Background to the complaint

1. The complainant, the general manager of a company in Albania, had concerns about how the European Commission manages public procurement involving EU funds in countries outside the EU. He asked the Commission to give him public access to documents concerning the checks it carried out both before^[1] and after^[2] contracts for certain projects were awarded and implemented.

2.  Dissatisfied with the information he received, the complainant turned to the Ombudsman on 7 December 2017.

The inquiry

3. The Ombudsman opened an inquiry into the complainant’s concern that the Commission failed to ensure that public procurement in countries outside the EU was properly managed.

4. In the course of the inquiry, the Ombudsman’s inquiry team met with Commission representatives to clarify the Commission’s role under the three ways it has to implement the EU budget, namely ‘direct’, ‘indirect’, and ‘shared management’^[3]. The inquiry team also obtained copies of relevant documents.

Arguments presented to the Ombudsman

5. The complainant contended that from the very few documents disclosed to him, it was clear that the Commission had failed to carry out the necessary checks to prevent fraud, irregularities and corruption in public procurement involving EU funds in countries outside the EU, and had thus failed to comply with the applicable rules^[4]. He added that, for the procurement procedures and resulting contracts in question, the Commission remains responsible for budget implementation irrespective of the way the EU budget is implemented^[5].

6. During the meeting, the Commission (Directorate-General in charge of the European Neighbourhood Policy and Enlargement Negotiations, ’DG NEAR’) provided a comprehensive account of the tools and systems it has in place to detect errors at different levels of the public procurement process. It referred to its ‘Annual Activity Reports’^[6], which set out how the Commission verifies the implementation of EU-funded projects, and which constitute the basis on which the Commission takes political responsibility for its decisions in this area. The Commission added that its Internal Audit Service (‘IAS’) and the European Court of Auditors (‘ECA’) regularly audit its system^[7] while the Commission visits each EU Delegation every two to four years to monitor their capacity to manage EU assistance to third countries. In addition to these checks, the Commission also relies on the ‘Residual Error Rate’ to measure the errors that are not detected by the system it has in place^[8]. It stated that the 2016 Residual Error Rate remained well below the threshold set by ECA^[9], which demonstrated that the system put in place by DG NEAR was effective.

7. The Commission further clarified its supervisory functions and the different checks implemented under each of the three ways it has to implement the EU budget. Under direct management, the Commission concludes contracts with successful tenderers and is directly responsible for all budget implementation tasks. The Commission and the EU Delegations carry out checks before each transaction by using ‘checklists’. Based on an annual risk assessment of each contract, it decides if additional checks - such as monitoring visits, on-the-spot checks, audits and evaluations - are necessary^[10].

8. Under shared management, Member States conclude contracts with the successful tenderers and are thus responsible for verifying that co-financed projects comply with the applicable EU and national rules. The Commission carries out checks only at the end by auditing the projects or programmes in question^[11]. Based on these checks, the Commission can recover from the Member States any unduly paid funds. The Commission referred to a particular procurement procedure to illustrate the effectiveness of the system^[12]. In addition, the Commission requested the relevant authorities to issue an opinion on the compliance of the management and monitoring systems for the programmes under the 2014-2020 programming period. It stated that an independent external auditor was examining these opinions on behalf of the Commission.

9. Finally, under indirect management, it is the partner countries that conclude the contracts with successful tenderers, and bear responsibility for their implementation. The Commission entrusts such tasks only to countries that fulfil certain criteria^[13]. It also monitors the implementation of the relevant programmes through checks and committees. The Commission added that it carries out checks either before or after the public procurement process, depending on a yearly risk assessment. The Commission provided four concrete examples of prior checks performed by the EU Delegations in North Macedonia and Turkey that led to the rejection of the files submitted by the partner countries. It provided further information on the rate of rejections for contracts implemented by partner countries^[14]. Where no prior checks take place^[15], the EU Delegation performs checks directly after the signature of the contract, and after the execution of the contract.

10. In reply, the complainant contended that the Residual Error Rate used by the Commission was unreliable, and that the Commission’s checks are not effective because of the level of corruption in the countries receiving funds for projects and programmes outside the EU^[16]. He also considered that the Commission was wrong to entrust budget implementation tasks to countries under indirect management since it is the Commission that is responsible for the implementation of the Union’s budget. The complainant also stated that the Commission had not given examples of prior checks for public procurement procedures under direct management and that no proper checks existed for public procurement under shared management.

The Ombudsman's assessment

11. The complainant’s main concern is that the Commission does not verify public procurement procedures involving EU funds in countries outside the EU.

12. It is not the role of the Ombudsman to verify the effectiveness, as such, of the systems put in place by the Commission to monitor and verify public procurement procedures involving EU funds in countries outside the EU. Rather, what the Ombudsman can do is to verify that the Commission has addressed adequately the points raised by the complainant and responded to any concerns he has expressed.

13. In that regard, the Commission provided a detailed account of its supervisory functions and of the kind of checks carried out for public procurement procedures under the three different ways of implementing the EU budget (direct, shared, indirect). The fact that the Commission did not provide concrete examples of prior checks of public procurement procedures carried out under direct management does not imply that the Commission does not carry out such checks. From the overall explanations provided by the Commission during the meeting, and in particular the information in its 2016 Annual Activity Report^[17], it is clear that the Commission does perform such checks. Likewise, the complainant’s argument that the Commission does not verify public procurement procedures carried out under shared management cannot be upheld either (see paragraph 8 above).

14. In light of the above, the Commission has adequately addressed the complainant’s contention that it does not properly verify public procurement procedures under the different ways of implementing the EU budget and thus fails to detect fraud or other irregularities^[18].

15. The complainant also raised concerns regarding (a) the fact that the Commission delegates budget implementation tasks to Member States and partner countries, and (b) the Residual Error Rate used by the Commission as part of its supervisory functions, which he considered unreliable.

16. Regarding (a), the complainant argued that, as a matter of principle, the Commission should not delegate budget implementation tasks to Member States and partner countries since it is the Commission that is responsible for the proper execution of the EU budget. In that regard, the Ombudsman notes that the EU legislature has laid down specific and detailed rules regarding the different ways to implement the EU budget and the extent of the checks required for each of them^[19]. These rules, including the delegation of budget implementation tasks to Member States and partner countries, are legislative in nature and therefore, fall outside the Ombudsman’s mandate^[20].

17. Regarding (b) the complainant’s argument that the Residual Error Rate used by the Commission as part of its supervisory functions is unreliable given the allegedly high level of corruption in the countries concerned, the complainant has not provided any concrete evidence to link his allegations to any of the procurement procedures and contracts in question. Nor has he explained why the Residual Error Rate as such is an unreliable tool to detect irregularities in the countries in question.

18. In light of the above, the Ombudsman does not find maladministration by the Commission in this case.

Conclusion

Based on the inquiry, the Ombudsman closes this case with the following conclusion:

There was no maladministration by the European Commission.

The complainant and the European Commission will be informed of this decision.

 

Emily O'Reilly

European Ombudsman

Strasbourg, 28/03/2019

 

[1] Known as ‘ex-ante controls’, used to verify operations before they are authorised.

[2] Known as ‘ex-post controls’, used to verify operations after they are finalised.

[3] The direct, shared and indirect management modes are different ways of implementing the general budget of the EU, depending on the degree of delegation of a number of budget implementation tasks. Under direct management, the Commission or a European executive agency concludes contracts with the final recipients of funds. The Commission is thus in charge of all EU budget implementation tasks. Under indirect management, the Commission entrusts budget implementation tasks to, among others, partner countries, which conclude contracts with the final recipients. Under shared management, the Commission entrusts budget implementation tasks to the EU Member States, which conclude contracts with the final recipients: https://ec.europa.eu/europeaid/funding/about-funding-and-procedures/how-do-we-offer-funding_en.

[4] The complainant referred to: Article 2(r) on the definition of ‘control’ under Regulation 966/2012 on the financial rules applicable to the general budget of the Union (‘Financial Regulation’), preamble 13 of Regulation (EU) No 236/2014 laying down common rules and procedures for the implementation of the Union's instruments for financing external action, and Articles 18 and 49 of the Commission Delegated Regulation (EU) No 1268/2012 on the rules of application of the Financial Regulation (hereafter: ‘Rules of Application’).

[5] He referred to Article 317 of the Treaty on the Functioning of the European Union (TFEU) and Article 58(2) of the Financial Regulation.

[6] In particular, it referred to section 2 ‘Organisational Management and Internal Control’ (pages 33-88) of its 2016 Annual Activity Report: https://ec.europa.eu/info/sites/info/files/file_import/aar-near-2016_en_0.pdf. For an overview of the different types of checks in place, see pages 33-36.

[7] For a detailed presentation of the observations and recommendations from the IAS and ECA, see section 2.1.2. ‘Audit observations and recommendations’ (pages 63-69) of the 2016 Annual Activity Report.

[8] The Residual Error Rate is an indicator measured by an external auditor to diagnose any major remaining discrepancies in the monitoring procedures of both the enlargement and neighbourhood region. See pages 36-37 of the 2016 Annual Activity Report.

[9] The threshold set by ECA is 2%.

[10] For more information on the checks carried out for projects under direct management, see pages 40-42 of the 2016 Annual Activity Report.

[11] The Commission also mentioned the checks foreseen for the programmes that were of particular interest to the complainant and in particular, its examination of reports submitted by the responsible authorities, in accordance with the requirements set out in the Commission Implementing Regulation (EU) No 897/2014. For more information, see page 49 of the 2016 Annual Activity Report.  

[12] In that case, because the successful tenderer failed to deliver the progress report, neither the first level supervisory officers in the country concerned, nor the relevant authority validated the expenses incurred for equipment purchased. As a result, the EU had not co-financed the programme in question.

[13] In accordance with the Financial Regulation and the bilateral agreements between the Commission and the country concerned.

[14] The Commission stated that at the EU Delegation to North Macedonia, the rate of rejections of contracts implemented by partner countries under the indirect management mode was 12.62% in 2017, 22.02% in 2016 and 22.27% in 2015.

[15] The Commission gradually reduces prior checks and replaces them by subsequent checks to heighten the capacities of national authorities in procurement and contracting processes. For more information on the checks carried out for projects under indirect management, see pages 35 and 44-46 of the 2016 Annual Activity Report.

[16] In that regard, the complainant also referred to other complaints he had submitted to the Ombudsman, in particular complaints 6/2017/PL, 1641/2017/PL, 1642/2017/CEC, 1644/2017/JCN, 1721/2017/PL and 740/2017/CEC.

[17] In the 2016 Annual Activity Report, the Commission mentions that grants and procurement procedures under direct management have the highest cost of supervision in absolute terms due to the need for significant prior checks and audits for such procedures. According to the Report, in 2016, there were 720 contracts under procurement in direct management, of which the absolute cost of checks amounted to 16,136,351.08 EUR. See page 55 of the 2016 Annual Activity Report.

[18] In that regard the Ombudsman also took into account the complainant’s other complaints regarding public procurement involving EU funds in countries outside the EU (see cases 6/2017/PL, 1641/2017/PL, 1642/2017/CEC, 1721/2017/PL, 1644/2017/JCN and 740/2017/CEC).

[19] See in particular the Financial Regulation, its Rules of Application and Regulation 236/2014 laying down common rules and procedures for the implementation of the Union’s instruments for financing external action. See also the IPA II Regulation (EU) No 231/2014, the IPA II Implementing Regulation (EU) No 447/2014, the ENI Regulation (EU) No 232/2014 and the ENI CBC Implementing Regulation (EU) No 897/2014.

[20] In accordance with Article 228 TFEU.