarding what can be claimed (eligibility) and how costs can be properly incurred (public procurement or state aid rules).

• — 

  The risk of error is lower for expenditure subject to simplified/less complex rules. This type of expenditure comprises mainly entitlement-based payments, where beneficiaries receive payment if they meet certain conditions. Such payments represent a lower risk of error if the conditions set are not overly complex.

1.17.

In 2018, we continued to find that low-risk (mainly entitlement-based) expenditure (19) was free from material error, but that high-risk (mainly reimbursement-based) expenditure continued to be affected by material error (see Box 1.6 ).

1.18.

For 49,4 % of our audit population, we conclude, based on our audit work, that the estimated level of error is below our materiality threshold of 2 %, as it was in 2017. Low-risk expenditure mainly comprises entitlement-based payments and administrative expenditure (see Box 1.7 ). Entitlement-based payments include student and research fellowships (‘Competitiveness’ – chapter 5), direct aid for farmers (‘Natural resources’ – chapter 7) and budget support for non-EU countries (‘Global Europe’ – chapter 9). Administrative expenditure mainly comprises the salaries and pensions of EU civil servants (‘Administration’ – chapter 10).

1.19.

Where complex conditions are in place, we found a high risk of error. This applies to reimbursement-based expenditure and to a small proportion of entitlement-based expenditure where complex conditions apply (some rural development schemes). This high-risk type of expenditure represents around 50,6 % of our audit population. We estimate the level of error in this type of expenditure at 4,5 % (2017: 3,7 %), which exceeds the materiality threshold of 2 % (see Box 1.6 ).

1.20.

Most reimbursement-based EU funds are spent on research projects (‘Competitiveness’ – chapter 5), employment-related projects (‘Cohesion’ – chapter 6), projects in regional and rural development (‘Cohesion’ – chapter 6 and ‘Natural resources’ – chapter 7) and development projects in non-EU countries (‘Global Europe’ – chapter 9) (see Box 1.7 ).

1.21.

This complexity leads to errors which affect our conclusion for ‘Competitiveness’ (see paragraph 5.35), ‘Cohesion’ (see paragraph 6.71) and ‘Natural resources’ (see paragraph 7.37).

1.22.

This year, as we did in 2017, we provide a specific assessment for four MFF headings: ‘Competitiveness’, ‘Cohesion’, ‘Natural resources’ and ‘Administration’.

1.23.

We do not estimate levels of error for other areas of expenditure, including ‘Security and citizenship’ (chapter 8) and ‘Global Europe’ (chapter 9). In total, expenditure covered by our statement of assurance in these two areas amounted to 11,0 billion euros (9,1 % of the expenditure covered by our audit). Work performed in these areas continues to contribute to our overall conclusions on 2018.

1.24.

‘Competitiveness’ (chapter 5): our estimated level of error is lower than in the last two years. As in previous years, research expenditure remains high-risk and is the main source of error. Errors in research spending include different categories of ineligible costs (in particular direct personnel costs and other direct costs, indirect costs and subcontracting costs).

1.25.

‘Cohesion’ (chapter 6): expenditure in this area is dominated by reimbursements. The main types of error detected by audit authorities were ineligible costs and infringements of public procurement rules. For these errors, Member State authorities applied corrections with a view to reducing the residual error rates for programmes below the 2 % materiality threshold. However, we also found errors that audit authorities had not detected, such as infringements of the EU’s state aid rules. Neither the Member States nor, to date, the Commission have applied any corrections for these errors. Based on errors that either audit authorities or we ourselves detected, and considering all relevant financial corrections, we estimate that the level of error is material.

1.26.

‘Natural resources’ (chapter 7): as a whole, this area is materially affected by error. However, direct payments from the European Agriculture Guarantee Fund (EAGF), which account for 71,8 % of spending in this area, are free from material error. Direct payments to farmers are entitlement-based and have benefited from simplified land eligibility rules and an effective control system (IACS – Integrated Administration and Control System), which allows automated cross-checks between databases. We continue to find a material level of error in the other spending areas (rural development, EAGF market measures, fisheries, environment and climate action). Expenditure in these areas mainly takes the form of reimbursement of costs and is subject to complex eligibility conditions. Ineligible beneficiaries, activities or declared costs and the provision of inaccurate information on areas or animals account for more than half of the estimated level of error for this MFF heading.

1.27.

‘Administration’ (chapter 10): this area is free from material error. Most administrative expenditure takes the form of salaries, pensions and allowances paid by EU institutions and bodies.

1.28.

As in recent years, we focussed more closely on the types of error found in expenditure subject to complex rules (mainly reimbursement-based), as this is the area in which material error persists. Box 1.8 provides a breakdown of the 2018 estimated level of error 4,5 % for high-risk (mainly reimbursement-based) spending by error type. It also provides the corresponding figures for the 2017 (3,7 %) and 2016 (4,8 %) estimates.

1.29.

The biggest contributors to our 2018 estimated level of error for high risk expenditure were ‘Cohesion’ (43,0 %), followed by ‘Rural development, EAGF market measures, fisheries, environment and climate action’ under ‘Natural resources’ (30,2 %), ‘Competitiveness’ (12,2 %) and ‘Global Europe’ (4,5 %).

1.30.

As in previous years, eligibility errors (i.e. ineligible costs in costs claims and ineligible projects, activities or beneficiaries) contributed most to the estimated level of error for high-risk expenditure. However, their impact was less than in 2017 (2018: 68 %; 2017: 93 %). This was because in 2018 we found a significantly higher number of errors in relation to public procurement, state aid rules and grant award procedures. These errors contributed 16 % of our estimated level of error for high-risk expenditure (2017: 1 %) and were mainly in ‘Cohesion’ and ‘Natural Resources’.

1.31.

This year, expenditure accepted under the European Regional Development Fund (ERDF) and the Cohesion Fund made up 74 % of total ‘Cohesion’ expenditure. Operations co-financed by these funds are more prone to public-procurement related errors (see paragraphs 6.26-6.28).

1.32.

‘Cohesion’ and ‘Natural resources’ accounted for most administrative errors by intermediary bodies (20) (see category “other” in Box 6.2 and category “administrative errors” in Box 7.2 ). Such errors include incorrect aid calculations.

1.33.

According to Article 317 of the TFEU, the Commission is ultimately responsible for implementing the EU budget and manages EU spending together with Member States (21). The Commission accounts for its actions in three reports, which are included in the ‘Integrated Financial Reporting Package’ (22):

• (a) 

  EU consolidated accounts (provisional in March; final in June);

• (b) 

  Annual Management and Performance Report for the EU budget (AMPR) (no provisional version; final version in June);

• (c) 

  Report on the follow-up to the discharge of the previous financial year (July).

1.34.

Under our 2018-2020 strategy, we set out to base our statement of assurance on an attestation approach, meaning that in future, we intend to provide assurance on the Commission’s (management) statement. This builds on our experience of applying this approach since 1994 when auditing the reliability of the accounts. For the regularity of transactions underlying the accounts, we are working with the Commission to establish the conditions necessary to progress towards this approach. An important element is the timely availability of information for compilation and audit (23).

1.35.

In the AMPR, the Commission presents, for the transactions underlying the 2018 accounts, its assessment of the risk at payment. The risk at payment represents the Commission’s estimate of the amount, at the moment of payment, that has been paid not in accordance with the applicable rules. This concept is closest to our estimate for the level of error.

1.36.

Box 1.9 presents the Commission’s figures for the risk at payment alongside the range of our estimate of error. The Commission’s estimate of the risk at payment for 2018 is slightly below our range at 1,7 %. Our estimated level of error is 2,6 % (2017: 2,4 %), in a range between 1,8 % and 3,4 %.

1.37.

The Commission uses the statements of assurance made by its directors-general in their annual activity reports (AARs) as the basis for its overall assessment of the risk at payment for the different policy areas. The risk at payment is based mainly on the results of ex-post checks performed by the Commission in areas under direct or indirect management or by national authorities in areas under shared management. Box 1.10 illustrates the basis for establishing the risk at payment for the different spending areas.

1.38.

The Commission presents the risk for a specific grouping of policy areas rather than per MFF heading (24). In Box 1.11 , we juxtapose our estimated level of error for those MFF headings for which we provide a specific assessment with the individual components of the Commission’s overall estimate. We have taken account of the difference between the way we estimate the level of error and the way the Commission presents its figures in the AMPR (25).

1.39.

We found that:

• — 

  for ‘Competitiveness’, the overall estimate of the risk at payment for the MFF heading (1,6 %), which we calculated based on the information included in the AMPR, is within the range of our estimated level of error (see paragraphs 5.36 and 5.38).

• — 

  for ‘Cohesion’, the Commission’s overall estimate for the MFF heading (26) is (1,7) %, which is below the range of our estimated level of error (see paragraphs 6.56 and 6.74).

• — 

  for ‘Natural resources’, the overall estimate of the risk at payment for the MFF heading (2,1 %), which we calculated based on the information included in the AMPR, as well as the Commission’s estimates for CAP spending as a whole and for direct payments, are consistent with our conclusion (see paragraphs 1.38 and 7.37-7.38).

1.40.

The Commission presents a further regularity indicator in the AMPR called the risk at closure. This is the risk at payment (see paragraph 1.36) minus the estimated future corrections and recoveries that managers of EU funds expect to make in respect of 2018 expenditure during the next year(s) of the current programmes.

1.41.

To prepare an estimate of future corrections and recoveries, the Commission uses a historical average based on transactions over the previous years. To ensure it is relevant for current programmes, Commission internal guidance requires DGs to adjust the historical averages or to use another estimation method as appropriate, and to disclose these adjustments and the approach they have taken in their AARs. In 2018, most Commission DGs adjusted their historical averages.

1.42.

We cooperate closely with the European Anti-Fraud Office (OLAF) in fighting fraud against the EU budget. We forward to OLAF any suspicion of fraud, corruption or other illegal activity affecting the EU’s financial interests that we identify in the course of our audit work (including our work on performance) or on the basis of information provided to us directly by third parties. OLAF then follows up on these cases, decides whether to launch an investigation and cooperates as necessary with Member State authorities.

1.43.

In 2018:

• (a) 

  we assessed the regularity of 728 transactions for our audit work on the annual report and produced 35 special reports;

• (b) 

  we reported to OLAF 9 instances of suspected fraud found during our audits (13 in 2017); we did not refer any cases to OLAF based on information provided by third parties (6 in 2017).

1.44.

The suspected fraud cases arising from our work in 2018 that we referred to OLAF most frequently concerned the suspicions of artificial creation of the necessary conditions for EU financing, declaration of costs not meeting the eligibility criteria, or procurement irregularities. Some of the suspected fraud cases we reported to OLAF involved several irregularities.

1.45.

In 2018, we referred to OLAF nine cases arising from audit work. OLAF has opened two investigations. In seven cases, OLAF did not open an investigation, for one of the following reasons:

• — 

  OLAF considered that a national authority or EU institution, body, office or agency was better placed to deal with the case and transferred it accordingly;

• — 

  there was already an ongoing investigation at national level, of which we were not aware;

• — 

  for proportionality reasons;

• — 

  due to insufficient suspicion.

1.46.

Based on audit information it received from us between 2010 and 2018, OLAF has recommended the recovery of a total of 312,8 million euros. The underlying financial recommendations relate to 24 cases arising from our audit work (27).

1.47.

The key function of this chapter is to support the audit opinion presented in the statement of assurance.

1.48.

We conclude that the accounts were not affected by material misstatements.

1.49.

As for the regularity of transactions, we conclude that revenue was free from material error. For expenditure, our audit results show that the estimated level of error increased slightly on last year. As we did last year, we conclude that expenditure subject to simplified/less complex rules (mainly entitlement-based) is free from material error. A material level of error is confined to expenditure subject to complex rules (mainly reimbursement-based), which this year accounted for 50,6 % of our audit population.

‘The Commission shall implement the budget in cooperation with the Member States, in accordance with the provisions of the regulations made pursuant to Article 322, on its own responsibility and within the limits of the appropriations, having regard to the principles of sound financial management. Member States shall cooperate with the Commission to ensure that the appropriations are used in accordance with the principles of sound financial management.’

(1)

Our audit approach is set out in the Financial and Compliance Audit Manual, which is available on our website (1). We use an assurance model to plan our work. In our planning, we consider the risk of errors occurring (inherent risk) and the risk of errors not being prevented or detected and corrected (control risk).

(2)

In 2018, the first year of our strategy, we improved the added value of our statement of assurance.

(3)

Our recent annual reports show improvements in management and control systems and in the availability of legality and regularity information provided by our auditees. In light of these developments, we strive to make better use of our auditee’s legality and regularity information in areas where this is feasible. Our ultimate goal is to move in future years towards an attestation approach (2). Under this approach, the auditor gathers sufficient and appropriate evidence to provide a conclusion on the assurance expressed by the responsible entity. In practice, this would mean that in areas where we had made sure that information was of sufficient quality and could draw assurance from the legality and regularity information provided by our auditee, we would review and, if necessary, re-perform their work.

(4)

Since 2017, we have amended our audit approach for ‘Economic, social and territorial cohesion’ to take account of changes in the design of the control systems for the 2014-2020 programming period. Our objective is, in addition to contributing to the 2018 statement of assurance, to conclude on the reliability of the Commission’s key regularity indicator for this area – the residual risk of error (3).

(5)

We examine the EU’s consolidated accounts to determine their reliability. These consist of:

• (a) 

  the consolidated financial statements; and

• (b) 

  the budgetary implementation reports.

(6)

The consolidated accounts should properly present, in all material respects:

• (a) 

  the financial position of the European Union at year end;

• (b) 

  the results of its operations and cash flows; and

• (c) 

  the changes in net assets for the year ended.

(7)

In our audit, we:

• (a) 

  evaluate the accounting control environment;

• (b) 

  check the functioning of key accounting procedures and the year-end closure process;

• (c) 

  analyse the main accounting data for consistency and reasonableness;

• (d) 

  analyse and reconcile accounts and/or balances;

• (e) 

  perform substantive tests of commitments, payments and specific balance sheet items, based on representative samples;

• (f) 

  use the work of other auditors where possible, in accordance with international standards on auditing, particularly when auditing borrowing and lending activities managed by the Commission for which external audit certificates are available.

(8)

Our current approach for assessing whether the transactions underlying the accounts comply with EU rules and regulations is to rely mainly on direct testing of compliance for a large, random, representative sample of transactions.

(9)

However, we consider whether we can make efficient use of the checks on regularity already performed by others. If we want to use the results of these checks in our audit work, in line with audit standards, we assess the independence and competence of the other party and the scope and adequacy of its work.

(10)

Under each MFF heading where we provide a specific assessment (chapters 5, 6, 7 and 10), we test a representative sample of transactions in order to estimate the share of irregular transactions in the overall population.

(11)

For each selected transaction, we determine whether or not the claim or payment was made for the purpose approved in the budget and specified in legislation. We examine how the amount of the claim or payment was calculated (for larger claims: based on a selection representative of all items in the transaction). This involves tracing the transaction from the budgetary accounts to the final recipient (e.g. a farmer, or the organiser of a training course or development aid project), testing compliance at each level.

(12)

When testing revenue transactions, our examination of value added tax and GNI-based own resources takes as a starting point the macroeconomic aggregates based on which these are calculated. We examine the Commission’s controls on these Member State contributions up to the point they were received and recorded in the consolidated accounts. For traditional own resources, we examine the customs authorities’ accounts and the flow of duties — again up to the point they were received and recorded by the Commission.

(13)

On the expenditure side, we examine payments once expenditure has been incurred, recorded and accepted. This applies to all categories of payments (including those made to purchase assets). We do not examine advances at the point they were made, but rather once:

• (a) 

  the final recipient of EU funds (e.g. a farmer, a research institute, a company providing publicly procured works or services) has provided evidence of their use; and

• (b) 

  the Commission (or other institution or body managing EU funds) has accepted the final use of the funds by clearing the advance.

(14)

Our audit sample is designed to provide an estimate of the level of error for the expenditure as a whole rather than for individual transactions (e.g. a particular project). We use monetary unit sampling to select claims or payments and, at a lower level, individual items within a transaction (e.g. project invoices, parcels in a claim by a farmer). The error rates reported for these items should not be seen as a conclusion on their respective transactions, but rather contribute directly to the overall level of error for EU expenditure as a whole.

(15)

We do not examine transactions in every Member State, beneficiary state and region in any given year. While we may name certain Member States, beneficiary states and/or regions, this does not mean that the examples do not occur elsewhere. The illustrative examples presented in this report do not form a basis for conclusions to be drawn on the specific Member States, beneficiary states and/or regions concerned.

(16)

Our approach is not designed to gather data on the frequency of error in the whole population. Therefore, figures presented on the number of errors detected in an MFF heading, in expenditure managed by a DG or in spending in a particular Member State are not an indication of the frequency of error in EU-funded transactions or in individual Member States

(17)

An error may concern all or part of the amount involved in an individual transaction. We consider whether errors are quantifiable or non-quantifiable, i.e. whether or not it is possible to measure how much of the amount examined was affected by the error. Errors detected and corrected prior to and independently of our checks are excluded from the calculation and frequency of error, since their detection and correction demonstrate that the control systems have worked effectively.

(18)

Our criteria for the quantification of public procurement errors are described in the document ‘Non-compliance with the rules on public procurement – types of irregularities and basis for quantification’ (4).

(19)

Our quantification may differ from that used by the Commission or Member States when deciding how to respond to the misapplication of the public procurement rules.

(20)

For most MFF headings and for the overall EU budget, we present an ‘estimated level of error’ (ELE). The ELE takes account of quantifiable errors only and is expressed as a percentage. Examples of errors are quantifiable breaches of applicable regulations, rules or contract or grant conditions. We also estimate the lower error limit (LEL) and the upper error limit (UEL).

(21)

We use the level of 2 % as materiality threshold for our opinion. We also take account of the nature, amount and context of errors.

(22)

We no longer base our statement of assurance solely on our overall estimate of error. Since 2016, we have continued to identify low-risk areas of the EU budget, where we expect to find a non-material level of error in accepted expenditure, and high-risk areas, where we assume that there will be a material level of error. This enables us to determine as efficiently as possible whether material errors found are pervasive.

(23)

The Commission, other EU institutions and bodies, Member State authorities, beneficiary countries and regions establish systems for managing the risks to the budget and overseeing/ensuring the regularity of transactions. It is helpful to examine these systems in order to identify areas for improvement.

(24)

Each MFF heading, including revenue, involves many individual systems. We select a sample of systems each year and present the results together with recommendations for improvement.

(25)

We plan our work to obtain sufficient, relevant and reliable audit evidence for our opinion on the regularity of transactions underlying the EU’s consolidated accounts. This work is reported on in chapters 4 to 10. Our opinion is set out in the statement of assurance. Our work allows us to arrive at an informed opinion as to whether errors in the population exceed or fall within the materiality limits.

(26)

Where we find a material level of error and determine its impact on the audit opinion, we must determine whether or not the errors, or the absence of audit evidence, are ‘pervasive’. In doing so, we apply the guidance contained in ISSAI 17 05 (extending this guidance to apply to issues of legality and regularity, in accordance with our mandate). Where errors are material and pervasive, we present an adverse opinion.

(27)

An error or an absence of audit evidence are deemed ‘pervasive’ if, in the auditor’s judgment, they are not confined to specific elements, accounts or items of the financial statements (i.e. they are spread throughout the accounts or transactions tested), or, if they are so confined, they represent or could represent a substantial proportion of the financial statements, or relate to disclosures which are fundamental to users’ understanding of the financial statements.

(28)

Our best estimate of the level of error for overall spending in 2018 is 2,6 %. We did not assess this error as pervasive, as it is confined to expenditure subject to complex rules (mainly reimbursement-based). The estimated level of error found for the different MFF headings varies, as described in chapters 5 to 7 and 10.

(29)

If we have reason to suspect that fraudulent activity has taken place, we report this to OLAF, the EU’s anti-fraud office. OLAF is responsible for carrying out any resulting investigations. We report several cases per year to OLAF.

(30)

We have issued:

• (a) 

  an audit opinion on the consolidated accounts of the EU for the financial year ended; and

• (b) 

  audit opinions on the regularity of the revenue and expenditure underlying those accounts.

(31)

Our work and our opinions follow the IFAC’s International Standards on Auditing and Codes of Ethics and INTOSAI’s International Standards of Supreme Audit Institutions.

(32)

Where auditors issue audit opinions on both the reliability of accounts and the regularity of transactions underlying those accounts, these standards state that a modified opinion on the regularity of transactions does not, in itself, lead to a modified opinion on the reliability of accounts.

2.1.

This chapter presents our review of budgetary and financial management issues. It also identifies risks and challenges facing the EU budget in future years, based on our current work and on views expressed in our special reports, rapid case reviews, briefing papers and opinions.

2.2.

In May 2018, the Commission submitted its proposal for the new Multiannual Financial Framework (MFF) 2021-2027 (1) to the European Parliament and Council (which together form the budgetary authority). Negotiations are in progress with a view to reaching an agreement before the end of 2019. We have expressed our views on the subject in a briefing paper (2).

2.3.

The withdrawal of the United Kingdom from the EU does not affect the 2018 budgetary accounts. In parts of our analysis, we make projections about future EU budgets. In such cases, we have assumed that the draft withdrawal agreement between the United Kingdom and the EU (3) will be approved and implemented.

2.4.

Each year, the budgetary authority sets a limit on new EU financial obligations (commitment appropriations) and on payments that can be made from the EU budget (payment appropriations).

2.5.

In 2018, commitment appropriations were used almost entirely. Out of 160,7 billion euros available in the 2018 EU budget, 159,9 billion euros were used (99,5 %) (see Box 2.1 ).

2.6.

The EU used also nearly all the available payment appropriations included in the final budget (4). Of the 144,8 billion euros available, payments of 142,7 billion euros were made (98,6 %) (5) (see Box 2.1 ). This followed two years of lower-than-initially budgeted payments. There was a significant increase in payment claims from Member States in 2018 for the European Structural and Investment Funds (ESI Funds) (6). These funds account for around 43 % of the 2014-2020 MFF (7).

2.7.

The difference between the initial and the final budget was small. The six amending budgets adopted in 2018 added only 583 million euros (8) of commitment appropriations and 87 million euros of payment appropriations.

2.8.

The ESI Funds influence the planning and implementation of the MFF for two main reasons. Firstly, they are a substantial part of the MFF. Secondly, they are implemented via multiannual commitments, and requests for payment may come in any of the subsequent years. The delays in the ESI Funds’ implementation, which the Commission has previously noted and we have confirmed (9), continue to impact the final years of this MFF. We note that, for the European Agricultural Fund for Rural Development (EAFRD), the implementation rates were considerably higher than for other ESI Funds. Payment claims for a substantial value have been delayed and will be submitted in future years. This has affected the use of pre-financing and the evolution of outstanding commitments, and will affect payment appropriation needs at the start of the next MFF, as described below.

2.9.

Every year, Member States receive annual pre-financing for ESI Funds operations (except the EAFRD) from the EU budget (10). If a Member State submits claims for an amount less than the pre-financing received, the unused pre-financing is returned to the EU budget the following year. This happens as part of the annual examination and acceptance of accounts procedure for the ESI Funds, which was introduced in the current MFF and first applied in 2017.

2.10.

These unused pre-financing amounts are re-entered in the budget as assigned revenue. They are earmarked for use for the relevant ESI Funds budget lines only. They become commitment and payment appropriations on top of the appropriations in the year’s budget. Commitment appropriations are used immediately. Payment appropriations must be used for payments to Member States either the same or the following year to prevent them from being cancelled.

2.11.

Member States received annual pre-financing of 6,8 billion euros in 2016 and 9,0 billion euros in 2017. Due mainly to the delays in implementation, Member States returned substantial amounts of this unused annual pre-financing, 6,6 billion euros in 2017 and 8,1 billion euros in 2018 respectively. This significantly increased assigned revenue in these two years. The payment appropriations created by these returned amounts were used to make payments on claims from Member States over and above the approved budget for the year, amounting to 5,4 billion euros in 2017 and 6,9 billion euros in 2018 (see Box 2.2 below). If these payment appropriations had not been available for re-use, this might have necessitated the use of the global margin for payments (GMP) in 2018.

2.12.

The global margin for payments (GMP) is a mechanism introduced in the current MFF to make payment appropriations more flexible. Its aim is to avoid running out of payment appropriations, as occurred in the last years of the previous MFF (11). The mechanism allows each year’s unused appropriations, up to the MFF ceiling, to be transferred for use in future years.

2.13.

The amount of available GMP transferred to 2018-2020 from previous years is 33,7 billion euros (2018: 5,3 billion euros, 2019: 12,9 billion euros and 2020: 15,5 billion euros) (see Box 2.3 ). The MFF placed a ceiling of 36,5 billion euros on the use of the GMP in 2018-2020 (2018: 8,0 billion euros, 2019: 12,9 billion euros and 2020: 15,5 billion euros).

2.14.

In 2018, there was no need for additional payments, and the 5,3 billion euros of available GMP from previous years were not needed. However, they could not be transferred forward because the 2019 and the 2020 GMP ceilings had been reached. For the same reason, an additional amount of 11,2 billion euros in payment appropriations not used in 2018 (12) likewise could not be transferred to 2019 or 2020.

2.15.

According to the initial budget for 2019, the 12,9 billion euros of GMP available for the year will also not be needed to cover payment requirements (13). In addition, according to the draft budget for 2020 (14), the full 15,5 billion euros of available GMP may not be needed in 2020. Therefore, a total of 33,7 billion euros in available GMP may not be needed in 2018-2020.

2.16.

Unless payment needs increase in 2019-2020, the 33,7 billion euros available under the GMP will remain unused by 2020. Together with the 11,2 billion euros of unused payment appropriation from 2018 that could not be transferred to future years (see paragraph 2.14) this gives a total of 44,9 billion euros in payment appropriations that may remain unused by 2020. The flexibility provided by the GMP ends with the current MFF in 2020. It cannot address any flexibility needs in the next MFF (see paragraphs 2.19 - 2.21).

2.17.

Outstanding commitments have continued to grow, reaching 281,2 billion euros at the end of 2018 (2017: 267,3 billion euros). They have increased by 36 % (73,7 billion euros) over the past seven years since 2011, the corresponding year of the previous MFF (see Box 2.4 ). Based on the Commission’s long-term forecast (15), outstanding commitments will reach 313,8 billion euros by 2023, which is close to our projections.

2.18.

We have extensively analysed outstanding commitments in our rapid case review ‘Outstanding commitments - a closer look’ (16), which covers the period up to the end of 2017. We concluded that three main reasons contributed to their rise: the annual gap between commitments and payments, slow implementation of the ESI Funds and the increase in the size of the EU budget.

2.19.

A risk exists that not enough payment appropriations will be available to cover all amounts due in the first years of the new MFF. The Commission projected, in its long-term forecast (17), that payment appropriations in 2019 and 2020 would be well below the ceilings (18). This suggests that payment needs that were previously planned to be covered in 2019-2020 will be carried forward to the first years of the new MFF.

2.20.

The value of claims submitted in the period 2021-2023 will largely depend on Member States’ implementation of their ESI Funds operational programmes. Based on our review, payment appropriations available at the start of the 2021-2027 MFF may not be enough to cover all payment requirements in the first years of the period. This may be particularly true for 2021, the first year of the new MFF.

2.21.

In the Commission’s long-term forecast, projected payment appropriations for 2021 relating to pre-2021 commitments under Headings 1b and 2 (19), which mostly relate to the ESI Funds, amount to 63,7 billion euros. Under the 2007-2013 MFF, around 40 % of Cohesion Funds’ commitments still outstanding at the end of the 2013, the final year of that MFF, were paid in 2014, the first year of the current MFF. Assuming that a similar proportion (40 %) of ESI Funds commitments from the current MFF still outstanding by the end of 2020 will be due for payment in 2021, the projected payment appropriations of 63,7 billion euros may not be enough. Outstanding commitments from the ESI Funds had reached 200,9 billion euros by the end of 2018 and will be even higher by the end of 2020; 40 % of 2018’s outstanding ESI Funds commitments is already 80 billion euros (considerably more than the projected payment appropriations of 63,7 billion euros), so 40 % of 2020’s outstanding commitments will probably be even higher. The risk of insufficient payment appropriations is all the greater given that the implementation of the ESI Funds has been even more delayed than in the previous MFF and that more claims may be submitted than in 2014.

2.22.

ESI Funds absorption gained momentum in 2018, the fifth year of the current MFF. However, by the end of the year, on average only 27,3 % of total allocations for the whole MFF had been paid to the Member States, compared with 33,4 % by the end of 2011, the corresponding year of the previous MFF. During 2018, 10,9 % of total allocations were paid, similar to the proportion of the previous MFF’s allocations paid in 2011 (11,3 %). Because of slower-than-anticipated implementation in the earlier years of the current MFF (20), the cumulative implementation rate is lagging significantly behind that of the previous MFF. In addition to the risk of insufficient payment appropriations at the beginning of the next MFF, there will be substantial overlap between MFF periods, which is likely to overload Member State administrations with work and cause similar delays in the first years of the 2021-2027 MFF to those experienced in the current MFF.

2.23.

The chart in Box 2.5 shows how much of the total ESI Funds allocation for the current MFF had been paid by the end of 2018 and how much had been paid by the end of 2011, the corresponding year of the previous MFF. It reveals that only Bulgaria, Luxembourg, Austria, Romania and Finland have a faster absorption rate during the current MFF than during the previous one.

2.24.

The low absorption of ESI Funds has contributed to increasing ESI Funds outstanding commitments. Box 2.6 below shows each Member State’s outstanding commitments, both as an amount in euros and as a percentage of its 2018 general government expenditure.

2.25.

As shown in Box 2.7 below, guarantees have grown in the last few years, mainly due to the addition of the European Fund for Strategic Investments (EFSI) guarantee and the European Fund for Sustainable Development (EFSD) guarantee. The aim of these guarantees was to leverage external funds in order to increase the potential impact of the EU budget. Other guarantees supported by the EU budget include external lending mandate guarantees given to the EIB (21) and EU guarantees backing borrowing and lending activities, which are mainly loans to Member States (22) and have existed for many years at a fairly consistent level. However, this growth has exposed the EU budget to potential risks, which must be continuously monitored so that they do not become excessive (23).

2.26.

The ceilings show the maximum possible exposure of the EU budget. The extension of EFSI (24) and the introduction of the EFSD guarantee increased the ceilings in 2018, reaching 125,5 billion euros at the end of 2018. The actual exposure will increase gradually as disbursements (25) are made. In total, the actual exposure at the end of 2018 was 92,8 billion euros.

2.27.

Some of these guarantees are supported by guarantee funds, providing a liquidity cushion against potential losses. The assets held by the three guarantee funds at the end of 2018 totalled 8,3 billion euros (5,5 billion euros in the EFSI Guarantee Fund, 2,5 billion euros in the Guarantee Fund for External Actions and 0,3 billion euros in the EFSD Guarantee Fund). Payments are made from these guarantee funds when calls are made on the guarantees. As of the end of 2018, no significant calls had been made on these guarantees.

2.28.

Future events may trigger calls on guarantees that will require immediate payment. The Commission bases its assessment of the risk of these events occurring on historical evidence, benchmarks, prevailing conditions and professional expertise. An example of a risk assessment is included in the Commission’s re-evaluation of the EFSI guarantee as part of its proposal for an extension to EFSI (26). The Commission also produces a report annually on guarantees covered by the budget, which analyses such risks (27).

2.29.

Various arrangements exist to provide immediate support in case guarantees are called, such as the guarantee funds (28). These funds cover losses in relation to the EU guarantees and have been established using funds from the EU budget within the limits of the MFF ceiling. Under normal circumstances, payment needs can be covered by such guarantee funds and by payment appropriations up to the MFF ceiling. In addition, an own resources ceiling exists over and above the MFF ceiling (see Box 2.8 ) as a safety buffer to cover extreme circumstances such as severe economic downturns. The sum of all own resources collected from Member States in a given year must not exceed 1,20 % of the sum of all the Member States' GNIs. The amount available between the MFF ceiling and the own resources ceiling to cover payment appropriations each year varies and is recalculated annually as part of the technical adjustment to the MFF, irrespective of the amounts of other revenue. For 2018, it was 33,9 billion euros, 0,22 % of the sum of all the Member States' GNIs.

2.30.

The withdrawal of the United Kingdom from the EU will decrease the sum of the Member States’ GNIs, and the inclusion of the European Development Fund (EDF) in the EU budget will increase the MFF ceilings. Due to these adjustments, the Commission has proposed for the next MFF increasing the own resources ceiling by 0,09 % (29) to 1,29 % of the sum of all the Member States' GNIs to take these changes into account.

2.31.

Furthermore, for the 2021-2027 MFF, the Commission will pool guarantee funds in a common provisioning fund based on an effective provisioning rate (30) in order to facilitate better management of the guarantees provided (31).

2.32.

The new Financial Regulation recognises the increasing importance of guarantees, financial assistance and financial instruments. It has consolidated all relevant provisions into a new Title X (Articles 208-220) to address issues relating to this area. In our opinion on the Financial Regulation, we welcomed the inclusion of Title X (32).

2.33.

The objective of the EIB Group (33) is to grant loans, guarantees and other kinds of support on a non-profit-making basis in order to serve EU interests. At the end of 2018, the aggregate total of outstanding loans granted by the EIB Group was 536 billion euros (2017: 548) (34).

2.34.

Part of the EIB Group’s activities is governed by a series of mandates from the EU (see Annex 2.1 ). In recent years, the EU has increasingly made use of financial instruments and budgetary guarantees provided to the EIB Group to cover part of its financing activities. The most notable increase has been through EFSI, since 2015. In total, by the end of 2018, the EIB had signed 53,6 billion euros worth of EFSI-supported financial operations (2017: 36,7 billion euros). We published a special report on the operation of EFSI in 2019, setting out what actions we consider necessary to make EFSI a full success (35). In addition, we have previously reported on the EIB Group’s management of other EU funds (36).

2.35.

Box 2.9 shows commitments and payments from the EU to the EIB Group each year since 2007, in particular for fees for advisory services and management of EU funds and transfers relating to financial instruments. The amounts include spending from all parts of the budget, except MFF heading 5 ‘Administration’. Most spending is from MFF heading 1 ‘Smart and inclusive growth’ and heading 4 ‘Global Europe’. During the period 2007-2018, a total amount of 14,7 billion euros was committed from the EU budget to the EIB Group and a total amount of 12,3 billion euros was paid (37). The chart indicates a solid long-term trend for payments to the EIB Group with year-to-year variations (38).

2.36.

Box 2.10 shows commitments and payments from the EU budget since 2007, for the annual provisioning of the Guarantee Fund for External Actions and the EFSI Guarantee Fund (39). Commitments for the provisioning of the two guarantee funds amounted to 9,8 billion euros and payments to 7,1 billion euros over the same period, most of which stem from the period 2015-2018.

2.37.

The two charts illustrate the EIB Group’s growing importance over time as a partner in implementing the EU budget. The most significant increase has come from the provisioning of the EFSI Guarantee Fund.

2.38.

The relationships between the EU budget and the EIB Group are complex and significant, even though the EIB Group is not part of the budget. The EU budget provides its support from various budget lines in many different ways, including direct grants, EU budget guarantees backed by guarantee funds and EU funding assigned to the EIB Group through Member State authorities under shared and indirect management. The EIB Group also manages a high number of financial instruments for the EU, supporting different EU policies (see Annex 2.2 ). The EIB informed us that, as of 2018, almost 35 % of its annual lending volume comes from operations under mandate, much of which are with the EU.

2.39.

The EIB only disclosed to us at a very late stage of the audit the financial volume of the EU mandates under its management, financed from the EU budget or the EDFs, which did not allow us to perform a solid analysis and checking of the information provided. In Box 2.11 , we map the main components of the financial relationship between the EU budget and the EDFs on one hand and the EIB Group on the other. The chart shows the management and flow of funds between the Member States, the Commission and the EIB Group.

2.40.

Based on a provisional and partial agreement reached between the European Parliament and Council in April 2019, the EIB Group is expected to play a major role in implementing EU policy in the next MFF through the InvestEU programme, which builds on the experience of EFSI (see Box 2.12 ).

2.41.

The EIB Group is not an EU institution, but is nevertheless an integral part of the EU’s architecture and has been established under the EU treaties to serve EU objectives. In order to take account of its special nature, however, it has different management and governance arrangements compared to the rest of the EU budget. At present, EIB Group operations that are not financed by the EU budget but serve the same EU objectives do not come under our audit mandate. This means that the ECA is not able to provide a full picture of all EIB Group operations. In our briefing paper on the future of EU finances (February 2018), we proposed that we should also be invited to audit the EIB’s non-EU-budget-related operations. This would not prevent the EIB from maintaining its present audit arrangements with private audit firms for the reliability of the accounts. The European Parliament supported our proposal in its resolution on the Annual Report on the control of the financial activities of the EIB for 2017 (40).

2.42.

Based on our observations, we highlight below the main issues affecting the EU’s budgetary and financial management in 2018, some of which may pose risks to future budgets, in particular in the first years of the next MFF.

2.43.

Commitment and payment appropriations available in the final budget were almost fully used (see paragraphs 2.4 - 2.7).

2.44.

The delays in the implementation of the ESI Funds have affected the implementation of the MFF in various ways and may also affect the future MFF:

• — 

  Substantial amounts of annual pre-financing were returned to the EU budget (see paragraphs 2.8 - 2.11).

• — 

  A significant amount of the GMP was not needed but cannot be transferred to the new MFF (see paragraphs 2.12 - 2.16).

• — 

  The high level of outstanding commitments is mainly due to the slow implementation of the ESI Funds, but also to the annual gap between commitments and payments and the increase in the size of the EU budget. Outstanding commitments continued to rise in 2018 (see paragraphs 2.17 - 2.18).

• — 

  The first years of the new MFF may be at risk of insufficient payment appropriations (see paragraphs 2.19 - 2.21).

2.45.

Overall, Member States’ ESI Funds absorption was lower than in the corresponding year of the previous MFF (see paragraphs 2.22 - 2.24).

2.46.

Guarantees supported by the EU budget have increased in recent years. This increases the EU budget’s exposure to risk. The level of losses expected by the Commission is covered by guarantee funds, which the new MFF will pool into a common provisioning fund (see paragraphs 2.25 - 2.32).

2.47.

The EIB Group is an integral part of the EU’s architecture. In recent years, the EU has increasingly made use of financial instruments and budgetary guarantees provided to the EIB Group. It is also expected to play a major role in implementing EU policy in the next MFF. The EIB Group has a complex relationship with the EU budget and different accountability arrangements to EU institutions. At present, EIB Group operations that are not financed by the EU budget but which serve the same EU objectives do not come under our audit mandate. This means that the ECA is unable to provide a full picture of the links between EIB Group operations and the EU budget. We therefore maintain our proposal that we should be invited to audit the EIB’s non-EU budget-related operations (see paragraphs 2.33 - 2.41).

2.48.

We recommend that the Commission

List of programmes included in our sample

2018 recommendations to Member States

Detailed status of 2015 recommendations by report

Improvements achieved and remaining weaknesses of partially implemented recommendations by report

Follow-up of previous recommendations for performance framework issues

3.1.

Each year, in this chapter, we analyse a number of aspects relating to performance, the results achieved by the EU budget, which is implemented by the Commission in cooperation with the Member States (1). This year we have looked at:

• (1) 

  what the EU budget performance indicators tell us;

• (2) 

  the main results from our 2018 special reports on performance;

• (3) 

  and the implementation of the recommendations we made in the special reports we published in 2015.

3.2.

The last two years, we reviewed how the Commission’s approach to performance reporting compared with good practice. We also assessed whether the Commission had used performance information appropriately in decision-making. This year, we have analysed performance information published by the Commission. In particular, we have reviewed the performance indicators in:

• (i) 

  the programme statements accompanying the 2019 draft budget (2),

• (ii) 

  the 2014-2020 EU Budget Programmes’ Performance Overview (PPO), issued for the first time in May 2018 (3).

3.3.

The PPO dedicates two pages to each programme. This includes a half-page summary of both the general and specific objectives and progress made for a selection of indicators; however, the rationale for the selection is not well explained. Publishing the PPO is a big step forwards and demonstrates the Commission’s willingness to produce reader-friendly reports. The Commission indicated that the PPO was an extract from the programme statements attached to Draft Budget 2019. It was designed to present all EU spending programmes (2014-2020) in a concise and uniform way; explain what each programme was about and how it was intended to benefit EU citizens; provide information on implementation status; present the programme performance framework; and highlight recent key achievements.

3.4.

The programme statements take the form of a 557-page document that is not very reader-friendly. It does not contain an overview of how well the 60 programmes in the 2014-2020 MFF are performing.

3.5.

For our analysis, we selected 22 of the 60 spending programmes, choosing the four programmes with the highest planned expenditure for each of the five 2014-2020 multiannual financial framework (MFF) heading, plus two programmes for special instruments. The 22 selected programmes covered 97 % of the financial programming for the seven-year period (see Annex 3.1 for list of programmes).

3.6.

In section A, we summarise at an aggregate level, the information provided by the EU budget performance indicators. Any interpretation of this analysis should consider the limitations of the information provided by the EU budget performance indicators, which we describe in section B.

3.7.

Measuring the achievements of EU priorities, policies and programmes is challenging. It can be difficult to isolate the effect of the EU budget from that of national budgets and external factors. However, effective performance monitoring is essential in order to grasp the situation, identify emerging issues and take evidence-based decisions to ensure proper performance.

3.8.

We focused our review on the quantitative information provided by performance indicators. As we noted in the 2016 annual report (4), the Commission does not provide information on the reliability of the underlying data in programme statements.

3.9.

We provide two sets of performance information for each programme examined:

• — 

  Progress calculated from the baseline (5) towards the target according to the data available in the programme statements. This methodology is widely used and is easy to calculate (6). The Commission referred to this approach in its ‘Better Regulation Guidelines’, advising: ‘The expected significance of impacts should be assessed in terms of changes relative to the baseline’ (7).

• — 

  Progress calculated from zero towards the target as included in the Commission’s PPO (8). The figures presented are different from those in the first indent above because they are based on a selection of indicators made by the Commission and were generally calculated as the latest actual result divided by the target value without taking account of the baseline. They also included percentage forecasts for progress towards the target that are much higher for two programmes, the Cohesion Fund (CF) and the European Regional Development Fund (ERDF). This explains most of the difference between our calculations on the basis of the programme statements and those on the basis of the PPO at an overall level.

Box 3.1 illustrates the differences in these two ways of calculating progress.

3.10.

The progress from baseline percentages are the averages of all indicators from a programme for which the necessary data was available in the programme statements. We consider that such averages should provide useful indications of programme performance if all programme indicators are of the required quality. For the Commission PPO, we calculated the average progress for the indicators selected. We also calculated weighted averages for each MFF heading based on 2014-2020 financial programming for both types of progress indicators. We note that such information may have limitations and that a full picture of performance is better captured by complementing it with qualitative information.

3.11.

The availability of performance information varied depending on the programme management mode. For programmes under direct management by the Commission, the latest data available was generally from the end of 2017. For programmes under shared management, the latest data provided by Member States was generally from the end of 2016. Data for programmes under indirect management was mainly from 2017 or 2016, but in some cases dated back to 2015 or even earlier. Overall, for our sample, the latest available data was from 2016 in 42 % of cases and 2017 in 48 % of cases.

3.12.

While the expected progress of performance indicators from 2014 to 2020 is in most cases not linear, had it been so, it would have been 43 % in 2016 and 57 % in 2017 (9). Overall, the data made available by the Commission shows a significant variation in programme achievements, with moderate progress overall (see Box 3.2 ).

3.13.

We analysed the indicators of four of the 23 MFF heading 1A ‘Competitiveness for growth and jobs’ programmes (see also Chapter 5):

• — 

  Progress measured for the Framework Programme for Research and Innovation (Horizon 2020) was moderate at 40 % (see Box 3.3 ). The Commission’s PPO gave a more positive message on progress made. Based on the seven indicators selected by the Commission in its PPO, we calculated an average progress-to-target of 73 %.

• — 

  It was not possible to measure the progress of the Connecting Europe Facility (CEF) for 31 of the 44 indicators due to missing data. The other indicators showed moderate progress of 37 %. The PPO figures only represent the sum of grant agreements, i.e. budget absorption rather than performance.

• — 

  The Commission’s PPO rated progress for the Union Programme for Education, Training, Youth and Sport (Erasmus+) at 100 %. However, this measurement compared actual results with the 2017 milestone rather than the 2020 target. The progress from baseline of 69 % is based on the 26 indicators for which it could be calculated.

• — 

  The European Fund for Strategic Investments (EFSI) has a target to mobilise 500 billion euros in investments by 2020. The actual 2017 figure was 256,3 billion euros. The PPO compared results to the 315 billion euros target for mid-2018 initially set for the first three years of operation. The PPO selection of six indicators showed 100 % achievement of the 2017 intermediate targets (10).

3.14.

While the progress from baseline percentage calculation (31 %) was rather low, the figure we calculated on the basis of the Commission’s PPO (40 %) showed moderate progress for MFF heading 1B ‘Economic, social and territorial cohesion’ when including forecast rather than actual data. These results are mainly explained by the late adoption of legislation and subsequent delay in the implementation of Cohesion programmes, i.e. the CF, the ERDF and the European Social Fund (ESF). This heading includes four programmes (see also Chapter 6), which were all part of our sample:

• — 

  The indicators for the CF and the ERDF showed little progress also because only results for fully implemented operations (11) were reported. Even including forecasts, for which the source is not explained, the figure we calculated on the basis of the Commission’s PPO showed only moderate progress of 35 % for the CF and 34 % for the ERDF (see Box 3.4 ).

• — 

  For the ESF, the progress from baseline percentage of 75 % could only be calculated on the basis of three of the 13 indicators. The figure we calculated on the basis of the Commission’s PPO (12) was lower, at 55 %.

• — 

  For the Fund for European Aid to the Most Deprived, we calculated moderate progress from baseline of 39 % for the only specific objective indicator measuring the ‘Number of persons receiving assistance from the Fund’. Our overall progress percentage of 50 % was higher as the one general objective indicator on ‘People at risk of poverty or social exclusion’ showed 61 % progress.

3.15.

The weighted average progress for heading 2 ‘Natural resources’, based on our sample, was 31 % (see Box 3.5 ) – the lowest for all MFF headings together with MFF heading 1b. The EU carries out its policy under MFF heading 2 through five programmes (see also Chapter 7), the four biggest of which we covered in our sample:

• — 

  For the European Agricultural Guarantee Fund (EAGF), chiefly because of a lack of quantitative targets, we could only calculate progress from baseline for one of the 27 indicators included in the Programme Statement. The one indicator in question – ‘Percentage of expenditure (EAGF+EAFRD) with statistics or 100 % checks’ –is not sufficient to provide a representative picture of the programme’s achievements. The EAGF represents four fifths of the expenditure for heading 2.

• — 

  For the European Agricultural Fund for Rural Development (EAFRD), progress was 28 %, based on 24 indicators. In most cases, this figure only reflected achievements in the first year of implementation. The most recent data was from 2016, and the vast majority of the rural development programmes through which Member States and regions implement the EAFRD had started in 2015. Progress was better for the 10 indicators selected by the Commission for the PPO.

• — 

  For the European Maritime and Fisheries Fund (EMFF) and the Programme for the Environment and Climate Action (LIFE), we were able to calculate progress from baseline for over half of the indicators. The result was 58 % for the EMFF (based on eight of the 15 indicators) and 77 % for LIFE (based on 21 of the 33 indicators).

3.16.

We selected four of the eleven programmes under MFF heading 3 ‘Security and citizenship’ (see also Chapter 8): the Asylum, Migration and Integration Fund, the Internal Security Fund, Food and Feed, and the Creative Europe Programme. Their combined weighted average progress from baseline was an overall reasonable 49 % (see Box 3.6 ).

3.17.

The average progress, when it could be calculated and using 2017 data, suggested that both the Asylum, Migration and Integration Fund (53 %) and the Internal Security Fund (56 %) were on track. The Creative Europe programme showed moderate progress of 41 %, while the Food and Feed programme appeared to be lagging behind with progress of 20 %.

3.18.

We analysed four programmes of the 15 under MFF heading 4 ‘Global Europe’: the Development Cooperation Instrument (DCI), the European Neighbourhood Instrument (ENI), the Instrument for Pre-accession Assistance (IPA II) and Humanitarian Aid (see also Chapter 9). The weighted average progress from baseline was overall reasonable at 49 % (for the 49 – out of a total of 65 – indicators for which it could be calculated – see Box 3.7 ).

3.19.

For all programmes except the DCI, the Commission’s PPO showed a much higher level of progress, due to the selection of indicators. In the case of the DCI, the Commission exceptionally calculated progress towards the target from the baseline, without explaining in the PPO that this methodology had been used.

3.20.

The programme statements indicate that the targets of the two MFF 2014-2020 special instruments were met, although this is not substantiated:

• — 

  For the European Union Solidarity Fund (EUSF), the Commission considered that the target had been achieved for 2017, with the combination of the measures taken covering 100 % of the population affected by a crisis situation. However, the information for actual results included in the programme statements issued in May 2018 only gave some information on four out of the 10 aid applications received in 2017.

• — 

  Thanks to the European Globalisation Adjustment Fund (EGF), 57 % of redundant workers were reported to have been reintegrated into employment, which is above the target of 50 %. However, the objective included in the legislation (13) was different as it refers to ‘beneficiaries finding sustainable employment as soon as possible…’.

3.21.

In this section, we focus on weaknesses we identified in the performance information provided by the Commission. The legal acts underpinning the programmes for the 2014-2020 MFF define the performance indicators on which the Commission has to report.

3.22.

Performance monitoring requires keeping track of programme inputs, outputs, results and impacts (see Table 3.1 ). Input and output indicators are important for the day-to-day management of public spending programmes. Results and impact indicators are more useful for assessing the progress towards programme objectives, and are therefore more relevant for high-level performance reports, such as the programme statements.

3.23.

Our analysis shows that more than 60 % of the indicators included in the programme statements were input or output indicators (15) (see Box 3.9 ). This predominance of input and output indicators limits the usefulness of the information provided on progress in achieving objectives (16).

3.24.

One of the key functions of programme statements is to ‘provide information for each of the spending programmes on (…) progress on programme performance (…) and contribution to the main EU policies and objectives’ (17). This aim is best achieved through results and impact indicators that are closely linked to the programme objectives and can be meaningfully affected by the EU programme in question (18).

3.25.

We found cases where the indicators used were almost completely irrelevant to the effects of EU spending (see Table 3.2 ). In certain cases, the programme statements even highlighted the fact that the programmes did not affect the indicators (19).

3.26.

Programme statements have a hierarchical structure, with objectives organised into two tiers: higher level ‘general objectives’ and lower level ‘specific objectives’ (20). Each objective (general or specific) has at least one indicator, and usually more than one. The links between general and specific objectives are clear in most cases, but are not explicitly indicated in the programme statements. Certain specific objectives can be linked to more than one general objective, and vice versa.

3.27.

Our analysis of the 22 programme statements selected for review revealed that certain aspects of the objectives were not covered by an indicator, such as:

• — 

  CF: Specific objective 4 (‘Promoting sustainable transport and removing bottlenecks in key network infrastructures’) had six indicators but none addressing ‘removing bottlenecks in key network infrastructures’;

• — 

  DCI: Specific objective 1 (‘Poverty reduction and fostering sustainable economic, social and environmental development’) had five indicators but none covering “sustainable (…) environmental development”;

• — 

  ERDF: Specific objective 9 (‘Promoting social inclusion, combating poverty and any discrimination’) had four indicators dealing with social inclusion but none dealing with combating poverty or discrimination.

3.28.

In section A, we presented our progress percentages for the various MFF headings. However, as shown in Box 3.10 below, it was impossible to calculate this percentage for almost half the indicators in our sample (44 %), mainly because:

• — 

  there was either no specific, quantified target (e.g., target defined as ‘to increase’, ‘to maintain’, etc.); and/or

• — 

  the baseline value was not given;

• — 

  there was no data available on progress achieved;

• — 

  baseline, data on progress achieved and target were not presented in the same format.

3.29.

The EAGF and Horizon 2020 are two examples of programmes for which it was not possible to calculate the progress percentage for many indicators (26 of the 27 indicators and 39 of the 52 indicators, respectively). For the EUSF, there was only one indicator (21) for which the large quantity of data available did not enable progress calculation.

3.30.

Annual milestones were frequently missing. Where milestones were available, the Commission had reservations about their use (22), whereas we consider them important for performance monitoring.

3.31.

We noted that for some programmes (see Box 3.11 ), more than 25 % of indicators had no data beyond 2015 or no data for progress achieved at all. We also noted that the performance framework included certain indicators despite known problems concerning the availability of data (23).

3.32.

In its recommendation on the discharge for the financial year 2017, the Council underlined the ‘need to include up-to-date performance information in performance reporting on progress made towards achieving targets’ (24). Similarly, the European Parliament in its 2017 discharge called on the Commission to ‘include up-to-date performance information in performance reporting, including in the AMPR, on progress made towards achieving targets…’ (25).

3.33.

A number of other data quality issues further complicate progress analysis, such as:

• — 

  Significant changes to the scope of an indicator, resulting in inconsistencies between baseline, data on progress achieved and target, e.g. the Development Cooperation Instrument (DCI), Specific objective 2, indicator 2, ‘Number of projects funded from the DCI to promote democracy, the rule of law, good governance and respect for human rights in the DCI beneficiary countries’. The Common RELEX Information System (CRIS) codes used to extract data for this indicator were expanded significantly from the year 2016 ‘to cover a broader range of sectors included in the indicator’.

• — 

  Baseline, milestone and data on progress achieved in different formats, making it impossible to assess the progress made, e.g. Horizon 2020 Programme Specific objectives 8 to 12 indicator 2. The results (“number of patent applications”) for these indicators are not in the same format as the baseline and the target, which show the ‘number of patent applications for 10 million euros funding’.

• — 

  Outdated indicator baselines, leading to unrealistic ‘progress towards the target’ and ‘distance to target’ results, e.g. the ERDF programme General objective 1, indicator 3, ‘Greenhouse gas emissions’ (also used for Cohesion Fund General objective 1, indicator 1). The baseline for a planned 20 % reduction in greenhouse gas emissions by 2020 is the year 1990 but, according to the programme statements, a 19,8 % reduction had already occurred before the programmes began in 2014.

3.34.

A number of programmes (17 of the 22 programmes examined) included targets that we considered to be not ambitious. How ambitious a target is can be a matter of professional judgement. We identified the following categories that we considered to be unequivocally unambitious:

• (1) 

  Targets fully achieved in the first few years of the seven-year programme implementation period: e.g. the EMFF indicator ‘Profitability of the EU fishing fleet by fleet segment’, for which the target of having a net average profit margin of the EU fishing fleet from 10 to 12 % had already been achieved by 2015;

• (2) 

  Particularly low targets: e.g. the target for the Cohesion Fund indicator ‘Total length of new railway line’, set at 64 km (TEN-T) for the entire programme period, i.e. around 9 km per year for the whole of the EU (26).

• (3) 

  Targets equivalent to/ close to the baseline: e.g., the Horizon 2020 indicator ‘Patent applications and patents awarded in the different enabling and industrial technologies’ for specific objective 5, ‘Industrial leadership’, had a target even lower than the baseline (27).

3.35.

Box 3.12 shows the programmes for which the proportion of such indicators with unambitious targets was 15 % or over.

3.36.

Each year, we publish special reports in which we examine how well the principles of sound financial management have been applied in implementing the EU budget. In 2018, we published 35 special reports (28) (29). They covered all the MFF headings (30) and contained 380 recommendations on a wide range of topics (see Box 3.13 ). The published replies to our reports show that our auditees fully accepted 78 % of our recommendations, compared with 68 % in 2017 (see Box 3.14 ). Annex 3.2 summarises the recommendations made to Member States in our 2018 special reports.

3.37.

In 2018, we published twelve special reports for these MFF headings (31). We wish to draw attention to some of the key conclusions and recommendations from six of these reports.

3.38.

We found that the projects audited had, in general, delivered the planned output and that, in most cases, that output still existed and was being used. However, in one fifth of the cases the results achieved did not last. We concluded that this was mainly due to a lack of emphasis by the Commission and national / regional authorities on the durability of results in management at both programme and project level.

3.39.

We recommended that:

• — 

  the Commission pay particular attention to how Member States address the durability of project results during the approval process of operational programmes; and

• — 

  Member States improve project selection procedures and criteria.

3.40.

We found that while PPPs had the potential to achieve faster policy implementation and ensure good maintenance levels throughout their lifetime, the audited EU-supported PPPs were not always managed effectively and did not provide adequate value for money. Potential benefits of the audited PPPs were often not achieved, as – similarly to traditionally procured projects - they were subject to delays, cost increases and under-use of project outcomes. In addition, there was a lack of adequate analyses about the potential for PPPs to deliver additional value for money, as well as a lack of adequate strategies on the use of PPPs and of institutional and legal frameworks.

3.41.

We recommended that the Commission and the Member States avoid promoting more intensive and widespread use of PPPs until the issues identified have been addressed.

3.42.

We found that although broadband coverage had generally improved across the EU, not all targets set for 2020 would be met. While all Member States had developed broadband strategies, the targets of the strategies we examined were not always consistent with Europe 2020. In addition, not all the Member States visited had established an appropriate legal and regulatory environment concerning competition between providers. Finally, financing needs for broadband infrastructure in rural and suburban areas were not always properly addressed.

3.43.

We recommended that:

• — 

  Member States develop new plans for the period after 2020;

• — 

  the Commission clarify the application of state aid guidelines and support Member States’ efforts to foster greater competition in broadband; and

• — 

  the European Investment Bank focus its support on small- and medium-sized projects in areas where public sector support is most needed.

3.44.

We found that for both the 2007-2013 and 2014-2020 programming periods, the late adoption of the legislative framework meant late adoption of the operational programmes. This had a knock-on effect on when spending of the allocated funds began. While some of the measures taken by the Commission led to a marked increase in absorption during the 2007-2013 period, little consideration was given to results.

3.45.

We recommended that the Commission:

• — 

  propose a timetable to the legislative authorities to ensure that implementation can start at the beginning of the programming period; and

• — 

  ensure that the focus is on the delivery of results.

3.46.

We found the main modes of public transport to be covered in the regulations, making the EU framework for passenger rights unique globally. However, many passengers were not sufficiently aware of their rights and frequently could not benefit from them due to problems with enforcement. In addition, while the core rights are meant to protect all passengers across all four modes of public transport, the extent of protection depends on the mode of transport used.

3.47.

We recommended that the Commission:

• — 

  improve the coherence, clarity and effectiveness of the EU passenger rights framework;

• — 

  take action to promote and coordinate the launch of awareness campaigns by the national enforcement bodies;

• — 

  address in its proposals to amend the existing regulations the need to provide National Enforcement Bodies with further tools for enforcing passenger rights.

3.48.

Our overall conclusion in this special report was that the majority of simplification measures taken by the Commission have been effective in reducing the administrative burden for beneficiaries in Horizon 2020, although not all actions produced the desired result and opportunities to improve still exist. Beneficiaries need more user-friendly guidance and tools, and the Commission has to further test the appropriateness and usability of new funding schemes. Stability in the rules is also important and, while beneficiaries are able to adapt to complexity, frequent modifications to guidance can cause confusion and uncertainty.

3.49.

We recommend that the Commission:

• — 

  better communicate with applicants and beneficiaries;

• — 

  intensify testing of lump sums;

• — 

  explore greater use of two-stage proposal evaluations;

• — 

  re-examine remuneration conditions for expert evaluators;

• — 

  increase recognition of the Seal of Excellence;

• — 

  ensure stability for rules and guidance for participants;

• — 

  improve quality of outsourced audits;

• — 

  further simplify tools and guidance for SMEs.

3.50.

We published eight special reports concerning sustainable growth and natural resources and environmental and climate action. We also published a briefing paper on the future of the common agricultural policy (CAP), followed by Opinion 7/2018 on proposals for regulations relating to the CAP for the post-2020 period.

3.51.

Our special reports dealing with various aspects of the agriculture policy included recommendations for improving the performance of CAP instruments, funding and schemes, as follows:

• — 

  In special report 5/2018, we emphasized the potential synergies between renewable energy policy and funds designed to facilitate sustainable rural development, but noted that these synergies were mostly unrealised. Our recommendations addressed the sustainability of the future renewable energy policy.

• — 

  In special report 10/2018, we concluded that the basic payment scheme for farmers, although operationally on track, had only limited impact on the simplification, targeting and convergence of aid levels. We recommended that proposed income support measures for farmers be linked to appropriate operational objectives and baselines against which their performance could be compared.

• — 

  Special report 11/2018 examined the new options for financing rural development projects, which, although simpler, did not focus on results. We recommended that the Commission assess the potential for moving away from reimbursing costs towards results-based reimbursement.

3.52.

The other special reports, covering policy areas such as energy, climate, the environment, air quality and animal welfare, also included recommendations aimed at improving the performance of the EU budget through enhanced synergies between sectors and greater accountability. For example:

• — 

  mainstreaming air quality policy into other EU policies (special report 23/2018);

• — 

  strengthening links between the cross-compliance system and animal welfare (special report 31/2018);

• — 

  improving coherence between agriculture, climate, environment and research frameworks to enhance soil protection (special report 33/2018);

• — 

  improving critical elements of governance and accountability in the EU programme for the demonstration of environmentally safe carbon capture and storage and innovative renewable energy technologies on a commercial scale (special report 24/2018);

• — 

  improving project selection based on objective and relevant criteria for flood prevention projects (special report 25/2018), carbon capture or innovative renewables projects (special report 24/2018).

3.53.

We published eight special reports concerning these MFF headings. We wish to draw attention to some of the key conclusions and recommendations from four of these reports.

3.54.

We found that the assistance was generally well designed and projects had delivered their output. However, mainly due to a lack of political will and the fact that the Commission had made little use of conditionality, EU assistance had not sufficiently addressed some of the country’s fundamental needs to improve its governance and the rule of law. Furthermore, the sustainability of results was often at risk. We therefore considered that the effectiveness of the funding was only limited.

3.55.

We recommended that the Commission, and where applicable, the European External Action Service:

• — 

  target ‘Instrument for Pre-Accession’ funds more specifically in areas where reforms are overdue;

• — 

  improve sector approach assessments;

• — 

  increase the use of conditionality;

• — 

  improve project performance monitoring;

• — 

  reduce backlogs by applying indirect management selectively.

3.56.

We found that the EU support, funded under the European Development Fund, had had little effect and needed refocusing. Although a broad strategic framework was in place, EU support for the APSA had long focused on contributing to basic operational costs. Due to weak financial ownership by the African Union, the APSA had been heavily dependent on donor support for many years. Despite the EU’s financial contributions to APSA components, capacity varied considerably and a number of challenges remained.

3.57.

We recommended that the Commission, and where applicable the European External Action Service:

• — 

  foster African Union ownership of the APSA in order to achieve financial independence and focus EU support on capacity-building measures instead of supporting operational costs;

• — 

  make interventions consistently results-based, reduce delays in contracting and retroactive financing, improve monitoring and make coherent use of financing instruments.

3.58.

We found that, in a challenging context, the Facility for Refugees in Turkey had rapidly mobilised 3 billion euros to provide a swift response to the refugee crisis. Nevertheless, it had not fully achieved its objective of coordinating the response effectively. The projects audited provided helpful support to refugees, most of them had achieved their outputs, but half had not yet achieved their expected outcomes. Furthermore, we found scope for increasing the efficiency of cash-assistance projects. We therefore concluded that the Facility could have been more effective and could achieve better value for money.

3.59.

We recommended that the Commission:

• — 

  address refugees’ needs for municipal infrastructure and socio-economic support more effectively;

• — 

  improve streamlining and complementarity of assistance by clearly dividing tasks between different funding sources;

• — 

  implement a strategy for the transition from humanitarian to development assistance;

• — 

  improve the efficiency of cash-assistance projects;

• — 

  work with the Turkish authorities to improve the operating environment for International NGOs;

• — 

  scale up monitoring and reporting regarding the Facility for Refugees in Turkey.

3.60.

We found the EUTF for Africa to be a flexible tool. Considering the unprecedented challenges it faced, however, its design needed greater focus. The EUTF for Africa was faster than traditional instruments in launching projects, but faced similar challenges delaying implementation. Although the audited projects were at an early stage, they had started producing output.

3.61.

We recommended that the Commission:

• — 

  improve the quality of EUTF for Africa objectives;

• — 

  revise the project selection procedure;

• — 

  take measures to speed up implementation;

• — 

  improve monitoring of the EUTF for Africa.

3.62.

In 2018, we published three special reports in the area of administration. We wish to draw attention to some of the key conclusions and recommendations from one of these reports.

3.63.

We found that the institutions managed their spending on office accommodation efficiently, but building strategies were not always officially documented. The institutions cooperated and applied similar decision-making principles. Reporting to the budgetary authorities did not, however allow for comparison and efficiency analysis. The financing mechanisms for the large construction projects we analysed were often complex, which affected transparency. Most of these projects were delayed, which in some cases led to additional costs.

3.64.

We recommended that the institutions:

• — 

  update and officially document their building strategies, and regularly update planning documents;

• — 

  increase budgetary transparency regarding the use of financing mechanisms for construction projects;

• — 

  set up adequate management procedures for large construction and renovation projects; and

• — 

  improve the consistency of building portfolio data and monitoring.

3.65.

Finally, we published four special reports on the ‘Functioning Single Market and sustainable Monetary Union’. We wish to draw attention to some of the key conclusions and recommendations from three of these reports.

3.66.

This audit assessed the operational efficiency of the European Central Bank’s (ECB’s) management of one specific supervisory task: crisis management. The ECB had established a framework for crisis management, but needed to address some design flaws and signs of inefficient implementation. Procedures for assessing banks’ recovery plans were in place, and the assessors had access to useful tools and guidance. However, the results of recovery plan assessments were not systematically used for crisis identification and response. The ECB did not have a system for using bank-specific triggers, which could flag up any likely deterioration in a bank’s financial condition. In addition, systems and guidance for a rapid early intervention assessment were underdeveloped, while management reporting on weak banks’ asset quality and corresponding on-site capacity needed improving.

3.67.

We recommended that the ECB:

• — 

  further develop its guidance on early assessment, including rapid crisis response;

• — 

  define a clear set of indicators for crisis identification and response;

• — 

  improve monitoring and use of recovery plan information.

3.68.

We examined the European Commission’s implementation of the Macroeconomic Imbalance Procedure, which aims to identify, prevent and address macroeconomic imbalances that could adversely affect economic stability. We found that although the MIP was generally well designed, the Commission was not implementing it in a way that would ensure effective prevention and correction of imbalances. More generally, the country-specific recommendations (CSRs) issued by the Commission displayed several weaknesses; the classification of Member States with imbalances lacked transparency; the Commission’s in-depth analysis, while of a good standard, had become less visible, and there was a lack of public awareness of the procedure and its implications. Moreover, the procedure did not adequately facilitate early identification of imbalances as its indicators were based on out-of-date data and moving averages, making it blind to recent events.

3.69.

We recommended that the Commission substantially improve certain aspects of its management and give greater prominence to the MIP.

3.70.

We found that in several Member States with high debt, the SGP had not delivered sufficient progress towards the medium term objectives within a reasonable time. The European Commission had used its discretionary powers extensively when setting rules for implementation and making individual decisions in order to reduce the adjustment requirements.

3.71.

We recommended that the Commission:

• — 

  change the required adjustment rates contained in the ‘matrix of requirements’ to increase the adjustment requirements for Member States with a debt ratio above 60 % and address the cumulative effects of permitted deviation when granting multiple clauses;

• — 

  reform the current application of flexibility clauses, limiting flexibility to actual fiscal costs of reforms, and ensuring that the investment clause is discontinued in its current form, and reformed to ensure that all additional expenditure resulting from the deviation from the original path towards the MTO (i.e. in all years after granting the clause) is related to investment, and leads to an increase in public investment relative to GDP;

• — 

  ensure consistency between requirements under the preventive and the corrective arm;

• — 

  include clearer requirements in the country-specific recommendations, with better explanations of the requirements and the risks if they are not implemented on time.

3.72.

Every year, we review the extent to which our auditees have taken action in response to our recommendations. This follow-up of our recommendations is an important step in the audit cycle. It provides feedback on the impact of our work and encourages our auditees to implement our recommendations.

3.73.

In previous years, we only analysed a selection of the recommendations made three years earlier. This year, we analysed all 185 recommendations addressed to the Commission in the 25 special reports adopted in 2015. We did not examine the implementation of one recommendation because it was no longer relevant. We did also not follow up the 48 recommendations addressed to Member States.

3.74.

We used documentary reviews and interviews with Commission staff to carry out our follow-up. To ensure a fair and balanced review, we sent our findings to the Commission and took account of its replies in our final analysis.

3.75.

Of the 184 recommendations followed-up, the Commission had fully implemented 114 (62 %). It had implemented 26 of the remaining recommendations (14 %) in most respects, 33 (18 %) in some respects, and had not implemented the other 11 (6 %) at all (see Box 3.15 ). Annex 3.3 shows the implementation status of the recommendations in detail.

3.76.

In some areas, the Commission had been particularly responsive to our recommendations. For three special reports related to renewable energy in East Africa (SR 15/2015), financial assistance provided to countries in difficulties (SR 18/2015), and technical assistance to Greece (SR 19/2015), all recommendations had been implemented in full.

3.77.

The Commission did not accept 15 recommendations and partially accepted 17. However, 10 of the 17 partially accepted recommendations were eventually fully implemented, while two of the recommendations rejected were addressed fully and another two were addressed in some respects.

3.78.

In conclusion, we observed that our performance audits had led to several key improvements, although some of the weaknesses identified remained. Annex 3.4 describes the weaknesses remaining for the partially implemented recommendations.

3.79.

Overall, the data included in the programme statements suggests that progress towards the performance targets is moderate. The late, slow start for both the cohesion and rural development programmes was an important limiting factor.

3.80.

Both the calculation of progress towards the target from the baseline and the progress towards the target reported by the Commission in the PPO should be treated with caution for various reasons:

• (a) 

  Many indicators were not well chosen (paragraphs 3.22 to 3.27)

  • — 

    Indicators focused on inputs and outputs rather than results and impacts;

  • — 

    Certain indicators did not measure the achievements of the EU budget;

  • — 

    There were no indicators for certain aspects of some programme objectives.

• (b) 

  Progress could not be calculated for many indicators (paragraphs 3.28 to 3.30)

  • — 

    For almost half the indicators, it was not possible to calculate progress towards the target from the baseline. While this can be explained by various factors, the main reason was the absence of baseline, progress achieved and/or target figures.

• (c) 

  For some programmes, data available was of insufficient quality (paragraphs 3.31 to 3.33)

  • — 

    For some programmes, numerous indicators had no data beyond 2015 or no data for progress achieved at all;

  • — 

    A number of other data quality issues further complicated progress analysis.

• (d) 

  Some programmes include targets that are not sufficiently ambitious (paragraphs 3.34 to 3.35)

  • — 

    Many programmes included targets that we consider to be unambitious. In seven programmes, these targets constituted at least 15 % of all targets.

3.81.

Box 3.16 summarises our conclusions on the extent to which programmes were particularly affected by the weaknesses identified in (a) to (d) above:

• (a) 

  programmes with a proportion of input and output indicators exceeding 66 %;

• (b) 

  programmes for which, for more than 33 % of indicators, progress could not be measured;

• (c) 

  programmes for which at least 25 % of indicators had no data beyond 2015 or no data for progress achieved at all;

• (d) 

  programmes for which at least 15 % of indicators had unambitious targets.

It shows that there is no single programme in our sample unaffected by these weaknesses.

3.82.

In paragraphs 3.36 to 3.71, we present key conclusions and recommendations from a selection of the special reports we published in 2018.

3.83.

This year’s follow-up of past recommendations (see paragraphs 3.72 to 3.78) confirmed that, as in previous years, 76 % of the recommendations we assessed had been implemented fully or in most respects. In 18 % of cases, recommendations had been implemented only in some respects with significant weaknesses remaining. Only 6 % of the recommendations had not been implemented.

3.84.

Annex 3.5 shows the findings of our follow-up review of the three recommendations we made in Chapter 3 of our 2015 annual report. All three had been implemented in some respects.

3.85.

Based on our conclusions for 2018, we make the following recommendations: