Financial Management
The Committee consisted of the following Members:
† Barwell, Gavin (Lord Commissioner of Her Majesty's Treasury)
† Gauke, Mr David (Financial Secretary to the Treasury)
† Hilling, Julie (Bolton West) (Lab)
Hopkins, Kelvin (Luton North) (Lab)
† Horwood, Martin (Cheltenham) (LD)
† Jamieson, Cathy (Kilmarnock and Loudoun) (Lab/Co-op)
† Johnson, Gareth (Dartford) (Con)
Keeley, Barbara (Worsley and Eccles South) (Lab)
† Love, Mr Andrew (Edmonton) (Lab/Co-op)
† Rees-Mogg, Jacob (North East Somerset) (Con)
Shannon, Jim (Strangford) (DUP)
† Swayne, Mr Desmond (Minister of State, Department for International Development)
† White, Chris (Warwick and Leamington) (Con)
John-Paul Flaherty, Committee Clerk
† attended the Committee
The following also attended (S tanding Order No. 119(6) ) :
Heaton-Harris, Chris (Daventry) (Con)
European Committee B
Monday 9 February 2015
[Miss Anne McIntosh in the Chair]
Financial Management
4.30 pm
The Chair: Does a member of the European Scrutiny Committee wish to make a statement?
Jacob Rees-Mogg (North East Somerset) (Con): It is a pleasure to serve under your chairmanship, Miss McIntosh. I am conscious that you are sitting underneath the painting of Alfred defeating the Danes and, given your ancestry, I must be polite about the Danes.
It might help the Committee if I took a few moments to explain the background to the documents and the reason why the European Scrutiny Committee recommended this debate. The first document is the Commission’s 2013 annual report on protecting the EU’s financial interests. In the report, the Commission summarises and evaluates measures taken by it and by member states to counter fraud and irregularities against EU expenditure and revenue in 2013. As this is the last report of the previous Commission, it outlines the achievements over the past five years. The report is supplemented by six detailed annexes covering matters such as a statistical evaluation of irregularities reported in 2013, recommendations to follow up the 2012 report and the methodology for the statistical evaluation of reported irregularities in 2013.
The European Court of Auditors must report each year on the accreditation of the EU’s annual general budget and on the European development funds, which disburse development aid. The second document contains the ECA’s 2013 reports on the general budget and the European development funds. The documents also contain the statement of assurance—commonly referred to, from the French, as the DAS—concerning the reliability of the accounts and the legality and regularity of the underlying transactions, which the ECA is required to produce.
Because the ECA’s annual audit reports have, for many years, revealed serious inadequacies in the implementation of the EU general budget, it has become customary each year for the latest report to be debated together with the Commission’s annual anti-fraud report. Although the present ECA report confirms the reliability of the accounts, for the 20th successive year, there is not a positive statement of assurance, so the European Scrutiny Committee had no hesitation in recommending that that document be debated. We suggested that Members might wish to focus in particular on the Government’s effort to improve EU financial management. They might also examine the ECA’s comments about the ineffectiveness of some of the UK’s management of EU funds and the Government’s response.
4.32 pm
The Financial Secretary to the Treasury (Mr David Gauke): It is a great pleasure to serve under your chairmanship, Miss McIntosh. As always, it is also a great pleasure to follow my hon. Friend the Member for North East Somerset.
I am pleased to have the opportunity to address the Committee today, accompanied by my right hon. Friend the Minister of State, Department for International Development, to discuss three important reports: the annual report of the European Court of Auditors on the implementation of the EU budget concerning the financial year 2013; the EU Commission’s report to the European Union and the European Council on the protection of the European Union’s financial interests, “Fight against Fraud 2013 Annual Report”; and, to be dealt with by my right hon. Friend, the annual report of the European Court of Auditors on the activities funded by the eighth, ninth and 10th European development funds in the financial year 2013. I assure the Committee that the Government welcome the reports, which continue to play a key role in informing the UK’s approach to the financial management of fraud against the EU budget at both national and EU levels.
As the Committee is aware, the Government continue to take a robust approach to financial management and strongly believe that improvements in that area are necessary to enhance the effectiveness of EU budget expenditure. As such, the Government welcome the ECA’s report on the 2013 EU budget and support the ECA’s view that a greater focus must be applied to ensuring that EU budget funds deliver intended outcomes and represent real value for money. Taxpayers deserve to know that that money is being deployed to maximum effect and that all those involved in the use of EU budget funds should take steps to focus on that element of EU budget expenditure.
The Government are very concerned that, for the 20th consecutive year, the ECA has been unable to grant EU budget expenditure a positive statement of assurance, as my hon. Friend the Member for North East Somerset pointed out. The estimated error rate for the 2013 EU budget—the estimated error rate concerns expenditure that does not comply with the rules and regulations governing EU budget funds—stands at 4.7%, which is far above the acceptable 2% threshold. Although that marks a halt to the upward trend in the error rate of recent years, it shows almost no improvement on the 4.8% error rate of the previous year. Those findings continue to undermine the credibility of the EU budget and prove that the UK’s strong stance on financial management is necessary.
I take this opportunity to remind the Committee that this was the first UK Government to adopt a strong stance on error in the management of EU funds by voting against the Council’s annual decision to recommend discharging the Commission of its responsibility for the EU budget. Until the 2009 EU budget, the UK had consistently voted to support discharge of EU annual budgets, implying that the UK was satisfied that the Commission and others had sufficiently fulfilled their duties in relation to financial management of the EU budget.
However, under this Government, the UK took the unprecedented step of abstaining on the Council position for the 2009 EU budget and has since voted against discharge for the 2010, 2011 and 2012 EU budgets. The Government have not been alone in adopting a tough stance; we have joined forces with the Netherlands and Sweden to vote against discharge of the 2010 to 2012 EU budgets and to issue a joint counter-statement
which calls for immediate improvements to how EU funds are managed and sets out our recommendations for securing necessary improvements.The Government are of the view that all those involved in the deployment and use of EU budget funds must do more to ensure that those funds are managed and implemented effectively. That includes member states, which share with the Commission the management of some 80% of EU budget funds. As in previous years, the ECA’s report presents specific examples of shortcomings identified in individual member states, including the United Kingdom. I am pleased to confirm that, in the limited number of UK-specific cases, the relevant UK authorities continue to engage with the Commission and the ECA to better understand and address identified weaknesses.
I now turn briefly to the Commission’s report on the fight against fraud in 2013. As the Committee is aware, the Government take a very serious approach to fraud against the EU budget and consider any fraudulent misuse or diversion of EU funds to be unacceptable. We continue to support efforts by the European Anti-Fraud Office to tackle that important issue. In accordance with new requirements under the amended European Anti-Fraud Office regulations, we designated the City of London police as the UK’s anti-fraud co-ordination service last year. The UK also continues to engage actively in discussions on various anti-fraud proposals to ensure that they are as targeted and effective as possible.
Before handing over to the Minister of State, Department for International Development, I assure the Committee that the Government continue to work with other member states and the Commission to push for action that will better address the financial management of the EU budget and fraud against it. That continues to be an area of real concern which the Government take very seriously.
The Government are clear that taxpayers should have confidence that the EU budget is spent appropriately and represents value for money. We will continue to work with key allies to ensure that that is a key priority at an EU level. It gives me great pleasure to hand over to my right hon. Friend, who will say a few words about the report on the European development fund. I look forward to discussing Members’ views on these reports.
4.38 pm
The Minister of State, Department for International Development (Mr Desmond Swayne): This is the second time that I have had the pleasure of addressing this Committee and, indeed, the second time that that pleasure has been magnified by finding you in the Chair, Miss McIntosh. Today, my pleasure is multiplied further by the fact that we are studying an audit report. In 1980, having emerged from university with a degree in late mediaeval church history, I struggled to find employment and ended up training to be an accountant at a firm called Lodge and Winter in Falmouth. After three months, I decided that there simply had to be an easier way of making a living. However, I find every now and again that audit reports remind me of what might have been. This is therefore a great pleasure.
In the debate just a year ago, the then Minister, my right hon. Friend the Member for Hornsey and Wood Green (Lynne Featherstone), reported that then the
accounts for the European funds were “materially correct”, with a lower error rate than previously, at 3%, and that the Commission was“one year into a three-year action plan”—[Official Report, European Committee B, 4 February 2014; c. 5.]
with improvements in train through something that went by the acronym CRIS—the common external relations information system—which turns out to be the management information system. Yet here we are again, a year later, and the problems persist despite being two years into the action plan, and the error rate has increased. I inquired of my officials whether I should be very cross about this, and they replied, “Actually, it would be more appropriate to be disappointed—very disappointed.”
I draw the Committee’s attention to the conclusions on page 311 of the report. The auditors report that
“the Court concludes that the EDFs’ accounts for the financial year ending 31 December 2013 present fairly, in all material respects, the financial position of the EDFs as of 31 December 2013.”
“The Court concludes that, for the financial year ending 31 December 2013…the revenue of the EDFs was free from material error”
“the commitments entered into by the EDFs were free from material error”,
“EDF payment transactions were affected by material error”.
Those errors are set out in paragraphs 23 to 31 and, helpfully, summarised in a table in annex 1, to which I also draw the Committee’s attention. It takes some time to get to grips with the table—it is far from transparent—but an error rate in transactions of some 26% translates into an overall error rate for the portfolio of some 3.4%, which is 0.4% higher than the preceding year. No doubt it involves the d’Hondt formula or some other algorithm to translate the number of transactions into the value of the portfolio.
The recommendations that follow from that error rate, I will summarise rather than treat the Committee to the detail. However, I would point out in relation to paragraph 26(b) that the Commission rejects some eight transactions as being erroneous and insists they were correct; it is largely a question of the interpretation of the discretion awarded to the people making the decisions as to whether they were proper or not. Notwithstanding that rejection, the Commission accepts all the recommendations of the court. Broadly, they require continued progress on improving the knowledge and application of sound financial principles and further changes to the CRIS computer system. In fact, I understand, they are all in place, but would not have been captured by the report on the preceding year.
Returning to the big picture, we have a 15% share of these funds, we are the third largest contributor and we have some £1.7 billion committed over the next four years. The multilateral aid review we carried out in 2013 rated the funds among the top performers in delivering effective and transparent aid, but rather weaker in demonstrating results and communicating the impact. Add to that this persistent weakness in financial control, and I think we would be justified in being very cross. However, my officials have been in touch with the European Court of Auditors and have been told that
the court has seen genuine commitment on the part of the Commission to address the weaknesses pointed out by the ECA and that the auditors are satisfied with the implementation of their recommendations and with the rate of progress. Accordingly, I am merely disappointed.The Chair: We now have until 5.30 pm for questions to the Minister. May I remind Members that these should be brief? It is open to a Member, subject to my discretion, to ask related supplementary questions, and I am sure that the Ministers would like to group their replies.
Cathy Jamieson (Kilmarnock and Loudoun) (Lab/Co-op): It is indeed a double delight to have two Ministers here to answer questions. I have three questions to ask, and if it is in order, I will ask them together and then the Ministers can decide who will answer each.
First, may we have some clarification on where the Government stand on improving national systems and processes to ensure that the UK manages EU funds effectively? Despite how such matters are sometimes portrayed, 80% of the EU budget is spent under shared management, which means that member states, not the European Commission, have responsibility for distributing funds. The Financial Secretary touched on that. What proactive work have the Government undertaken to improve EU financial management? He touched on that as well.
Secondly, on fraud and irregularity, the Financial Secretary said that discussions were under way on various proposals, perhaps to try to deal with the problem and simplify systems and regulations. I appreciate that there are sensitivities when dealing with fraud, so perhaps chapter and verse on all the discussions taking place would not be appropriate, but may we be given a steer on the areas that the Government are prioritising? What specific action are they taking to ensure that we see an end to the protracted run of unfavourable statements of assurance? I think we all want to see that.
Thirdly, on the European development fund, I understood that CRIS was supposed to have been completed by the end of 2014. The Government have been clear that they regard that system as the cornerstone of EU programming and financial management, so I was interested to hear the Minister ponder on whether he should be disappointed or cross. He made reference to some of the issues that have been raised, but, so that we are clear about what the Government intend to do, what role are they playing in the project, given the major share that the UK provides as the third largest contributor to the EDF?
Mr Gauke: It is a great pleasure to respond to the hon. Lady’s questions. On where responsibility lies, she rightly said that member states have responsibility, but the Government have been clear that all those involved in the management and implementation of the EU budget have a responsibility to ensure that systems and processes are effective. That includes the Commission and all member states, which together share responsibility for managing 80% of EU budget expenditure. The UK takes that role seriously and strives to ensure that our systems and processes are effective and a model of best practice.
Nevertheless, the Government have also been clear that overall responsibility for managing EU budget funds lies with the Commission, and we have urged it to do more in that area, including through the simplification of complex regulatory frameworks to facilitate compliance, and through better engagement with member states to understand and address systemic and repeated error, for example in agricultural expenditure. It is worth pointing out that in the limited number of UK cases in which weaknesses were identified, the risk to EU funds was low. Further, the relevant UK Departments and authorities continue to investigate and, where appropriate, they will take steps to strengthen national systems and processes.
On the issue of unfavourable statements of assurance, we continue to urge the Commission and the ECA to provide a clear road map for achieving a positive statement of assurance. The Government have repeatedly stressed that point and taken strong action to highlight our views, and we have voted accordingly. It is unacceptable that it is taking so long to address the matter.
Mr Swayne: I wish to answer the hon. Lady’s on the EDF. I assure her that we are vigorous in maintaining contact with the Court of Auditors and in driving forward the changes required of the Commission.
The hon. Lady asked about CRIS. The recommendation in this year’s report was that the development of the CRIS system should be completed by the end of 2014, to allow interest on pre-financing of funds from €250,000 to €750,000 to be recognised as financial revenue. Effectively, an accounting module change is required. My understanding is that the new software was piloted in summer 2014 and will provide consolidated data on budgeting, forecasting and expenditure. It was due to be implemented in December and at the beginning of January. I will seek an update on whether that has been achieved and write to the hon. Lady. My general understanding is that the Court’s previous requirements were implemented, although not in time for the compilation of these reports.
Jacob Rees-Mogg: I have one question for my right hon. Friend the Minister of State and half a dozen questions for my hon. Friend the Financial Secretary to the Treasury.
My question to my right hon. Friend pertains to the 2.6% error rate in the field of overseas aid. Page 336 of our package of documents states:
“The Commission’s contributions to multi-donor projects are pooled with those of other donors”.
If only 10% of the expenditure is contributed by the European Union and 10% of the expenditure is made properly, the European Union will deem that 100% of the expenditure is made properly, even if 90% of the project is wasted. I wonder, therefore, whether the 2.6% error rate understates the proportion of EU aid that goes through multi-donor projects in that way. Does my right hon. Friend think that it might be better for the Court of Auditors to look at the underlying projects?
My first question to my hon. Friend the Financial Secretary pertains to revenue. The ECA concludes that the systems that it examined for gross national income and VAT-based own resources are effective. If that is the case, why were Her Majesty’s Government suddenly faced with a large bill in the latter part of 2014? Surely,
if they were so effective, they would have calculated properly what we owed at an earlier stage and it would not have surprised us.My second question to my hon. Friend is on the issue of trend. I notice that in 2009 there was a rate of 3.3%, rising to 4.8% in 2012, although there is a minor adjustment of 0.3% because of changes in the methodology. However, 4.7% seems to be in line with the increased trend, rather than showing a gentle reduction. It runs from 3.3% to 3.7% to 3.9%, then leaps to 4.8% and stays at 4.7%. I am concerned about that.
The next part of my question pertains to the high error rate in rural development, environment, fisheries and health, which is running at 6.7%. That represents a reduction, but of the 13 systems examined, six—nearly half—were found to be not effective. That seems to me a pretty poor standard and means that things are not going as well as may have been suggested. Shall I pause at this point for the responses?
Mr Swayne: I was hoping that my hon. Friend would go on longer and provide time for the 7th Cavalry to arrive, but as they have not, I shall have a stab at answering the question.
There is clearly a problem where funds are pooled. Once someone’s funds are in a pool, there is no way of tracing which euro note, or which accounting entry, actually finds its way through to the project being delivered. The answer to my hon. Friend’s question is in the Commission’s response, on page 295. It states:
“The Commission believes that the internal control measures put in place, together with those of the international organisations, limit this theoretical risk to a level which is…acceptable.”
I wonder whether that is indeed acceptable and what level it is. I cannot give my hon. Friend an answer now, but I will endeavour to find out and write to him.
Mr Gauke: I thank my hon. Friend the Member for North East Somerset for his questions. His first question was about the large and surprising bill that was presented to the UK last year. As he is aware, I will be debating that matter with him on, I think, 25 February, when the surcharge and other issues will be discussed in some detail. If he will forgive me, I would like, rather than being drawn into that subject today, to address it in greater detail then. One point that I will make on the surprise bill is that an understanding of what the adjustment was going to be required an understanding of all the member states’ positions, rather than just looking at the UK’s position, because after all the key amount is the net amount, but I will return to that subject at greater length.
My hon. Friend also referred to the trend and the rate of 4.7% versus 4.8% the previous year. There is a “glass half full” and a “glass half empty” view of that. The “glass half full” view is that the increase in the error rate has at least been arrested and that there is a marginal improvement. However, I subscribe, as I think he does, to the “glass half empty” view. One might have hoped that 2012, in which there was a significant increase, could be seen as an exceptional year—an outlier—but the fact that the following year was, to all intents and purposes, much the same suggests that that was not the case. There are different ways of looking at it, but either way, the rate is clearly too high and remains significantly above the 2% threshold. I suspect that in making that point, I am in agreement with my hon. Friend.
My hon. Friend mentioned the 6.7% rate for certain sectors, including environment and health care, where almost half of systems are not effective. That is clearly not good enough, and that is why the UK continues proactively to monitor national processes and improve them where necessary, so I share his concern on that point as well.
Jacob Rees-Mogg: I want to follow up something that my hon. Friend the Financial Secretary in his introductory speech. He said that we voted against last year, along with the Netherlands and Sweden. Are the Netherlands and Sweden expected to join us again this year in voting against the discharge? Also, will he place on the record the error rate for the UK Government, so that we can compare where we are with the 4.7% rate? We do not want to throw stones if we are living in a glass house. I have an expectation that we are living in a pretty solidly constructed granite building, but I may be wrong, so it would be helpful to know what the error rate is.
I have one point that might, oddly, be in defence of the European Commission. In the regional policy, transport and energy category, it is noted that the failures are primarily caused by the public procurement rules. It occurs to me that in this area the EU may be hoist by its own petard, because the public procurement rules are so complex, and make it so difficult for smaller companies in particular to get involved, that there might be less error if the rules were simplified.
I have a few more questions, Miss McIntosh, but may I leave those three with the Minister for the moment?
Mr Gauke: I am grateful to my hon. Friend for his remarks. As he rightly says, we have stood with Sweden and the Netherlands in the past in taking a robust approach and voting against discharge. I can confirm again that we will do so in respect of the 2013 EU budget at this month’s ECOFIN. He asked whether the Swedes and Dutch will join us in that process. Of course, the accounts pre-empt the outcome of other member states’ scrutiny, and as I understand it neither has completed its scrutiny process yet. However, I look forward to standing alongside those able to take a similarly firm stand against poor financial management, and I am optimistic that we will not be alone on that front.
There is no UK error rate comparable to the EU one that considers the legality and regularity of accounts, so am afraid I cannot give my hon. Friend a number. However, in the limited number of UK cases in which weaknesses were identified, the risks to EU funds were low. The relevant UK Departments and authorities will continue to investigate the issue and, where appropriate, take steps to strengthen national systems and processes. Although I cannot give my hon. Friend a number, I can say that our construction is not made of glass. I hope that that is helpful to him.
On the question whether the simplification of public procurement rules would bring down the error rate, I suppose that all those involved in the deployment and use of EU budget funds must accept some responsibility for financial management and implementation. However, the complex rules and regulatory framework for many areas of EU budget expenditure can impede compliance. We believe that more should be done to ensure that the rules are readily accessible by the range of organisations
and individuals involved in the use of EU budgets, some of whom have limited knowledge and experience of EU processes and legislation. I hope that those points are helpful to my hon. Friend.Jacob Rees-Mogg: I am grateful for those helpful answers.
I have only two further questions. One is about chapter 10 of the Court of Auditors report, on the Commission’s failure to set out the extent to which its expenditure is value added, in spite of that being a major objective of the Commission. Its answers to the Court of Auditors’ comments struck me as particularly wishy-washy. I know that value added and value for money are a particular concern of Her Majesty’s Government, and I want the assurance that that will be pushed at the Council.
My final point—I thought it was so obscure that it deserved to be raised—relates to an example of cross-compliance on page 218 of the bundle:
“EU cross-compliance legislation requires animal movements/births/deaths to be notified to the national animal database within 7 days. In the United Kingdom (Scotland) a farmer had not respected the notification deadline for 53 out of 104 such events.”
Does the Financial Secretary share my surprise that a farmer in Scotland should be highlighted in a European Court of Auditors report, which indicates many billions being misspent? It slightly seemed to me that the Court was desperate to find one thing where the UK was in error. If it is only a small number of cows, perhaps we are not doing too badly.
Mr Gauke: I am grateful to my hon. Friend for highlighting the importance of value added. He is absolutely right, and that is a very important point for the UK Government.
We welcome the ECA’s recommendation that the performance of EU budget funds should be better monitored and assessed to ensure that they deliver value for money. Taxpayers need to have confidence that EU funds are deployed effectively, and the consideration of performance and the added value of EU budget expenditure therefore remain key priorities for the Government. We note the Commission’s efforts in that area, including in the development of more coherent monitoring, evaluation and reporting on the performance of EU financial programmes for the 2014 to 2020 programme period. We will continue to work with like-minded member states to ensure that the Commission makes further changes to achieve more in that area.
In short, we consider this to be important and will continue to do so. When my hon. Friend stands up and says, “My next point is going to be obscure,” the blood runs cold. However, he raises a rather important point. I am perhaps not as familiar as him with the case of the Scottish farmer’s 53 failures to report a birth or death, but we take all cases seriously. It is certainly true that there were a limited number of UK cases where weaknesses were identified. Some encouragement might be taken from the fact that this one was highlighted rather than one that posed a more systemic threat to the EU’s finances.
Chris Heaton-Harris (Daventry) (Con): It is cheering to see the Government taking this seriously and voting as they have for the last three years. After a long period
when we had little focus as a Government on this matter, I welcome the Government’s focus and their leading the way in the Council with other countries. However, I wonder what the Government’s assessment is of the new Commission and its priorities in this area.Mr Gauke: In our discussions, particularly with Commissioner Georgieva, there is a recognition that more needs to be done about value for money and ensuring that money is spent wisely. There is some encouragement on that front. Of course, the true test will be the performance in the years ahead. We will continue to engage with the Commission to ensure that it does everything it can to address these matters with the rigour with which we would hope and expect them to be treated.
Martin Horwood (Cheltenham) (LD) rose—
The Chair: I will call you, Mr Horwood, but I notice that you were not in your place at the start. I am sure that you meant no discourtesy to either Mr Rees-Mogg or the Minister who was on his feet when you came in, but I am sure that you will wish to keep your questions brief.
Martin Horwood: I apologise to you, Miss McIntosh, and to the Committee for missing some of the Minister’s opening remarks.
My first question is further to the answer given to the hon. Member for North East Somerset, particularly about the humanitarian aid error rate of 2.6%. It is worth noting that that is about compliance with procurement procedures and ineligible expenditure, so it may be quite technical in nature rather than representing money misspent as such. In his answer to the hon. Gentleman, the Financial Secretary said that there is no directly comparable number in British overseas development assistance; I accept that.
However, given all the work that the Government have done in the past few years to set up the Independent Commission for Aid Impact and to conduct, for example, the multilateral aid review, there are presumably comparable numbers from those exercises that look at how effective, accurate and compliant aid provided to other multilateral agencies such as the Commonwealth, the Global Alliance for Vaccines and Immunisation and others has been. Even if that cannot be provided on the spur of the moment, perhaps it is a matter to be considered and shared with members of the Committee. Is that possible?
My second question is more about general numbers and trends. On the face of it, some of them are quite alarming: between 2009 and 2013, reported irregularities increased by 22%, and by 48% in value. Yet the most recent year’s figures, from 2012 to 2013, show an increase in number of 17%, but a fall in value of 36%. Clearly, some of that may be to do with increased levels of reporting, and changes in the means of accounting for errors and in categorisation. Would either Minister like to share any general conclusion about the trend in the number or value of irregularities, and whether things are improving—even if that is because more is being reported and discovered?
Mr Swayne: I can deal with the first point. It is true to say that the mistakes are technical. There is no question of fraud being discovered with respect to the European Development Fund. I have drawn the Committee’s attention
to the dispute between the auditors and the Commission over eight transactions. It is a question of whether the people who authorised them had the authority to do so. The Commission insists that they did, on the basis of an interpretation that it has taken from the European Court of Justice. The auditors take a more hawkish view. Nevertheless, the Commission has accepted all the recommendations, although it disputes a number of the transactions.On the question of comparison with us, we are always at the top of the league in international comparisons with respect to transparency. The information that the hon. Gentleman wants is on our website. The tracker tool is available for those who want to drill down into the results.
Mr Gauke: As to trends, there have been examples of improvement, but we must consider the overall picture, which remains inadequate. It is not good enough, and consequently the Government will continue to press for further improvements.
The Chair: If there are no further questions we will proceed to the debate on the motion.
Motion made, and Question proposed,
That the Committee takes note of European Union Documents No. 12213/14 and Addenda 1-6, a Commission Report: Protection of the European Union’s financial interests-Fight against fraud 2013 Annual Report, and unnumbered Document, the European Court of Auditors' 2013 Annual Reports on the implementation of the budget and on the activities funded by the Eighth, Ninth and Tenth European Development Funds; agrees that budgetary discipline and robust financial management at all levels remains crucial, including to support domestic efforts to tackle the deficit and debt, especially given the continuing fiscal constraints and fragile economic recovery across the EU; believes that it is unacceptable that EU budget expenditure has not been granted an unqualified Statement of Assurance by the European Court of Auditors for the twentieth year; supports the Government's efforts to press the Commission for a clear action plan to address the European Court of Auditors’ recommendations relating to the European Development Fund; and urges the Government to continue to engage with other Member States and the Commission to drive for urgent improvements designed to facilitate an error rate below the European Court of Auditor’s materiality threshold.—(Mr Gauke. )
5.12 pm
Cathy Jamieson: The questions have been interesting, and I am sure that the debate will be, too. I am grateful to the hon. Member for North East Somerset for getting in ahead of me. I always like to get something about Scotland on the record, and he beat me to it this time by highlighting the circumstances of the Scottish farmer who has been mentioned in a substantial document. Part of my constituency is a farming area, and I hope that it was not one of my local farmers.
In a time of tightened public finances, it is crucial that every penny of EU funding should be spent as efficiently and effectively as possible. The questions perhaps reflected disappointment at the fact that according to the ECA’s report on the 2013 budget, the EU’s error rate for payments, while marginally down on the previous year, remains obstinately high.
It almost seems that the problem is becoming perennial, and that it is unlikely to go away completely any time soon. Indeed, my hon. Friend the Member for Nottingham East (Chris Leslie) commented on the same issue in an equivalent debate in this Committee a couple of years
ago, and my hon. Friend the Member for Newcastle upon Tyne North (Catherine McKinnell) reiterated what he said last year.My hon. Friend put it extremely well:
“It is simply not good enough that the process rolls on year after year. We seem almost to have settled into a lazy habit of raising questions, with partial answers coming back from the European Union, yet the steamroller rides forward with little change to the high levels of fraud and irregularities that are occurring.”—[Official Report, European Committee B, 27 June 2012; c. 11.]
We have discussed some of the actions the Government are taking and will take, but there is a warning there: if there is not concerted action, the steamroller will continue to roll on.
Chris Heaton-Harris: In reading that debate, the hon. Lady will also have read my contribution, so she will, I hope, have an answer. However, for 13 of the last 17 years in which the United Kingdom Government waved through the European Commission’s accounts even though they had not received a statement of assurance, a different party was in power. The hon. Lady is taking the correct tone, and I do not want to stray from it, but did that not give the Commission the wrong signal back then—that eyes were not focusing on this issue quite as much as they should have done—and allow these things to continue for too long?
Cathy Jamieson: I thank the hon. Gentleman for his comments. I had hoped that we would have some consensus on the need for thorough scrutiny. That is why it is important to recognise what the motion says,
“that budgetary discipline and robust financial management at all levels remains crucial, including to support domestic efforts to tackle the deficit and debt, especially given the continuing fiscal constraints and fragile economic recovery across the EU”.
I agree with that sentiment. The Opposition have always been clear about our determination to close our own deficit and reduce our own debt as soon as possible in the next Parliament. We will be prudent in our stewardship of the national finances and proactive in collecting all the taxes that are due. If we were not, we would leave ourselves open to accusations of hypocrisy—of casting aspersions on others, while acting irresponsibly ourselves. We have no wish to do that.
Without wishing to stray or to alter the tone of the debate, it would be fair to say that the Government have been pretty vocal about their willingness to walk out of Europe, but not always quite so forthcoming about how they are working constructively with our European partners to make sure Europe is run more efficiently. I hope that the hon. Gentleman will take that comment in the spirit in which I made it, because I did so in the interests of trying to move forward, which is what we all want or should want.
If we look at the reports, the budget areas in which the UK is highlighted include agricultural market and direct support, where an error rate of 3.8% was detected. That included payments to ineligible beneficiaries and for ineligible activities, as well as expenditure and payments affected by administrative errors. We have to look at that to put our own house in order, and we have been given some indication today of how that may be taken forward.
The ECA’s recommendations include the Commission and member states ensuring that the integrated administration and control system is used to its full potential, and we have had some reference to that. However, rather than simply turning up once a year in a European Committee to discuss these matters, it would be helpful if we could get some of these things on the agenda so that we can have regular updates and ongoing scrutiny.
Another area where the UK was highlighted was employment and social affairs, where an error rate of 3.1% was detected. That is another example of why we should continue to look at these issues across the board, rather than simply once in a while, when they are brought to our attention.
The Financial Secretary told the European Scrutiny Committee that this state of affairs
“seriously undermines the credibility of EU spending”.
I return to the point I made when we were asking questions. Given that the vast majority of the money is deployed by member states, that comment applies as much to individual member states as it does to the EU as a whole. I hope the Financial Secretary can reassure us that he will continue to have discussions not only within the Government—we have had a good example of that today, because we have had both Ministers here to be held to account—but with his counterparts in the EU to ensure that we see a reduction in the error rate for payments and that we address all the other issues highlighted in the reports.
I thank the European Scrutiny Committee for bringing the reports to our attention. This debate has given us an opportunity to question Ministers and to put on record the importance of constant scrutiny, which we hope to see in the months ahead.
5.20 pm
Jacob Rees-Mogg: It is a great pleasure to follow the hon. Member for Kilmarnock and Loudoun, who takes such a diligent and thorough approach to scrutiny in all European such debates. It is a real pleasure to see these Committees being able to do their job properly.
The European Court of Auditors deserves praise. It is one of the bodies that actually stands up for the interests of taxpayers across the European Union. From time to time, the ECA has come under political pressure to be less robust in what it says—it is an obvious political problem for the European Union that its accounts have not been fully signed off for 20 years—so I begin by stating my admiration for the ECA and the thoroughness of its documentation. Although I slightly teased the Ministers about the 53 cows, going into the detail of what goes wrong is important. I may have thought that 53 cows in Scotland is below the necessary threshold, but when the ECA reported that officials in Romania were getting four or five times the going rate for their work, I suddenly changed my view and thought that it was a rather important detail because, actually, the easiest way to get money out of the organisation is to inflate costs and make things much more expensive for the EU than for a national Government—that is the way in which British taxpayers’ money is most misused. The amount is not insubstantial. We are talking about
£5.3 billion for 2013, which is heading towards half our contribution to the European Union, so a lot of money is not being properly accounted for.I commend the Government for their courage in voting against the budget. I rather like the fact that, in 2010, the Government abstained and the world did not collapse—it is amazing that the whole European Union did not implode—so they got a bit braver the next year and voted against the budget, making it clear, “up with this we will not put.” Other countries then came along, and pressure continues on the European Union to spend money as if it were a national Government and subject to the type of scrutiny to which national Parliaments subject their Governments.
I mentioned in passing during questions that there is an issue with the bureaucracy and its inflexibility. To go back to Parliament and cows, in my constituency, I have a farmer who had a cow that died between Christmas and the new year, and because the post office was not working, he was fined under his single farm payment for not reporting in time, but it was not his fault. Outrageously, there is no form of proper redress when the bureaucracy behaves in that way. If the British Government had done that, I have every confidence that he would have been able to seek redress for his grievance, but there is no redress once it goes to the European Union. We have a cumbersome bureaucracy tacked on to a relatively inefficient method of spending money.
I should like to go further because the amounts that are misspent are surprisingly low compared with the number of transactions that are deemed to have been erroneous. Looking through the figures, there is something wrong with the high 20% of transactions, which is a matter of concern. I would have thought that, if that number of transactions contain some error, the actual amount is likely to be higher. In terms of overseas aid, it is extremely likely that, through multinational projects, the figure has been understated.
Saying, “Well, as long as the amount we have contributed is spent properly, and is identified to have been spent properly, we will deem that all our contribution is spent properly,” seems a naive approach. That does not seem realistic because, if we took 10 donors each giving 10%, yet with only 10% of the overall money being spent properly, each one could claim in their own accounts that 100% of their funds had been spent properly. There must be something wrong with that politically, and possibly even logically, although I will not try to be too philosophical. There is a problem, and the Government’s approach is absolutely right. The Government should carry on taking a tough line, and, indeed, I would encourage them to be even tougher by withholding a percentage of our payments until the estimated error rate gets down to 2%.
I must finish with one of my favourite stories of inefficiency in the European Union; I like it so much because it involves my own Church. There used to be wonderful subsidies for exporting beef. Italian farmers worked that out and therefore exported tons and tons of beef to the Holy See, until somebody finally worked out that every cleric in the Vatican was happily eating pounds of beef every day and realised that that could not be possible. So we eventually uncover these things, even if we require divine inspiration to find them out.
5.25 pm
Chris Heaton-Harris: It is always a pleasure to serve under your chairmanship, Miss McIntosh. It is not always a pleasure to follow my hon. Friend the Member for North East Somerset. I was very worried when he stood up because we share a researcher for these matters, and I feared that he might steal my thunder.
I am here because I serve on the Public Accounts Committee, and we, too, look into these matters. Actually, seven members of the PAC visited Brussels only two weeks ago. We met our ambassador, Ivan Rogers, and the British member of the Court of Auditors, Phil Wynn Owen. We met a whole host of people from OLAF, the anti-fraud office, and Commissioner Georgieva and her team as well. There are a couple of points I would like to raise. The Financial Secretary is lucky, on a long day for him, that other members of the PAC are not here, because if this Committee had not clashed with a PAC meeting, six or seven Members of the PAC were going to turn up to make different points here.
We have all seen the background. The ECA has refused to give the 2013 EU budget a positive statement of assurance, as it believed, following its audit work, that €149 billion of the budget was, overall, materially affected by error. In other words, an unacceptable level of spending took place that was not in accordance with EU rules governing such spending, and this is the 20th consecutive year that the ECA has refused to give a positive statement of assurance.
I was a Member of the European Parliament for 10 of those years, and the conversations that the members of the PAC had with Commissioner Georgieva were very interesting. We looked back to the period when we had two commissioners—for those 10 years, I served on both the budget and the budgetary control committees of that illustrious place—and we did so almost in trepidation, because people understand now that the Commission really did not have the proper checks, or even the accounting practices to make the checks, that we would expect for Government accounts and taxpayers’ money to be verified against.
The ECA estimated that the most likely error rate for the EU spending in 2013 was, as the Minister said, 4.7%. That would amount to about €7 billion, so it is not an insignificant sum. Let us try to work out what that means to the average British taxpayer. The UK funded about 12.4% of the EU budget in 2013, so about £657 million of UK money was wrongly given out, according to the ECA’s central estimate.
All the functional areas of EU payments in 2013 were individually materially affected by error, apart from administrative and related expenditure. I will pick up a point that you know only too well, Miss McIntosh, from your own time in the European Parliament: when these reports come out, the bit that the Commission can verify and that the ECA is comfortable that the Commission spends correctly is the bit that it spends on administration at the centre—salaries and all that—but with all the parts where the Commission extends money elsewhere in any of its programmes, it has great difficulty.
My hon. Friend the Member for North East Somerset asked about comparing the error rate with anything we have in the UK. As the Financial Secretary will know, the National Audit Office has some issues with, say, how the Department for Work and Pensions spends its
money and qualifies its accounts; I think that it has qualified its accounts for the past two or three years, or at least for a decent period of time. However, the millions—potentially, hundreds of millions—of transactions that go on between the Department for Work and Pensions and individuals throughout the country, who all do an amount of paperwork for themselves and all make claims, are bound to involve more error than the thousands, or hundreds of thousands, of transactions by the European Commission. That is not comparing like with like, so the comparison is a difficult one to make.In the spending area of regional policy, transport and energy, the ECA estimated an error rate of 6.9%, so €3.14 billion was wrongly given out. The bulk of that spending was through the European regional development fund and the cohesion fund—the latter is pretty much purely aimed at the slightly poorer member states. In the spending area of rural development, environment, fisheries and health, the ECA estimated an error rate of 6.7%, so a little more than €1 billion was wrongly given out.
In common with my hon. Friends, I am concerned about the trajectory of all that. I have had experience of a number of Commissions, and at the beginning of any Commission, there has always been great excitement about how it will stop fraud and maladministration on its watch. The trajectory since 2009 of 3.3%, 3.7%, 3.9%, 4.8% and 4.7% is not a good one. Given that proper accounting procedures are now going on in the European Commission, so some of those things should not happen, the error rate is significant. Having met Commissioner Georgieva, I know that she is concerned about the error rate and wants to change it.
Under the treaties, we have the fantastic discharge procedure for each annual EU budget, which is interesting, although we in this House do not take it seriously enough. As I mentioned, an auditor somewhere has basically said of £657 million of British taxpayers’ money, “Well, it’s not being spent particularly well.” For the 20th year running, something as significant as that has happened, but we do not see much excitement around us any more. That is probably a good thing, I guess. Perhaps we are more savvy, because we know that we now have a Government who are working towards changing things and are ensuring that the Council does not sign off the Commission’s accounts so that significant changes are made. This is the area where I have my largest questions for the Financial Secretary.
When the PAC met Commissioner Georgieva, she talked positively about changing the culture of the European Commission and ensuring that it was focused on not spending money in a way that was materially affected by error. She also talked about ensuring that money spent was giving better value for money. That is a positive thing; the European Commission has never really focused on getting value for money on any of its spending. It has been given other people’s money, which it has spent, but it has not worried about the value for money part. While a significant amount of spending is still materially affected by error, however, I am concerned that it distracts her focus from the core concerns of ensuring that money is spent properly, as well as trying to get value for money on what is spent. Has the Financial Secretary had any thoughts on that?
I also have a couple of points to make to the Minister. I was pleased to hear that he has a financial background. I have read through the wonderful documents that anyone who is a geek in the area enjoys receiving each year, and I was pleased to see the test that was set by the photocopier in this particular batch. In many of the tables, especially on pages 33 and 34, a number of the figures are missing, so people can take a stab, for example, on the figures for the irregularities not reported as fraudulent in 2013.
The Minister detailed a handful of what the Official Journal says in its conclusion for 2013, which is on page 443 of our briefing pack. First, the Court of Auditors decided that
“the revenue of the EDFs was free from material error”.
It should be, because a very small channel of money goes into them from a very small number of places. Secondly, the Court decided that
“the commitments entered into by the EDFs were free from material error”.
They should be, because they are only promises, and one can promise pretty much anything. The punch line is that the payment transactions—the place where money goes out—were affected by material error.
There have always been concerns about the EDFs. They were not budgetised for a significant period of time, so we are in a much better place than we have ever been with them. I have concerns, as expressed by my right hon. Friend the Minister, about whether the sound financial principles and the further changes to the computer system CRIS, which everyone seems to be quite excited about, will actually do the job. I do not expect him to answer, but I want him to keep a close eye on the matter, because significant amounts of British taxpayers’ money are being used.
5.36 pm
Mr Gauke: I thank hon. Members for their participation in the debate. I am grateful for all the contributions to the question session and the short debate. We have had contributions from three of the parties in the House, and I was a little surprised that there was no one here from the UK Independence party, but perhaps they are busy with something important elsewhere.
I will set out a few of the themes of the debate and the questions. The theme that has come across most strongly is the shared view that more needs to be done. That is why the Government have consistently opposed discharge and sent the strongest and most public statement of discontent regarding the financial management of taxpayers’ funds. As my hon. Friend the Member for Daventry pointed out, we have adopted a change of approach compared with that of our predecessors, which demonstrates how seriously we take the matter.
We continue to co-operate with other member states to ensure that progress is made, and we work with like-minded member states in the Council to push for improvement across the board. We continue to strive to act as a model for other member states, and we have a proud record of doing so. We want to send the strongest possible message that improvements must be made to restore the credibility of EU expenditure. I will not dwell at length on the points that have been raised in addition to the clear central point that we are not satisfied, as a Committee or across the board, with the lack of progress.
My hon. Friend the Member for North East Somerset mentioned agriculture and employment, and we must ensure that our own house is in order. Systemic and repeated errors in areas such as agriculture, as well as employment and social affairs, across all member states must be addressed by simplifying the complex regulatory framework. That practical point comes out strongly.
On the point touched upon by my hon. Friends the Members for North East Somerset and for Daventry, there is a difference between compliance errors that do not lead to funds being misspent—for example, being unable to notify an annual death because a post office is closed—and serious errors that require recoveries or financial corrections. This is not the same as fraud. Certainly, all are important, but it is the misuse of budget funds that the UK remains concerned about, and we will continue to press for further improvements to financial management at the EU level.
On a point raised by my hon. Friend the Member for Daventry, it is unsurprising that chapter 9 on administrative expenditure continues to be error free. A comparison with the complexities of agricultural or cohesion expenditure is difficult. He also raised an important point about value for money. Although a focus on compliance is important to ensure the EU budget funds are spent in accordance with rules and regulations, it is also vital that the Commission places greater emphasis on value for money and the outcomes achieved by EU funds to ensure that they are employed effectively and yield maximum results. It is not too much to ask that both are done, but he is right to remind us that the debate tends to focus on fraud and error, which are very important matters, but there is also a test of ensuring that value for money is found for every penny and every euro that is spent at the EU level.
I thank members of the Committee for their support and ongoing engagement with these important issues and for their continued support of the Government’s strong position on financial management and fraud.