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Annual report of the Court of Auditors on the activities funded by the 8th, 9th, 10th and 11th European Development Funds (EDFs) concerning the financial year 2018, together with the Commission's replies

IO C 340, 8.10.2019, p. 269–298 (BG, ES, CS, DA, DE, ET, EL, EN, FR, HR, IT, LV, LT, HU, MT, NL, PL, PT, RO, SK, SL, FI, SV)

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Official Journal

8.10.2019

Official Journal of the European Union

C 340/269

ANNUAL REPORT ON THE ACTIVITIES FUNDED BY THE 8TH, 9TH, 10TH AND 11TH EUROPEAN DEVELOPMENT FUNDS (EDFS)

(2019/C 340/02)

TABLE OF CONTENTS

EDF —

Annual report on the activities funded by the 8th, 9th, 10th and 11thEuropean Development Funds (EDFs)

273

Replies of the Commission

295

Annual report on the activities funded by the 8th, 9th, 10th and 11th European Development Funds for the financial year 2018

CONTENTS

Introduction

1-5

Brief description of the European Development Funds

2-5

Chapter I — Financial implementation of the 8th, 9th, 10th and 11th EDFs

6-9

Chapter II — The ECA’s statement of assurance on the EDFs

I.-37

The ECA’s statement of assurance to the 8th, 9th, 10th and 11th EDFs to the European Parliament and the Council — Independent auditor’s report

I.-XXI.

Information in support of the statement of assurance

10-37

Audit scope and approach

10-14

Reliability of accounts

Regularity of transactions

16-22

Annual activity report and other governance arrangements

23-37

Conclusion and recommendations

38-41

Conclusion

38-39

Recommendations

40-41

Chapter III — Performance

42-43

Annex I —

Results of transaction testing for the European Development Funds

Annex II —

EDF payments in 2018 by main region

Annex III —

Follow-up of previous recommendations for the European Development Funds

Introduction

This annual report presents our findings on the 8th, 9th, 10th and 11th European Development Funds (EDFs). Box 1 gives an overview of the activities and spending in this area in 2018.

Box 1

European Development Funds – 2018 financial overview

(1)	In line with the harmonised definition of underlying transactions (see paragraph 13 of Annex 1.1 to the ECA’s 2018 annual report on the implementation of the budget).

Source:

ECA, based on 2018 consolidated accounts of the 8th, 9th, 10th and 11th EDFs and DG DEVCO annual activity report 2018.

Brief description of the European Development Funds

Launched in 1959, the EDFs are the main instrument by which the European Union (EU) provides development cooperation aid to the African, Caribbean and Pacific (ACP) countries and overseas countries and territories (OCTs). The partnership agreement signed in Cotonou on 23 June 2000 for a period of 20 years (‘the Cotonou Agreement’) is the current framework governing the EU’s relations with ACP countries and OCTs. Its primary objective is to reduce and ultimately eradicate poverty.

The EDFs are particular in that:

(a)	they are funded by the Member States according to quotas, or ‘contribution keys’, which are set by the national governments at the Council of the European Union;

(b)	they are managed by the Commission, outside the framework of the EU general budget, and the European Investment Bank (EIB);

(c)

due to the intergovernmental nature of the EDFs, the European Parliament exercises a more limited role in their functioning than it does for the development cooperation instruments financed by the EU general budget; notably, it is not involved in establishing and allocating EDF resources. However, the European Parliament is still the discharge authority, except for the Investment Facility, which is managed by the EIB and therefore outside the scope of our audit (1) (2);

(d)	the principle of annuality does not apply to the EDFs: EDF agreements are usually concluded for a commitment period of five to seven years, and payments can be made over a much longer time frame.

The EDFs are managed almost entirely by the Commission’s Directorate-General for International Cooperation and Development (DG DEVCO) (3).

The expenditure covered in this report is delivered using a wide range of methods (4) implemented in 79 countries.

Chapter I — Financial implementation of the 8th, 9th, 10th and 11th EDFs

The budget of the 8th EDF (1995-2000) was 12 840 million euros, that of the 9th EDF (2000-2007) 13 800 million euros, and that of the 10th EDF (2008-2013) 22 682 million euros.

The Internal Agreement establishing the 11th EDF (5) (2015-2020) came into force on 1 March 2015 (6). The 11th EDF holds 30 506 million euros (7), of which 29 089 million is allocated to the ACP countries and 364,5 million to the OCTs.

Box 2 shows the use of EDF resources both in 2018 and cumulatively.

Box 2

Use of EDF resources at 31 December 2018

(million euro)

Situation at end of 2017

Budgetary implementation during the 2018 financial year (net) (13)

Situation at end of 2018

Total amount

Implement. rate (9)

8th EDF (10)

9th EDF (10)

10th EDF

11th EDF (10)

Total amount

8th EDF

9th EDF

10th EDF

11th EDF

Total amount

Implement. rate (9)

A -	RESOURCES (8)

76 924

– 7

– 40

– 65

126

10 378

15 390

21 423

29 747

76 938

B -

USE

1.	Global commitments (11)

65 852

8,6 %

– 4

– 33

– 147

4 332

4 148

10 378

15 358

20 905

23 359

70 000

9,1 %

2.	Individual commitments (12)

59 243

7,7 %

236

4 687

4 939

10 376

15 305

20 361

18 140

64 182

8,3 %

Payments

49 498

6,4 %

1 076

2 970

4 069

10 375

15 187

18 829

9 176

53 567

7,0 %

C -	Outstanding commitments (B1-B3)

16 354

2,1 %

171

2 076

14 183

16 433

2,1 %

D -	Available balance (A-B1)

11 072

1,4 %

518

6 388

6 938

0,9 %

Source:

European Court of Auditors, based on the 2018 consolidated accounts of the 8th, 9th, 10th and 11th EDFs. The figures presented do not cover the EDF part managed by the EIB.

In 2018 DG DEVCO continued its efforts to reduce old prefinancing and unspent commitments, with a target of 25 % (14) (see Box 3 ).

Box 3

KPIs on reducing old prefinancing, unspent commitments and expired contracts

DG DEVCO exceeded its target, reducing old prefinancing by 43,79 % across its entire area of responsibility (40,33 % for the EDF) and old unspent commitments by 39,71 % (37,10 % for the EDF).

DG DEVCO also met its KPI target (target value below 15 %) on the share of old expired contracts, reaching 13,88 % overall. Although the target was not met for the EDF, the percentage improved compared with 2017. As in previous years, the main reason for the difference between the EDF and the rest of DG DEVCO’s area of responsibility results from the technical complexity of closing EDF contracts that have uncashed recovery orders. Following the new procedure established in September 2017, DG DEVCO managed to bring down the percentage from 18,75 % in 2017 to 17,27 % in 2018.

Chapter II — The ECA’s statement of assurance on the EDFs

The ECA’s statement of assurance on the 8th, 9th, 10th and 11th EDFs to the European Parliament and the Council – Independent auditor’s report

Opinion

We have audited:

(a)

the annual accounts of the 8th, 9th, 10th and 11th EDFs, which comprise the balance sheet, the statement of financial performance, the cash flow statement, the statement of changes in net assets and the report on financial implementation for the financial year ended 31 December 2018, approved by the Commission on 26 June 2019;

(b)	the legality and regularity of the underlying transactions of which financial management falls to the Commission (15).

Reliability of the accounts

Opinion on the reliability of the accounts

II.

In our opinion, the annual accounts of the 8th, 9th, 10th and 11th EDFs for the year ended 31 December 2018 present fairly, in all material respects, their financial position as at 31 December 2018, the results of their operations, their cash flow and the changes in their net assets for the year then ended, in accordance with the EDF Financial Regulation and with accounting rules based on internationally accepted accounting standards for the public sector.

Legality and regularity of the transactions underlying the accounts

Revenue

Opinion on the legality and regularity of revenue

III.

In our opinion, the revenue underlying the accounts for the year ended 31 December 2018 is legal and regular in all material respects.

Expenditure

Adverse opinion on the legality and regularity of expenditure

IV.

In our opinion, owing to the significance of the matter described under ‘Basis for adverse opinion on the legality and regularity of expenditure’, the expenditure accepted in the accounts for the year ended 31 December 2018 is materially affected by error.

Basis for opinion

We have conducted our audit in accordance with the IFAC International Standards on Auditing (ISAs) and Codes of Ethics and the INTOSAI International Standards of Supreme Audit Institutions (ISSAIs). Our responsibilities under these standards and codes are described in more detail in the ‘Auditor’s responsibilities’ section of our report. We have also met independence requirements and fulfilled our ethical obligations under the International Ethics Standards Board for Accountants Code of Ethics for Professional Accountants. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

Basis for adverse opinion on the legality and regularity of expenditure

VI.

The expenditure recorded in 2018 under the 8th, 9th, 10th and 11th EDFs is materially affected by error. Our estimated level of error for expenditure accepted in the accounts is 5,2 %.

Key audit matters

VII.

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.

Accrued charges

VIII.

We assessed the accrued charges presented in the accounts (see note 2.8) which are subject to a high degree of estimation. At year-end 2018, the Commission estimated that eligible expenses incurred but not yet reported by beneficiaries amounted to 5 133 million euros (year-end 2017: 4 653 million euros).

IX.

We examined the calculation of these accrual estimates and reviewed a sample of 30 individual contracts to address the risk that the accrual was misstated. The work performed led us to conclude that the accrued charges recognised in the final accounts were appropriate.

Potential impact on the 2018 EDF accounts of the United Kingdom’s withdrawal from the European Union

On 29 March 2017, the United Kingdom (UK) formally notified the European Council of its intention to leave the EU. On 19 March 2018, the Commission published a draft withdrawal agreement that outlined the progress made in the negotiations with the UK. This draft withdrawal agreement states that the UK will remain party to the EDF until the closure of the 11th EDF and all previous unclosed EDFs, and will assume the same obligations as the Member States under the internal agreement by which the 11th EDF was set up, as well as the obligations arising from previous EDFs until their closure.

XI.

The draft withdrawal agreement also states that, where the amounts from projects under the 10th EDF or from previous EDFs have not been committed or have been decommitted on the date of entry into force of this agreement, the UK's share of those amounts will not be reused. The same applies to the UK’s share of funds not committed or decommitted under the 11th EDF after 31 December 2020. The negotiations on the UK’s withdrawal from the European Union are still ongoing and, therefore, the final text of the agreement has not yet been confirmed.

XII.

Based on this, there is no financial impact to report on the 2018 EDF accounts. We conclude that the EDF accounts as at 31 December 2018 correctly reflect the state of the withdrawal process at that date.

Responsibilities of management

XIII.

In accordance with Articles 310 to 325 of the TFEU and with the 11th EDF Financial Regulation, management is responsible for preparing and presenting the EDF annual accounts on the basis of internationally accepted accounting standards for the public sector and for the legality and regularity of the underlying transactions. This responsibility includes designing, implementing and maintaining internal control relevant to the preparation and presentation of financial statements that are free from material misstatement, whether due to fraud or error. The Commission is ultimately responsible for the legality and regularity of the transactions underlying the EDF accounts.

XIV.

When preparing the EDF accounts, the Commission is responsible for assessing the EDFs’ ability to continue as a going concern, disclosing any relevant matters and using the going concern basis of accounting unless it either intends to liquidate the entity or to cease operations, or has no realistic alternative but to do so.

XV.

The Commission is responsible for overseeing the EDFs’ financial reporting process.

Auditor's responsibilities for the audit of the EDF accounts and underlying transactions

XVI.

Our objectives are to obtain reasonable assurance as to whether the EDF accounts are free from material misstatement and the underlying transactions are legal and regular, and to provide, on the basis of our audit, the European Parliament and the Council with a statement of assurance as to the reliability of the accounts and the legality and regularity of the underlying transactions. Reasonable assurance is a high level of assurance, but it is not a guarantee that the audit has necessarily detected all instances of a material misstatement or non-compliance that may exist. These can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence any economic decisions taken on the basis of these EDF accounts.

XVII.

As part of an audit in accordance with ISAs and ISSAIs, we exercise professional judgement and maintain professional scepticism throughout the audit. We also:

—

Identify and assess the risks of material misstatement of the EDF accounts and of material non-compliance of the underlying transactions with the requirements of the EDF legal framework, whether due to fraud or error. We design and perform audit procedures responsive to those risks and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. Instances of material misstatement or non-compliance resulting from fraud are more difficult to detect than those resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. Consequently, there is a greater risk of such instances not being detected.

—	Obtain an understanding of internal control relevant to the audit in order to design appropriate audit procedures, but not for the purpose of expressing an opinion on the effectiveness of the internal control.

—	Evaluate the appropriateness of the accounting policies used by management and the reasonableness of management’s accounting estimates and related disclosures.

—

Conclude as to the appropriateness of management’s use of the going concern basis of accounting and, based on the audit evidence obtained, as to whether material uncertainty exists owing to events or conditions that may cast significant doubt on the EDFs’ ability to continue as a going concern. If we conclude that such material uncertainty exists, we are required to draw attention in our report to the related disclosures in the EDF accounts or, if these disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our report. However, future events or conditions may cause the entity to cease to continue as a going concern.

—	Evaluate the overall presentation, structure and content of the annual accounts, including all disclosures, and assess whether the annual accounts fairly represent the underlying transactions and events.

XVIII.

We communicate with management regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including findings of any significant deficiencies in internal control.

XIX.

For revenue, we examine all contributions from Member States and a sample of other types of revenue transactions.

XX.

For expenditure, we examine payment transactions once expenditure has been incurred, recorded and accepted. This examination covers all categories of payments (other than advances) at the point they are made. Advance payments are examined once the recipient of funds has provided evidence of their proper use and the institution or body has accepted that evidence by clearing the advance payment, which might not happen until a subsequent year.

XXI.

Of the matters discussed with the Commission, we determine which were of most significance in the audit of the EDF accounts and are therefore the key audit matters for the current period. We describe these matters in our report unless law or regulation precludes public disclosure or, as happens extremely rarely, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh any public interest benefits.

11 July 2019

Klaus-Heiner LEHNE

President

European Court of Auditors

12, rue Alcide De Gasperi, Luxembourg, LUXEMBOURG

Information in support of the statement of assurance

Audit scope and approach

10.

Annex 1.1 to the ECA’s 2018 annual report on the implementation of the budget sets out our audit approach and methods.

11.

Our observations on the reliability of the EDF accounts are based on the financial statements (16) of the 8th, 9th, 10th and 11th EDFs, approved by the Commission in compliance with the EDF Financial Regulation (17), together with the accounting officer’s letter of representation received on 27 June 2019. We tested amounts and disclosures, and assessed the accounting principles used, as well as any significant estimates made by the Commission and the overall presentation of the accounts.

12.

To audit the regularity of transactions, we examined a sample of 125 transactions representative of the full range of payments within the EDF, comprising 96 payments authorised by 19 EU delegations (18) and 29 payments approved by Commission headquarters (19). Since part of our audited population was covered by DG DEVCO’s 2018 residual error rate (the RER) study (20), we included 14 further transactions in our sample, to which we applied, after adjustment, the results (21) of this study. The total sample size was, then, 139, in accordance with the ECA’s assurance model. Where errors were detected in the transactions, we analysed the relevant systems to identify weaknesses.

13.

We also examined the following in 2018:

(a)	all Member State contributions and a sample of other types of revenue transactions;

(b)

certain systems used by DG DEVCO and the EU delegations, covering: (i) ex ante checks by Commission staff, external auditors (contracted by the Commission or the beneficiaries) or supervisors before payments were made, (ii) monitoring and supervision, notably the follow-up of external audits and the RER study mentioned above;

(c)	the reliability of the regularity information in the annual activity report (AAR) of DG DEVCO, the consistency of the methodology for estimating amounts at risk, future corrections and recoveries, and their inclusion in the Commission’s Annual Management and Performance Report (AMPR);

(d)	the follow-up of our previous recommendations.

14.

As stated in paragraph 04, DG DEVCO implements most of the external aid instruments financed from both the general EU budget and the EDFs. Our observations on systems, the reliability of the AAR and the Director-General’s declaration for 2018 refer to DG DEVCO’s entire area of responsibility.

Reliability of accounts

15.

Our audit found that the accounts were not affected by material misstatements.

Regularity of transactions

Revenue

16.

Revenue transactions did not contain a material level of error.

Payments

17.

Annex I provides an overview of the results of transaction testing of the 125 payment transactions examined, 51 (41 %) contained errors. On the basis of the 39 errors we have quantified and the adjusted results of the 2018 RER study (see paragraph 12), we estimate the level of error to be 5,2 % (22). Of the 39 payment transactions containing quantifiable errors, 9 (23 %) were final transactions authorised once all ex ante checks had been carried out. Box 4 gives a breakdown of our estimated level of error for 2018 by error type. Box 5 presents examples of these errors.

Box 4

Breakdown of the estimated level of error by error type

Source:

European Court of Auditors.

18.

As in previous years, the Commission and its implementing partners committed more errors in transactions relating to programme estimates, grants, contribution agreements with international organisations and delegation agreements with EU Member States’ cooperation agencies than it did with other forms of support (23). Of the 61 transactions of this type examined, 33 (54 %) contained quantifiable errors, which accounted for 62,5 % of the estimated level of error.

Box 5

Examples of quantifiable errors in project transactions

(a) Expenditure not incurred

The Commission concluded a contribution agreement with an international organisation (IO) regarding natural disaster risk management in the Caribbean. The total contract value and EU contribution was 12,29 million euros. The IO implemented parts of the project through sub-grants to other organisations. When examining 10 individual expenditure items, we identified four cases where the IO had reported advance payments to other organisations as incurred costs. We confirmed that the other organisations had either not started or not completed the project work, meaning the reported expenditure (573 494 euros) had therefore not yet been incurred.

(b) Absence of essential supporting documents

The Commission endorsed a grant contract with an association for the implementation of a cultural and educational project in Belize. The total contract value was 0,5 million euros; the maximum EU contribution was set at 0,4 million euros. The Commission erroneously accepted the project costs (360 000 euros) before receiving the final financial report, the request for payment or the expenditure verification report, as contractually required.

The Commission concluded an administration agreement with an IO concerning a disaster risk reduction programme in the ACP countries. The total contract value and EU contribution was 74,5 million euros. The IO implemented parts of the project through grants given to third parties. When examining 10 individual expenditure items, we did not receive supporting documents for two cases of third-party expenditure (247 497 euros) reported as project costs.

The Commission concluded a grant contract with a non-governmental organisation (NGO) to implement a sanitation project in Haiti. The total contract value was 2,86 million euros; the maximum EU contribution was set at 2 million euros. We examined 10 individual expenditure items, including the final payment (8 768 euros) for the construction of sanitary blocks. The NGO issued a public tender and evaluated the bids received against technical and financial criteria. The contract was awarded to the tenderer with the second highest score instead of the tenderer with the highest score, without further justifications.

The Commission concluded a contribution agreement with an IO to support public finance management in Jamaica. The total contract value and EU contribution was 5 million euros. When procuring supplies (193 700 euros) for the project, the IO considered only its member countries as eligible suppliers. This excluded several countries, including some EU Member States, which should be eligible for EDF-funded projects.

(d) Indirect costs claimed as direct

The Commission concluded a contribution agreement with an IO to implement a nutritional well-being project in Kenya. The total contract value and EU contribution was 19 million euros. When examining 10 individual expenditure items, we saw that the IO partner’s indirect costs (24 278 euros) had been reported as direct costs. As the IO claimed 7 % of indirect costs based on the total direct costs reported in the financial report, the partners’ indirect costs should have been considered within the flat rate agreed between the Commission and the IO.

19.

For 10 transactions implemented by international organisations, they did not forward essential supporting documents within a reasonable time frame. This had a negative impact on the planning and execution of our audit work; for example, in some cases we were unable to conduct on-the-spot visits to projects (see Box 6 ). This lack of cooperation goes against the Treaty on the Functioning of the EU (24), which establishes the ECA’s right to be forwarded the requested information. We recommend in our Opinion No 10/2018 (25) that the Commission consider reinforcing the obligation on international organisations to forward the ECA the necessary documents, to allow us to complete our audits.

Box 6

Lack of cooperation from international organisations

In September 2018, we notified the Commission of a visit to Mozambique, to audit a water supply and sanitation project implemented by the Unicef and a food security and malnutrition prevention project implemented by the World Food Programme.

In order to prepare the audit visit and plan the on-the-spot checks of the projects, we requested the organisations to forward us the necessary documentation on the expenditure items sampled. However, in both cases, we were not provided with the information until we arrived to Mozambique in November 2018 to start the audit. This lack of cooperation prevented us from visiting the projects on the spot. In addition, when we arrived in Mozambique, the documentation available at the organisations’ premises was still incomplete. As a result, we were not able to check whether the sampled items existed. Furthermore, some of the documentation was only provided after our visit, thereby significantly delaying the completion of our audit work.

We also faced lack of cooperation with other international organisations such as the African Union Commission, the Caribbean Development Bank, the United Nations Development Programme and the World Bank Group.

20.

In 9 cases of quantifiable error and 8 cases of non-quantifiable error, the Commission had sufficient information to prevent, or to detect and correct, the error before accepting the expenditure. Had the Commission made proper use of all the information at its disposal, the estimated level of error would have been 1,3 percentage points lower. We found 5 other transactions with errors which external auditors and supervisors should have detected. These cases contributed 1,1 percentage point to the estimated level of error (26).

21.

In addition, 17 transactions containing a quantifiable error (27) were subjected to an audit or expenditure verification. The information provided in the audit/verification reports on the actual work done did not allow us to assess whether the errors could have been detected and corrected during these ex ante checks.

22.

In two areas, the transactions examined contained no errors. The first of these areas was budget support (28) (nine audited transactions). The second area comprised cases where the ‘notional approach’ had been applied in multi-donor projects implemented by international organisations (nine audited transactions). Paragraphs 9.9–9.12 in Chapter 9 of the ECA’s 2018 annual report on the implementation of the budget give more details on the nature of these areas.

Annual activity report and other governance arrangements

23.

In every annual activity report since 2012, DG DEVCO has issued a reservation on the regularity of underlying transactions. An action plan has therefore been adopted to address the weaknesses in the implementation of DG DEVCO’s control system.

24.

Last year we reported on the satisfactory progress achieved under the 2016 action plan: 10 actions had been completed, 2 partially implemented and 2 were ongoing.

25.

In its 2017 action plan, DG DEVCO continued its efforts in reducing the error rate by taking measures targeting current or previously identified high-risk areas: funds under indirect management via international organisations and grants under direct management. At the same time, several actions were linked to adjustments for alignment with the new Financial Regulation — some of which had to be carried over due to the late adoption of the regulation itself. By April 2019, nine actions had been completed, one partially implemented and four were still ongoing.

26.

Two new targeted measures were added to the 2018 action plan, reflecting the need to clarify and promote simplified cost options and the results-based financing introduced by the new Financial Regulation. A pre-existing measure clarifying grant procedures was reformulated, and another targeting pillar assessments by IOs was broken down into three separate actions. In total, the 2018 action plan contained 13 measures, of which 7 had been carried over from previous years, 4 followed up on measures from previous years and 2 were new.

27.

DG DEVCO’s control system is based on ex ante checks conducted before the expenditure claimed by beneficiaries is accepted. Once again this year, the frequency of the errors found – including some contained in final claims which had been subjected to ex ante external audits and expenditure verifications – points to weaknesses in these checks.

2018 RER study

28.

In 2018 DG DEVCO carried out its seventh RER study to estimate the level of error which had evaded all management checks to prevent, detect and correct errors across its entire area of responsibility (29). For the third year in a row, the study estimated the RER to be below the 2 % materiality threshold set by the Commission (30).

29.

The RER study does not constitute an assurance engagement or an audit; it is based on the RER methodology and manual provided by DG DEVCO. As in previous years, we have identified limitations, such as the very few on-the-spot checks performed on transactions (31), the incomplete checks on public procurement procedures and calls for proposals (32), and the estimation of errors (33). All these limitations contributed to a lower residual error rate, which does not reflect reality.

30.

The RER contractor has significant scope for interpretation of the methodology, as the RER manual provides mainly general guidance rather than detailed instructions. Furthermore, the RER study contract is concluded for only one year at a time, and so the contractor and approach taken might change each year. Were the RER methodology and the guidance by DG DEVCO more comprehensive, the level of consistency and assurance could be improved, even if the contractor changes.

31.

Our review of the RER contractor’s work identified errors and inconsistencies in the calculation and extrapolation of individual errors. We also noted errors in the contractor’s working papers, such as arithmetical errors and the fact that the checks did not cover all the expenditure eligibility criteria. If these errors had been corrected, the residual error rate would be higher.

32.

In our 2017 annual report, we noted that the number of transactions where no substantive testing had been performed due to full reliance being placed on previous control work was far higher in the 2017 RER study than in previous studies. This year, we note that the percentage of full-reliance transactions has returned to the level in the 2016 study. However, where the previous control work checked only a part of the expenditure, the errors identified are not extrapolated to the untested part of the expenditure. Therefore, the study assumes the untested part to be free from error, which decreases the residual error rate.

Review of the 2018 annual activity report

33.

The Director-General’s declaration of assurance in the 2018 AAR includes two reservations. The first relates to grants managed by DG NEAR on behalf of DG DEVCO. The second concerns indirect management via an international organisation, and explicitly refers to programmes managed by the African Union Commission that involve significant procurement. This second reservation was issued in 2017 and has been maintained for 2018.

34.

The scope of the first reservation was tightened significantly in both 2017 and 2018. This is partly because the residual error rate has been below materiality three years in a row. Considering the limitations of the RER study in 2018 (see paragraphs 29-32) and in previous years, (34) the narrow scope of the first reservation is not sufficiently justified. As the RER study is one of the key elements in DG DEVCO’s risk assessment, it needs to be supported by sufficiently detailed guidance in order to provide a reliable basis for the reservation. Box 7 presents the evolution of the reservations presented in the AARs from 2011 to 2018.

Box 7

DG DEVCO AAR reservations 2011 – 2018

Share of expenditure subject to reservation has decreased sharply

Source:

European Court of Auditors.

35.

DG DEVCO estimated the overall amount at risk at closure to be 49,8 million euros (35). Based on the RER study, this estimate is 29 % down on the previous year. Our observations on the RER study also affect the estimates of the amounts at risk.

36.

DG DEVCO estimated the overall amount at risk at payment to be 64,7 million euros (36) (1 % of 2018 expenditure). Of this amount, it estimates that 14,9 million euros (23 %) will be corrected by its checks in subsequent years (37).

37.

In 2018 DG DEVCO took several steps to improve the quality of the data for calculating its corrective capacity and to address the shortcomings that we had identified in previous years. It increased its monitoring and controls of recovery orders and made further efforts to raise awareness of how to encode them correctly by, for instance, including a specific instruction on the recovery context in the note on the 2018 closure exercise. As far as the calculation of corrective capacity for 2018 is concerned, we did not identify any errors in our sample (38).

Conclusion and recommendations

Conclusion

38.

The overall audit evidence indicates that the EDFs’ accounts for the financial year ending 31 December 2018 present fairly, in all material respects, their financial position, the results of their operations, their cash flows and the changes in net assets for the year then ended, in accordance with the provisions of the Financial Regulation and the accounting rules adopted by the accounting officer.

39.

The overall audit evidence indicates that, for the financial year ending 31 December 2018:

(a)	the revenue of the EDFs was not affected by a material level of error;

(b)	EDF payment transactions were affected by a material level of error (see paragraphs 17-22). We estimate the level of error to be 5,2 % based on our transaction testing, including the imported adjusted RER results (see Annex I ).

Recommendations

40.

Annex III shows the findings of our follow-up review of the six recommendations we made in our 2015 annual report (39), of which DG DEVCO had implemented (40) recommendations 2, 3, 4 and 6 in full and recommendation 5 in most respects. Recommendation 1 is no longer applicable due to DG DEVCO’s decision to improve the quality of its audits and expenditure verifications by modifying the terms of reference opposed to using quality grids.

41.

Based on this review and our findings and conclusions for 2018, we recommend that, by 2020, the Commission:

Recommendation 1

Take steps to reinforce the obligation on international organisations to forward to the ECA, at its request, any document or information necessary to carry out its task as foreseen in the TFEU (see paragraph 19);

Recommendation 2

Improve the RER study’s methodology and manual so that they give more comprehensive guidance on the issues we have identified in this report and, therefore provide appropriate support for DG DEVCO’s risk assessment for the reservations (see paragraphs 29-34).

Chapter III — Performance

42.

Our on-the-spot checks allowed us to not only examine the regularity of transactions but also to make observations on performance aspects of the selected transactions.

43.

While verifying the existence of purchased items during our on-the-spot checks, we noted cases where the items had been used effectively and contributed to the achievement of project objectives. By contrast, we also noted cases where the efficiency and effectiveness of the action had been compromised, as the items purchased/installations were not being used as planned.

Box 8

Examples of performance-related observations

(a) Efficient and effective use of purchased items/installations

In Saint Lucia, the Commission endorsed a contract for the supply of hospital equipment and related services. During our on-the-spot visit, we found that the items selected had been delivered, and were being well managed and used for their intended purpose, thus contributing to the achievement of the action’s objectives and therefore the benefits to the final beneficiaries were clear.

(b) Project sustainability endangered

The Commission endorsed a works contract for the construction of a desalination plant in Djibouti. During our on-the-spot control, we found that the area originally dedicated to the project was substantially decreased and a new port and a military base were built instead in the immediate proximity of the desalination plant. The construction works and consequent operation of the port and the military base may affect the maritime currents and water quality as well as the location of the water intake. All these factors could have a significant impact on the viability of the desalination plant, risking its long-term sustainability.

The Commission signed a contribution agreement with an IO to support public financial management in Jamaica. The IO implemented the project fully through its partners. During our on-the-spot check in 2019, we saw that one of the two computer servers purchased in the beginning of 2017 for the project had been installed in an office that was not in use at the time of our audit. The second server was still in its original box nearly two years after delivery.

In Haiti, the Commission concluded a grant contract with a non-governmental organisation (NGO) for a sanitation project. When we checked a public bathroom constructed under the grant, we found that the toilets were not functioning properly and some were not open for use.

(d) Principle of economy not respected

In Mozambique, the Commission concluded a grant contract with an IO to improve access to food and nutrition. One of the items selected for our examination was a payment for a radio-drama series intended to promote sustained behavioural change. The amount was charged based on an inter-agency agreement between the IO and a related organisation from the same family, whereby the IO agreed to contribute 180 000 euros to its sister organisation. We found that this sum had not been determined by cost analysis but was set arbitrarily between the two related IOs based on the EU funding available.

(1) See Articles 43, 48-50 and 58 of Council Regulation (EU) 2015/323 of 2 March 2015 on the financial regulation applicable to the 11th European Development Fund (OJ L 58, 3.3.2015, p. 17).

(2) In 2012, a tripartite agreement between the EIB, the Commission and the Court (Article 134 of Council Regulation (EC) No 215/2008 of 18 February 2008 on the Financial Regulation applicable to the 10th European Development Fund (OJ L 78, 19.3.2008, p. 1)) set out the rules for the audit of these operations by the Court. The Investment Facility is not covered by the Court’s statement of assurance.

(3) With the exception of the 5 % of the 2018 EDF expenditure managed by the Directorate-General for Humanitarian Aid and Civil Protection (DG ECHO).

(4) Such as works/supply/service contracts, grants, budget support, programme estimates.

(5) OJ L 210, 6.8.2013, p. 1.

(6) Between 2013 and 2015, funds were committed via a bridging facility to ensure continuity pending ratification of the 11th EDF.

(7) Including 1 139 million euros managed by the EIB.

(8) Include initial allocations to the 8th, 9th, 10th and 11th EDFs, co-financing, interest, sundry resources and transfers from previous EDFs.

(9) As a percentage of resources.

(10) Negative amounts correspond to decommitments.

(11) Global commitments relate to financing decisions.

(12) Individual commitments relate to individual contracts.

(13) Net commitments after decommitments. Net payments after recoveries.

(14) This was set as both an overall target for DG DEVCO’s entire area of responsibility and as a specific target for the EDFs.

(15) Pursuant to Articles 43, 48-50 and 58 of the Financial Regulation applicable to the 11th EDF, this statement of assurance does not extend to the EDF resources managed by the EIB.

(16) See Article 39 of Regulation (EU) 2018/1877.

(17) See Article 38 of Regulation (EU) 2018/1877.

(18) Angola, Barbados, Botswana, Burkina Faso, Chad, Djibouti, Ethiopia, Guinea, Haiti, Jamaica, Kenya, Madagascar, Malawi, Mozambique, Niger, Sierra Leone, Sudan, Tanzania and Zimbabwe.

(19) DG DEVCO: 124 payments; ECHO: 1 payment for humanitarian aid.

(20) DG DEVCO contracts an RER study annually to estimate the level of error which has evaded all management checks to prevent, detect and correct errors across its entire area of responsibility. The RER study does not constitute an assurance engagement or an audit; it is based on the RER methodology and manual provided by DG DEVCO.

(21) Our reviews of RER studies have shown that, compared with our audit work, the underlying methodology involves far fewer (up to nine) on-the-spot checks and allows less scope for examining procurement procedures. Therefore, this year we adjusted the results of the RER study to reflect the degree of non-compliance with public procurement rules. The basis for adjustment was the ECA’s 2014-2017 SoA findings for EDFs.

(22) We base our calculation of error on a representative sample. The figure quoted is the best estimate. We have 95 % confidence that the estimated level of error in the population lies between 1,2 % and 9,1 % (the lower and upper error limits respectively).

(23) Such as works/supply/service contracts.

(24) Article 287 of the Treaty on the Functioning of the European Union: ‘Any natural or legal person in receipt of payments from the budget, shall forward to the Court of Auditors, at its request, any document or information necessary to carry out its task.’

(25) The Court of Auditors’ Opinion No 10/2018 concerning the proposal for a Regulation of the European Parliament and of the Council establishing the Neighbourhood, Development and International Cooperation Instrument, paragraph 18.

(26) For less than 0,1 percentage point of the error rate (1 case) the Commission committed the error itself and for 2,5 percentage points (11 cases) the error was made by the beneficiaries.

(27) Contributing 1,7 percentage point to the estimated level of error.

(28) Budget support payments financed by the EDFs in 2018 amounted to 796 million euros.

(29) EDFs and the EU general budget.

(30) 2016: 1,7 %; 2017: 1,18 % and 2018: 0,85 %.

(31) In the 2018 study, fieldwork in the country of project implementation was conducted for only 5 of the 219 transactions tested.

(32) The RER work did not sufficiently cover certain aspects of the procurement procedures, such as the reasons for rejecting unsuccessful candidates or the winning tenderer’s compliance with all selection and award criteria, nor did it check the call for proposals procedures or direct award justifications.

(33) The RER-specific estimation method allows for a wide margin for judgement when estimating individual errors (e.g. missing documents and the validity of the reason for the missing documents).

(34) See the ECA’s annual report 2017 on the EDFs, paragraphs 34-38.

(35) See DG DEVCO’s 2018 annual activity report, p. 69.

(36) This is the best conservative estimate of the amount of expenditure authorised during the year but not compliant with the contractual and regulatory provisions applicable at the time payment is made.

(37) See DG DEVCO’s 2018 annual activity report, p. 69.

(38) We tested 12 recovery orders amounting to 10,5 million euros, that is 58 % of the total population (18,2 million euros).

(39) We chose our 2015 report for this year’s follow-up exercise as, typically, enough time should have elapsed for the Commission to have implemented our recommendations.

(40) The aim of this follow-up was to verify whether corrective measures had been introduced in response to our recommendations, and not to assess the effectiveness of their implementation.

ANNEX I

RESULTS OF TRANSACTION TESTING FOR THE EUROPEAN DEVELOPMENT FUNDS

	2018	2017
SIZE AND STRUCTURE OF THE SAMPLE
Total transactions	139	142
ESTIMATED IMPACT OF QUANTIFIABLE ERRORS
Estimated level of error	5,2 %	4,5 %
Upper error limit (UEL)	9,1 %
Lower error limit (LEL)	1,2 %

ANNEX II

EDF PAYMENTS IN 2018 BY MAIN REGION

European Development Fund Payments — Africa

Source:

Map background © OpenStreetMap contributors licensed under the Creative Commons Attribution-ShareAlike 2.0 licence (CC BY-SA) and European Court of Auditors, based on the 2018 consolidated accounts of the 8th, 9th, 10th and 11th EDFs.

European Development Fund Payments — Caribbean and Pacific

Source:

ANNEX III

FOLLOW-UP OF PREVIOUS RECOMMENDATIONS FOR THE EUROPEAN DEVELOPMENT FUNDS

Year	Court recommendation	Court's analysis of the progress made
		Fully implemented	Being implemented		Not implemented	Not applicable	Insufficient evidence
		Fully implemented	In most respects	In some respects	Not implemented	Not applicable	Insufficient evidence
2015	Recommendation 1: expand the use of the quality grid to audits and expenditure verifications contracted directly by beneficiaries;					x
	Recommendation 2: adapt the terms of reference of audits and expenditure verifications with a view to obtaining all relevant information on the actual work done that is necessary to assess their quality using the new quality grid;	x
	Recommendation 3: assess the costs and benefits of improving the monitoring of audits and expenditure verifications contracted directly by beneficiaries by including them in the new audit application;	x
	Recommendation 4: apply appropriate sanctions to entities that do not comply with their obligation to provide essential supporting documentation for the Court’s audit;	x
	Recommendation 5: for payments under indirect management with beneficiary countries, (i) support the declaration of assurance with the statistically most reliable evidence available, and (ii) distinguish between forms of aid with different risk profiles, as is done for payments under direct management;		x
	Recommendation 6: revise the estimate of its future corrective capacity by excluding from the calculation (i) recoveries of unspent prefinancing and earned interest, and (ii) cancellations of recovery orders previously issued.	x

REPLIES OF THE COMMISSION TO THE ANNUAL REPORT OF THE COURT OF AUDITORS ON THE ACTIVITIES FUNDED BY THE 8TH, 9TH, 10TH AND 11TH EUROPEAN DEVELOPMENT FUNDS (EDFS) CONCERNING THE FINANCIAL YEAR 2018

Chapter II – The ECA’s statement of assurance on the EDFs

Box 6 — Lack of cooperation from international organisations

The Commission reached out to the international organisations concerned at all levels to facilitate the provision of the supporting documents requested by the ECA. It is currently analysing the specific cases raised by the ECA.

The Commission will introduce a system of immediate contact of international organisations at central level whenever their operations are sampled by the ECA.

Annual Activity Report and other governance arrangements

27.

As regards DG DEVCO’s control system, revised terms of reference (ToR) for expenditure verifications were adopted at the end of March 2018. They are expected to contribute to improved performance of ex-ante checks.

28.

The RER study is one of several elements in the assurance-building process. The limitations noted by the ECA are well-known to the Commission and are taken into account by the Commission when assessing the strengths and weaknesses of its management system. All of these elements, taken together, ensure that the DEVCO Annual Activity Report presents the management information in a true and fair view.

30.

Concerning the RER manual, the level of detail in the manual and methodology has to strike a balance between exhaustiveness and flexibility. The RER study is contracted every year in order to keep some flexibility in the definition of the specific terms of reference. At that moment, findings and recommendations of the ECA can be taken into account.

31.

The differences in quantifiable errors identified by the ECA will indeed result in an increase of the residual error rate. However, the bulk of that increase comes from just one operation, which the Commission considers was implemented under exceptional circumstances. The Commission does not share the ECA’s conclusion on this specific case.

32.

The approach has not changed compared to the previous year. The errors identified in a previous control work report on which full reliance was placed, are not extrapolated if there is evidence that the Commission has issued related recovery orders or adjusted the final payment on the action based on the ineligible amount detected.

The contractor’s work includes exercising professional judgement to determine when and in how far extrapolation of findings is allowed or required.

34.

The Commission will look into ways of introducing more comprehensive guidance.

Even for other segments not under reservation, the control efforts are not reduced. In the description of the reservation it is explained that although the reservation relates to grants in direct management only, the actions relating to the other spending areas will also be continued.

Conclusion and recommendations

Recommendation 1 (international organisations)

The Commission accepts the recommendation. The Commission will introduce a system of immediate contact of international organisations at central level whenever their operations are sampled by the ECA.

Recommendation 2 (RER study’s methodology and manual)

The Commission accepts this recommendation and will look into ways of introducing more comprehensive guidance.

Chapter III — Performance

Box 8 — Examples of performance-related observations

(b)	Project sustainability endangered: The Commission is planning a technical audit and evaluation to assess the status of the project and identify potential risks in order to secure the viability of the project. The Commission also ensures a close follow-up with all parties involved.

(c)	Purchased items/installations not in use: The Commission will look into both matters to check the status of use of the corresponding equipment and installations.

(d)

Principle of economy not respected: The Commission would like to stress that the contribution was agreed in a contract between the two IO’s and payments were executed in line with the contractual provisions. The progress report confirms positive results of the series as analysed by independent media research companies.

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