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Session 2004 - 05 Publications on the internet Standing Committee Debates European Standing Committee B Debates |
European Standing Committee B |
Column Number: 1 European Standing Committee BThe Committee consisted of the following Members: Chairman: †Mr. Eric Forth Barrett, John (Edinburgh, West) (LD)Byrne, Mr. Liam (Birmingham, Hodge Hill) (Lab) †Cairns, David (Greenock and Inverclyde) (Lab) Farrelly, Paul (Newcastle-under-Lyme) (Lab) †Francis, Dr. Hywel (Aberavon) (Lab) †Griffiths, Jane (Reading, East) (Lab) †Hopkins, Mr. Kelvin (Luton, North) (Lab) Johnson, Mr. Boris (Henley) (Con) Picking, Anne (East Lothian) (Lab) Tami, Mark (Alyn and Deeside) (Lab) Walter, Mr. Robert (North Dorset) (Con) Wilkinson, Mr. John (Ruislip-Northwood) (Con) Wishart, Pete (North Tayside) (SNP) Geoffrey Farrar, Committee Clerk † attended the Committee The following also attended, pursuant to Standing Order No. 119(5): Murphy, Mr. Jim (Lord Commissioner of Her Majestys Treasury)Stewart, Ian (Eccles) (Lab) Timms, Mr. Stephen (Financial Secretary to the Treasury) Tyrie, Mr. Andrew (Chichester) (Con) Column Number: 3 Wednesday 2 March 2005[Mr. Eric Forth in the Chair]Protecting the European Communitys Financial Interests2 pmThe Financial Secretary to the Treasury (Mr. Stephen Timms): I am pleased, Mr. Forth, that you are presiding over our proceedings because I know of the close interest that you take in such mattersas do we all. I welcome the opportunity given by this annual debate to review efforts to improve the financial management of the European Union and to counter fraud against its budget. I welcome the hon. Member for Chichester (Mr. Tyrie), who took part in last years debate. I did not, so it is a new experience for me. Like all members of the Committee, he will know that the Government attach a high priority to such mattersas does the Commission, as the lengthy and substantial pile of documents before us bears witness. Good work has been undertaken on financial management and tackling fraud in recent years and we have seen improvements, but the task is a long way from being completed. There is certainly no room for complacency and a great deal remains to be done. The three key priorities are, first, to improve the method by which the Community budget is audited, so that we have a clearer picture of problems and of trends; secondly, to carry on with the systems and other reforms set in train by Neil Kinnock, the Vice-President of the Commission; and, thirdly, to ensure that the European Union budget is focused on activities that will lead to tangible outputs, as well as being compliant with the requirements of sound budget discipline and financial management. I want to say a few words about the first two objectiveson audit and systems reformto which the documents before us principally relate. Of course, many of us will have the opportunity to return to wider European Union budget issues in next weeks debate on the next financial perspective. The Committee will be well aware that the report that we are considering from the European Court of Auditors for the budget year 2003 was the 10th in a row in which it was able to give a positive statement of assurance only on the transactions for administrative payments, which amounted to about 6 per cent. of the total budget. The Court was also satisfied with its audit of budget revenue and budget commitments. However, for the remainder of the budgetthe vast bulk of it, including the major expenditure on agriculture and structural fundsthe Court was not able to give an assurance that payments were legal and regular. Column Number: 4 The failure to gain a positive statement of assurance on the most visible and largest sectors 10 times in succession is clearly unacceptable. That is why a great deal more improvement is needed. The Commission is legally responsible under the treaty for the whole of the budget, but the management of agriculture payments and structural funds is shared with member states, so the latter need to take some responsibility for the proper management of those funds. I shall comment first on how the Court assesses its findings. It audits a sample of transactions every year from which it makes an assessment. It is a small sampleperhaps 300 or 400 transactions out of hundreds of thousandsbut it is representative. It is generated randomly but includes transactions from every sector of the budget, both by the Commission and by member states, and the Court is careful to include samples of varying size or amounts of funding. In the past, the Court examined errors detected in the samples that it audited, and extrapolated that ratio over the whole budget to calculate a global error rate. That was last done for the 1996 budget, when the published error rate was assessed at 5.4 per cent. However, the Court has not done that since, because the figures were widely misinterpreted as the definitive figure for fraud, when they actually referred to errors of all kinds. The second problem was that the Commission could, and did, claim that it had recovered an amount equivalent to the error rate. However good that might sound, it does not compare like with like, as Commission recoveries would almost certainly include amounts from preceding years as well as from the year in question. So that was also misleading. Thirdly, the error rate was inevitably used to make comparisons of the sort that one would like to make from year to year. That was misleading, because the causes of the error rate would not usually be the same for different samples taken in different years, as different things are being sampled. So that was not a helpful comparison either. Until recently, the statement of assurance was assessed on the same basis, and there was the same problem of interpretation. The ECA responded to those criticisms a couple of years ago by expanding its methodology to cover four sources of information: a sample of transactions, as always; an assessment of the internal control systems in the Commission and in member states; an examination of the annual activity reports by directors general; and an evaluation of the findings of other external auditors, such as our own National Audit Office. We welcome those changes as important steps in the right direction. Our own practice in the United Kingdom, led by the NAO, is to give greater weight to the assessment of systems and controls, rather than simply to draw conclusions from a small sample of transactions. So the ECA report now includes assessments of internal controls in the Commission and member states. The information provided on the commissioners is particularly useful. It suggests that the standard of financial management is much higher than the
It would be good to be able to say the same of the ECAs assessment of the performance of member states in managing agriculture and structural fund payments, but the picture is rather more one of could do better. We are, however, at last receiving some factual information on financial management. I strongly encourage the ECA to continue in that direction. This is not, as some have complained, simply moving the goalposts. I want the ECA to go much further. The broader approach to audit should enable us to have a much better and more informative assessment of how the Community budget is being managed. Assessment of Government institutions in the UK, for example, allows us to make a much more informative assessment of the level and nature of problems in each budget area, and of trends over time. We have been working hard on this issue in concert with the ECA, the Commission and other member states, which is an important step towards achieving the positive statement of assurance that we all want. It is heartening to note in the documents on the fight against fraud that the volume of fraud and other irregularity cases reported by member states in 2003 decreased in all sectors. Irregularities in own resources are down by 21 per cent., in agriculture payments by 15 per cent., and in structural funds by 22 per cent. Overall, the value of irregularities reported for all sectors was down by 20 per cent. compared with the previous year to a little under €920 million. That is encouraging, although reported irregularities can fluctuate markedly from year to year. The figures can be distorted by the outcome of a particularly large case that leads to a spike for the year in which the case is resolved. The cycle of Community programmes, too, can lead to significant variations in the figures. For example, the final closure of the 199499 structural fund programmes required a great deal of auditing and led to a much higher level of errors reported in 2002. Increases can also indicate improved vigilance in detecting and reporting irregularities, rather than telling us anything about the incidence of irregularities. Of course, the overall figures will also rise when the report for the current year is published, because it will cover a European Union of 25 member states, rather than 15. However, even that information about the trend in reported irregularities does not tell us much about the overall extent of fraud. In the past, estimates made by the anti-fraud office, OLAF, have suggested that about 20 per cent. of reported irregularities may turn out to be fraud. I mentioned that €920 million of irregularities were reported in 2003those are the
That takes no account, however, of unreported irregularities. OLAF now has the staff to undertake a proper analysis of the overall extent of fraud against the Community budget, and it is important that it does so. It is unacceptable that we do not have a clear picture of the extent of fraud, because we and others need one to discharge our fiduciary responsibilities. Of course, one can never be definitive about the amount of fraud perpetrated, but we need a sound assessment of the scale and nature of the problem if we are to tackle it effectively. In 2003, the UK reported just over 900 cases of irregularities, of which eight were for suspected fraud, and all of them involved structural funds payments. The value of the Community budget element involved was about £335,000, or 0.04 per cent. of UK receipts for that year. So our figures on fraud are lower than those reported across the European Union as a whole. The Chairman: Order. I remind the Minister that the rule in such Committees is that the opening statement should last for 10 minutes. We allow a little leeway, but I hope that he is getting close to his conclusion. Perhaps I could ask him to move in that direction. Mr. Timms: I am grateful to you, Mr. Forth. I did not realise that 10 minutes had passed so quickly. As I said, we need an assessment of the extent of unreported fraud. We also have on the table the complementary evaluation report on the work of OLAF, which I am sure will interest the Committee. The Council has yet to discuss the Commissions draft proposals on amending the OLAF regulation. We hope that that will happen once the audit of OLAF, which the ECA carried out last year, has been published, probably as a special report. We will then take that work forward under the UK presidency. To sum up, we need a better picture of the financial management of the Community budget, including the extent of fraud. We need to move forward with the reform efforts that are already under way, and I very much welcome this opportunity to debate those important challenges. The Chairman: We now have until 3 oclock for questions to the Minister, after which we will come to the debate. I remind members of the Committee that questions should be brief. I am happy to be a little relaxed and perhaps to allow one or two questions at a time, but I am anxious that everybody should have a full opportunity to ask questions. Mr. Andrew Tyrie (Chichester) (Con): I shall do my best to be brief, but I will just make one very short remark by way of a preamble. I do not expect the Minister to be able to answer all the questions that I am about to put to him and I would be happy to take answers in writing, provided he looks at my questions carefully and ensures that the Department actually tries to answer them, rather than avoids answering them. Who knows? I might be in his shoes shortly, and I hope that he would extend me the same courtesy. Column Number: 7 My first question relates to the point on which you, sadly, curtailed the Ministers remarks, Mr. Forth. What is the Governments overall assessment of fraud? Is it still increasing, is it decreasing or is it about the same? Mr. Timms: We just do not know the answer to that pertinent question. We ought to know what is happening and what the trend is in fraud, but we simply do not. There are a few observations that one could make around the subject, such as what is happening to reported irregularities, but that does not tell us what is happening to overall fraud. That is a strong reason why we need more progress in assessing what is going on and in providing sound management of a European Union budget in which its citizens can have confidence. At the moment, we do not have that. Mr. Kelvin Hopkins (Luton, North) (Lab): I imagine my hon. Friend will have reflected that time flies when he is having fun. I am astonished that for 10 years in a row the European Court of Auditors has failed to sign off the accounts. If that happened in Britain with the Public Accounts Committee, there would be a public outcry. Is not it time for the Governmentespecially as the United Kingdom is a net contributor to the European budgetto make a lot more of this and demand improvement, particularly in those member states in which things are clearly going wrong? Mr. Timms: It is important that we do everything we can to improve things. I welcome the proposal from the EU Fraud Commissioner for a road map towards a positive statement of assurance. That is a helpful step and the commissioner is right to draw attention to its importance. When we take up the presidency later in the year, it will be an important priority for us to make further progress. That is the right response: to do everything we can to put things right. We have several ideas about how we can do that when we take on the presidency later this year. Mr. Tyrie: The Minister was chary about answering my question a moment ago, which I understand, but will he consider whether the Government should put into the public domain an overall assessmenta best estimateof whether fraud is increasing or decreasing, so that we have some sort of yardstick by which to assess whether we are making progress? While they are at it, they should do the same for malpractice, by which I mean those accounting practices that fall short of fraud. Do the Government think that the performance so far of the recently created OLAF is satisfactory overall? Mr. Timms: I hope, Mr. Forth, that you did not think that I was chary in answering the hon. Gentlemans question. I certainly did not intend to be chary. I thought that I gave him a straightforward answer, which is that we do not know. If there were such an assessment, I would be comfortable about it being in the public domain. It is important that we know such things, but we do not know about the
OLAF represents progress in comparison with its predecessor UCLAF. It has reduced the length of time that it takes to deal with cases from 29 to 22 months. The evaluation report on OLAF had a number of gaps, which led to the Councils request, in December 2003, for a complementary evaluation report addressing the recommendations of the Council and European Parliament and providing some detailed analysis and statistical data on OLAFs achievements since its first year of operation. OLAF has become significantly more effective, particularly over the past 12 to 18 months. That is the lengthy answer. OLAF represents progress, but there is more to come. We are awaiting the ECAs report on OLAF, which we expect to be published in the spring. That will be a useful document. Mr. Hopkins: From a cursory reading of the documentsI have to confess that I have not read every page in detail, because there are 953 of them Jane Griffiths (Reading, East) (Lab): Shame. Mr. Hopkins: I have freely confessed that. I am sure that other hon. Members have read every page, but I have not. However, I have scanned them and it seems to me that, by and large, Britain behaves much better than most other member states. Clearly, some member states, notably net budget recipients, are less good at dealing with such problems. Should there not be some focus on the particular states where there is a serious problem? Without being too self-righteous, could we not offer some advice on how Government funding accounting should be undertaken? Britain has a good record in such things, and could we not put on a bit of pressure, give some advice and focus attention on the malefactors? Mr. Timms: I am certainly willing to give advice where it is needed and sought. However, we need to ensure that robust arrangements are in place so that we know in significantly greater detail what is happening with fraud in the European Union. If those procedures and arrangements were in place, we could address the problems much more rigorously. I would not for a moment say that there are no problems in the UK. We know that on occasion there are. There are certainly problems in other countries, as my hon. Friend said, but I have not carried out an assessment of each countrys performance. Robust and sound financial management, assessment of the incidence of fraud from year to year, and assessment of the effectiveness of the systems that identify fraud and put it right are essential. If we had those, we could have much more confidence about the future, irrespective of the past performance of different member states. Column Number: 9 Mr. Tyrie: When I asked the Minister about OLAF, I wanted to know whether he was satisfied with its overall performance and that it was doing its job properly. If I asked him whether he was satisfied with the overall performance of the Inland Revenue, he would not for a moment say that it was perfect. Instead, he would say that he was satisfied that, overall, it was doing its job properly. Will he qualify his views on OLAF, which is now the only real hope that we have in bringing downward pressure on fraud? The Commission recently produced a supplementary report self-triggered by demands for more information on OLAF. What is his view of that report? Will he give his opinion on whether there is a case for separating OLAF from the Commission, of which it is technically a part? Would full independence for that body be useful? Mr. Timms: I shall try to provide a more satisfactory answer. It is no secret that to begin with OLAF did not do as well as everybody had hoped. It took a long time for it to get properly staffed up, for example. It is now properly staffed, and the evidence so far suggests that its performance has greatly improved over the past 12 to 18 months. Further improvement will undoubtedly be needed, but at least things are moving in the right direction. The complementary evaluation report, to which the hon. Gentleman referred, is the one that I mentioned. It is in the pile of documents. The principal conclusion that can be drawn is the one that I have made: OLAF has become more effective in the past 12 to 18 months. The next significant milestone in assessing its work will be the ECAs report, which is expected to be published in the spring. The UK has always taken the view that OLAF need not be independent of the Commission. If the Courts report reaches a different conclusion, we will consider it, but we have not yet been persuaded of the need for that independence. Mr. Hopkins: Without for a moment criticising my hon. Friends good faith, I shall quote the European Scrutiny Committees 32nd report, found on page 457 of the bundle of documents, which says:
That suggests that the Government are rather laid back and not sufficiently vigorous in pursuing irregularities and the Commissions poor performance. Will he respond specifically to the suggestion that the Government have a benign view? Mr. Timms: I refute it, as I hope I have made clear. It is essential not to take a benign view because now, perhaps more than for a long time, we need citizens of the European Union to be confident about the way in which the Union budget is managed. Complacency about problems, such as those that we are debating, would be disastrous. I certainly do not take a benign view of the difficulties. Mr. Tyrie: I would be grateful if the Minister could put on the record his view about the Commissions persistent proposalits long-standing demandfor a
Mr. Timms: Yes, I can certainly give that reassurance. The Government do not believe that creating a centralised European public prosecutor is either necessary or practicable. As I said, we recognise that more needs to be done to ensure effective prosecution of fraud within the Community, but I am certainly not persuaded of the need or desirability for a centralised EU body that prosecutes cases, and the Governments position on that remains unchanged. Mr. Hopkins: I am sorry to pursue this matter vigorously, but paragraph 33 of my hon. Friends explanatory memorandumpage 680 of the bundlesays:
The language is bland and not very confident. It does not sound very strong. Will my hon. Friend comment on that? Mr. Timms: I can certainly reassure my hon. Friend that we will pursue such matters very vigorously during the UK presidency. We will make a number of proposals and see significant progress on this and, I hope, a number of other fronts. There has been a helpful change of mood within the Commission and I am optimistic that such matters will be more vigorously pursued in the period ahead. That is certainly what the UK Government will push for. Mr. Tyrie: It sent shivers down my spine to hear that things are about to improve. I have heard that so often in respect of the Commissions activities, in particular with regard to the culture of the institution. However, this is the time not to make remarks but to ask questions. Will the Minister briefly explain something that travels under the ghastly name of budgetisationthe process whereby the European development fund will be brought within the general budgetand say whether the Government are still vigorously opposed to it? I refer to page 324 of the report. Mr. Timms: I know what the hon. Gentleman is talking about. The UK Governments position remains that we cannot agree to the budgetisation of the European development fund. We believe that it is very important to improve the effectiveness of the external budget, of which the European development fund is part, particularly in making progress towards the millennium development goals. That means bringing the budget performance closer to the performance of the European development fund by following international best practice more closely, allocating resources according to need and impact, and increasing the focus on poverty reduction. However, until we can demonstrate the long-term
Mr. Tyrie: I serve on the Public Accounts Commission. Its primary role is to keep an eye on the performance of the NAO. In that context, we should try to keep an eye on the performance of the ECA. A while ago, the House of Lords produced a report that made several suggestions for improving its work. We are all happy to say that the ECA is a worthy institution, but it sometimes seems to be ineffective in clamping down on the problems that it identifies, which may not be its fault. What do the Government propose to do to improve its effectiveness? Mr. Timms: The ECAs current structure of one member from each member state was introduced when only nine countries were represented in the EU. The principle was laid down in the treaty that there should be one member from each member state. Following enlargement in 2004, there are 25 members of the ECA, which makes its functioning under the principle of collective responsibility unwieldy and somewhat ineffective. Further addition to the Nice treaty allows the ECA to adopt a system of chambers that would group the auditors more formally into sub-colleges, but we are not persuaded that that would improve its efficiency. A paper submitted by the UK to the convention on the future of Europe contained proposals to replace the large ECA with a governing committee, made up of a representative from each member state, to elect the president, provide strategic direction, agree the annual business plan and set up a nine-member executive board of auditors general made up from member states strictly rotated on the basis of equality, with a president at its head. I am sad to say that there was little support for change or for our proposal, other than from Sweden, so the proposals were not accepted. It remains our view, however, that reform is essential, and we will take every opportunity to raise the topic again. |
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