Documents considered by the Committee on 8th December 2010 - European Scrutiny Committee Contents

1 European Development Fund (EDF) expenditure


European Court of Auditors' Annual Report on the Activities Funded by the Seventh, Eighth and Ninth European Development Funds (EDFs)

Legal baseArticle 248 TEC
Deposited in Parliament10 November 2010
DepartmentInternational Development
Basis of considerationEM of 24 November 2010
Previous Committee ReportNone; but see (31188) —: HC 5-iv (2009-10), chapter 1 (15 December 2009)
To be discussed in CouncilTo be determined
Committee's assessmentPolitically important
Committee's decisionNot cleared; for debate as part of the debate recommended elsewhere on the annual audit of the EU budget


1.1 The European Development Fund (EDF) is the EU's main development cooperation instrument for 78 African, Caribbean and Pacific (ACP) countries and 20 Overseas Countries and Territories (OCTs). The 7th EDF was established in 1990 and the 8th EDF in 1995. The 9th EDF was signed in 2000 and came into force in 2003 under the Cotonou Agreement.[1] The 9th EDF provides €13.8 billion for Community assistance for the period 2003-2007, in addition to all uncommitted funds from previous EDFs.

1.2 The EDFs are funded by the Member States, governed by its own financial regulation and managed by a specific committee. The European Commission is responsible for the financial implementation of operations funded with resources of the EDFs. The UK share of the 9th EDF is 12.69%.

1.3 The EuropeAid Co-operation Office is a Directorate-General (DG) of the European Commission which provides development assistance worldwide. According to its website, it turns "into practical action the strategies and policies designed by DG Development for the African, Caribbean and Pacific countries, and DG External Relations for the other regions and countries of the world", and says that its "primary mission is to put the European Commission's external aid instruments to use in close collaboration with its partners." Commonly known as EuropeAid, it says that it "aims to deliver development aid in an efficient and effective way", and that its "focus is on maximising the value and impact of aid funding by making sure support is provided in a speedy and accountable fashion." [2]

1.4 The EDFs are managed under three main arrangements: centralised, joint and decentralised management. Under centralised management (40% of payments in 2009), the Commission implements the aid activities directly; this relates mainly to budget support. Under joint management (14% of payments in 2009), international organisations are responsible for implementing Community funded actions, provided that the accounting, audit, control and procurement procedures of the organisations offer guarantees equivalent to internationally accepted standards; EuropeAid's main partners are the United Nations' agencies and the World Bank. Under decentralised management (46% of payments in 2009), the Commission entrusts the management of certain tasks to the authorities of the beneficiary countries, with EC delegations working with National Authorising Officers (NAOs) who in turn work with the relevant local Ministries (the ECA's diagram of this process is reproduced at the Annex to this chapter of our Report).

The Court of Auditors' Report

1.5 The European Court of Auditors' (ECA) Report includes a positive statement of assurance on the European Development Fund's (EDF) expenditure in 2009. According to the Report, that expenditure amounted to:

—  Total payments: €3.123 billion[3]

—  Total individual commitments: €4.141 billion[4]

—  Total global commitments: €3.405 billion4

1.6 The ECA Report focuses on the accounts, transactions and systems used in the EDF. It is based on an assessment of a representative statistical sample of 50 financial and individual commitments and 170 interim and final payments made by EuropeAid and Delegations as well as audit visits to partner countries and other data sources.

1.7 The ECA concludes that:

—  the EDF accounts for 2009 fairly present the financial position in accordance with the provisions of the Financial Regulation and accounting rules;

—  the underlying transactions are legal and regular in all material aspects; but

—  the Commission's supervisory and control systems were only partially effective in preventing or detecting and correcting errors.

1.8 The ECA notes that EuropeAid has remedied some shortcomings observed in the previous ECA Report. In particular, the ECA welcomes the substantial improvement in the decision making framework for budget support eligibility, and for disbursement conditions. However, the ECA also notes a high frequency of non-quantifiable errors, due to the lack of formalised and structured demonstration of compliance with payment conditions.

1.9 In response, EuropeAid:

—   confirmed that it finalised a revised framework for monitoring and reporting progress in public financial management in June 2010, which focuses on results achieved against initial baseline expectations; country reports using this revised approach will be the basis on which eligibility will be assessed for disbursements for the remainder of 2010 and beyond;

—   also recognises the importance of greater rigour in defining performance targets, calculation methods and verification sources of budget support, which it says is now receiving greater attention during EuropeAid's peer review process (Quality Support Group) for the consideration of new programmes (paragraphs 32 and 55).

1.10 In addition, the ECA notes the Commission's introduction of both new guidance on budget support to fragile states which requires certain very basic elements of public financial management systems to be in place before budget support can be granted; and a more logical sequence for financial and operational checks in the payment approval process.

1.11 As in previous years, the ECA highlights a lack of capacity of most NAOs in partner countries, resulting in poorly documented and ineffective checks. The ECA also detects shortcomings in the financial procedures and controls instituted by implementing organisations and supervisors.

1.12 In response, EuropeAid:

—  confirmed its plans to supplement the training courses already provided by Delegations to NAOs and the extensive information on EuropeAid's website by disseminating a Financial Management Toolkit by the end of 2010, which it says will provide basic practical guidance in an easy-to-use format to help beneficiaries to comply with financial management and eligibility rules in the Commission's financial external aid actions;

—  also highlighted the work of the delegations in providing additional checks to offset weaknesses of NAOs.

1.13 The ECA recommends that, in the context of EuropeAid's planned review of its overall control strategy, it develops a key indicator for the estimated financial impact of residual errors as well as to assess the cost effectiveness of various controls. In response, EuropeAid confirms that work is underway to develop such an indicator and that it will produce a Communication on the Tolerable Risk of Error in the field of external aid in 2010 (paragraph 54).

The Government's view

1.14 In his Explanatory Memorandum of 24 November 2010, the Parliamentary Under-Secretary at the Department for International Development (Stephen O'Brien) welcomes the ECA's report and its statement of assurance on the EDF.

1.15 He also welcomes the steps the Commission has taken to address the ECA's previous and latest recommendations. He also sees the Report as not only most useful for the Commission in helping to identify opportunities to strengthen their systems, but also in providing valuable information for Member States on issues where the Commission needs to, or is, strengthening its processes. He says that he will continue to monitor the Commission's financial management performance and use opportunities in the EDF Management Committee and the Council's Africa Caribbean and Pacific (ACP) Working Group to follow up on progress in addressing the issues raised, in particular during the detailed discussions on the report in 2011.

1.16 He continues his comments thus:

"We recognise the challenges posed by the EDF structure of having National Authorising Officers and the limited capacity in many countries. We welcome the Commissions efforts to train and build capacity in the NAOs and will strongly encourage them to continue to support work in this area. We will, through EDF Committees, Working Groups and other opportunities, encourage the monitoring and evaluation of those who have received training. This is in addition to their ongoing training for Commission staff on financial management and programming. We also welcome the Commission's commitment to provide a "Financial Management Toolkit" to staff and NAOs.

"Finally, we strongly welcome the Commission's substantial improvement in the demonstration of eligibility for budget support, and welcome the revised framework for monitoring and reporting progress in public financial management. Given that under EDF 10 roughly 44% of allocated resources are currently programmed as budget support, it is vital that clear guidelines and frameworks are in place. It should be noted that where there are shortcomings in key public financial management (PFM) areas, the Commission has taken action to stop or suspend budget support, for example in 2006 in Chad and in Tanzania in 2008."

1.17 Looking ahead, the Minister says that the Court of Auditors' Report will be considered by the ACP Working Group in the new year, after which the Council will make a recommendation to the European Parliament to give the Commission a discharge on EDF expenditure in 2009.


1.18 Overall EU budget commitments in 2009 totalled €142.5 billion and payments totalled €118.4 billion. This perhaps gives the Court's critical remarks about some of the control aspects of the EDF's €4.141 billion/€3.123 billion some perspective, particularly as the continuing debate about budget support is essentially between the development professionals, who regard it as the key to building national capacity in developing countries, and the auditors, whose natural concern is over the inherent risks in such an approach.

1.19 This is a debate that we are content for others to pursue. We therefore recommend that this Court of Auditors' Report be debated on the Floor of the House as part of the debate on the annual audit of the EU budget that we are recommending elsewhere in this Report.[5]

Annex: ECA depiction of the decentralised management process

1   EDFs 7 and 8 were established under the 3rd Lome Convention, which preceded the Cotonou Agreement. Back

2   See for full information about its activities. Back

3   Gross payments, excluding recoveries. Back

4   The totals of individual and global commitments contain the decommitments. Source: European Court of Auditors on the basis of data provided by the European Commission. Back

5   See (32166): chapter 3 of this Report. Back

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Prepared 24 December 2010