Court of Auditors highlights errors in EU spending again

Each year the EU's Court of Auditors issues its opinion on the EU's spending and each year it is the same - "material errors" amounting to billions of euros probably misspent.

First of all, let's get the usual caveats out of the way - the auditors have signed off the accounts, which means that they are a reliable picture of EU revenue and spending. However, there remain significant errors in how the money was spent.

This is from the ECA press release:

The ECA’s estimate of the error rate is not a measure of fraud, inefficiency or waste. It is an estimate of the money that should not have been paid from the EU budget because it was not used in accordance with EU rules.

The other defence that the European Commission will make is that much of this spending is a shared responsibility between national governments and the EU institutions. But that does not excuse the fact that the errors keep rolling in year after year with little improvement and that much of this results from the complexity and Byzantine nature of EU spending programmes.

So how bad was it this year? 

Well here are some of the main findings for 2013:

•  93% of the EU Budget is affected by "material errors"
•  The error rate was 4.7%, amounting to c.€7bn euros "that should not have been paid out from EU budget"

Illustrative examples of waste highlighted by the EU's Auditors:

• Claims under the CAP for grassland that was actually forest.
• Claims for four Spanish border control helicopters that spent little time controlling borders.
• The salary of a private school director in Portugal charged to an EU project.
• €150 million of pre-accession exenditure validated by the Commission on the basis of estimates rather than for incurred, paid and accepted costs.

Is control of spending getting better?

Rate at which EU funding is misspent

One of the more depressing aspects of the EU budget is that the rate at which money is misspent remains consistently high. As we can see over time, it has gone down and then back up leading to the conclusion that the problem is persistent. This year it was 4.7%, which is lower than some previous years but still higher than others pointing to the fact there has been no "solution" to poor financial control.

Same old suspects?

Although there are a number of examples of misspending in Southern Europe, examples are also catalogued across the EU including in regional funding within richer states such as Germany. This begs the question as to why the EU is funding poorly controlled programmes in states that are net contributors and able to pay for their own, probably better quality programmes.

A solution - reform the budget?

Cutting regional funding in rich EU states would cut the EU error total, the EU budget and give states more autonomy all in one go as Open Europe has consistently argued.. Likewise Open Europe has also proposed radical CAP reform moving spending back to national governments. This would allow for more scrutiny of spending as well as well as remove some of the incentives to national governments to spend the money as fast as possible whatever the quality of projects.

Other Court of Auditor suggestions:

The Auditor's make a number of sensible recommendations and observations, including the following which are particularly interesting: 

• A better harmonisation of how GNI is calculated: The Court of Auditors has found that there are inconsistencies as to how different states calculate their "unofficial" economies. Given that the EU budget contributions are based on relative sizes of member states GNI and that recent statistical revisions have led to the UK receiving a large £1.7 surcharge any inconsistencies will no doubt be looked at very closely in HM Treasury.
 

• EU value added often difficult to discern: The EU's globalisation fund was picked out as an example of funding that has a low rate of EU "value added." That begs a question as to why it exists.

Verdict: Good report but, unfortunately, we will no doubt be returning to the subject of misspending when next year's report comes out... 

MEPs miss an opportunity to do their job

Last week, the European Parliament had the opportunity of doing what most other elected bodies in the free world consider a core task: making sure taxpayers' money is spent in a transparent, accountable and regular way.

MEPs were asked to provide discharge to the 2012 EU budget, in which according to the European Court of Auditors, the rate of error rate had increased to 4.8% compared with 3.9% in 2011 and affected every area of EU spending. The COA's own benchmark for acceptable levels of error is 2%. Of the total €138.6bn spent by the EU in 2012, €6.7bn was affected by errors.

However, MEPs voted to approve the discharge report, drafted by German CDU MEP Markus Pieper, with 488 votes in favour, 121 against and 10 abstentions - effectively signing off the budget.

The report admits that: 

"For the 19th time in succession, the Court of Auditors was unable to grant a positive statement of assurance regarding the legality and regularity of the payments underlying the accounts". 

(Yes, we know the Court of Auditors signed off the Commission's own accounts, so no need for any Commission officials reading this to make that well-worn point). The MEPs provided various justifications for nodding through the budget despite the errors, including:

"a distinction must be drawn between errors and fraud, and [the EP] considers that, in the vast majority of cases, errors stem from administrative mistakes, many of which are linked to the complexity of Union and national rules, which can be corrected".

They have a point. Errors and fraud are not the same thing - though the line can be awfully blurred. However, we doubt the average taxpayer would be entirely content with that explanation. The bottom line is that the cash should not have been paid out. As we've argued before, the high level of error is primarily due to the nature of the EU budget itself - it's size, complexity, confused objectives etc - and this will persist until it's fundamentally reformed.

What's interesting about the MEPs' behaviour is that they are a lot less forgiving when it comes to the spending by European Council/Council of Ministers - i.e. the member states.The EP decided to postpone the approval of the Council's accounts "because of its lack of cooperation".

EU Anti-Fraud Commissioner Algirdas Šemeta reacted to the EP's decision by saying that "The EU budget is the one of the most transparent and accounted for public budgets in the world", while arguing that "For the past 5 years, the overall error rate has been consistently below 5%. In other words, over 95% of all EU spending is in line with the rules."

The Netherlands, Sweden and the UK- three of the biggest net contributors to the EU budget collectively responsible for 20% of the funding - take a radically different approach. They again voted against discharge in the Council of Ministers, regretting that

"the overall error rate in recent years has increased to 4.8 %, being significantly above the acceptable threshold of 2 %."

Surprisingly, Labour and Lib Dem MEP, but also Dutch VVD MEP Hans Van Baalen voted against the position taken by their member states in the Council.

Not inspiring confidence.

The EU's structural funds - still heading in the wrong direction?

A new report published by the EU’s Court of Auditors yesterday provides an interesting reminder of the failings inherent in the current EU regional policy, whereby the cash is recycled between every region in every member state – irrespective how wealthy – via the EU's structural funds.

The EU has allocated around €65bn towards co-financing the construction and renovation of roads between 2000 and 2013, and the ECA report focuses on 24 projects in Germany, Greece, Poland and Spain, coming in at a total cost of around €3bn. The good news is that, unlike in one particularly notorious case in Southern Italy, the money was actually used to build or upgrade roads which “delivered savings in travel-time and improved road safety”.

However, the report then goes on to state that:

“insufficient attention was paid to ensuring cost-effectiveness. Most of the audited projects were affected by inaccurate traffic forecasts. The result was that the type of road chosen was often not best suited to the traffic it carried. Motorways were preferred where express roads could have solved the traffic problems. 14 out of 19 projects recorded less traffic-use than expected.” 

“due to the lack of appropriate indicators (such as actual employment created, share of new transit traffic, number of new enterprises in the region)… it is not possible to assess whether the funded projects actually generated the expected economic impact.” 

This is a microcosm of the wider problems with EU regional policy. As we argued in our 2012 report on this topic: “There are still a number of problems with the funds, including an unsatisfactory correlation between funding and results.” We also flagged up that, contrary to some of the Commission’s more boastful claims, due to the inability to consider individual indicators in isolation, it was virtually impossible to objectively assess the economic impact of the structural funds.

Essentially, project selection across the EU is driven more by the fact that there is a pot of money that has to be spent, and less by the existence of a genuine economic case or by seeking to maximise added value. The report also found that the cost of constructing roads varied hugely both between and within countries. Interestingly, the German projects were the cheapest, followed by Greece and Poland, with Spain being the most expensive.

Fundamentally, this also illustrates another point we raised in the report – namely that the structural funds come with significant opportunity costs – i.e. where spending leads directly to other, more productive economic opportunities being wasted. For example, the money spent on the La Herradura project in Spain – where actual traffic was 50% lower than planned - could have been spent on a different project with higher economic returns or not raised via tax and sent to Brussels via national governments in the first place.

This also underlines another critique set out in the report – that far too much cash from the structural funds has been funnelled into infrastructure construction (some of it clearly not corresponding to a genuine economic need) in the countries most affected by the eurozone crisis – Spain, Portugal, Greece etc. resulting in a number of ‘white elephant’ projects.

In wealthier EU countries – and also those most affected by the eurozone crisis – EU structural funds are simply the wrong tool for boosting regional development. While there is a case to be made for continued support to less wealthy member states via the EU budget, wealthier member states could both achieve a much needed financial saving but also regain the ability to tailor the rules to better suit their own circumstances rather than being constrained by Brussels’ one-size-fits-all framework.

In the UK, such a move would broadly enjoy cross party support and could save the government around £4bn net over seven years – something for Mr. Cameron (or indeed Mr Miliband) to target during the 2016 mid-term review into the long-term EU budget?

EU farm subsidies - the mother of all misallocations

Its been a busy few days on the EU budget front with the inconclusive EU leaders’ summit on the EU’s long term budget, and the Commission’s new proposal for the 2013 annual budget (largely unchanged from the version MEPs and member states were unable to agree on). Much of the attention in the talks were given to absolute numbers over substance, which is why Tuesday's Court of Auditors' report on the 'single farm payment' – accounting for roughly one third of the EU budget – is very interesting. The CAP as a whole (comprising the rural development component and the remaining market distorting subsidies) accounts for around 40% of expenditure - €56.8bn this year alone.

Specifically, the report looks at the effectiveness of the ‘Single Area Payment Scheme’ (SAPS) which is just EU jargon for the bulk of farm subsidies to most of the new EU12 member states under the CAP (The EU15 states plus Malta and Slovenia have a different support scheme called the Single Payment Scheme. A unified scheme for all 27 states is due to be introduced in 2014. The generic terms for both is usually 'the single farm payment').

The language is, as usual, cautious but it's quite clear that by EU standards, the Court of Auditors absolutely slams these subsidies. In the report’s executive summary we read that:

• The definition of ‘farmers’ is inadequate leading to subsidies being paid out to "beneficiaries not or only marginally involved in farming". In some of the Member States concerned, SAPS aid was paid to organisations not involved in farming, including public entities managing state land, hunting associations, fishing clubs and ski clubs. So the farce continues.
• The subsidies fail to take into consideration either the specific regional characteristics of farming activity, nor the contribution of farmers to the production of public goods. 
• The payments disproportionately benefit large landowners (who are more likely to be relatively wealthy) while the majority of farmers receive very small amounts of aid. 
• There is no option to differentiate payments within member states to take into account the agricultural potential of regions or environmental criteria. In other words, those who say the CAP in its current form is the best tool for delivering 'food security' or environmental objectives (including bio-diversity) don't know what they're talking about.
• The Commission has not analysed the effects of SAPS aid on the restructuring of the farming sector - a huge 'blind spot' given that modernising agriculture is one of the stated objectives of the CAP, and given that by giving people income support irrespective of the economic activity their engaged in (if any) is usually an active disincentive for reform. 
• The Commission has also not yet analysed the effects of the subsidies on land prices. Again a massive blind spot given that the regime is effectively subsidising landowners. 

So in other words, the single farm payment is a ill-targeted subsidy with no clear links to either the delivery of public goods or economic reform. In today's economic climate, to maintain such a fundamentally irrational policy must be considered something of an accomplishment.

What should we have instead? As we argue in our dedicated report on this issue, there could be a broad rationale for having a publicly subsidised system for delivering public goods in the countryside such as bio-diversity. One way of achieving something at least remotely sensible, would be for the CAP to be slimmed down (we proposed a 30% to the direct subsidies which would have saved over €12bn this year) and refocused to deliver a range of environmental benefit through a system of transferable agri-allowances (if intrigued, check out the full study).

But the current system just has to go. 

Deja vu anyone? EU auditors refuse to sign off EU spending for 18th year running

This morning, the EU’s Court of Auditors published its report on the EU’s 2011 accounts. Although the auditors concluded that the Commission’s accounts are reliable, they also found that the actual spending was “affected by material error”, and for the 18th year in a row they refused to sign off on it.

Here are the key points:

Total spending in 2011 was €127.2bn, of which 3.9% - or €4.96bn - was “affected by material error”. In 2010, the corresponding figures were 3.7% and €5.38bn, meaning an increase of €580m in the amount of erroneous spending.

Breaking down the budget into policy headings, we see that only the areas of External relations, aid and enlargement and administrative spending were deemed to be “free from material error”, i.e. an error rate of below 2%. For the other policy areas:

Agriculture: market and direct support
Total Spending = €43.8bn
Estimated error rate = 2.9%
Erroneous Spending = €1.27bn

Rural development, environment, fisheries and health
Total Spending = €13.3bn
Estimated error rate = 7.7%
Erroneous Spending = €1.02bn

Regional policy, energy and transport
Total Spending = €33.4bn
Estimated error rate = 6%
Erroneous Spending = €2bn

Employment and social affairs
Total Spending = €10.2bn
Estimated error rate = 2.2%
Erroneous Spending = €0.22bn

Research and other internal policies
Total Spending = €10.6bn
Estimated error rate = 3%
Erroneous Spending = €0.32bn

The Court also found that controls over 86% of the EU budget were only "partially effective".

The Court also highlighted a few practical examples of how such errors were made. Here are a few examples from the report:

• A farmer was granted a special premium for 150 sheep. The Court found that the beneficiary did not have any sheep. The corresponding payment was therefore irregular.
• In two Member States Italy (Lombardia) and Spain (Galicia), the Court found cases where ‘permanent pasture’ reference parcels were recorded as being 100% eligible despite the fact that they are fully or partially covered with dense forest or other ineligible features.
• European Social Fund - one of the so-called structural funds - gave money to a commercial association, as support for its activities, which included advising small and medium-sized enterprises (SMEs). The costs of several staff members of the association were charged to the ESF project, although evidence supporting the charging of their time to the project could not be provided. The Court considers that the project staff costs have been overcharged by 60%.
• A beneficiary from the EU's research funding pot declared overheads amounting to €366,891 and included the indirect costs of all its departments while only considering the research personnel as an allocation key when charging these costs to research projects. This resulted in non-related costs being charged, leading to an over-claim of €180,670.

Vitor Caldeira, the ECA's chairman, is quoted in the Telegraph as saying that auditors had "found too many cases of EU money not hitting the target or being used sub-optimally", an argument we have also made repeatedly, not least in recent reports on the EU’s largest spending areas – Regional and Agricultural policy. Caldeira concluded that: 

“With Europe's public finances under severe pressure, there remains scope to spend EU money more efficiently and in a better targeted manner. Member states must agree on better rules for how EU money is spent, and member states and the commission must enforce them properly. In this way, the EU budget could be used more efficiently and effectively to deliver greater added value for citizens." 

We couldn't have put it better ourselves. Brussels needs to get its own house in order (albeit many of the faults lie with national managing authorities) rather than demanding ever more money from European taxpayers.

Commission's efforts to reform EU budget actually make things worse

As you may be aware, the Commission last year tabled its proposal for how the EU's budget should look like over the next long-term budget period (set to run between 2014 and 2020). With the exception of some modestly positive elements - such as a "performance reserve" for regional funding (albeit very small) to provide incentives for regions to actually deliver results and a bit more cash on R&D - the Commission's proposal is in many ways making an already irrational, wasteful and unresponsive budget even worse.

For example, through the "greening" of the so-called Pillar I of the CAP (involving 7% of farmland to be set aside to provide ‘ecological focus areas’, a requirement to rotate crops and some other elements, more here), the Commission has opted for an almighty fudge that further undermines effective production while not delivering any significant green benefits in return. Also, despite one of the claimed objectives of the Commission's proposal being to "simplify" the budget, the exact opposite has happened. And remember, direct CAP subsidies under Pillar I are already rather bizarre things. As they're based on land ownership or historical entitlement, these are subsidies to a random group of people rather than directed at any specific outcome. This is of course what the Commission is trying to correct through the "greening" proposals, but, alas, it has failed miserably.

This was yesterday echoed by the EU's own Court of Auditors, which noted in an evaluation of the proposal,

"The Court considers that the legislative framework of this policy remains too complex. For example, six distinct layers of rules govern rural development expenditure. With respect to cross compliance, the Court considers that, in spite of the proposed reorganisation, the complexity of this policy continues to make it difficult for paying agencies and beneficiaries to administer.

In spite of the claim that it focuses on results, the policy remains fundamentally focussed on spending and controlling expenditure and therefore oriented more towards compliance than performance."

Pretty damning.

Another example of how the Commission's new proposal is making matters worse is the new 'intermediate' funding category proposed for distributing the EU's structural funds, for regions with a GDP between 75% and 90% of the EU average. Without reiterating all the flaws of the structural funds, this proposal would actually be a blow to focussing the funds on the genuinely poor regions, where they can have the largest comparative impact (see p. 17-18 here for a more detailed discussion). As the Swedish Europe Minister Birgitta Ohlsson has pointed out, this will mean that potentially more cash will go to the EU's richest countries, which will continue to send each other money via Brussels. "We're totally against introducing this category", Ohlsson has said. We certainly agree.

Incidentally, EU Budgetary Commissioner Janusz Lewandowski announced on Monday that there was a €1.49bn surplus left over from last year’s EU budget, which will be credited against member states’ planned contributions for next year’s budget. In other words, despite the "go for broke" nature of the EU budget (if you know of that board game - you need to spend your money as quickly as possible in order to win), member states still don't manage to fully spend all their allocated funds. And yet, next week, the Commission is expected to propose a 5% increase to the EU's 2013 budget. This links to the lack of absorption critera and performance controls in the EU budget, although its a long discussion that is worth saving for another entry.

What's clear is that there's something fundamentally wrong with the EU budget. Come to think of it, it's actually quite fascinating that this anomaly is allowed continue to exist at the heart of Europe.

PS. If you want to know how to make sense out of the CAP and the structural funds - making them help rather than hinder jobs, growth and the environment in Europe - check out our recent reports on the topic, here and here.