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2010.05.20 REGIO AAR2009 final with all tecnical amendments -clean Powered By Docstoc
					EUROPEAN COMMISSION




    DG Regional Policy



         2010
 Annual Activity Report
                                         Executive summary
Regional policy is delivered through shared management with agreement on multi-annual development and
investment programmes between the Commission, Member States and regions every seven years. These
agreed programmes ensure that sufficient resources are made available in good time to the right objectives.
Regional policy is funded by the Structural and Cohesion Funds (European Regional Development Fund –
ERDF- and the Cohesion Fund –CF- and invest in a variety of social and economic activities ranging from
large infrastructure projects to small-scale support services for SMEs. The forms of assistance also vary from
grants to more sophisticated financial engineering instruments and public-private partnerships.
Regional policy represents one of the core policies of the Union and accounted for almost 25% of the total
EU budget in 2010. It is therefore essential that the resources devoted to it are used to best effect, and in
accordance with the principle of sound financial management.
In 2010, the Directorate General (DG) for Regional policy achieved its annual objectives to help Member
States and regions to recover from the crisis, to consolidate evidence on the added value of the EU Regional
policy and to launch an informed debate on the reform of the policy.
Budgetary execution was very good with more than EUR 30 billion paid which representing 106% of the
budget originally allocated. In some Member States programme execution on the ground progressed very
favourably while others experienced difficulties, amplified by the context of the economic and financial crisis.
In this context, Regional policy resources have been mobilised to support national recovery efforts, even
providing decisive help in breaking the vicious circle created by the credit crunch.
Regional policy evaluation capacity has increased in quality and presented in 2010 robust evidence of the
impacts and results. Some key achievements for the 2000-2006 period include: 1.4 million jobs created; 2000
Km of motorway constructed; 4000 km of rail; 14 million people gained access to cleaner water; 38.000
research projects were supported and over 800.000 SMEs were aided. Evidence was provided that the multi-
level governance of Regional policy has had positive spill-over effects on national and regional administrative
systems.
The 2010 Fifth Report on Economic, Social and Territorial cohesion launched the debate on future options
for Regional policy to enable it to contribute even more effectively to create better jobs and sustainable
growth.


Different sources of information are used to build up the Director General's annual declaration of assurance
that the resources assigned to the activities have been used for the intended purpose and in accordance with
the principle of sound financial management, and that the control procedures put in place give the necessary
guarantees concerning the legality and regularity of the underlying transactions. The assurance is built on a
comprehensive assessment by all parties involved in the management and control of every programme.
The first source of information are the annual control reports and the opinions submitted by the National
Audit authorities (2007-13 programming period). They were for the first time in 2010 quite comprehensive,
even though not all the individual control mechanisms have been able to play their full role within the overall
process. In particular the audit of operations carried out by the national audit authorities related to payments
made in 2009 to a sample of operations which, due to the early stage of programme life, were not fully
representative of the 2010 more complex operations.
As complementary sources of information to build up the annual declaration of assurance, DG Regional
policy has used the results of the Commission's own audit work, the opinions of the Directors managing the
programmes and the experience learnt from previous years.
Putting together these sources of information, DG Regional policy has made an assessment of the
functioning of the national management and control systems and has on this basis classified all programmes
in four categories. It has then estimated the total amount of 2010 payments at risk. In doing so DG Regional
Policy takes full account of the fact that the control systems and processes for Structural Funds operate on a
multi-annual basis, which means that the Commission and Member States can apply corrective recovery
measures to protect the EU financial interests up to several years after a payment is made.

Regio_aar_2010_final
The Director General has given a reasonable assurance on the use of the resources in 2010 including on the
appropriateness of the control procedures put in place to guarantee the legality and regularity of the
underlying transactions.
However he noted reservations concerning both programming periods 2007-2013 and 2000-2006. The
reservations are made in respect of significant deficiencies in the systems in the Member States where the
resulting risk to the EU budget is relevant. The specific reasons of the reservations are listed below.
    For the period 2007-2013, the reasons include (i) a delay in the implementation of the national audit
    strategies leading to insufficient coverage in terms of both system audit and audit of operations on the
    ground, (ii) the identification by National audit authorities or the DG for Regional policy of serious
    deficiencies in the management and control systems with regard to the compliance of the operations with
    the public procurement rules, or with regard to insufficient management verifications before making
    payments, (iii) high error rate reported by the National audit authorities and (iv) very late submission to
    the Commission of the description of the management and control systems which has led to a late
    approval.
    For the period 2000-2006, programmes are being examined to come to a conclusion on final payments;
    reservations are on those programmes which have not been subject to sufficient control and corrective
    measures by the National authorities and that will be treated in the closure process; even though payments
    to these programmes was negligible in 2010, the deficiencies may still have an impact on previous years'
    expenditure.
For the 2007-13 period, the number of ERDF and CF programmes under reservation in 2010 is higher than
in 2009 (69 and 51 respectively out of 317) and affect a larger number of Member States (including both old
and new Member States). These increases result from two main causes: a higher volume of operations in
2010 with a higher complexity and the more effective capacity of DG Regional Policy in cooperation with
Member States through the single audit approach to detect weaknesses at an early stage.
The increased control capacity is based on many new control mechanisms at Member States and Commission
levels which were fully deployed for the first time in 2010 (detailed audit opinions on the functioning of the
systems and first audits of operations at national level and, at Commission level complementary audit work
and payment interruptions).
However these specific difficulties should not overshadow the good results in the majority of Member States,
including some that are large beneficiaries and thus manage a large amount of funds, proving that when the
regulatory framework is applied properly it delivers satisfactory results.
The amount of payments quantified as "at risk" is between 0.8% and 1.7% of ERDF / Cohesion Fund
payments in 2010 (the quantification for the 2000-06 programmes is not representative as most of the
remaining irregularities have already been compensated). Thus, these percentages represent the remaining risk
of irregular expenditure in the 2010 intermediate payments in those programmes for which DG Regional
Policy has a limited or no assurance due to material deficiencies in the functioning of the national
management and control systems. This percentage cannot be compared with the error rate determined by the
European Court of Auditors for the Cohesion policy in its annual report. Whilst in both cases the figures are
an estimate, they are founded on different elements and measure different concepts.
In early 2011, DG Regional Policy has taken immediate actions for the 2007-13 programmes under
reservation, proposing an interruption of payment deadlines for programmes where the risks are high,
considering that it is preferable to correct deficiencies as soon as possible to ensure improvements
throughout the implementation period until 2015. 20002006 programmes are being scrutinised in the so
called "closure" process and payments are de facto stopped until an agreement is found with the Member
States on the final amount to be paid or recovered.
At the same time DG Regional Policy is acting in cooperation with the Member States and regions concerned
to redress residual structural weaknesses in their management and control systems. Agreed actions should be
executed swiftly so that programmes execution can go ahead and to meet the expected objectives in favour
of growth and jobs for the citizens and businesses.




Regio_aar_2010_final
Shared management: assessment of national control systems
                                                                                                                  Total Payments in 2010 per level of assurance (in EUR million)                                                                                                                                                                                          Estimate of 2010 payments at risk of irregularities (in EUR million)
                                          Intermediate and final payments in 2010 per Member State and per Fund distributed on the basis of the level of assurance on the functioning
                                                                                       of the national management and control systems.

          Member States                                       REASONABLE                                     REASONABLE                                                  LIMITED ASSURANCE     NO ASSURANCE                                                                                         Total all Funds                                                  Programming period                            Programming period                       Total
                                                               ASSURANCE                                   ASSURANCE WITH                                                 WITH SIGNIFICANT  (MATERIAL DEFICIENCIES
                                                                                                                                                                                                                                                                                                                                                                         2007 - 2013                                   2000 - 2006                    estimated amount
                                                                   (a)                                    MODERATE IMPACT                                                      IMPACT      OR LACK OF INFORMATION)
                                                                                                                                                                                                       (d)                                                                                                                                                                                                                                                 at risk
                                                                                                                 (b)                                                              (c)                                                                                                                                                              Number of     Number of       Total estimated amount      Number of       Total estimated amount
                                                                                                                                                                                                                                                                                                                                                  Programmes interruptions                 at risk          Programmes                at risk                 (e)
                                                                                                                                                                                                                                                                                                                                                      under      of payment                  (e)                under                   (e)
 Classified on ascending order on the                                                                                                                                                                                                                                                                                                              reservation    deadlines                                  reservation
                                                                                                                                                                                                                                                                                                                                                [total number of   (2010 +                                [total number of
                                            ERDF/CF 2007-13




                                                                                                          ERDF/CF 2007-13




                                                                                                                                                                          ERDF/CF 2007-13




                                                                                                                                                                                                                                   ERDF/CF 2007-13




                                                                                                                                                                                                                                                                                       ERDF/CF 2007-13
 basis of the total estimated amount of




                                                                    ERDF 2000-06




                                                                                                                                  ERDF 2000-06




                                                                                                                                                                                             ERDF 2000-06




                                                                                                                                                                                                                                                          ERDF 2000-06




                                                                                                                                                                                                                                                                                                          ERDF 2000-06
         2010 payments at risk.                                                                                                                                                                                                                                                                                                                   programmes]     1Q2011)                                   programmes]




                                                                                        CF 2000-06




                                                                                                                                                      CF 2000-06




                                                                                                                                                                                                                 CF 2000-06




                                                                                                                                                                                                                                                                         CF 2000-06




                                                                                                                                                                                                                                                                                                                              CF 2000-06
      When the risk is considered
  manageable on a multiannual basis,
        the order is alphabetical.


                                                                                                                                                                                                                                                                                                                                                                                   Min          Max                            Min          Max        Min           Max
Austria (AT)                                                  53                    1                                       13                                                                                                                                                            66                              1
Belgium (BE)                                                  65                   24                                       32                                                                                                                                                            97                             24
Cyprus (CY)                                                   54                                                                                                                                                                                                                          54
Denmark (DK)                                                  20                                                                                                                                                                                                                          20
Estonia (EE)                                                                                         38              426                                                                                                                                                                 426                                               38                                      Risk considered                            Risk considered          Risk considered
Finland (FI)                                                   0                                                     111                                                                                                                                                                 111
France (FR)                                                                         2                                821                                                                                                                                                                 821                              2                                                       manageable on a                             manageable on a         manageable on a
Ireland (IE)                                                  45                                                                                                                                                                                                                          45
Luxembourg (LU)                                                                                                             3                                                                                                                                                              3                                                                                      multiannual basis                          multiannual basis        multiannual basis
Malta (MT)                                      61                                                    0                                                                                                                                                                                   61                                           0
Poland (PL)                                  3,349                                                         2,535                                             894                                                                                                                       5,884                                         894                                                  (e)                                         (e)                     (e)
Portugal (PT)                                                                                  237         1,713                                                                                                                                                                       1,713                                         237                                 1
Slovakia (SK)                                                                                                975                                                   61                                                                                                                    975                                          61
Slovenia (SI)                                          360                                           12                                                                                                                                                                                  360                                          12
Sweden (SE)                                             78                          0                         15                                                                                                                                                                          93                              0
The Netherlands (NL)                                                                                          82                                 49                                                         16                                                                            82                             65                                                                                 1 [8]              0.8           1.6        0.8          1.6
Hungary (HU)                                                                                               1,622                                                   29                                                         18                                                       1,622                                               46                            1                                  1 [7]              0.9           1.8        0.9           1.8
ETC (cross-borders coop.)                                     90                   49                        261                                 13                                  102                    28                                       0                                   453                             90                      13   [70]   (f-h)       2          5.1         10.3        9 [82]             1.4           2.8        6.5         13.0
Romania (RO)                                                                                                  38                                             209                     166                                                                                                 203                                         209          2   [5]     (f)                   8.3         16.6                                                    8.3         16.6
Lithuania (LT)                                                                                               478                                              30                     166                                                                                                 644                                          30          1   [2]     (g)         1         8.3         16.6                                                    8.3         16.6
Spain (ES)                                   1,321                                                         2,206                          348                603                     190                                                                                               3,716                       348               603         22   [23]    (g)        36         9.5         19.0                                                    9.5         19.0
Germany (DE)                                   703                                 86                        814                                                                     200                                                                                               1,717                        86                            4   [18]    (h)        15        10.0         20.0        2 [30]                                     10.0         20.0
Latvia (LV)                                                                                                                                                        37                276                                                                                                 276                                          37          2   [2]                          13.8         27.6        1 [4]                                      13.8         27.6
Bulgaria (BG)                                                                                                 75                                                   76                278                                      39                     1                                   354                                         115          3   [5]                 5        14.0         28.1        1 [3] (g)          2.0           3.9       16.0         32.0
Greece (GR)                                                                                    240         1,501                                 16                                  478                                                                                               1,978                             16          240          1   [10]                2        23.9         47.8                                                   23.9          47.8
The United Kingdom (UK)                                161                         47                        112                                 51                                  475                                                             42                                  791                             98                       9   [17]               18        28.0         58.1                                                   28.0          58.1
Czech republic (CZ)                                                                                          886                                                   83                986                                                                                               1,872                                               83     5   [14]                2        49.3         98.6                                                   49.3          98.6
Italy (IT)                                             171                          1                        556                          398                                         98             550                                      286                                      1,110                       948                            7   [28]   (h)          9        33.5         81.3        8 [37]            27.5          55.0       61.0         136.2
TOTAL                                       6,529                           210               527 15,273                                  875         2,021               3,414                      593                      57             330                                      25,547              1,679               2,605
TOTAL                                                              7,266                                                         18,170                                                     4,064                                                         330                          29,830         69             92                                                           203.7         423.9     23                 32.5           65.0      236.2         488.9
                                                                                                                                                                                                                                                                            estimated amount at risk as % of 2010 payments                                                        0.8%          1.7%                         0.8%           1.5%      0.8%          1.6%
(a) no material deficiencies in key elements of the systems                                                                                                             (c) material deficiencies in key elements of the systems and risk for payment is medium
(b) material deficiencies in key elements of the systems but risk for payment is low                                                                                    (d) material deficiencies in key elements of the systems plus no assurance on the functionning of the systems and risk for payment is high
(e) Methodology used for the estimation of the amount at risk:
For programmes with reasonable assurance and reasonable assurance with moderate impact, the risk for payments is estimated at less than 2% and 5% respectively; this risk is considered as acceptable during programme implementation because payments cannot exceed 95% of committed funds prior to
programme closure and it can be managed by multiannual national and Commission corrective procedures including at programme closure. There is no residual risk (above materiality level) to quantify.
For programmes with limited assurance and no assurance, the residual risk for payments is estimated between 5% and 10% (medium risk) and between 10% and 25% (high risk) respectively of the 2010 payments.
(f) Reservations for reputational reasons and potential risks without legal ground to interrupt payment deadlines (RO, one ETC programme)
(g) Partial reservations: Spain, for 21 programmes reservation applies to 13 (out of 145) intermediate bodies; Lithuania, reservation on one intermediate body; Bulgaria, reservation on one project
(h) Compliance assessment not approved (one German programme, 2 Italian programmes, one ETC programme)



Regio_aar_2010_final
                                                                 TABLE OF CONTENTS
     WHO WE ARE - DG REGIONAL POLICY AT A GLANCE ...........................................................................................1
     DID YOU KNOW ? SOME 2010 FIGURES ..................................................................................................................1
     HIGHLIGHTS OF 2010 ..............................................................................................................................................2
1.              POLICY ACHIEVEMENTS: COHESION POLICY ...........................................................................3
     1.1.    ACHIEVING SOUND AND EFFECTIVE MANAGEMENT OF EU RESOURCES ...................................................3
        1.1.1.   Sound financial management..............................................................................................................3
        1.1.2.   A good budgetary execution reflecting progress in 2010 ...................................................................4
        1.1.3.   Facilitating the high quality implementation of programmes ............................................................5
        1.1.4.   Helping Member States/regions to recover from the crisis ................................................................7
        1.1.5.   European Regional Development Fund (ERDF)................................................................................8
            1.1.5.1. Implementation of the 2007-2013 programming period on the ground ...............................................................8
            1.1.5.2. Implementation of the 2000-2006 programming period ......................................................................................9
            1.1.5.3. Result indicators for ERDF ...............................................................................................................................10
        1.1.6.         Cohesion Fund (CF) .........................................................................................................................10
            1.1.6.1. Implementation of the 2007-2013 programming period ....................................................................................10
            1.1.6.2. Implementation of the 2000-2006 programming period ....................................................................................11
            1.1.6.3. Result indicators for Cohesion Fund .................................................................................................................11
        1.1.7.   Pre-accession interventions related to structural policies (IPA)......................................................12
        1.1.8.   European Union Solidarity Fund (EUSF) ........................................................................................13
        1.1.9.   Implementation of pilot projects and preparatory actions ...............................................................13
     1.2.    DEMONTRATING ADDED VALUE AND EFFICIENCY OF COHESION POLICY...............................................14
        1.2.1.   Evidence of impacts and results of Cohesion policy through evaluations........................................14
        1.2.2.   Improving evaluations as a sound basis for future decisions ...........................................................14
     1.3.    DEVELOPING COHESION POLICY TO MEET FUTURE CHALLENGES .........................................................15
        1.3.1.   Highlighting contribution of Cohesion policy to the EU's long term objectives and aligning the
                  policy with the Europe 2020 strategy ..............................................................................................15
        1.3.2.   Pioneering new ways of territorial cooperation: the macro-regions ...............................................16
2.              MANAGEMENT AND INTERNAL CONTROL SYSTEMS ............................................................18
     2.1.    MANAGEMENT WITHIN DG REGIONAL POLICY ......................................................................................18
        2.1.1.  Management modes ..........................................................................................................................18
        2.1.2.  Cooperation with Member States – improving institutional and administrative capacity ...............19
        2.1.3.  Cooperation with other bodies .........................................................................................................20
            2.1.3.1. Cooperation with Commission services.............................................................................................................20
            2.1.3.2. Cooperation with the European Court of Auditors ............................................................................................20
            2.1.3.3. Cooperation with OLAF ....................................................................................................................................21
               A)    Joint Fraud Prevention Strategy (JFPS) 2010-2011                                                                                                          21
               B)    Cooperation with OLAF on fraud cases concerning ERDF and Cohesion Fund                                                                                    21
               C)    Fight against fraud as a means of protection of the European Union's financial interests - annual report for
                     2009                                                                                                                                                      21
            2.1.3.4. Cooperation with the European Parliament .......................................................................................................21
        2.1.4.   Internal control systems within DG Regional Policy........................................................................22
     2.2.    THE FUNCTIONING OF THE ENTIRE INTERNAL CONTROL SYSTEM ..........................................................22
        2.2.1.   Compliance with the requirements of the control standards ............................................................22
        2.2.2.   Effectiveness of implementation of the prioritised control standards...............................................23
        2.2.3.   Conclusions on the functioning and effectiveness of the entire internal control system...................24
     2.3.    WORKING ARRANGEMENTS WITH AND INFORMATION TO THE COMMISSIONER ....................................24
3.              BUILDING BLOCKS TOWARDS THE DECLARATION OF ASSURANCE (AND POSSIBLE
                RESERVATIONS TO IT)......................................................................................................................25
     3.1.    BUILDING BLOCKS TOWARDS REASONABLE ASSURANCE ........................................................................25
        3.1.1.   Activities under Shared management ...............................................................................................25
            3.1.1.1.   Control strategy for the Funds under shared management.................................................................................25
            3.1.1.2.   Investment in control activities for assurance in the field of shared management (input indicators) ................27
               A)       Member States' control and audit activities                                                                                            27
               B)       DG Regional Policy's management, control and audit                                                                                     27
            3.1.1.3.   Building block 1: Assessment by DG Regional Policy .....................................................................................28
               A)       ERDF and Cohesion Fund 2007-2013                                                                                                       28

Regio_aar_2010_final
                  A.1)   The setting-up of the national management and control systems.............................................................28
                  A.2)   Analysis of the systems audit reports, the annual control reports and the audit opinions sent by Member
                         States........................................................................................................................................................29
                A.3)     DG Regional Policy's review of national audit authorities ...................................................................... 32
                A.4)     DG Regional Policy's complementary audit work ...................................................................................33
             B) Cross-Border component of IPA 2007-2013                                                                                                                                34
             C) ERDF 2000-2006                                                                                                                                                         34
                C.1)     DG Regional Policy's audit work up to 2010...........................................................................................34
                C.2)     Analysis of the Winding-Up declarations ................................................................................................35
             D) Cohesion Fund 2000-2006                                                                                                                                                37
                D.1)     DG Regional Policy's on-the-spot audit work (reminder)........................................................................37
                D.2)     Winding-Up declarations Cohesion Fund ................................................................................................38
             E)    DG Regional Policy operational monitoring, especially for the 2007-13 programming period                                                                            39
             F)    Annual summaries of Member States' audit activities and declarations for the year 2010                                                                              40
             G) National declarations                                                                                                                                                  41
             H) Impact of controls: Interruptions of 2007-2013 payments in 2010                                                                                                        42
             I)    Impact of controls: Suspension decisions in 2010                                                                                                                    48
             J)    Impact of controls: Financial corrections in 2010                                                                                                                   48
          3.1.1.4. Building block 2: Results from audits in 2010 ..................................................................................................51
             A) European Court of Auditors' main findings and recommendations                                                                                                          51
                A.1)     Annual report and DAS 2009...................................................................................................................51
                A.2)     Performance audits ..................................................................................................................................54
             B) IAS main findings and main recommendations                                                                                                                             55
             C) Internal Audit & Advice main findings and recommendations:                                                                                                             55
          3.1.1.5. Building block 3: Follow-up of 2009 reservations and action plans for audits from previous years.................56
             A) Follow-up of 2009 reservations                                                                                                                                         56
                A.1)     Follow-up in 2010 of 2009 AAR reservations for ERDF and Cohesion Fund (2007-2013) ....................56
                A.2)     Follow-up in 2010 of 2009 AAR reservations for ERDF or Cohesion Fund (2000-2006) ......................57
                A.3)     Main indicators: follow-up of 2009 reservations .....................................................................................59
             B) Follow-up of action plans for audits from previous year                                                                                                                59
                B.1)     Follow-up of ECA findings DAS 2008: correction of errors ...................................................................59
                B.2)     Follow-up IAS recommendations (audits until 2009) .............................................................................. 60
                B.3)     Follow-up IAC recommendations (audits until 2009).............................................................................. 60
      3.1.2.          Other Activities .................................................................................................................................61
          3.1.2.1. Building block 1: Assessment by DG Regional Policy .....................................................................................61
             A) Activities under decentralised management IPA/ISPA                                                                                                           61
             B) Activities under centralised management                                                                                                                      62
                B.1)     Direct management ..................................................................................................................................62
                B.2)     Regional programmes of Innovative actions (Indirect management).......................................................62
                B.3)     Solidarity Fund (Indirect management) ...................................................................................................62
                B.4)     Activities under joint management ..........................................................................................................63
                B.5)     Article 66(2) of the Financial Regulation ................................................................................................63
          3.1.2.2. Building block 2: Results from audits during the reporting year.......................................................................64
          3.1.2.3. Building block 3: Follow-up of previous years' reservations and action plans for audits from previous years .64
          3.1.2.4. Building block 4: Assurance received from other Authorising Officers in cases of crossed sub-delegation.....64
             A) Crossed sub-delegations regarding IPA/ISPA                                                                                                                   64
             B) Crossed sub-delegations regarding other activities                                                                                                           65
      3.1.3.   Completeness and reliability of the information reported in the building blocks.............................65
   3.2.    RESERVATIONS .........................................................................................................................................66
      3.2.1.   Overall opinion and analysis of residual financial risks ..................................................................66
          3.2.1.1. DG Regional Policy's audit opinion on the functioning of national management and control ..........................66
          3.2.1.2. Assessment of the functioning of national management and control by DG Regional Policy authorising
                   officers by subdelegation...................................................................................................................................67
          3.2.1.3. Overall assessment of the functioning of national management and control.....................................................67
             A) Overall assessment of ERDF and Cohesion Fund programmes (activities 13.03 and 13.04) for the 2007-2013
                   and 2000-2006 programming periods:                                                                                                                          67
             B) Overall assessment of IPA / ISPA (activity 13.05) for both programming periods 2000-2006 and 2007-2013:
                                                                                                                                                                               70
             C) Impact evaluation for other activities                                                                                                                         70
          3.2.1.4. Material deficiencies and correctives measures.................................................................................................70
             A) Programming period 2007-2013: detailed explanations for the reservations                                                                                       70
             B) Programming period 2000-2006: detailed explanation for the reserves                                                                                            75
      3.2.2.          Reservations 2010.............................................................................................................................77
          3.2.2.1. Reservation concerning the ERDF/Cohesion Fund/IPA management and control systems for the period 2007-
                   2013 in several Member States..........................................................................................................................77


Regio_aar_2010_final
            3.2.2.2. Reservation concerning the ERDF/Cohesion Fund management and control systems for the period 2000-2006
                     in some Member States......................................................................................................................................80
     3.3.      OVERALL CONCLUSIONS ON THE COMBINED IMPACT OF THE RESERVATIONS ON THE DECLARATION AS
               A WHOLE ...................................................................................................................................................81
     3.4.      OVERALL ACTION PLAN TO TACKLE RESIDUAL WEAKNESSES AT MEMBER STATES LEVEL FOR THE
               PROGRAMMING PERIOD 2007-2013 ..........................................................................................................83

4.             THE DECLARATION OF ASSURANCE............................................................................................86

ANNEX 1: STATEMENT OF THE RESOURCES DIRECTOR .......................................................................88

ANNEX 2: HUMAN AND FINANCIAL RESOURCES BY ABB ACTIVITY .................................................89

ANNEX 3: DRAFT ANNUAL ACCOUNTS AND FINANCIAL REPORTS ....................................................91

ANNEX 4: ASSESSMENT OF RISKS AND MATERIALITY CRITERIA......................................................92

ANNEX 5: INTERNAL CONTROL TEMPLATE FOR BUDGET IMPLEMENTATION (ICT)..................94

ANNEX 6: BUDGETARY EXECUTION 2010....................................................................................................97

ANNEX 7: IMPACT AND RESULT INDICATORS ..........................................................................................98

ANNEX 8: DETAILED ANALYSIS OF THE ANNUAL SUMMARIES ........................................................110




Regio_aar_2010_final
                       Who we are - DG Regional Policy at a glance

The Directorate General for Regional policy (DG Regional Policy) is the Commission's department
responsible for developing and pursuing actions leading to the strengthening of the European Union's
economic, social and territorial cohesion, with the objective of promoting smart, sustainable and inclusive
growth for the benefit of EU citizens.
To this end, DG Regional Policy manages regional development programmes in partnership with national,
regional and local actors, to deliver EU policy priorities on the ground throughout the European Union,
particularly in the least favoured regions, reflecting the principle of solidarity. It does this through the
following financial instruments: the European Regional Development Fund (ERDF)1, the Cohesion Fund
and the Instrument for Pre-Accession Assistance (IPA) - Regional Development / Cross-Border
Cooperation components. DG Regional Policy also manages the EU Solidarity Fund (EUSF). The
Directorate General is responsible for the coordination of EU policies on territorial and urban affairs and on
the outermost regions.




                              Did you know ? Some 2010 figures

                           Management of operational programmes/projects
    334 operational programmes managed by DG Regional Policy for the 2007-2013 programming period (with EUR
    267 billion of ERDF-Cohesion Fund support 2007-2013 and EUR 1.8 billion of IPA support 2007-2011)
    74 modifying decisions for 2007-2013 programmes in order to adapt these to the new economic context
    106 major projects adopted (60 Cohesion Fund, 44 ERDF and 2 IPA)
    17 applications for the EU Solidarity Fund (second highest number since the Fund's inception)

                                               Budgetary execution
    A record of EUR 30 billion paid in 2010 to Member States and regions (106% of the initial budget set for 2010) :
    ERDF payments of EUR 22.09 billion and Cohesion Fund payments of EUR 7.95 billion
    Interim payments for 2007-2013 programmes (ERDF–Cohesion Fund only) amounted to EUR 25.55 billion in
    2010 (EUR 9.42 billion in 2009), indicating an acceleration of implementation on the ground.
    EUR 60 billion of expenditure incurred on the ground by beneficiaries of 2007-2013 programmes up to the end of
    2010

                                                 Human resources
    769 members of staff (618 officials and 151 external staff)
    53% women and 47% men (of all staff)

                                Information and Communication activities
    25 events (conferences, seminars, workshops) organised by DG Regional Policy (13,000 participants at these
    events, out of which 5,900 at the OPEN DAYS in October; 380 journalists attended DG Regional Policy
    conferences in Brussels; 5 press conferences organised in Brussels)
    35 information sessions in all Member States on the Fifth Cohesion Report
    2.7 million visits at INFOREGIO website and 9.4 million page views



1   DG Employment , Social Affairs and Inclusion manages the ESF (European Social Fund)


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                                                                                                  1- Policy achievements


                                              Highlights of 2010
January                2010 RegioStars finalists announced (RegioStars : the awards for innovative projects)
February               M. Johannes Hahn takes up office as new Commissioner for EU Regional policy.
                       First stakeholders conference to prepare EU strategy for the Danube region (in Germany).
                       Report on Impact of the "Action Plan to strengthen the supervisory role of the Commission
                       under shared management of structural actions" (Commission Communication).
March                  Commissioner Hahn visited places devastated by storm Xynthia in France.
                       Strategic Report 2010 on the implementation of the Cohesion policy 2007-2013 operational
                       programmes (Commission Communication).
April                  Ex post evaluation reports for the 2000-2006 ERDF programmes and debate on the final
                       report.
                       Conference on Europe's macro-regions at the Committee of the Regions (13 April).
                       First Informal Round Table with NGOs representing environment, sustainable development,
                       social inclusion (including Roma communities) and gender mainstreaming policy areas.
May                    2010 Regions for Economic Change conference (20-21 May) and award ceremony for the 2010
                       RegioStars winners.
                       First Forum for Outermost Europe which called for the maintenance and strengthening of a
                       specific EU policy in the outermost regions after 2013.
June                   Final stakeholders conference on EU strategy for the Danube region (in Romania).
                       Successful conclusion of the Simplification package with the entry into force of the modified
                       Structural Funds General Regulation and the ERDF Regulation.
                       "Train the trainers" seminar (Brussels) – managing and certifying authorities
                       JASPERS Stakeholders meeting (Sofia).
July                   DG Regional Policy publication "Investing in our regions: 150 examples of projects co-funded
                       by European Regional Policy".
                       Ex post evaluation reports on the URBAN and INTERREG Community initiatives (2000-
                       2006).
                       "Territorial cohesion: improving policy coherence on the ground" (3rd seminar of the Sub-
                       Committee of Territorial Cohesion and Urban Matters).
                       Signature of a Joint Declaration on Regional policy dialogue with Moldova (15 July).
August                 Analysis of "Annual Implementation Reports 2009" for the 2007-2013 programmes.
September              Flash Eurobarometer 2010: "Citizens' awareness and perceptions of EU Regional policy".
                       Modification of Commission implementing regulation n° 1828/2006.
October                Conference on "Celebrating 20 years of cooperation and looking beyond 2013" (Tournai).
                       OPEN DAYS 2010 with 5,900 participants in 127 seminars.
                       "Regional policy contributing to smart growth in Europe 2020" (Commission Communication).
                       "Cohesion policy: responding to the economic crisis - measures adopted in support of the
                       European Economic Recovery Plan" (Commission services working paper).
                       Homologues group meeting (Stockholm) – national audit authorities
                       XVI Conference of the Presidents of the Outermost regions in Tenerife.
November               Fifth Report on economic, social and territorial cohesion (Commission Communication).
                       Joint Conference on Micro-finance in Europe (EPMF, JASMINE, CIP).
                       Annual conference on JEREMIE and JESSICA: "Towards successful implementation".
                       Exchange of letters of intent with Chile establishing a dialogue on Regional policy.
December               Adoption of EU strategy for the Danube region (Commission Communication).
                       Visit by the First Minister and Deputy First Minister of Northern Ireland to President Barroso.
                       The visit included discussions on the possible construction of a "Peace Building and Conflict
                       Resolution Centre" in Northern Ireland. If the project goes ahead, it is likely to be on the basis
                       of a contribution from the PEACE programme.


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1. POLICY ACHIEVEMENTS: COHESION POLICY
In 2010, DG Regional Policy (DG REGIO) delivered on its operational priorities set for the year in its
Management Plan2. These priorities were the following:
    To achieve sound and effective management of EU resources as the key partner of Member States, their
    regions, and candidate countries for Cohesion policy: quality of interventions; absorption capacity; good
    governance.
    To demonstrate the added value and efficiency of Cohesion policy and EU regional development model.
    To contribute to the developments of Cohesion policy - including from 2014 -in the context of Treaty
    provision on territorial cohesion and of the integrated vision for the Europe 2020.
Cohesion policy continued to make significant progress towards its long term and multi-annual objectives. As
a development and investment policy, Cohesion policy has demonstrated its effectiveness in delivering
concrete results in the regions through its financial instruments and in helping Member States and regions to
recover from the crisis (see section 1.1 below). It has consolidated evidence on its added value and
achievements to date (section 1.2), and on its potential to bolster the Union's strategy and long term
objectives (section 1.3).


1.1.            Achieving sound and effective management of EU
                resources
1.1.1.          Sound financial management
Sound financial management implies that budget appropriations must be used in accordance with the principles
of economy (resources made available in due time, in appropriate quantity and quality and at the best price),
efficiency (the best relationship between resources employed and results achieved) and effectiveness (attainment
of objectives set and achievement of intended results):
    Economy: Cohesion policy is delivered through shared management with agreement on multi-annual
    development programmes between the Commission and the Member States every 7 years. This process
    means that resources are allocated based on strategic plans and detailed reflection on how the resources
    will lead to development of the regions and Member States. These agreed plans ensure that sufficient
    resources are made available in good time to the right objectives. The last such agreement on programmes
    took place in 2007 for the period up to the end of 2013. DG Regional Policyensures on an annual basis
    that programmes operate efficiently and that resources are paid to Member States speedily once eligible
    claims are made. DG Regional Policyalso ensures that the plans remain relevant to changing economic
    contexts and approves modifications to programmes when there is a clearly demonstrated need. A further
    task for DG Regional Policyto ensure the economy of Cohesion policy is its approval of major projects.
    These projects are of a strategic nature because of their size and merit a particularly close examination to
    ensure the appropriate amount of resources is allocated to the most important projects. Desk officers of
    DG Regional Policycarry out this examination supported by JASPERS and independent experts.
    Efficiency: the 769 members of staff in DG Regional Policy support the operation of the 334 current
    Operational Programmes, the closure of 379 ERDF 2000-2006 programmes and the management and
    closure of over 1,000 Cohesion Fund projects, and evaluate and analyse the overall policy. DG Regional
    Policy staff managed payments amounting to EUR 30.5 billion in 2010. Management costs for national
    authorities related to Structural Funds have been recently surveyed and additional studies have been
    launched to evaluate the administrative costs at the level of beneficairies of the co-funded projects.
    Several regulatory simplifications have been adopted in 2009 and 2010 to reduce the administrative
    burden. For the future programming period, the conclusions of feasability studies have been discussed
    with Member States to develop national clearing houses and create electronic intelligent portals accessible
    to beneficiaries of national/EU funds. This demonstrates the efficiency of the management of Regional
    Policy. In 2009 and 2010, DG Regional Policy has been working to develop a unit costs database for
    major infrastructure projects. This new initiative will further demonstrate and reinforce the efficiency of
2   http://ec.europa.eu/dgs/regional_policy/document/amp2010_en.pdf


Regio_aar_2010_final                                                                                       Page 3
                                                                                                          1- Policy achievements


    the policy. For the future, it is DG Regional Policy's intention to propose that output indicators reported
    by the Member States and regions should be linked to reports on the categorisation of expenditure which
    will strengthen information on the efficient use of the funds.
    Effectiveness: Assessing the attainment of objectives set and the achievement of intended results is
    essentially a task for evaluation. In a medium term policy such as Cohesion policy evaluation there is
    always a timelag between the expenditure of resources and the result achieved. In 2010, the ex post
    evaluations of the ERDF in 2000-2006 were published by DG Regional Policy and have influenced the
    content of the 5th Cohesion Report. The ex post evaluation of the Cohesion Fund/ISPA will be finalised
    in 2011. However, in order to obtain the most up-to-date analysis on the effectiveness of the policy in the
    current, 2007-2013 period, two initiatives were piloted in 2010. In the first, Member States and regions
    agreed to report on certain core indicators (mostly outputs) which facilitate the comparison and can be
    aggregated to the EU level. The first reports (based on 2009 – the first year when there was significant
    expenditure in the 2007-2013 period) were transferred to the Commission in June 2010. While there were
    some deficiencies in the quality of reporting, these were fed back to the Member States concerned and
    DG Regional Policy is confident that the quality of reporting will improve in 2011 and future years3. A
    second new initiative was putting in place an Expert Evaluation Network to deliver policy analysis on the
    performance of Cohesion policy in each Member State. The Network delivered its first set of reports in
    2010 and has now been put in place for the next 3 years. In this way, DG Regional Policy has put in place
    systems to obtain data on the effectiveness of the policy which it can use in its ongoing management of
    the funds in order to continuously improve their performance.
In 2010, the European Court of Auditors issued several special reports to assess the performance of EU
investments concerning rail infrastructures, supply of water for domestic consumption and the support to
research infrastructures. The findings and recommendations of these audits have been presented and
discussed with the European Parliament and the Commission (see section 3.1.1.4.A). Moreover, DG
Regional Policy has developed reflexion papers in 2010 to launch first performance audits in 2011 on a pilot
basis, drawing expertise from its various operational and audit services. Such performance audits include, as
preliminary possible scopes, technical assistance measures (oriented for example towards capacity building in
the Member States) and the selection of operations.

1.1.2.          A good budgetary execution reflecting progress in 2010
Regional policy represents one of the core policies of the Union and comprised almost one-quarter of the
total EU budget in 2010. It is therefore essential that the resources devoted to Cohesion policy be used to
best effect, and that the principles of sound financial management are rigorously applied. Budgetary
execution of the 2010 Commission budget was excellent for Regional policy (EUR 30,557 billion was paid
out); it amounted to 106% of the initial budget allocated to Regional policy, since the latter was increased
on three occasions in 2010. Financial figures by operational activity are presented in the table below and in
annexe 3.
                          DG Regional Policycommitments and payments in 2010
                                             (in EUR million)
          Title 13: Regional policy (budget)              Commitments                                          Payments
13.01        Administrative expenditure                              18.41                                                    18.01
13.03        European Regional Development Fund                  28,228.33                                                22,090.79
             and other regional operations
13.04        Cohesion Fund                                       10,180.11                                                 7,956.60
13.05        Pre-accession operations related to                    408.13                                                   478.94
             structural policies
13.06        EU Solidarity Fund                                      79.91                                                    13.02
                                            TOTAL                38,914.90                                                30,557.37




3   Annexe 7 on Impact and Result indicators presents data from macro-economic models, from evaluations and from the
    reporting against the core indicators. Sources for all the data are presented. The models and evaluations are all published on the
    DG REGIO website.


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                                                                                                                                                        1- Policy achievements


For the first time the bulk of the payments in 2010 related mainly to the implementation of the 2007-2013
programmes (EUR 25.55 billion of interim payments, compared with EUR 9.42 billion in 2009). While in
2009 the emphasis had been on increasing advance payments in order to boost cash flow to the relevant
authorities in the Member States, the 2010 level of intermediate payments (payments to reimburse real
expenditure incurred on the ground) demonstrates an overall good progress on the ground in implementing
the programmes. This finding is reflected in the rate of cumulative payments to the 2007-2013 programmes
which, at the end of 2010 represented 22% of allocations for the whole period, with a varied intensity (see
table below).

                                                     Financial implementation 2007-2013 by countries
                                                         All Funds (ERDF / Cohesion Fund / IPA)
                                                                 (EC payments in % of the decided amounts)


  40%
                                                                                                                                                                                           35%
  35%                                                                                                                                                                               34%

  30%                                                                                                                                                                         30%
                                                                                                                                                                   28% 28%
                                                                                                                                                 27% 28% 28%
                                                                                                                    24% 24% 24%       25% 25%
  25%                                                                                       23% 23% 23%
                                                                                      22%
                                                                            21% 21%
                                                                  20% 20%
                                                            19%
  20%                                         18% 18% 18%
                                    16% 17%
                              15%
                        14%
  15%         13% 13%
        11%
  10%

   5%

   0%
        MK RO RG*       IT    CB* BG DK       LU   MT HR    NL    SK   TR   CZ   PT   HU    FR           AT    LV    PL     ES   GR   UK    SI   BE    SE    CY     FI   DE   IE    EE     LT

                                                                                                                                                         *CB: Cross-borders, RG: inter-regional




Leverage effect of EU funds
The Commission contributes to the funding of the
                                                                                                                 Certified costs declared to the Commission
programmes on the basis of co-financing rates. Since                                                                 (2007-2013programmes - ERDF / Cohesion Fund)
2007, total expenditure incurred by the final                                                            70
                                                                                              Billions




beneficiaries for the 2007-2013 programmes (both for                                                     60

ERDF and Cohesion Fund) and certified to the                                                             50

Commission has amounted to EUR 60.59 billion,                                                            40

increasing steadily year on year with a big jump in                                                      30

2010. On this basis the Commission has paid back                                                         20
EUR 36.42 billion.                                                                                       10

This graph shows that the effective start of                                                              0
                                                                                                                     2007               2008                2009               2010
implementation of the programmes has recently                                                                 Total costs incurred by final beneficiairies, certified and declared to EC
boosted investments on the ground.                                                                            Interim payments paid by EC




1.1.3.            Facilitating the high quality implementation of programmes
As ERDF and Cohesion Fund have been programmed together for 2007-2013 programming period, it is
advisable to present management achievements concerning the progress of the implementation of the
programmes without distinguishing each Fund; while the specificities related to ERDF and Cohesion Fund
are presented in further sections.
DG Regional Policy completed an overview of the state of play of implementation for each programme for
the current programming period, based on the following common criteria:
    progress in project selection procedures,
    major projects preparation and implementation,
    financial engineering instruments: setting-up and investment,
    payments to beneficiaries.


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                                                                                                 1- Policy achievements


Based on these criteria, the level of implementation of operational programmes has been categorized as good,
acceptable, poor or critical. As shown in the chart below, 73% of the 2007-2013 decided amounts have been
implemented satisfactorily (17% good, and 56% acceptable). Furthermore, as programme modification is
now simplified, Member States have on numerous occasions been able to make the necessary adjustments
within priorities of the programmes. Portugal represents a good example of this, where actions in support of
energy efficiency and renewable energy investments in the housing sector were implemented. Similarly,
several regions in Spain modified selection criteria in order to introduce a JEREMIE (Joint European
Resources for Micro to Medium Enterprises) facility offering loans to SME's.
        Operational implementation ERDF/CF 2007-2013  However, these overall good results should not mask
                                                      some weaknesses. Indeed, ERDF-Cohesion Fund
         (DG REGIO's assessment, based on decided amount)

                 critical
                   7%           good
                                                      programmes and projects representing 7% of all 2007-
                                 17%                  2013 decided amounts, are assessed as being at a
       poor
                                                      "critical" level of implementation. The main difficulties
        20%                                           are concentrated in five Member States as well as in
                                                      European Territorial Cooperation (ETC)4. The main
                                                      issues stem from deficiencies in the administrative
                                                      capacity of managing authorities (lack of national
                                                      funding, shortage of administrative resources, high staff
                                                      turnover, lack of political steer, complexities in the
                                                      organisation, lack of control activities…) and delays in
                                                      the launching of public procurement procedures; all
                             acceptable
                                56%                   these weaknesses led to strong delays in the selection of
                                                      projects and implementation of the programmes
concerned. In response to this situation, DG Regional Policy services adopted a hands-on approach in 2010
to assist the responsible authorities through many technical meetings, project visits, advice on specific
problem areas, and the setting up of task forces to follow up on implementation of EU funds. The
Commission also proposed a comprehensive set of measures - the "EU Investment delivered initiative" –
including the set up of action plans, to address the specific situation in Romania and Bulgaria:
    for Romania, measures to counter the critical situation in terms of absorption, caused by the lack of
    administrative capacity, implementation difficulties as well as the consequences of the crisis;
    the specific problem of administrative capacity in Bulgaria has also been addressed by enhanced
    cooperation with JASPERS and the Commission has additionally encouraged the Bulgarian authorities to
    involve International Financial Institutions, notably the European Investment Bank, the World Bank and
    the European Bank for Reconstruction and Development in capacity building.
In addition, DG Regional Policy services have assessed as "poor" the implementation of several programmes
totalling 20% of the decided amount for the programming period (see chart above). These programmes
concern eleven Member States and ETC5. The main weaknesses identified by DG Regional Policy services
range from delays in selection of projects/implementation of programmes, to problems with timely
preparation of major projects, delays in evaluation activities/availability of core indicators, unbalanced
implementation of priority axes, lack of financial flows to beneficiaries (for financial engineering
instruments), or even limited cooperation for some ETC programmes.
The 2010 Strategic Report on the progress in the implementation of the Cohesion programmes 2007-20136
marked an important contribution to transparency and accountability in the delivery of the policy objectives -
especially the contribution to high level EU objectives. The report also gave a clear picture of the type of
projects being selected. More than one third of the total budget had been allocated at the end of 2009 to
projects in areas such as promoting research and innovation in small and medium-sized enterprises, clean
urban transport, education and health infrastructure.


4   RO (40% of the number of operational programmes of this country assessed as critical), BG (20%), EL (20%), IT (14%), SK
    (11%), ES (4%) and ETC (4%).
5   BG (40% of the number of Bulgarian programmes), CZ (35%), DE (6%), ES (4%), FR (26%), EL (30%), HU (8%), IT (28%),
    LV (100%), RO (40%), SK (11%) and ETC (6%).
6   COM (2010) 110 final Commission Communication "Cohesion policy: Strategic report 2010 on the implementation of the
    programmes 2007-2013" of 31 March 2010.


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                                                                                                  1- Policy achievements


Progress in key sectors such as R&D and innovation is generally positive. Evidence of this was given in a
2010 policy paper on innovation by the Expert Evaluation Network 2007-20137. Member States developed
novel measures in the "innovation policy" area. These measures can be broadly classified under three policy
areas: innovation-friendly environment; knowledge transfer, innovation poles and clusters; boosting applied
research and product development.
Some illustrative examples of actions carried out are:
              Policy area                      Country                                Description
Innovation-friendly environment            France                Development of Regional Innovation Strategies in all
                                                                 French regions (for the first time French regions have
                                                                 carried out such an exercise which is expected to have a
                                                                 medium-term impact beyond its impact on the
                                                                 implementation of ERDF OPs)
Knowledge transfer, innovation poles       Spain                 Projects boosting the transfer of research results to the
and clusters                                                     business sector: Grants aimed at stimulating business RD
                                                                 demand projects by means of agreements between
                                                                 research and technological centres (applicants or
                                                                 implementing entities), which have obtained suitable
                                                                 research results, and the firms which may benefit from
                                                                 these results (co-financing entities).
                                           Estonia               Innovation Voucher Programme - a new measure aimed at
                                                                 providing flexible support to SMEs to acquire services
                                                                 from research centres.
Boosting applied research           and    Netherlands           C-energy, generating energy and electricity through tides
product development                                              and waves in the waters of Zeeland. It is an innovative
                                                                 combination of the development of new technologies
                                                                 through collaboration between of companies and
                                                                 knowledge institutes, in the context of future energy
                                                                 scarcity.


Example of ERDF intervention in an innovative project to foster competitiveness and growth in
Berlin (Germany)
 Projekt Zukunft - Project Future - is an example of an innovative project which aims to strengthen Berlin's
international reputation as a competitive and attractive business location. It seeks to support the media, ICT and
creative businesses by linking these with already established scientific, political and management structures. Since its
creation in 1997, Projekt Zukunft has become an important communication and support network for the information
and knowledge society of Germany's capital. The project focuses on strengthening Berlin's competitiveness by fostering
technological, economic and societal innovation and improving the general conditions for the city's growth
industries. The programme shall support and facilitate the network with approximately EUR 3.5 million between 2007
and 2013 (in 2010 approximately EUR 0.7 million); investments of a total of EUR 7.0 million are foreseen for the
period 2007-2013. It is estimated that Projekt Zukunft will leverage additional investments of approx.
EUR 300 million (private investments or other national programmes). EU funding: EUR 1.5 million (from 2007 to
2010) The programme has supported and facilitated the network with approximately EUR 3.1million since 2007 (in
2010 approximately EUR 1.5 million); investments of a total of EUR 7.0 million are foreseen for the period 2007-
2013. It is estimated that Projekt Zukunft will leverage additional investments of approximately EUR 300
million (private investments or other national programmes).                EU funding: EUR 1.5 million (from 2007 to
2010)



1.1.4.          Helping Member States/regions to recover from the crisis
On 25 October 20108, the Commission recognised that Cohesion policy-related measures within the EU
Recovery Plan9 (adopted in November 2008) have revealed positive impacts one and a half years after their
adoption. While Cohesion policy is long-term in nature and addresses structural and development needs, it
has demonstrated its flexibility in ensuring that all Cohesion policy resources are mobilised to support
national recovery efforts — even providing decisive help in breaking the vicious circle created by the credit
7http://ec.europa.eu/regional_policy/sources/docgener/evaluation/pdf/eval2007/expert_eval_ntw_inception_report_synthesis.pdf
8   See document SEC(2010) 1291 final of 25.10.2010
9   See DG Regional Policy Annual Activity report 2009, page 3


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                                                                                                1- Policy achievements


crunch. Cohesion policy has offered a unique resource to provide growth impetus to the economy and
minimize the social impact of the crisis.
One of the planks of the Commission's strategy for gearing Cohesion policy to respond to the crisis has been
the Commission's readiness to work with Member States to examine changes to programmes with a view to
addressing new needs, simplifying delivery and speeding up implementation of established priorities. This
approach continued to remain relevant in 2010. In the course of the year the Commission adopted a total of
74 modifying decisions (57 for ERDF and Cohesion Fund and 17 for IPA) of which a substantial proportion
were crisis-related. Actions to help Member States and regions recover from the crisis also included extension
of the scope of eligible expenditure in strategic areas.
The adoption of the so called third Simplification package10 has helped make significant simplifying
implementation of the programmes and boosting absorption of the funds, while reducing administrative
burdens on beneficiaries, through the following measures: introducing one single threshold for the definition
of a major project in ERDF and Cohesion Fund, possibility to cover major projects by more than one
operational programme, availability of financial engineering instruments for energy efficiency and renewable
energy measures, simplification of the calculation and the monitoring of the revenue generated by a project,
simplification of the procedure to revise programmes and accelerate payments for projects based on revised
programmes, simplification of information required for annual reporting on the financial implementation of
an operational programme, additional pre-financing installment for 2010 for the Member States worst hit by
the crisis in order to allow for a regular cash flow and to facilitate payments to beneficiaries, extension of the
deadline for the automatic decommitment of the 2007 annual budget commitment to improve the absorption
of funds for certain operational programmes.


Specific support to Greece: the "Economic adjustment programme"
As regards the specific situation of Greece, following the emergency package for this country, an Economic adjustment
programme and related Memorandum have been decided, which include specific conditions related to the Structural
Funds. The release of the tranches of the financial assistance of the euro area Member States is based on the respect of
quantitative performance criteria, and a positive evaluation of progress made with respect to policy criteria, e.g. for
Cohesion policy. In this context, DG Regional Policy has actively participated in a series of meetings (starting in the
first semester of 2010) and several missions with DG Economic and financial Affairs in particular, and has intensified
the closer work with the Greek authorities on realistic scenarios on the implementation and effectiveness of Cohesion
policy. DG Regional Policy services provide advice and support on priorities set by the Greek Government. The
support is focused on strategic guidance, definition of interventions, , and acceleration and preparation of major project
applications. Greece was able to meet the condition laid down in its Memorandum of Understanding concluded with
the International Monetary Fund, European Central Bank and Commission by achieving the year-end target for
presentation of payment claims and the submission of 10 major project applications.

1.1.5.          European Regional Development Fund (ERDF)
1.1.5.1.        Implementation of the 2007-2013 programming period on the ground
As shown in section 1.1.3. above, 2010 witnessed good progress in implementation of programmes also with
regard to the selection of individual projects and the signature of grant agreements for the allocation of EU
funds to beneficiaries. Progress was uneven though, so that in some Member States implementation
progressed very favourably while others experienced difficulties, amplified by the context of the economic
crisis. At the end of 2010, more than 56% of the total ERDF envelope decided for 2007-2013 was already
committed .
Major Projects (projects of a value exceeding EUR 50 million which need ad hoc approval from the Commission).
77 ERDF major projects were submitted in 2010 (out of an expected 98 submissions) and 44 major projects
were adopted. Major projects approved in 2010 relate mainly to management of household and industrial
waste, promotion of clean urban transport, railways (TEN-T), telephone infrastructures (including broadband
networks) and R&D infrastructure and centres of competence in a specific technology. Approximately half
(411) of the expected major projects for the entire 2007-2013 programming period (ERDF and Cohesion
10   Regulation (EU) No 539/2010 of the European Parliament and of the Council of 16 June 2010 amending Council Regulation
     (EC) No 1083/2006 of 11 July 2006


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                                                                                         1- Policy achievements


Fund) have been submitted to the Commission. This leaves further 400-420 major project applications to be
submitted by the end of 2013.
Financial Engineering
In 2010, financial engineering instruments for enterprises, set up under the JEREMIE initiative (Joint
European Resources for Micro to Medium Enterprises) and financial engineering instruments for urban
development and regeneration set up under the JESSICA initiative (Joint European Support for Sustainable
Investment in City Areas), attracted positive reaction from both Member States and regions.
The amendment of Regulation (EC) N°1083/2006 in June 2010 widened the scope of financial engineering
instruments that can now support interventions related to energy efficiency and renewable energy in
buildings in all EU regions. The first such fund in Europe was set up in Greece in July 2010.
DG Regional Policy is aware that some Member States and regions face significant challenges in the
development and implementation of financial engineering instruments. Indeed, for some Member States and
regions these instruments are a new form of assistance for public funds and they lack the know-how and
capacity to set up complex financing structures, requiring very technical negotiations with financial
institutions. On the other hand, financial engineering instruments also face competition with national or EU
funded grant schemes.
Therefore, in 2010 DG Regional policy assisted Member States and regions in the implementation of
financial engineering instruments. It prepared a comprehensive Guidance Note setting out the Commission's
reading of the applicable Regulations as well as best practice recommendations, regarding the key issues faced
by Member States and managing authorities when setting up and implementing these instruments, from the
initial decisions to using of legacy resources. The preparation of this note also offered the opportunity for in-
depth discussions with Member States and other stakeholders.
 Even though, as with other operations financed under Structural and Cohesion funds, conclusive
information regarding the amounts allocated to the operations and progress achieved on the ground can only
be drawn from the Annual Implementation Reports submitted to the Commission by 30 June pursuant to
Article 67 of Council Regulation (EC) 1083/2006, there is positive feedback from Member States and
managing authorities regarding the rolling-out of these instruments in 2010.
DG Regional Policy developed significant efforts in 2010 with a view to establish a comprehensive map of
existing financial engineering instruments supported with Structural Funds in nearly all Member States and
regions. This mapping will continue in the first half of 2011 and is expected to provide useful information to
support the Commission's proposals regarding the use of financial instruments in post 2013 Cohesion policy.

1.1.5.2.        Implementation of the 2000-2006 programming period
In 2010, the closure process started for most 2000-2006 ERDF operational programmes. Most of the related
closure documents were submitted by Member States in September 2010. The Commission must assess the
final report of each programme within 5 months of its submission; the closure process can then go on after
acceptation of the final report.
A closure task force, set up in autumn 2009, closely monitored the process, including the registration of
closure documents. The closure of operational programmes is an important moment and time-consuming
process involving audit and operational units of DG Regional Policy, to assess the quality of the results
delivered by programmes and to check the legality and regularity of final expenditure declared to the
Commission for reimbursement (final clearance of all payments made). Ex post audits are also carried out to
assess the residual risk of error in the programmes.
As of 25 March 2011, the Commission had closed 31 programmes, sent closure proposals to Managing
Authorities in respect of 33 programmes while the remaining 315 programmes will be closed in the coming
years (see status of closure in the chart below).




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                                                                                                              1- Policy achievements


                                        Status of the ERDF Closure 2000 - 2006
                                                    (as of 25/03/2011)
                400
                350                                                                        31
                300                                    113                                 33
   programmes




                250                                                      190

                200      379           355             157
                150                                                                       291
                100                                                      142
                 50                                     85
                                                                         23                                 33                 31
                   0
                         Total       Received      operational          audit          financial         closure        fully closed
                        Number         doc           analysis          analysis         analysis         proposal
                                                                                                                                    8
                                                                                                           sent

                Total Number     on-going    interrupted        approved          accepted      on hold          provisional        final

Operational analysis:: assessment of the final report; 'on going' means that the (operational or audit) analysis is on-going. This category
                       covers also those cases for which the analysis was initially interrupted by DG Regional Policy and resumed after
                       Member State reply was received.
Audit analysis:        analysis of the national independent audit opinion on the programme (Winding-up declaration);
Financial analysis:    treatment of the final payment claim ('provisional' corresponds to the number of programmes for which 'closure
                       proposals' were sent out; 'final' corresponds to the number of programmes 'fully closed', 'On hold' means waiting
                       for both the Final Report and Winding-up declaration to be approved. The financial information has already
                       been checked)

As regards the 2000-2006 Regional Innovative Actions Programmes, 24 were closed in 2010 bringing the
total number of programmes closed so far to 176. Only 5 programmes remain to be closed (2 in France, 2 in
Portugal and 1 in Italy) out of a total of 181 programmes adopted.

1.1.5.3.               Result indicators for ERDF
Output and result indicators are fixed in each Operational Programme. In 2007-2013 the ERDF and
Cohesion Fund are programmed together so it is not always possible to separate physical information related
to each fund. DG Regional Policy has developed some common "core indicators" in cooperation with the
Member States to enable aggregation of data at EU level. These core indicators are now reported on an
annual basis starting from 2010. Some of these core indicators for the ERDF (and also for the Cohesion
Fund and IPA) are reported on in annexe 7 of this report. DG Regional Policy also uses evidence from
independent on going and ex post evaluations; this is the case for the ex post evaluations of the 2000-2006
programmes delivered in 2010 as well as for the expert evaluation network 2007-2013 delivering analysis on
policy achievements and on thematic issues (like innovation in 2010). Therefore, the latest known results
highlighted in annexe 7 may concern also the 2000-2006 period, whereas the targets generally stem from the
programmes of the 2007-2013 period. The sources and the relevant programming period are indicated in the
footnotes to the tables.
As an example, see result indicators related to the additional capacity of renewable energy production for
which several Member States set targets and on which they reported results for 2007-2009, as well as the
number of research jobs created which nine Member States reported on.

1.1.6.                 Cohesion Fund (CF)
1.1.6.1.               Implementation of the 2007-2013 programming period
As regards the 2007-2013 period, the Cohesion Fund has been integrated into the ERDF multi-annual
programming cycle in 24 operational programmes in the 15 eligible Member States, including a specific



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                                                                                                     1- Policy achievements


phasing out Cohesion Fund programme in Spain. At the end of 2010, almost 50% of the total envelope
decided for 2007-2013 had been committed. Total payments, including advance payments represented 20.5
% of decided funds (execution rate).
Major projects
105 Cohesion Fund major projects were submitted in 2010, bringing the total of projects submitted since the
beginning of the programming period to 196. 60 Cohesion Fund major projects were adopted in 2010 out of
a total of 89 since the beginning of the period. The major projects approved in 2010 comprise mainly of
railways (TEN-T), motorways (TEN-T) and water treatment (wastewater) plants. At end-2010, 186
applications for grant support (ERDF and Cohesion Fund) which had received assistance from JASPERS
had been submitted to the Commission, of which 104 were approved.

1.1.6.2.        Implementation of the 2000-2006 programming period
As of 25 March 2011, almost one third of all
2000-2006 Cohesion Fund projects were closed:                                 Status of CF 2000-2006 Closure
367 out of a total of 1140 projects (see chart                                       (as of 25/03/2011)
below). The closure process will intensify in                         1200    1140

2011-2012 since the normal deadline for
expenditure on the ground was 31 December
                                                                                                             773
2010. In light of the financial crisis, the                           800
                                                           Projects


Commission authorised, in April 2010, the
extension of a limited number of projects to 2011
and 2012. Financial implementation of the                             400
                                                                                            367
projects which remained open generally
improved throughout 2010.                                                                                          76

There was a higher incidence of high risk projects                      0
(projects with a serious possibility of not being                            Total Number   Fully closed   to be closed (of
completed within the currently valid eligibility                                                            which closure
deadline) in the environment sector: 16% of high
                                                                                                            proposal sent)
risk projects for the environment sector
compared to an average of 13% covering all
sectors.


Example of Cohesion Fund intervention: Waste sorting goes high-tech - Celje (Slovenia)
The Regional Waste Management Centre project has helped to solve the problem of how to manage communal waste
and disposal of sludge from the wastewater treatment plant in Celje. Upon completion of the project, Celje will cater
for 31 municipalities representing some 250,000 residents. With the introduction of modern treatment methods, the
quantity of landfill waste in the targeted waste collection region is set to decrease by 62% in the long-term. The project
has also helped ensure that the treatment facilities at the waste management centre comply with European technical
and environmental standards covering waste and landfills. The funds invested were used for the construction of a
mechanical-biological treatment system for municipal waste; and the construction of a thermal treatment system for
municipal waste. The level of methane (CH4) and greenhouse gas emissions from landfills has fallen as a result of
reduced amounts of organic waste disposed of at landfill sites. One important feature is that a heat supply has been
generated, thus minimizing consumption of non-renewable energy and ensuring less reliance on fossil fuels.
                                                                        EU funding: EUR 20.3 million (from 2005 to 2010)

1.1.6.3.         Result indicators for Cohesion Fund
Result indicators have also been defined to measure the contribution of the Cohesion Fund to the
development of the trans-European transport network and to the promotion of sustainable development in
the EU. Some related targets and result indicators are presented in annexe 7. The forthcoming ex post
evaluation of the Cohesion Fund (2000-2006) identifies the following results:
    4,457 km of TEN-T road network built or reconstructed. Ten-T priority projects included 141 km of the
    Multi-modal axis Portugal/Spain – rest of Europe.



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                                                                                                   1- Policy achievements


     5,350 km of TEN-T rail network built or reconstructed, including 1,236 km of the high speed railway axis
     of South West Europe and 436 km of the railway axis Athina-Sofia-Budapest-Wien-Praha-Nürnberg.
     45 million additional people served by water supply and waste water treatment meeting EU requirements.

1.1.7.          Pre-accession interventions related to structural policies (IPA)
As regards management of programmes in the IPA countries during 2010, Turkey and the Former
Yugoslav Republic Of Macedonia had put in place for the first time and Croatia for the second time all the
necessary pre-requisites for effective implementation of IPA under the decentralised implementation system.
For the 2007-2013 period, EUR 56.2 million were paid out to Turkey in 2010, EUR 4.2 million to Croatia
and 35.8 million to IPA-Cross Border Cooperation. These mainly related to advance payments. 7 IPA-
regional development operational programmes were modified to include the financial allocations for 2010
and 201111. Following the modification of the programmes, the corresponding financing agreements were
signed and ratification procedures were concluded during 2010.
DG REGIO, with the active support of the EU Delegations focused on assisting candidate countries in
project preparation, selection of operations and on pushing forward implementation and enhancing the
capacity of implementing structures. In this context, 2 IPA major projects were adopted and 25 additional
major project applications were submitted in 2010. However, there is still an inadequate project pipeline and
project implementation remains slow, increasing the risk of underperformance (i.e. non compliance with the
N+3 rule). DG Regional Policy was also closely involved in assisting candidate countries with the
development of the regional development and cross-border cooperation components of the Pre-Accession
Instrument (IPA). The Council adopted a Draft Common Position on "Chapter 22" (for Cohesion policy) of
the enlargement negotiations with Croatia. As regards the two new candidate countries, Iceland and
Montenegro, special effort was devoted to preparing accession negotiations (Iceland) and disseminating
information on IPA requirements and preparation for the regional development component.
For potential candidate countries12, DG Regional Policy continued to assist in their progressive alignment
with the standards and policies of the EU in the fields of Regional policy through advice and guidance to
their national authorities.
Result indicators:
One of the main objectives of IPA is to assist candidate countries in building capacity for management of pre-
accession assistance aiming to prepare for Structural Funds. Therefore, one target is to reach a satisfactory
functioning of the decentralised implementation system under IPA regional development component, including
in particular public procurement. In 2008 and 2009, the conferral of decentralised management powers has been
formally decided by the Commission for the three candidate countries (Croatia, Turkey and the Former Yugoslav
Republic of Macedonia). The conferral of management powers for operational programme "Environment" in
Turkey was even modified to transfer procurement and payments functions from the Central Financing and
Control Unit to the Ministry of Environment. The functioning of the decentralised implementation systems is
verified by follow-up audits.
Example of IPA intervention: Greater Anatolia Guarantee Facility – GAGF (Turkey)
GAGF aims to increase the level of access to finance for micro enterprises and SMEs in the target regions (12 NUTS
II regions with income per capita below 75% of the Turkish national average as at 2001) through credit guarantees.
These guarantees will provide a risk sharing facility to financial intermediaries (FIs), thereby increasing the lending
capacity of commercial banks to micro enterprises and SMEs while reducing the collateral burden on SMEs. The
facility provides a customized structure that combines: a credit counter-guarantee scheme for micro loans, a credit
guarantee scheme for SME loans, and a co-financing mechanism provided by the European Investment Bank (EIB) on
a portfolio basis through FIs for the benefit of SMEs in the 12 regions concerned. In addition to credit guarantees, the
EIB will make available an SME Global Loan to FIs for the target regions, which will further increase SME access to
finance. The grant agreement was signed in 2010. The total EU grant contribution amounts to EUR 24 million,
leveraging up to EUR 500 million. A publicity event for the project launch took place in June 2010.                 IPA
period: from 2010 to 2015

11   Specific financial management of IPA regional development programmes: operational programmes were adopted in 2007. The
     initial programmes covering a three-year period (2007-2009) and the three-year allocations were extended in 2010 to cover
     additionally the period 2010-2011, and to cover additional budget years within the current financial perspectives.
12   Albania, Bosnia and Herzegovina, Serbia and Kosovo under UN Security Council Resolution 1244


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                                                                                          1- Policy achievements


1.1.8.          European Union Solidarity Fund (EUSF)
The EUSF is managed by DG Regional Policy with the objective of granting financial assistance to Member
States and countries negotiating their accession to the EU in the event of major natural disasters.
During 2010, the Commission received a total of 17 applications from 13 Member States and one country
currently involved in accession negotiations. This is the second highest number of applications in a single
year since the creation of the fund. 9 applications were approved by the Commission, 2 applications were
rejected as not meeting the criteria of the Regulation, while for the remaining 6 applications which were
received during the second half of 2010, the assessment and adoption procedures were still ongoing by the
end of the year. The total amount of aid approved for 2010 applications amounts to almost EUR 80 million
relating to the floods in Ireland of 2009, the mud and landslides on Madeira island and to storm Xynthia in
France of 2010. A grant of EUR 13.02 million was paid out by the Commission in 2010 in respect of the
serious flooding which affected Ireland in November 2009. In 2010, 4 Solidarity Fund cases were closed. The
Commission received final implementation reports for grants made in 2008 from the United Kingdom
(floods), France (storm Dean), Greece (forest fires) and Slovenia (floods). Two monitoring missions were
carried out to France (storm Klaus 2009) and Italy (Abruzzo earthquake 2009).
While the Fund has been working well, in particular as regards major natural disasters for which it was
initially set up, the experience gathered during recent years has confirmed that there is a need to further
develop the instrument. This issue will be addressed in a Communication on the future of the EU Solidarity
Fund which will be presented at the beginning of the second semester of 2011.
Result indicators:
Two result indicators have been chosen to measure the direct impact of EUSF interventions on population
and territories affected by major natural disasters: the number and percentage of population helped in
overcoming a crisis situation, and the percentage of the disaster-stricken area assisted through rehabilitation.
In 2010, 100% of the Irish population affected by the flooding of November 2009 have been helped by the
EUSF (i.e 1.7 million inhabitants) in 14 Irish counties (i.e two-thirds of the Irish territory) representing 100%
of the areas affected.

1.1.9.          Implementation of pilot projects and preparatory actions
In 2010, one preparatory action (PA) received additional ERDF allocation and two pilot projects (PP)
continued to be implemented with ERDF support.

The additional allocations concerned the pilot project "Enhancing cooperation through the promotion of EU
regional policy on a global scale" for an amount of EUR 1.5 million and the preparatory action "Promoting
micro-credit in Europe" for an amount of EUR 3 million. The funds allocated under the second pilot project
were transferred to a newly established European Micro-finance Facility by means of a crossed sub-
delegation to DG ECFIN in December 2010. Regarding the 2009 allocation (EUR 4 million), a grant
contribution agreement was signed with the EIF on 30 March 2010. In 2010, the Commission officially
launched a pilot project on a "Pan European coordination of Roma integration methods". The project covers
four main areas: early childhood education and care, self employment through micro-credits, raising
awareness among the Roma and non Roma population as well as tools and methods for evaluation and data
collection. The agreements with the beneficiaries were signed in June 2010 and EUR 2.02 million were paid
in 2010. Concerning the pilot project "Erasmus for elected local and regional representatives", EUR 0.259
million was committed and paid for a feasibility study.

                 Pilot projects (PP)                          Commitments (in EUR)        Payments (in EUR)
              Preparatory actions (PA)                          2009         2010           2009       2010
Enhancing cooperation through the promotion of EU                1,800,000    1,500,000       453,260   1,072,827
regional policy on a global scale (PP)
Pan European coordination of Roma integration methods             481,244     4,326,808             0   2,018,419
(PP)
Erasmus for elected local and regional representatives (PP)       259,117            0        129,558     129,559

Promoting micro-credit in Europe (PA)                                    0    7,000,000             0   2,000,000
TOTAL                                                            2,540,361   12,826,808       582,818   5,220,805



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                                                                                                  1- Policy achievements


1.2.            Demontrating added value and efficiency of Cohesion
                policy.
1.2.1.          Evidence of impacts and results of Cohesion policy through
                evaluations
DG Regional Policy delivered a significant body of work in the field of evaluation in 2010, not least with the
publication of the final reports of a series of ex post evaluations of ERDF programmes 2000-2006 as well
as on INTERREG and URBAN initiatives 2000-2006.
Evaluation has increased in quality and presents robust evidence of the impacts and results of Cohesion
policy so far. Some key achievements of Cohesion policy for the 2000-2006 period include: 1.4 million jobs
created; 2,000 km of motorway constructed; 4,000 km of rail; 14 million people gained access to cleaner
water; 38,000 research projects supported; over 800,000 SMEs supported. A macro-economic simulation,
undertaken in the context of the ex post evaluations, suggests that the entire EU - not just the major
beneficiaries - was better off as a result of Cohesion policy, notably because of increased trade effects. The
multi-level governance of Cohesion policy has also had positive spill-over effects on national and regional
administrative systems. Cohesion policy during the 2000-2006 programming period has had a positive impact
on the level of GDP and employment in the Member States and regions where investments were greatest13.
According to the results generated by the HERMIN model, investments undertaken in these regions during
the 2000-2006 period, have led to: 1) an average increase in GDP of 1.2% every year during 2000-2009; 2) a
rate of return of EUR 2.1 for each euro of Cohesion policy investment; 3) an expected increase in GDP of
0.4% and in employment of 0.2% up to 2014 (i.e after completion of the programming period), indicating the
longer-term sustainable impact of the policy. The ex post evaluation of the INTERREG 2000-2006
initiative14 included a comprehensive overview of all 81 programmes, and an in-depth examination of a
sample of 16 programmes and 80 projects. Because many of the activities are rather intangible, it was not
possible to quantify impacts, but the evaluation demonstrated the very significant amount of cross-border
activity which was supported and made recommendations on how this could be evaluated in the future. An
ex post evaluation of the URBAN 2000-2006 initiative15 highlighted that positive changes for the area as a
whole or at least stabilisation were noted in almost all the case studies and stakeholders attributed these to
URBAN.
The 2007-2013 programming period is also being assessed by an "Experts evaluation network" which
reported for the first time in 2010 on the initial results of the programmes. It was concluded that the
Structural Funds are likely to play an increasingly important role over the remainder of the current period in
preventing regional disparities across the EU from widening further as national funding for development is
constrained by the priority given to reducing budget deficits. On innovation, the network also concluded
that "the ERDF provides important support for R&D and Innovation policy across the EU not only in
financial terms but also in stimulating the development of more coherent strategies at regional level which
take into account local characteristics and the needs of business. The results as regards grants to research
institutions and firms for R&D and Innovation are generally positive in all countries. They have eased access
of SMEs to research and innovation and have created a collaborative context which in most cases is self-
sustainable".
The Fifth Cohesion Report summarised available evidence on the performance of Cohesion policy. It also
provides detailed pictures and data, in particular the evolution of growth in the EU. It shows that growth of
real GDP per head has been particularly high in the Baltic States as well as in regions hosting the national
capital or a large city although the crisis has disrupted this process. But strong upwards trends are also
frequently observed in regions with a low GDP in Romania and Bulgaria.

1.2.2.          Improving evaluations as a sound basis for future decisions
Evaluations seek to answer some fundamental questions: what would have happened in the absence of
support? How can effectiveness be improved? Assessing the quality of Cohesion policy interventions, be they
national/regional operational programmes, cross-border programmes or major projects, is a challenging task
13   IE, ES, EL, PT, eastern Germany, Italian Mezzogiorno, CY, SI, ,CZ, MT, EE, SK, HU, LT, LV and PL.
14   http://ec.europa.eu/regional_policy/sources/docgener/evaluation/pdf/expost2006/interreg_final_report_23062010.pdf
15   http://ec.europa.eu/regional_policy/sources/docgener/evaluation/pdf/expost2006/urbanii/final_report.pdf


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                                                                                                    1- Policy achievements


as no single method is suitable across all types of intervention and all contexts. Building on past experience
with different types of evaluations, DG Regional Policy embarked upon an innovative approach to evaluation
in 2007, made up of realism on data availability, the use of thematic evaluations, investing in efforts to build
up a picture over time and over successive evaluations, as well as transparency and open debate on the
findings of evaluations. Evaluation is recognised as a fundamental tool for better policy making but it makes
sense only if it is followed by discussion and if its results are disseminated16. High quality evaluations are
critical for feeding into the reflection process on improvements and on the future of the policy, by
showing in a transparent manner the results obtained so far and the weaknesses of the policy's delivery
mechanisms at all levels (see the Fifth Cohesion Report and its use of evaluation results).


Example of evaluation: Mid-term evaluation of the Midi-Pyrénées Operational Programme
In 2010 the Midi-Pyrénées Region (FR) launched the mid-term evaluation of the ERDF Operational Programme for
2007-2013 aiming to boost innovation and the knowledge economy, promote sustainable development and the
prevention of climate change, and strengthen territorial cohesion and the accessibility of the region. The study was
carried out throughout 2010 by EDATER that was requested to draw up evidence-based conclusions and operational
recommendations to guide decision-makers in reviewing the programme in itself. The relevance, coherence and
efficiency of the Operational Programme were analysed with a thematic focus on innovation, ICT, urban development,
water and risks management. To address all the evaluation questions, a mix of methods and tools were used, including
desk research and a beneficiary survey. The final report provides useful and interesting insights into implementation of
different axes, their main constraints and positive aspects. Overall the study found that the Operational Programme has
positively influenced the regional economy by supporting sectors mainly affected by the economic crisis and boosting
structural changes. However, on the basis of the detailed analysis of each axis, the evaluators identified some critical
aspects to be addressed in the mid-term revision of the programme. The evaluation findings were presented to and
discussed during the Monitoring Committee meeting of November 2010 by the main stakeholders (regional actors and
European Commission). The evaluation provided the basis for the modifying decision of the programme at mid-term,
the request for which was approved during the same Monitoring Committee meeting.


1.3.            Developing Cohesion policy to meet future challenges
1.3.1.          Highlighting contribution of Cohesion policy to the EU's long term
                objectives and aligning the policy with the Europe 2020 strategy
The 2010 Strategic Report summarising the 27 national reports from the Member States on the
contribution of their programmes towards achievement of Cohesion policy, competitiveness and job creation
objectives, showed that Member States are making progress on delivering Cohesion policy objectives. The
bulk of Cohesion policy resources (around EUR 230 billion) have been earmarked for investment in the key
areas of the growth and jobs agenda. Implementation of the agreed strategies is proceeding satisfactorily. The
Commission's report highlighted important and timely messages on programme implementation by thematic
field: progress has been positive in important areas such as Research & Development (R&D), innovation,
lifelong learning and active labour market policies, but more should be done to accelerate project
implementation in the rail sector, in key energy and environment investments, in the digital economy, and in
support of social inclusion. The Commission called on the Member States to target these priority areas, if
necessary, by putting in place action plans to overcome the delays. The report also delivered messages on the
potential of the Structural Funds to contribute to EU objectives and to accelerate the exit from the economic
crisis.
The Budget Review Communication of November 201017 called upon Cohesion policy to play a key role to
achieve the objectives of Europe 2020. Indeed, it is particularly well placed to translate the strategic
objectives of Europe 2020 into development on the ground. As the Communication explains, "The explicit
linkage of Cohesion policy and Europe 2020 provides a real opportunity to both continue to help the poorer regions of the EU to
catch up, and to develop further Cohesion policy into an important enabler of growth for the whole of the EU." Regional
policy, through ERDF and the Cohesion Fund, will develop and promote actions related to several flagship
initiatives of Europe 2020, like the "Innovation Union" (Communication of 6/10/2010 “Regional policy
16   More     than    100     reports   are    publicly    available   in the searchable       Policy    Learning    Database:
     http://ec.europa.eu/regional_policy/projects/practices/index_en.cfm
17   http://ec.europa.eu/budget/reform/library/communication/com_2010_700_en.pdf


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                                                                                                    1- Policy achievements


contributing to smart growth in Europe 2020"), "A digital agenda for Europe", "Resource efficient Europe"
(Communication of 26/1/2011 on “Regional policy contributing to Sustainable growth in Europe 2020”),
"An agenda for new skills and jobs", "An industrial policy for the globalisation era" (access to finance for SMEs), and
the "European anti-poverty platform" (i.e. addressing amongst others the situation of the Roma population,
investments in housing for marginalised communities, EP pilot projects Roma integration).
The Fifth Report on Economic, Social and Territorial cohesion18 (Cohesion report) has been one of the
strategic initiatives of the Commission in 2010. After an intensive preparation process led by DG Regional
Policy, the Cohesion report was adopted by the Commission on 9 November 2010. This document
represents a significant milestone towards the future as it sets out options on future Cohesion policy. It
shows that the EU's Cohesion policy has made a significant contribution to growth and prosperity and
promoting balanced development across the Union. In view of the substantial economic and social
developments over recent years, the policy now has to address new challenges. In the wider context of the
EU budget review, the report underlines that future Cohesion policy investments must be closely aligned to
the objectives of Europe 2020. It also proposes introducing much stricter conditions as well as incentives to
ensure the effective use of the funds allocated to Cohesion policy and an increased focus on results.
From November 2010 to January 2011, a large public consultation on the future of Cohesion policy took
place, giving hundreds of contributors reacting on the Commission's 5th Cohesion report. 443 contributions
were received from the full range of Cohesion policy stakeholders: Member States, regional and local
authorities, economic and social partners, European interest organisations on territorial issues, civil society,
citizens, private companies, academic and research institutions. The Commission has pursued the dialogue
with the stakeholders with the Cohesion Forum in January, involving key stakeholders, and it intends to
present the results of the public consultation during the first semester of 2011.
At the same time the Commission continued the discussions with the informal platform for discussion of the
main building blocks for future Cohesion policy with the High Level Group of experts and policy makers.
Other institutions, in particular the European Parliament (REGI Committee) and the Committee of the
Regions (COTER Commission), have also shown a keen interest in its work and have been regularly
informed about the outcomes of the discussions.
These 2010 achievements form the basis to build on for the new regulatory framework for Cohesion policy
post 2013 which will be adopted in 2011.

1.3.2.          Pioneering new ways of territorial cooperation: the macro-regions
The effectiveness of Cohesion policy also lies in its multi-level governance and its potential to respond to
needs and common challenges facing specific countries and regions. Given the inter-linked nature of many of
these challenges, cooperation within a 'macro-regional' framework is intended to produce more effective
coordination.
The adoption by the Commission of the EU strategy for the Baltic Sea area in June 2009, following a
request by the European Council, represents a good illustration of this. This Strategy started to produce its
first results in 2010. One year into the implementation phase, the Strategy is progressing as planned.
Following the First Annual Forum held in October 2010 in Tallinn, the Commission published a report on
implementation in December. 2010 was an important first year, where concrete steps have been taken to
ensure that the Baltic Sea Region will further develop a coordinated approach to a sustainable environment,
improved economic conditions, good accessibility, and better safety and security. The Strategy has
encouraged many stakeholders to develop new projects to fulfil these goals. However, several challenges
remain, among them the most significant being: aligning the available funding with the Strategy; promoting
the involvement of regional and private actors; and creating genuinely cooperative links across the priority
areas.
Drawing closely on the experience of the EU's Baltic Sea Region Strategy, EU Member States formally
requested the European Commission to draw up a tailor-made EU strategy for the Danube Region by the
end of 2010. The strategy was adopted by the Commission on 8 December 2010. This initiative seeks to
develop the region's significant economic potential while improving environmental conditions. By
establishing a framework for long-term cooperation on a wide range of issues, the Strategy will play a key role
in improving sustainable transport, linking energy systems, protecting the environment, preserving water
18   http://ec.europa.eu/regional_policy/sources/docoffic/official/reports/cohesion5/index_en.cfm


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                                                                                     1- Policy achievements


resources and stimulating the business climate. With its focus on sustainable growth, it will also make an
important contribution to achieving the Europe 2020 goals. The Strategy will provide added value, by
ensuring coherence between different policy areas, and greater coordination between participating states.
While there are no new funds for implementation of the Strategy, closer alignment of programmes adopted
by these states should mean that the EUR 100 billion available to the region in the current financial period
achieves greater impact (the Strategy contains a detailed action plan). The main aim is to show how macro-
regional cooperation can help tackle local problems.




Regio_aar_2010_final                                                                                  Page 17
2. MANAGEMENT AND INTERNAL CONTROL SYSTEMS
2.1.               Management within DG Regional Policy
2.1.1.             Management modes
DG Regional Policy operates within several management modes:
     Shared management: European Regional Development Fund (ERDF) and Cohesion Fund are
     implemented under shared management19. Implementation of the instruments vis-à-vis the beneficiaries is
     delegated to the Member States, while the Commission supervises the work of the Member States and is
     responsible for implementation of the Budget. The cross-border component of IPA (see below) is also
     subject to shared management;
     Decentralised management: Since 2007, IPA has become the pre-accession instrument. It is split into
     five components of which three – regional development, human resources development and cross border
     cooperation – are the main focus for Cohesion policy. The IPA pre-accession programmes (except for
     cross-border cooperation) are implemented under decentralised management, i.e. implementation vis-à-vis
     the beneficiaries is delegated to the authorities of the beneficiary country;
     Centralised management: A relatively small part of DG Regional Policy's activities comes under
     centralised direct management. This mainly concerns contracts for supplying services to DG Regional
     Policy, for example, studies and information activities and grants signed with the European Investment
     Bank / European Investment Fund regarding financial engineering instruments. In addition, specific
     programmes are managed under centralised indirect management for Regional Programmes for
     Innovative Actions and the EU Solidarity Fund.
     Joint management only for the International Fund for Ireland.
The table below presents the 2010 payments according to the different management modes.
 2010 payments by management mode                    Total payments                            of which
           (EUR million)                                                     Advances           Interim            Final
Shared management          99.33%
ERDF 2000-06                                                   1,678.7                   0         1,586.0              92.7
Cohesion Fund 2000-06 (*)                                      2,688.7                84.2         2,114.0             490.6
ERDF/Cohesion Fund 2007-2013                                  25,950.9               403.8        25,547.1                 0
IPA Cross-Borders                                                 35.8                35.6             0.2                 0
Decentralised management               0.25%
ISPA (Croatia)                                                     14.7                 0.6            14.1                 0
IPA - Regional development                                         60.4                34.8            25.5                 0
Centralised management                0.32%
Indirect:
   EU solidarity Fund                                              13.0
   Regional Innovative actions programmes                          14.6
Direct:
   Pilot Projects / Preparatory Actions                             5.2
   Technical assistance                                            65.4
Joint Management                     0.10%
   International Fund for Ireland                                 30.0
TOTAL                               100 %                     30,557.4
(*) including ex-ISPA




19   Please refer to the Annual Activity Report 2008 for an analysis of the improvements introduced for the programming period
     2007-2013 regarding the management and control requirements (point 2.1 page 25).


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                                                                            2- Management and Internal Control Systems


As regards cross-sub delegations, in 2010 a very limited part of the budget was executed by cross-sub
delegation to the Directors General of DGs RELEX, ESTAT, ENTR, ECFIN, DEVCO (ex-AIDCO)20 and
DIGIT and three delegations in Croatia, Former Yugoslav Republic of Macedonia and Turkey.
Specific inherent risks in shared management relate to the complexity and diversity of operations and
activities financed, which range from large infrastructure projects to small-scale support services for SMEs.
The forms of assistance also vary with grants and co-funding of more sophisticated financial engineering
instruments. In addition, there is a multiplicity and diversity of management organisations, structures and
beneficiaries. The multi-annual nature of the system helps to offset the risk of national controls not
functioning effectively to prevent errors, allowing corrections to be made some years after the disbursement
of funds by the Member State to the beneficiaries.

2.1.2.          Cooperation with Member States – improving institutional and
                administrative capacity
Capacity building is mainly carried out by the Member States which decide on the use of technical assistance
for the operational programmes and on how to direct their capacity building actions, within an overall
framework discussed with the Commission. DG Regional Policy supports these efforts by providing
expertise and facilitating the logistics and organization of these actions. The DG also complements the
activities of the Member States by carrying out capacity building measures in specific key areas as follows:
     Specific intervention and support instruments:
           Support to increase capacity to build Financial engineering instruments (supported through
           JEREMIE and JESSICA in cooperation with the European Investment Bank –EIB- and the
           European Investment Fund EIF); these are important complements to normal grants in delivering
           Cohesion policy; in addition "networking platforms" for these instruments have been developed;
           Interventions in Member States which need to strengthen their experience in managing Structural
           Funds, hence the focus of JASPERS (Joint action with the European Investment Bank to prepare
           large infrastructure projects) on the member States who have joined the Union as from 2004;
           Support to capacity building for non-bank micro-credit providers (JASMINE - Joint Action to
           Support Micro-finance Institutions in Europe); delivery of the JASMINE technical assistance to 14
           non-bank micro-credit providers started in the first quarter of 2010, taking the form of an
           institutional assessment and subsequent training.
     Guidance, advice, networking and training actions:
           Guidance and advice to the authorities in the Member States implementing the programmes, on
           issues related to the application of the relevant Structural Funds Regulations. In 2010, these actions
           were reinforced to cope with changes in the regulatory framework brought about to improve
           implementation in the context of the difficult economic scenario and to further simplification;
           Technical meetings organised as part of the Coordination Committee of the Funds (COCOF), for
           example on financial engineering or strategic reporting/indicators;
           Common training sessions organised for managing and certifying authorities like the "Train the
           trainers" seminar organised in 2010 covering subjects such as "assurance model", "modification of
           Art 55 - revenue-generating projects" and "compliance with public procurement rules” as a
           continuation of the seminars held in 2008 and 2009;
           Targeted training sessions / seminars organised in regions in cooperation with managing authorities
           e.g. on the best use of the new rules on standard costs;
           Evaluation and information-communication activities where the Commission acts as an honest
           broker and catalyst in the dissemination of new methods, expertise and good practices through
           networking (Evaluation network, INFORM network).
     Problem areas and special interventions:

20   The cross sub-delegation to DEVCO relate to the 2011 budget and the use of the administrative appropriations for 2011 will be
     covered in the AAR 2011.


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                                                                   2- Management and Internal Control Systems


           Most notably in the area of public procurement (topic addressed over a number of years with
           specific coordinated actions with DG Internal Market).
           Special targeted interventions to Member States with acknowledged serious economic/operational
           problems, hence the specific support to Greece (see text box on page 4).
     Coordination, cooperation and capacity building for audit activities:
           Cooperation between the Commission and the Member States in relation to audit activities is
           stipulated in the Regulations and is a condition for the application of the single audit model and the
           creation of an integrated control framework;
           Annual Homologues Group meetings (with participants from the Member States, the Commission,
           and the Court of Auditors), served also to boost cooperation with the Audit Authorities and
           exchange ideas on good practices, e.g. last issue in October 2010 where topics such as sampling, the
           roadmap towards the application of the single audit concept (article 73), auditing of public
           procurement and financial engineering instruments and fraud prevention were covered;
           Common technical meetings are regularly organised with the audit authorities, e.g. in May 2010 to
           discuss the first experiences gained on systems audits and audits of operations and the evaluation of
           the compliance assessment process as part of the assurance model;
           Annual bilateral control coordination meetings (with audit authorities of each Member State
           individually) to provide the opportunity to share information on specific audit issues, such as the
           content and timing of the audit work and identified risks for the current year.

2.1.3.          Cooperation with other bodies
2.1.3.1.        Cooperation with Commission services
Throughout 2010, DG Regional Policy cooperated closely with many services of the Commission in the
context of the adoption of the EUROPE 2020 strategy and the development of future Cohesion policy. In
particular, two Communications, 'Regional policy contributing to smart growth in Europe 2020'21 and 'Regional Policy
contributing to sustainable growth in Europe 2020'22, were prepared jointly with other DGs and intensive work was
undertaken for the preparation of the EUROPE 2020 flagship initiatives and the establishment in 2011 of
thematic taskforces to prepare the future negotiations. These latter were set up in key areas linked to the
Europe 2020 flagship initiatives and will also provide support, on a case by case basis, during the negotiations
with the Member States, ensuring a consistent thematic approach across countries and regions.
DG Regional Policy has shared audit results with other audit services from the structural actions Directorates
General, i.e. DG Employment, Social Affairs and Equal Opportunities (DG EMPL) and DG Maritime
Affairs and Fisheries (DG MARE) where agencies and bodies common to these DGs were audited. Meetings
of an audit network for shared management are held regularly between the Commission audit services. The
Joint Audit Strategy has been developed by the structural actions audit services and audit priorities are
reviewed annually. In order to further improve mutual sharing of audit work, the structural actions
Directorates general developed in 2010 an inter service agreement to assist DGs to rely on and use each
other's audit work for launching, where necessary, legal procedures on interruption / suspension of payment.
The Legal Service validated the approach in early 2011 so that services can now implement this agreement.

2.1.3.2.        Cooperation with the European Court of Auditors
In 2010 the European Court of Auditors and DG Regional Policy and DG EMPL continued their
cooperation through various channels. The Court is invited and was present in several technical multilateral
meetings with the Member States audit authorities, thus providing useful input into guidance and
methodological issues, as for example in the finalisation of the guidance on the use of simplified costs. At
service level, DG Regional Policy meets with the Court services in charge of regional policy in regular
intervals to review the progress of our respective audits, both for legality/regularity and performance audits.
21   COM(2010) 553 This communication was prepared together with DG Research and Innovation (DG RTD), DG Enterprise
     (DG ENTR), DG Employment (DG EMPL) and DG Education, Culture and Audiovisual (DG EAC).
22   COM(2011) 17 This communication was prepared together with DG Climate Actions (DG CLIMA), DG Environment (DG
     ENV) and DG Energy (DG ENER).


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                                                                       2- Management and Internal Control Systems


An inter-institutional colloquium was held in January 2010, where issues related to the implementation of
public procurement rules and the quantification of errors in the area of public procurement were addressed.
For the discussion of the DAS ("Déclaration d'assurance") findings with the Court, the procedure of holding
tripartite meetings which was started for the 2007 annual report was continued. This procedure involves
three-way discussions between the Court, the Commission and the Member State concerned. These meetings
have reduced the areas of disagreement with the Court on the interpretation of findings and facilitated the
subsequent follow-up by the Commission and Member States. Thirteen such tripartite meetings were held
out of 18 ERDF programmes/Cohesion Fund projects audited for the 2009 Court's annual report.

2.1.3.3.        Cooperation with OLAF
                 A) Joint Fraud Prevention Strategy (JFPS) 2010-2011
The updated "Joint Fraud Prevention Strategy for ERDF, ESF, CF and EFF 2010-2011" was adopted by DG
Regional Policy, DG EMPL, DG MARE and OLAF in July 2010. The strategic objectives of the JFPS are as
follows:
     •     To reinforce fraud risk assessment;
     •     To provide more proactive guidance and support for Member States in fraud prevention and fraud
           detection work;
     •     To raise the level of fraud awareness in DG Regional Policy, DG EMPL and DG MARE;
     •     To raise the level of fraud awareness in the Member States

DG Regional Policy and DG EMPL jointly produced an information note targeted at desk officers and
auditors entitled "Summary description of irregularity/fraud cases in OLAF final case reports". The document provides
an overview of the types of suspected fraud perpetrated on ERDF/CF and ESF in order to increase
awareness about possible cases encountered in the field. A written survey on mechanisms for fraud
prevention and detection was sent to Member States in October 2009. The replies of the 22 Member States
which responded to the survey were analysed in 2010 and the findings related to prevention and detection of
fraud have been used for risk assessment purposes, namely for the enquiry on "bridging the assurance gap".

                 B) Cooperation with OLAF on fraud cases concerning ERDF and Cohesion Fund
DG Regional Policy operational directorates are currently responsible for follow-up actions, financial or
other, in relation to 45 cases affecting the ERDF and Cohesion Fund. The follow-up is based on
recommendations received from OLAF in its Final Case Reports. The number of on-going external
investigations on the ERDF and Cohesion Fund is 39 (in all cases OLAF is responsible for the investigative
work in the Member States except for a limited number of cases in which this work has been devolved to the
Member State in question).

                C) Fight against fraud as a means of protection of the European Union's financial
                    interests - annual report for 2009
According to the Commission's (OLAF) Annual Report on the fight against fraud of 14 July 2010, in 2009
the Member States communicated a total number of 2,551 and 109 irregularity cases amounting to EUR 956
million and EUR 67 million for the ERDF and the Cohesion Fund respectively23. According to OLAF's
report, in 2009 “suspected frauds” in the irregularities notified to the OLAF database by Member States
represented around 0.23% of 2009 budget allocations for the three programming periods in Cohesion
Policy24.

2.1.3.4.        Cooperation with the European Parliament
Relationship with the European Parliament was intensive in 2010. Regional policy has been the subject of in-
depth discussions with the Committee for Regional development (REGI) and the Plenary Session of the
23   These amounts of potential or pending recoveries in the Member States may overlap with the amounts of recoveries and
     pending recoveries declared in March 2010 by Member States and referred to under section 3.1.1.3. J).
24   Report from the Commission to the Council and the European Parliament, Protection of the European Union's financial
     Interests - Fight against fraud - Annual Report 2009, COM(2010)382 final, 14.7.2010, page 6



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                                                                 2- Management and Internal Control Systems


Parliament - concerning in particular the Fifth Cohesion Report and the future of Cohesion policy. It is also
reflected in the high number of parliamentary questions: about 900 written questions, directly or indirectly
involving the Commissioner for Regional policy.
Moreover, as a result of the extensive exchanges with the Committee for Budgetary Control (COCOBU) in
the context of the 2009 discharge procedure, a set of measures has been agreed to enhance the supervisory
role of the Commission in the field of shared management. This set of measures has been recently confirmed
by a letter addressed to the Chairman of the COCOBU.

2.1.4.          Internal control systems within DG Regional Policy
The internal control within the DG Regional Policy relies on a structured system encompassing:
    Risk reducing strategy;
    Strong internal control standards;
    Documentation of procedures and recording of exceptions to procedures;
    Checks on transactions and other operations, including sample checks;
    Monitoring of programme implementation in Member States as well as audits by the Commission and
    follow-up of audit recommendations issued by the Commission, the Member States and the ECA.

In the frame of the 2011 risk assessment exercise, a revised risk management methodology was elaborated
adding a multi-annual perspective and taking into account experience from the past. Internal control is based
on risk identification at each level of activity and an assessment and definition of the appropriate responses.
In terms of financial management, internal control is based on a clear definition and separation of roles in the
financial circuits involved in order to ensure the legality and regularity of commitments and payments.
Internal control in 2010 also aimed specifically at managing the following three main areas in order to ensure
a proper implementation of the budget and use of resources:
   national management and control authorities check properly public procurement rules which will
   contribute to reduce error rates on the ground;
   well prepared major projects are submitted and approved on time to ensure a good absorption
   throughout the programming period;
   staff allocation within DG Regional Policy is adequate, being more strategically aligned with medium term
   objectives.

The supervisory role of DG Regional Policy in the field of shared management is described and assessed in
part 3 of this report.


2.2.            The functioning of the entire internal control system
2.2.1.          Compliance with the requirements of the control standards
In 2010, DG Regional Policy conducted an in-depth self-assessment of all internal control standards (ICS)
and their requirements. The main relevant services gave a structured evaluation on the status of the ICS and
requirements under their responsibilities with respect to both compliance and effectiveness. Compliance and
effectiveness were assessed against objective indicators, results from tests and/or surveys, relevant audit
results and other recent opinions issued by Commission central services. In this way, the self-assessment was
comprehensive, robust and could rely on different sources of information. This assessment was reviewed by
the Internal Control Coordinator.
According to the results of this exercise, the DG was found to be in compliance with 59 requirements out of
61 and, hence, partially compliant only for 2 requirements in relation to 2 standards (ICS 4 and 12). In
particular:
    ICS 4 Staff evaluation and development: only one quarter of staff (25.3%) had their training
    programmes formally validated by end of March. However, the situation was quickly reversed and by the
    end of 2010, 91% of staff had their training programmes completed. However, this had limited impact on
    effectiveness: 94% of staff responded in feedback surveys that they thought they had received relevant



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                                                                   2- Management and Internal Control Systems


    training to accomplish their objectives in 2010. In order to reach full formal compliance, a closer
    monitoring of this exercise will be performed by end of March 2011.
    ICS 12 Information and Communication: a local IT security plan for the DG exists, but needs now to
    be put in line with the new standards being progressively issued in 2010 and 2011 by the DG Human
    Resources and Security. An update of the IT Security Plan is in the IT Schéma Directeur 2011. It is planned
    also by end of 2011 to perform a gap analysis which will determine how and in which reasonable
    timeframe DG Regional Policy will have to make the necessary improvements to meet the new standards.

Derogations to the mandatory staff mobility in relation to sensitive functions:
The DG identified staff subject to compulsory mobility by the end of 2010 owing to the sensitivity of their
posts(s). Out of 11 people having reached five years in the same sensitive function, 8 officials were granted
derogation. In particular, 6 officials received a derogation until the end of 2011 in the interest of the service
with varying reasons for each case (e.g. linguist constraints, high staff turnover in a unit where the official was
the only repository of a certain knowhow, etc.) and 2 officials received a derogation pending the
identification of a suitable mobility solution in 2011. For two of the above officials a solution was identified
in the beginning of 2011.
A mobility solution was identified for all staff members (8 people) who were granted derogation in the
context of the 2009 mobility exercise, with the exception of one member who was granted a last derogation
until the end of 2011, in accordance with the 5-year rule which provides for a maximum extension of 2 years.

2.2.2.          Effectiveness of implementation of the prioritised control standards
In 2010, DG Regional Policy selected ICS 3 'Staff allocation and mobility' as priority standard following
the annual risk assessment exercise and the need, identified by senior management, to have an adequate staff
allocation in a context of stability of human resources at Commission level. The main reasons for selection
were to assess and further improve the effectiveness of staff planning and allocation, mobility and career
development planning, talent development programmes and Human Resources reporting for top managers.
Following the review of ICS 3 effectiveness by the Internal Audit and Advice unit at the beginning 2010,
areas for improvement were identified and these have been addressed through the adoption by the senior
management of a long-term HR Strategy and accompanying action plan to which considerable efforts were
deployed in 2010. The HR Strategy, prepared through a bottom-up approach and adopted by senior
management at the beginning of 2011, covers, inter alia, actions for better aligned and transparent HR
processes, attraction of talent and review of procedures and working methods. The mobility policy, as an
integral part of the strategy, focuses on a well-planned mobility to be implemented via tools such as
individual development plans, professional paths and Professional Development Committees. This latter will
serve as a "career market place" where staff members can articulate their plans for mobility.
HR allocation was under constant scrutiny by senior management and regular meetings and bilateral sessions
were held on this. At the end of 2010, a HR report on staff structure and composition in DG Regional Policy
was issued to provide a clear view of the HR situation to senior management. Further actions were taken to
achieve greater effectiveness of ICS 3: update of job descriptions performed with very good results, and
reinforcement of the monitoring and planning system for the external staff budget. A "Chambre d'écoute"
was also organised to facilitate allocation of staff after the splitting of one unit into two separate units.
For a better appreciation of the effectiveness of this standard, three surveys on compulsory mobility (one)
and on recruitment (one for managers and one for staff) were prepared and launched at the beginning of
2011. As regards compulsory mobility, the results were varied showing how sometimes, despite the processes
put in place, it was difficult to adequately accompany staff throughout the whole mobility exercise and
reconcile individual aspirations with available opportunities, in a wider context of limited mobility and HR
growth. Suggestions for improvement and for better support to staff in this exercise were put forward. As
regards recruitment, the results were generally positive showing how a large majority of respondents (staff
and managers) was satisfied with how the process was handled within the DG and with the internal support
received from the Human Resources unit.
In conclusion, progress was achieved in 2010, the identified areas for improvement have been tackled and
greater effectiveness will be reached in 2011 with the execution of the HR strategy and action plan.



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                                                                  2- Management and Internal Control Systems


2.2.3.          Conclusions on the functioning and effectiveness of the entire
                internal control system
Overall, effective implementation for most of the internal control standards was observed in 2010. Areas for
improvement were identified and remedial actions were foreseen. The results of the ICS self-assessment
exercise described above (1.2.1), as reviewed by the Internal Control Coordinator, are regrouped hereafter:
    ICS generally effective: mission (ICS 1), business continuity (ICS 10), accounting and financial reporting
    (ICS 13), evaluation of activities (ICS 14), evaluation of the internal control system (ICS 15) and Internal
    Audit Capability (ICS 16);
    ICS generally effective with some improvements needed and already planned for specific areas:
    ethics and values (ICS 2), staff allocation and mobility (ICS 3), staff evaluation and development (ICS 4),
    risk management (ICS 6), management supervision (ICS 9)document management (ICS 11) and
    information and communication (ICS 12);
    ICS partially effective with targeted actions needed (to be planned in short term): objectives and
    indicators (ICS 5) to continue the actions launched in 2009, operational structure (ICS 7) as regards IT
    governance and processes and procedures (ICS 8) to streamline procedure.
ICS 6 and 8 have been selected as priority standards for 2011 and actions will be focus particularly on follow-
up of risk and simplification of key operational and financial processes. Attention will be also given to the
development of IT tools to address specific issues (e.g. on financial corrections) in order to have a more
accurate monitoring and a greater quality of reporting.
Overall, the controls and procedures in place, the constant attention of the audit services, the continuous
efforts made to obtain greater effectiveness and the management commitment to adapt to a changing
environment and emerging challenges enabled the DG to manage its main risks and intrinsic complexity.
Based on all available information and the above analysis, it can be concluded that DG Regional Policy has
reasonable assurance that: appropriate controls are in place and are working as intended; risks are mitigated
and monitored; improvements and reinforcements are being implemented.


2.3.            Working arrangements with and information to the
                Commissioner
In accordance with the Code of Conduct for Commissioners , the working arrangements in place between
the Commissioner and DG Regional Policy have been respected. Regular meetings have been held between
the Commissioner and the senior management of the Directorate General (Director General and Directors)
in order to discuss issues of major importance and to decide about all main initiatives and strategic initiatives
such as the Danube Strategy, budgetary execution, the future of Cohesion Policy, etc... Reports to the
Commissioner on the internal control environment are issued in the frame of the Mid-Term Review of the
Management Plan and the Annual Activity Report.
Moreover, the Director General informed the Commissioner about his draft Annual Activity Report on 22
and 28 March 2011, following the peer-review organised by the Secretary-General and DG Budget. The main
elements of this report and declaration, including the reservations envisaged, have been brought to the
attention of the Commissioner Johannes Hahn.




Regio_aar_2010_final                                                                                       Page 24
3. BUILDING BLOCKS TOWARDS THE DECLARATION OF
   ASSURANCE (AND POSSIBLE RESERVATIONS TO IT)

3.1.            Building blocks towards reasonable assurance
3.1.1.          Activities under Shared management
3.1.1.1.        Control strategy for the Funds under shared management
Cohesion policy is built on a multiannual and multilevel control system whereby one level of control may rely
on the work of previous controls performed by other bodies (single audit concept).
Daily control framework at local level:
Throughout the implementation period the managing authority performs management verifications, i.e. desk
checks on all payment claims and on-the-spot checks on sampled operations, which the certifying authority
relies on before certifying the legality and regularity of expenditure declared to the Commission. The
certifying authority takes steps to satisfy itself that adequate controls have been made by the managing
authority, including carrying out its own checks when necessary.


                                                             European Commission
                                                    Certification                                         Opinion
                                  Implementation    Declaration                      System audits      Annual control
                                      report       of expenditure                                          report




                                                     Certifying authority



                                                                                              Audit authority


                                          Managing authority
                                                                                      Audit
                                                                Operational
                                            Expenditure
                                                                checks

                                                                    Beneficiairies




The audit authority is the next level of control and is responsible for setting an audit strategy to perform
audits on the management and control systems and audits on representative samples of operations. It reports
the results annually to the Commission with an annual control report, which includes an annual audit opinion
on the functioning of the systems and the error rate resulting from sampling. Unlike the two previous levels
of controls, audits carried out by the national audit authorities are carried out ex-post after certification of
expenditure to the Commission.
Supervisory role of the Commission and control strategy:
Throughout the implementation period the operational and audit units of DG Regional Policy hold regular
meetings with Member States authorities to ensure the correct monitoring of implementation of all
programmes and audit activities.
DG Regional Policy has an audit strategy in place covering all structural fund instruments, which is based on
updated risk assessments. It updates annually its rolling audit plan based on the implementation of its audit
strategy and on new audit information coming to hand. For the 2007-2013 programming period, the control
strategy contributing to the assurance building is implemented through the various strands of controls
foreseen in the regulatory framework as described hereafter:




Regio_aar_2010_final                                                                                                     Page 25
                                                                            3- Building blocks towards reasonable assurance
                                                               3.1.1 – Shared Management / introduction – input indicators

- at the beginning of programme implementation: approval by the Commission of the Member States'
compliance assessments to ensure that systems are designed in compliance with the rules. The Commission
also approves the audit strategies proposed by the national audit authorities with a view to ensuring that the
most important risks and bodies will be covered adequately and in a timely manner. The Commission makes
no interim payment until it accepts the Member States' compliance assessments;




                                            Annual Activity Report


                                   Desk / on-the-spot review of national audit system

                                           On-the-spot risk based audits                        In-depth analysis
     Ex-ante validation
       of compliance
                                                                                              incl. pre-closure and      Commission
                                       Acceptability checks before payment                        ex-post audits
                                               Operational monitoring


                               Certification                                 Opinion
  Compliance      Audit        Declaration Implementation      System      Annual control     Closure    Audit opinion
  assessment     strategy     of expenditure   report          audits         report         declaration  at closure

    Independent review                   Audits on systems and operations                   Review of all audit work
                                                                                                                         Member States
     Design of systems                      Certification of expenditure                     Follow-up of recoveries

 Designation of authorities        Management verifications (1st level checks)              Review of implementation


         Set-up                               Implementation                                      Closure




- during programme implementation:
        a) Commission review of the work of the national audit authorities through the continuous analysis of
        reports on systems audits communicated by them (including analysis of the consistency of their results
        with Community audits), the analysis of annual control reports and opinions issued for all
        programmes, annual control coordination meetings and ad hoc contacts with the audit authorities to
        monitor the progress and results of all audit work in line with the approved national audit strategies;
        b) Commission on-the-spot enquiry to conclude, including through reperformance of audits, on the
        reliability of the work carried out and reported by the audit authorities;
        c) Commission audits on areas, bodies or parts of systems identified as at risk, to complement the
        assurance obtained from the national audit authorities, including specific enquiries on compliance with
        horizontal provisions such as public procurement, State aid, financial engineering or the national
        systems for recording and reporting irregularities and recoveries.
- at the end of the programming periods (2000-2006 and 2007-2013): the winding-up body / audit authority
examines for each programme the audit work done, the expenditure and irregularities declared and recoveries
made by the certifying authority and gives its opinion on the legality and regularity of expenditure declared
for the whole programme in view of the final payment from the Commission. The Commission scrutinizes
all closure declaration documents and may perform ex-post closure audits to obtain additional assurance that
the submitted closure documents, including the winding up / closure declarations and final control reports,
are reliable.
For further details see also the Internal Control Template in Annex 5 and the control brochure of Cohesion
policy: http://ec.europa.eu/regional_policy/sources/docgener/presenta/audit2009/audit2009_en.pdf




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                                                                         3- Building blocks towards reasonable assurance
                                                            3.1.1 – Shared Management / introduction – input indicators

3.1.1.2. Investment in control activities for assurance in the field of shared management
         (input indicators)
           A) Member States' control and audit activities
According to a recent study25, total costs for the administration26 of ERDF and CF in the Member States
were estimated at approximately EUR 12.5 billion out of a total eligible expenditure of EUR 390 billion over
the full 2007-2013 programme cycle. The most significant portion of costs (about 78%) relates to programme
management27. The managing authorities bear most of the administrative burden.28 "There are considerable
variations regarding administrative costs and workload over time and between Member States and
programmes. […] However, the different management and implementation systems in place in the Member
States do not appear to be linked to major differences in administrative costs or workload."29 DG Regional
Policy estimated at 62% the share of the costs of control30 (including the first level controls) out of total
administration costs, equivalent to about EUR 7.7 billion. In particular, for every million of ERDF and CF
disbursed, about EUR 28,700 were spent in control activities.
                                        Share of control costs / total management costs
                               Share of total       Total         Management     Share (%)                     Total             Control
                               management       management          costs per   control costs               control costs       costs per
                                 costs (%)          costs         EUR million      of total                 (EUR million)     EUR million
                                                (EUR million)      ERDF and    management                                      ERDF and
                                                                   CF funding       costs                                          CF
                                                                         (in EUR)                                              funding(in
                                                                                                                                   EUR)
National coordination               6.4%             800 million            3,000            0%                 0 million                0
Programme preparation               3.0%             370 million            1,400           15%                55 million              210
Programme management                77.6%          9,700 million           36,100            65%            6,305 million           23,465
Certification                       4.6%             580 million            2,200           50%               290 million            1,100
Audit                               8.4%           1,050 million            3,900           100%            1,050 million            3,900
Total                               100%          12,500 million           46,600           62%             7,700 million           28,675



            B) DG Regional Policy's management, control and audit
The table below is based on an inventory at the end of 2010 of estimated DG Regional Policy staff working
directly for the management of programmes (including pilot projects and preparatory actions) and control
activities (overheads and staff having support tasks like legal advice, etc are not included). Geographic desk
officers are responsible for promoting sound financial management as part of their overall task to ensure an
efficient implementation of programmes in co-operation with national management authorities.
                                   DG Regional Policy staff by management mode
                                Shared           Decentralised         Centralised        Centralised
                                                                                                                 Joint
                                                                       management         management                               Total
                                                                                                              Management
                             Management          Management              (direct)          (indirect)
 Desk Officers                      200                   9                          8                  3                    0.5   220.5
 Auditors (internal
 and external)                              56                     3                0.5                 1                            60.5
 Finance and
 control                                  26                   1                  13                0.5                             40.5
 Total                                   282                  13                21.5                4.5                      0.5   321.5
 Value in %                             88%                  4%                  7%                 1%                      <1%    100%




25   SWECO, Deliverable 7, 'Revised Final Report Regional governance in the context of globalisation', (Contract No
     2008.CE.16.0.AD.056 / CCI No 2008CE160AT090 – 092), June 2010. The study is available at the link:
     http://ec.europa.eu/regional_policy/sources/docgener/studies/study_en.htm
26   Total administrative costs, including costs for administrative staff, external services and consultancies and overheads
27   SWECO, Deliverable 7, ibídem, p.7
28   SWECO, Deliverable 7, ibídem, p.79
29   SWECO, Deliverable 7, ibídem, p.79
30   The costs of controls were calculated taking into account the tasks of the Member States authorities listed in the regulation (EC)
     1083/2006.


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3.1.1.3. Building block 1: Assessment by DG Regional Policy
             A) ERDF and Cohesion Fund 2007-2013
             A.1)      The setting-up of the national management and control systems
Compliance assessment
In line with Article 71 (1) (2) of Regulation (EC) No 1083/2006, the Member State shall submit to the
Commission a description of the systems, a report setting out the results of an assessment of the systems set
up and an opinion on their compliance with Articles 58 to 62 of this Regulation. In implementing this
procedure, it has been possible to undertake corrective measures on the set up of systems and to identify
risks early in the programming period.
At the end of 2010, the Commission had accepted the compliance assessment documents for 313
programmes out of 316 received. The procedure could not be finalised for three programmes in 2010. As of
31/12/2010, one ETC Cross-border programme had not submitted its compliance assessment31.
For the four programmes for which a compliance assessment has not yet been accepted, reservations are
made in the AAR as it is considered as a major risk to the effective implementation of the programme even if
no interim payments have been executed (Italy – 2 programmes, .Germany – 1 programme, ETC – 1
programme).
Audit strategy
In line with Article 62 (1) (c) of Regulation (EC) No 1083/2006, the Member States have submitted32 to the
Commission an audit strategy covering the bodies in charge of performing the audits, the sampling methods
for audits of operations and the indicative planning. This audit strategy serves as a basis for the assurance
building process. By discussing audit strategies with the audit authorities, the coordination of audit work is
improved in the framework of the single audit concept.

All expected audit strategies covering 311 programmes had been received and accepted by the Commission
up to the end of 2010, except for one case (a cross-border programme) placed under reservation. No
documentation had been received for this programme despite reminders from the Commission.
The acceptance of audit strategies provides reasonable assurance that, if correctly implemented, these
strategies will enable provision of sufficient and timely audit coverage and therefore will allow the timely
detection of any possible deficiency. The correct implementation of the agreed audit strategies was monitored
throughout 2010, following problems reported in the 2009 AAR (disclaimers of opinion in many 2009 annual
control reports). For 2011, DG Regional Policy has requested an update of the agreed audit strategies from
the audit authorities to be discussed in the bilateral co-ordination meetings starting in March 2011.


Main Indicators: ERDF/CF 2007-2013 - setting-up of the national management and control systems
                            Coverage                                                         Results
            Indicator             Target        2009       2010                   Indicator                         2009       2010
 Number of compliance              317           311       316      Number of Compliance assessment                 271        313
 assessment received up to end                 (98%)     (99.7%)    accepted                                       (87%)      (99%)
 of year
 Number of compliance              317          292        316
 assessment analysed up to end                 (92%)     (99.4%)
 of year
 Number of Audit Strategies        311          308        310      Number of Audit strategies accepted             305        310
 received up to end of year                    (99%)     (99.7%)                                                   (98%)     (100%)
 Number of Audit strategies        311          307        310
 analysed up to end of year                   (98.7%)    (99.7%)




31   As of 01/02/2011, these documents were finally submitted.
32   Article 74 of Council Regulation N° 1083/2006 also foresees that under certain conditions Member States may opt for a
     proportionality clause and decide not to send audit strategies under article 62 (1) (c). For six programmes, the administrations
     have opted for the proportionality clause.


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             A.2)      Analysis of the systems audit reports, the annual control reports and the audit
                       opinions sent by Member States
Audit authorities are requested to provide completed systems audit reports for analysis by the Commission
throughout the year. When significant deficiencies are detected in these reports; this may constitute a basis
for the Authorising Officer by Delegation to interrupt payments for the programme concerned in line with
article 91 of Council Regulation (EC) No 1083/2006. The on-going analysis of systems audit reports
therefore contribute to the assurance building process. In 2010, DG Regional Policy analysed a total of 565
audit reports.
Audit authorities are also responsible for submitting to the Commission, by 31 December each year an
annual control report (ACR) accompanied by an audit opinion covering each programme for which they are
responsible. The ACR submitted by 31/12/2010 covered the results of the audits carried out during the
previous 12 month-period ending on 30/06/2010, resulting from the system audits performed until June
2010 and audit of operations covering the expenditure declared to the Commission during the period
1.1.2009 until 31.12.2009. The Commission has also advised audit authorities to report on audit work
finalised during the second half of 2010 including subsequent events which are judged to have had an impact
on the assurance level at year end. Many audit authorities have reported accordingly.

                               2009                      2010
                                                         June 2010
                                                                                    2010
                                                                                   Annual
                       2009 Expenses declared                                      Control
                                                                                             Opinion on
                                                                                              systems
                                                             + subsequent events   Report    Error rate on
                                                                                              operations




                                                2010 Expenses reimbursed

                                                Assurance AAR 2010
All ACR have been received with the exception of one programme33. This programme has been included
among the reservations. In all cases, DG Regional Policy performed a detailed assessment of the ACR against
audit results and information at its disposal, coming from its own audit work and from ECA or other DGs'
audits. The analysis also included the examination of national systems audit reports received from the Audit
Authorities during the year. DG Regional Policy is sending letters to the audit authorities on the assessment
of the ACR in all cases, with requests for further information, clarification or follow-up actions where
necessary.
Analysis of the audit opinions reported by Member States:
The audit opinions expressed by the audit authorities are much more complete for 2010 than for 2009 as
systems audits and audits of operations could be carried out owing to greater implementation of projects on
the ground. Thus, for the first time in the current programming period, the Commission received in 2010
audit opinions established by the audit authorities for all (but one) programmes. This in itself constitutes a
significant step forward for the assurance building process, compared to the previous programming period.
As shown in the table below, the reported audit opinions expressed by the audit authorities covered all three
types of possible opinions: unqualified for 192 programmes (61 % in number of programmes; 59% of the
amount of 2010 interim payments), qualified for 111 programmes (35% and 41% respectively) and adverse
for 2 programmes (less than 1 % of programmes and payments).




33   Updated figure as at end of March 2011


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                                                   National audit opinion by Operational programmes

     Member State                                                                                                   Total

                                          Unqualified     Qualified     Adverse       Disclaimer   Not received
     Austria (AT)                              9                                                                      9
     Belgium (BE)                              2              2                                                       4
     Bulgaria (BG)                             2              3                                                       5
     Cyprus (CY)                               1                                                                      1
     Czech republic (CZ)                      10              3                           1                          14
     Germany (DE)                             14              3            1                                         18
     Denmark (DK)                              1                                                                      1
     Estonia (EE)                                             2                                                       2
     Spain (ES)                                1             22                                                      23
     Finland (FI)                              5                                                                      5
     France (FR)                              31                                                                     31
     Greece (GR)                                             10                                                      10
     Hungary (HU)                                            13                                                      13
     Ireland (IE)                              2                                                                      2
     Italy (IT)                               20              6                           2                          28
     Lithuania (LT)                                           2                                                       2
     Luxembourg (LU)                           1                                                                      1
     Latvia (LV)                               1              1                                                       2
     Malta (MT)                                1                                                                      1
     The Netherlands (NL)                                     4                                                       4
     Poland (PL)                              19              1                                                      20
     Portugal (PT)                            10                                                                     10
     Romania (RO)                              1              4                                                       5
     Sweden (SE)                               8                                                                      8
     Slovenia (SI)                             2                                                                      2
     Slovakia (SK)                                            9                                                       9
     The United Kingdom (UK)                   4             12             1                                        17
     ETC (cross-borders coop.)                47             14                           8             1            70
     Total                                   192             111           2             11             1            317
Following analysis of the audit opinions, DG Regional Policy confirmed the opinion expressed by audit
authorities for 182 operational programmes34 while it adjusted their opinion for a further 123 programmes.
This means that DG Regional Policy considered from its analysis including additional audit information, that
it could follow the national audit opinion for 60% of the programmes34. On the other hand, for 40% of
programmes34 DG Regional Policy adjusted the opinion for different reasons including: non completion of
planned audits of operations, inconsistency in the opinion expressed by the audit authority and the
information included in the ACR or in individual systems audit reports and reporting of high error rates
despite an unqualified opinion.
Audit authorities formulated a "disclaimer" of opinion for 11 programmes. For 3 cases, DG Regional Policy
had sufficient elements to conclude on a 'reasonable assurance with moderate impact'. For 6 cases, it was
found that there were serious delays in the audit work and/or significant deficiencies in the management and
control system which resulted in DG Regional Policy issuing a 'limited assurance' opinion. DG Regional
Policy issued a 'no assurance' opinion for the remaining 2 programmes as the compliance assessment was not
approved..
Audit opinions expressed by audit authorities as ‘qualified’ (with reported significant impact) and adverse
have been followed by DG Regional Policy in all but 2 cases of qualified opinions (two Hungarian
programmes) due to existing mitigating factors for these 2 programmes). These confirmed qualified or
adverse opinions led to reservations in all cases and interruption of payments, when necessary. The
Commission is following up with the audit authority the remedial actions proposed by the implementing
authorities.
34   Out of a total of 305, 11 cases for disclaimers and one case where the opinion was not received are excluded from the total of
     317 programmes.


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Analysis of error rates reported by Member States:
The audit authorities reported a significant audit coverage of the (2009) expenditure declared through audits
on operations, considerably higher than in the previous programming period. However the coverage range
varies much between programmes. DG Regional Policy also assessed the reliability and, based on provided
data, correctness of the reported projected error rates in the random samples of operations. Error rates were
reported for 86% of the programmes (all but 43 programmes). 177 programmes (56%) have reported error
rates below 2 %, the materiality level; 62 programmes (19%) between 2 % and 5 %; 19 programmes (6%)
between 5 % and 10 %; and 17 programmes (5%) above 10 %. 25 out of the 36 programmes with high
reported error rates (>5%) are under reservation. In the other cases, the systemic nature of the errors, the
sample methodology or the evidence of corrective measures at national level have been taken into account to
adjust the final opinion (Germany: one programme, ETC: one programme, Greece: 9 programmes).
After thorough analysis of the ACR, DG Regional Policy is requesting further clarifications in each specific
case, whenever problems are found; e.g. the audit of operations not finalised or contradictory procedure was
not completed; reported error rates were not correctly calculated; some "anomalies" in detected errors were
withdrawn from the projected error rate, thus having a positive impact on them. These methodological issues
will also be discussed with audit authorities in the annual bilateral meetings scheduled to take place between
March and June 2011. Furthermore, the Commission is holding a technical meeting with audit authorities
from all Member States in May 2011 to discuss these technical matters with a view to strengthening the
reliability of the audit opinions including treatment of errors for the next ACR in 2011.
As a consequence DG Regional Policy estimates that, overall, the reported error rates by the national audit
authorities which relate to 2009 declared expenditure have to be interpreted with caution when assessing the
functioning of systems in 2010. Therefore the information provided cannot be compared with the overall
error figure reported by the Court of Auditors which follows a statistical method for the entire Cohesion
Policy area. The reported error rate is one useful source of information which feeds into DG Regional
Policy's assessment of the assurance level for each programme. However, other sources of information are of
particular significance for some programmes.


Main Indicators: ERDF/CF 2007-2013 - annual control reports and audit opinions sent by Member States
                          Coverage                                                                  Results
           Indicator            Target         2009       2010                          Indicator                   2009       2010
Number of programmes for         317           317        316       Categorisation of programmes according to       317        317
which annual control reports                                        the reported national audit opinion
were received                                                       - unqualified                                    59         192
                                                                    - qualified                                      69         111
                                                                    - adverse                                        0           2
                                                                    - disclaimer                                    166          11
                                                                    - not received/ not applicable                   23           1
 Audit coverage reported by         N/A          -        60%35     Categorisation of OPs according to range        N/A
national audit authorities (audit                                   of error rate declared by Member States
of operations on expenditure                                        (and subject to technical adjustments by
declared up to 2009)                                                DG Regional Policy for consistency, when
                                                                    necessary) 36
                                                                    - below 2%                                                  177
                                                                    - between 2% and 5%                                         62
                                                                    - between 5% and 10%                                         19
                                                                    - over 10%                                                   17
                                                                    - not reported                                              43
                                                                    This is the first year this information is
                                                                    reported. Therefore the information
                                                                    provided should be interpreted with
                                                                    caution.


35   Coverage as reported but no possibility for DG Regional policy to check it; this could include part of 2010 or ESF expenditure
     for example, in case of joint ERDF/ESF samples, and covers statistical and non statistical samples.
36   For statistical purposes, in the case of the operational programmes grouped by the audit authorities for the purpose of sampling,
     DG Regional Policy considered that the extrapolated error rate applies to each operational programme. Moreover, the total is
     318 (for 316 programmes) because: for Spain, a separate error rate was reported for operations managed at national level (under
     one separate sample) and for operations managed at regional level for each regional programme; for a Romanian programme a
     separate error rate was reported for the Cohesion operations and for ERDF operations.


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                          Coverage                                                               Results
           Indicator            Target         2009      2010                         Indicator                   2009       2010
Number of programmes for         317            317      29837     Result of the analysis of the ACR and audit
which annual control reports                                       opinion sent by DG Regional Policy to the                  316
were analysed                                            94.3%     audit authorities:
                                                                   - accepted                                                 98
                                                                   - accepted with follow-up                                  160
                                                                   - returned (for correction)                                 25
                                                                   - analysis ongoing                                         33


             A.3)      DG Regional Policy's review of national audit authorities

The regulatory framework for the 2007-2013 programming period gives the audit authority the responsibility
to provide a reasonable assurance to the Commission on the management and control systems to ensure
legality and regularity of the expenditure certified. DG Regional Policy launched a comprehensive enquiry in
the second half of 2009 with the objective to review the work of the audit authorities and to assess their
reliability. This enquiry consisted of four modules including examination of methodology/procedures,
participation in audit missions, re performance of systems audits and re performance of audits of operations.
The results will provide the basis for the DG to implement the provisions of Article 73 paragraphs 2 and 3 of
Regulation 1083/2006 whereby the Commission can conclude where it has reasonable assurance that it can
rely principally on the opinion provided by the audit authority and limit its own on the spot audits.
For the purpose of the enquiry, a risk assessment was carried out at the beginning of 2009 covering all 74
audit authorities ranked by core risk criteria. The risk assessment (revised in 2010) took into account,
amongst other criteria, the EU budget that the audit authority was responsible for, the results of the review
of the compliance assessments and audit strategies, and the lessons learnt from the previous programming
period. From these criteria 22 audit authorities were identified as the most important and DG Regional
Policy planned to review their work in 2009 and 2010.
The first part of this enquiry was finalised (modules 1-4) at the end of 2010 for 17 out of the 22 selected
Audit Authorities. The 17 reviewed Audit Authorities are covering 82.5% of mainstream ERDF and CF
allocations and are responsible for auditing 158 operational programmes. Furthermore, the work of 3
additional audit authorities covering 3 operational programmes was partly covered in 2010. In total, 98 audit
missions (84 in 2010) were performed for the first part of this enquiry.

Out of the 17 Audit Authorities, for which the review work is close to finalisation pending the results of the
contradictory procedure or the completion of coverage through additional audits, DG Regional Policy can
draw the preliminary conclusion that two Audit Authorities (Germany/Sachsen and Sachsen Anhalt) fully
comply with the key requirements, while twelve Audit Authorities comply with the requirements but some
improvements are necessary38. This means that, pending some improvements which were explained to the
authority concerned and which will be followed up on the spot during 2011, DG Regional Policy fully or to a
large extent relies on their audit opinions for fourteen Audit Authorities (64% and 33% of the concerned
programmes respectively). For the remaining three Audit Authorities, DG Regional Policy's preliminary
conclusion is that they comply only partially with the requirements and that substantial improvements are
needed or that additional audit work is necessary in order to draw more robust conclusions

In 2011 DG Regional Policy will continue the work on the remaining selected authorities and will follow up
the work on the 17 authorities audited in 2009-2010 in order to verify that the required improvements are in
place. At the end of 2010, no operational programmes fulfilled all conditions for implementation of article
73.3 of regulation 1083/2006 which stipulates that the entire management and control system should be
without qualifications.




37   information available on 31 March 2011.
38   For Spain, due to the decentralised organisation of audits, or for Audit Authorities covering a large number of programmes such
     as FR, PL, EL for example, the scope of the enquiry will be further extended to confirm this preliminary conclusion.


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  Main Indicators: ERDF/CF 2007-2013 - Review of national audit authorities
                            Coverage                                                                   Results
                Indicator             Target          2009      2010                          Indicator                     2009      2010
Audit Authorities reviewed up to 2010                                  DG Regional Policy's preliminary opinions on the     N/A        17
- Number of audit authorities (all 4   22                 22     22    effectiveness of the assessed National Audit
modules)                                                               Authorities (4 modules) pending completion of
All 4 modules completed                                   -      17    contradictory procedure:
4 modules partially completed                             -      4     - works well, only minor improvements are needed                  2
Not covered                                               -      1     - works, but some improvements are needed                         12
                                                                       - works partially, substantial improvements are                   3
- Number of audit missions                   N/A          14     84    needed
                                                                       - essentially does not work                                       0
Coverage rate of mainstream budget by        87%          -    82.5%
reviewed audit authorities up to 2010 (all
modules completed)


                A.4)     DG Regional Policy's complementary audit work
  In cases where, from the review/monitoring of the most important Audit Authorities, deficiencies were
  identified which could jeopardise the assurance, there is a need for DG Regional Policy to carry out
  complementary audit work directly at the level of the Managing Authorities/ Intermediate Body and/or Final
  Beneficiaries concerned.

  In view of this, a complementary enquiry was developed "to obtain assurance on the functioning of the management
  and control systems through the audit of high risk Operational Programmes/ areas and horizontal themes" for which the on
  the spot work had already started in 2010 in four Member States. Based on the interim assessment of the
  progress of the audit strategy implemented by the high risk Audit Authorities, a need has been identified to
  carry out additional audit work for Romania, focusing on public procurement, for Bulgaria, focusing on
  management verifications, as well as for Spain (central managing authority, Andalucia, Galicia and Valencia)
  and Italy (Calabria, Campania, Puglia and programme network and Mobility) focusing on both issues (public
  procurement and management verifications). In total 12 missions were carried out in 2010 covering 33
  operational programmes (out of which 23 Spanish programmes covered through the audit of the central
  managing authority). The resulting DG Regional Policy preliminary audit opinions on the effectiveness of the
  audited processes and programmes, pending the outcome of all contradictory procedures, were: 2 work well
  (Bulgaria transport programme and Andalucia, Spain), 21 work but some improvements are needed (20
  Spanish programmes with regards to the audit of the central managing authority and Puglia, Italy), 10
  qualified with significant impact (Bulgaria:2 programmes, Italy: Calabria, Campania and Reti e mobilita
  programmes, Spain: Galicia and Valencia, Romania39:3 programmes).
  Another specific enquiry was also launched in 2010 on ETC programmes, focusing on management
  verifications. 4 missions were carried out during the second half of 2010 and the enquiry will continue in
  2011. The DG Regional Policy audit opinions for the effectiveness of these programmes are: 2 work well
  (CTE Manche Mer du Nord et Interreg IVA Rhin supérieur) and 2 work partially since significant
  improvements are needed (Cooperacion Transfronteriza España-Francia et Italia-Francia frontiera
  marittima).
  Main Indicators: ERDF/CF 2007-2013 - complementary DG Regional Policy audit work
                              Coverage                                                               Results
           Indicator                Target         2009        2010                      Indicator                   2009          2010
  Number of on-the-spot                0            0          1640    Preliminary audit opinions issued by DG       N/A            37
  missions                                                             Regional Policy on the effectiveness of
                                                                       audited process, pending completion of
                                                                       contradictory procedure:
                                                                       - Works well, minor improvements needed                      4
                                                                       - Works, but some improvements needed                        21
                                                                       - Works partially, significant improvements
                                                                       needed                                                       12
                                                                       - Essentially does not function                              0


  39     For Romania: assessment limited to Intermediate Bodies SMEs: Economic competitiveness
  40   Including ETC.


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                           Coverage                                                        Results
            Indicator            Target     2009       2010                    Indicator             2009     2010
2010 interim payments(EUR         N/A        0        4,690
million,) covered by the OPs                          (18%)
included in the scope (% of the
total during the year)


          B) Cross-Border component of IPA 2007-2013
The IPA Cross Border Cooperation programmes (IPA CBC) differ from the mainstream ETC programmes
because of the involvement of at least one third country in the programme. They are implemented under the
IPA implementing Commission Regulation (EC) No 718/2007.
The Commission had approved the compliance assessment for 5 out of the 10 IPA CBC programmes at the
end of 2010. The recent approval of the compliance assessments is a first element confirming that the
systems are adequately designed for these 5 programmes. The Commission approved an additional
compliance assessment in February 2011. The approval for the remaining 4 programmes is expected in April
2011. The progress of these programmes is both in physical and financial terms very limited, and no interim
payment will be made as long as the compliance assessment is not approved. These programmes have been
included in the reservations.
For the 5 programmes with an approved compliance assessment, the audit authority issued a disclaimer of
opinion in its annual control report because of the limited possible audit work in 2010. For these
programmes, DG Regional Policy has used other building blocks to define the level of assurance. The
Commission covered the work of 8 responsible Audit Authorities for IPA-CBC through the audits under the
mainstream programmes. According to preliminary conclusions, all 8 audit authorities work well but some
improvements are needed in all cases. In addition, DG Regional Policy has based its conclusions for an
acceptable level of assurance on its knowledge of the functioning of the same national authorities in other
programmes, ETC in particular. This was however not possible for 2 out of these 5 programmes. Therefore
they are in reservation for reputational reasons to highlight the limited evidence received so far on the
functioning of the systems.


Main Indicators: Cross-Border component of IPA 2007-2013
                          Coverage                                                        Results
         Indicator              Target      2009       2010                      Indicator             2009    2010
Compliance assessments            10          -         10     Compliance assessments approved          0       541
received


             C) ERDF 2000-2006
             C.1)      DG Regional Policy's audit work up to 2010
Assurance on 2000-2006 ERDF (mainstream and INTERREG) programmes has been built up gradually
over the years. The effective functioning of the Member States' management and control systems has been
the subject of wide-ranging audits since 2004 covering key elements of management and control. The details
and results of this audit enquiry were already reported in the AAR for 2009. In terms of coverage, the
programmes audited represent 43% of the number of the mainstream programmes and 76% of the decided
ERDF contribution. As regards INTERREG, a separate audit enquiry launched in 2006 was concluded in
2009/2010 for the 23 programmes examined (28% of total programmes) representing 54 % of the decided
contribution.
Other audit work carried out in 2010 for the 2000-2006 programming period included the examination of the
11 annual control reports received under Article 13 of Regulation No. 438/2001 (ERDF) and Article 12 of
Regulation No. 1386/2002 (Cohesion Fund). Assessment letters were sent to all the Member States with
observations and, where necessary, requests for additional information in order to be able to draw as much
assurance as possible from the results of national audit work. Furthermore, 86 national system audit reports
were received and analysed in 2010.

41   The figure amounts to 6 which were approved by February 2011.


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The closure process of programmes started in 2010 with the submission to the Commission of closure
documents for most programmes (final implementation report, final declaration of expenditure, winding-up
declaration summarising the audit findings). Two important measures were taken between 2007 and 2010 in
order to increase assurance at closure:
     First, the Commission services prepared detailed guidance for the Member States in relation to the closure
     process and provided extensive training and information before closure (capacity-building actions). The
     Structural Funds Directorates auditors have worked together and produced joint methodology for
     analysing the winding-up declarations and closure audits, including joint quality analysis checklists.
     Secondly, an extensive preparatory enquiry was carried out from 2007 to review the winding-up bodies
     (WUB) in order to verify the assurance which can be placed on their closure work underpinning the
     winding-up declarations, to verify the preparation of Member States for closure and to identify and
     mitigate related risks. The 42 audits (including three in 2010) carried out under this enquiry, together with
     work done on the WUB as part of systems audits, resulted in coverage of WUB in charge of
     approximately 85% of the decided amount of the 2000-2006 programmes at the end of 2010.
During 2010, four audit missions were carried out to follow up previous ERDF systems audits (mainly
implementation of action plans) in three countries: in Spain (1), Germany (1) and Italy (2).
Main indicators: ERDF 2000-2006 - audit work up to 2010
                           Coverage                                                            Results
            Indicator            Target        2009       2010                       Indicator                    2009       2010
Cumulative audit coverage of      85%          85%       85%42     Reliability of Winding-Up Bodies reviewed                 379
funds for Winding-up Bodies                                        as per number of programmes audited by
(WUB) audited to decided                                           these WUB:
ERDF amount up to the end                                          - Reliable                                              273 (72%)
of the year                                                        - Not reliable                                          11 (3%)
Cumulative coverage on                                             - Not audited                                           95 (25%)
number of WUB audited               -          63%        63%
Cumulative audit coverage on        -                              (impact of these audit missions is reflected
amount committed:                                                  in the amounts of financial corrections per
- % of nr. of programmes and                              43%      Member State presented in section J below)
of decided amount - mainstream                            76%

- % of nr. of programmes and                              28%
of decided amount - Interreg                              54%
Cumulative nr. Of audit               -
missions for 2000-2006
programmes:
-WUB                                           39         42
-systems audits                                279        283


             C.2)      Analysis of the Winding-Up declarations
The work on the analysis of winding-up declarations (WUDs) received from Member States started in 2010.
The total number of ERDF programmes to close for 2000-2006 period is 379. There were 350 WUDs due
and received by end 2010, the remaining 29 being due by March 2011 (one received in advance by end 2010).
The analysis of WUD also takes into account any overall analysis or statement of assurance supplied in the
annual summaries, where available, and a closure review panel ensures consistency of analysis for all WUDs.
By end 2010, 279 WUDs had been analysed: 165 (47%) WUD had been accepted, for 114 (33%) WUD the
analysis was interrupted in order to request additional clarifications or audit work from the Member States
and for the remaining 71 (20%) WUD the analysis was ongoing43.


42   In 2010 there were two follow-up missions for the review of the Winding-up Bodies in: Spain (National level) and Germany
     (Saarland)
43   As of 25 March 2011, 94% of WUD have been analysed: 190 WUDs (54% of submitted WUDs) have been accepted or
     accepted with a correction; for 142 WUD (40%) the analysis has been interrupted to ask for additional information or audit
     work from the Member State authorities. The remaining 23 WUDs (6%) are under analysis or inter-service consultation in DG
     Regional Policy (this figure includes also WUDs for which the analysis was interrupted to request for additional clarifications
     and then resumed after Member State reply was received). 24 WUDs are still to be submitted by the Member States (deadline:
     end of March 2011).



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                                                    Winding-up opinion by Operational programmes
     Member State                                                                                                             Total

                                          Unqualified      Qualified         Adverse      No opinion   Not available52
     Austria (AT)                             11                                                                               11
     Belgium (BE)                              9                2                                                              11
     Cyprus (CY)                               1                                                                                1
     Czech republic (CZ)                                        4                                                              4
     Germany (DE)                             29                                              1                               30
     Denmark (DK)                                               2                                                              2
     Estonia (EE)                              1                                                                                1
     Spain (ES)                                                35                                                             35
     Finland (FI)                              6                                                                               6
     France (FR)                              40                                                                              40
     Greece (GR)                              19                                                                8             27
     Hungary (HU)                              2                2                                                              4
     Ireland (IE)                              6                                                                               6
     Italy (IT)                               35                1                                               1             37
     Lithuania (LT)                            1                                                                                1
     Luxembourg (LU)                           1                                                                                1
     Latvia (LV)                               1                                                                                1
     Malta (MT)                                1                                                                                1
     The Netherlands (NL)                      8                                                                               8
     Poland (PL)                               4                                                                               4
     Portugal (PT)                            21                2                                                             23
     Sweden (SE)                               7                                                                               7
     Slovenia (SI)                             1                                                                                1
     Slovakia (SK)                             3                                                                               3
     The United Kingdom (UK)                  27                5                                                             32
     ETC (cross-borders coop.)                56               10                             1              15               82
     Total                                    290              63                             2              24               379
The Winding-Up Bodies in the Member States classified their audit opinions as: unqualified, qualified, and
adverse or disclaimer in line with the closure guidance. DG Regional Policy undertook an in depth analysis
and classified the reported qualified opinions into "reasonable assurance with moderate impact" or "limited
assurance", depending on the qualifications reported by the WUB. The categorisation is provisional as
outstanding issues will be cleared in the coming months. DG Regional Policy agreed with the opinions
expressed in the WUDs in 261 cases (74%)44 and reclassified the opinion in 92 cases (26%). For the latter
programmes, this means that DG Regional Policy considered that it could not entirely rely on the work or
opinion of the Winding-Up Body to draw its assurance or took into account additional audit information at
its disposal (for one programme).
Finally, in order to complete all the above audit work, an enquiry on the closure of ERDF and CF assistance
for 2000-2006 is planned. Following an analysis of the residual risk for closure, on the basis of the audit work
carried throughout the programming period and the result of the assessment of the WUDs, DG Regional
Policy will carry out closure audits in 2011 in 9 Member States (CZ, DE, ES, IE, EL, IT, PT, SK and the
UK).
Main Indicators: ERDF 2000-2006 - Winding-Up declarations
                           Coverage                                                                   Results
           Indicator             Target        2009       2010                           Indicator                   2009             2010
Number of Winding-Up              350          N/A        351          Categorisation of OPs according to the        N/A              379
declarations received by end of                          (31/12/10)    national audit opinion. Total nr.:
year                                                       354         - unqualified (update on 29 Greece/03)            28           290
                                                         (15/03/11)
                                                                       - qualified                                                    63
                                                                       - adverse                                                       0
                                                                       - no opinion                                                    2
                                                                       - not available                                                24
44   26 cases not received or opinion not available in the Winding-up declaration were excluded from the total of 379


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                          Coverage                                                         Results
           Indicator            Target   2009     2010                        Indicator                 2009     2010
Number of Winding-Up             100%    N/A      279      Estimation by DG Regional Policy of the
declarations analysed                            (31/12/   level of residual risk in view of planning
                                                  2010)    closure audits (number of programmes):
                                                  332      Very Low                                            193 (51%)
                                                 (25/03/   Low                                                 147 (39%)
                                                  2011)
                                                           Medium                                               27 (7%)
                                                           High                                                 12 (3%)


             D) Cohesion Fund 2000-2006
             D.1)      DG Regional Policy's on-the-spot audit work (reminder)
In total there are 1192 Cohesion Fund (CF) projects for 2000-2006 (including the ex-ISPA projects and
bridge projects 1994-99), of which 797 were still on-going in the Member States at the end of 2010: 389 (EU-
4), 317 (EU-10) and 91 (EU-2). The sheer number of CF projects makes the audit universe particularly
complex. DG Regional Policy ensured good audit coverage of these projects in all Member States concerned
up to 2010, thanks to various enquiries focused on the specific risks linked to CF implementation.
Up to 2007, extensive audit work had been carried out to seek reasonable assurance on the effective
functioning of the management and control systems through the enquiry "Systems audits of the CF and audit of
CF projects". In 2005 a horizontal enquiry on "public procurement" was launched to carry out substantive checks
of the functioning of the management and control systems in the EU 10 Member States by checking on a
sample basis the practical implementation of public procurement procedures after accession. The enquiry was
extended to EU2 in 2007.
In 2007 a complementary enquiry "Review of Winding-up Bodies and audit of closed projects" was launched, based on
the consideration that the main remaining risk concerns the reliability of the work of the winding up bodies
and the assurance that can be placed on the declarations received at closure.
The analysis below provides details on the work carried out up to 2010, grouped in accordance with the
historical development of the Fund.
     EU-4 Member States (EL, IE, PT, ES)
A significant amount of work has been carried out for EU-4 Member States since 2001 and a high level of
audit coverage has been attained (between 18% and 56% of projects, up to 80% of allocations covered).
Action plans were imposed to correct weaknesses found (for example verification of a representative sample
of expenditure declared from 2000 to 2004 in PT) and/or financial corrections were made (for example in
EL for to the use of the "mathematical formula" in the award of public procurement contracts). For these 4
Member States the assessment on the reliability of the winding-up body is positive. In the case of Spain, DG
Regional Policy established by the end of 2010 that the majority of submitted winding-up declarations
contain irregular expenditures not adequately quantified and corrected by the winding up body, mainly
related to irregular public procurement procedures (complementary work, modifications). DG Regional
Policy takes mitigating actions by monitoring each case individually. Hearings are held with the Member State
with a view to carrying out all necessary financial corrections at the closure of each project.
As a conclusion for this group of Member States, the residual risk at the end of 2010 is considered low
(considering also the taken mitigating actions for Spain) and the assurance level regarding these Member
States is positive.
     EU-10 Member States (first enlargement of the Cohesion Fund Member States)
As a result of the substantial amount of audit work carried out by DG Regional Policy, good audit coverage
has been attained for most of the 2004 enlargement Member States (between 5% and 41% of projects). The
assessment on the reliability of the work of the Winding up body varies for this group of Member States.
When problems were detected, DG Regional Policy requested the authorities to implement remedial action
plans and to carry out additional retrospective verifications, to strengthen the preparatory work for closure
carried out before sending the winding-up declarations, and to apply appropriate financial corrections (for
example audit findings in the public procurement area were addressed by application, at closure, of a net 2%
flat rate correction on all Cohesion Fund projects not yet closed in PL). The main residual risk factors are:
public procurement procedures and doubts about some winding-up bodies' ability to detect such irregularities


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(HU) or to propose any financial corrections (LT), weaknesses in the functioning of the winding-up body
(LV). In one case (HU), serious issues and a relatively high error rate have been reported for transport
projects. These projects have been included in a reservation fir Hungary. All these risks are subject to
thorough verifications by DG Regional Policy when analysing the winding up declarations. DG Regional
Policy will continue to monitor these risks through the audits of samples of remaining open projects. In four
Member States (SI, CY, EE, MT) there are no outstanding audit issues and DG Regional Policy can place a
high degree of reliance on the winding up declarations to close the projects.
Based on this in-depth knowledge of the national systems, DG Regional Policy has confirmed a positive
assessment (sometimes with some issues) for most of the Member States within this group with the
exception of Hungary / transport sector.
     EU-2 Member States (second enlargement of the Cohesion Fund Member States)
As a result of the significant amount of audit work carried out by DG Regional Policy on the EU2 a good
audit coverage has been attained (47% of projects audited for Bulgaria and 35% for Romania). It has to be
noted that implementation of Cohesion Fund projects started late for these two Member States. As a result,
some projects are still open in Bulgaria and Romania.
Public procurement audits and projects audits carried out revealed deficiencies in the public procurement
area (selection and award criteria, application of deadlines, use of negotiated procedures) and weaknesses in
management verification. This led to financial corrections initiated by the Commission. The financial
corrections reported in 2010 for CF in Bulgaria amount to EUR 18.47 million. For Romania, cumulative
financial corrections since 2008 have amounted to EUR 11.41 million. DG Regional Policy identified
deficiencies in the work of the winding-up body in Bulgaria, made recommendations to improve it and
closely monitors the situation. For Romania the audit mission on the work of the winding-up body carried
out in 2009 has been closed with unqualified opinion, providing a good basis for relying on the winding-up
declarations received so far.
As a consequence, the level of assurance is quite positive for the purpose of this annual activity report.
Main Indicators: Cohesion Fund 2000-2006 – audit work
                             Coverage                                                            Results
         Indicator              2009      2010     Cumulative                         Indicator                    2009      2010
Number of closure audits          4        2          14           Opinions issued by DG Regional Policy                      2
in the year                                                        following closure audits:
                                                                   - High risk                                                 0
                                                                   - Medium risk                                               1
                                                                   - Low risk                                                  1
System audits – number of        2          0           162        Estimation of the residual risk for             N/A        16
audit missions by year end                                         beneficiary Member States at the end of                   0/ 4
                                                                   2010/ adjusted for financial exposure45:                  4/ 5
                                                                   - High residual risk                                      12/ 7
                                                                   - Medium residual risk
                                                                   - Low residual risk


             D.2)       Winding-Up declarations Cohesion Fund
For the 1192 projects of Cohesion Fund 2000-06, 491 winding-up declarations have been received and 475
(97%) have been assessed by end 2010 (in addition to the winding-up declarations that were rejected or sent
back to the Member States for corrections) by DG Regional Policy in order to closely follow up systemic
irregularities and to apply corrective measures where necessary. The following table presents the state of
acceptance of the analysed WUD for the Cohesion Fund.




45   The total of 16 Member States taken into account are from: EU2 (Bulgaria and Romania), EU4 (Greece, Ireland, Spain and
     Portugal) and EU10 (Cyprus, Czech Republic, Estonia, Hungary, Lithuania, Latvia, Malta, Poland, Slovenia and Slovakia).
     An updated risk reassessment was performed for the 2011-2012 period, taking into account the payments still to be made for
     the open projects (financial exposure in the coming years). In this context, the risk was reviewed to higher levels from low to
     medium for 5 Member States and from medium to high for four Member States


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Result of the review of the Winding-up Declaration for the Cohesion Fund at 31/12/2010
     MEMBER STATE           Received     Acceptance     Acceptance      Interruption    Rejection        Total         % of
                                           without          with          (missing                     reviewed        WUD
                                          financial      proposed          info/                                     reviewed
                                         correction      financial       additional                                   to total
                                                        corrections      audit work                                  received
                                                                             to
                                                                         be carried
                                                                            out)
       BULGARIA                 5              4              0               1             0              5           100%
         CYPRUS                 0              0              0               0             0              0            0%
     CZECH REPUBLIC            29             17              7               5             0             29           100%
        ESTONIA                25             19              2               1             0             22            88%
          SPAIN                199            44             65               0             90            199          100%
         GREECE                65             64              1               0              0            65           100%
        HUNGARY                14             12              0               2              0            14           100%
        IRELAND                 6              2              1               2             1              6           100%
       LITHUANIA               21             14              0               7             0             21           100%
         LATVIA                25             18              0               7             0             25           100%
         MALTA                  0              0              0               0             0              0            0%
        POLAND                 30              6              8               3             0             17            57%
       PORTUGAL                26             13              7               0             6             26           100%
        ROMANIA                 8              1              6               1             0              8           100%
        SLOVENIA               14             14              0               0             0             14           100%
        SLOVAKIA               24             10             14               0             0             24           100%
          Total                491           238             111             29             97           475           97%


          E) DG Regional Policy operational monitoring, especially for the 2007-13 programming
               period46
Throughout the 2007-2013 programming period, the Member States are responsible for implementing the
programmes co-financed under the Structural Funds. The current regulatory framework gives more
responsibility to the Member States illustrated notably by the following changes related to funds management
introduced for the 2007-2013 programming period: reimbursements are calculated at priority level (and not at
measure level); the rules on eligibility of expenditure are mainly established at national rather than European
level; Commission officials only participate in monitoring committees as advisors.
Ensuring that appropriate monitoring systems are in place and operational from the start of the programming
period, together with actively monitoring the progress of the operational programmes in all their qualitative
and financial aspects is an important task for the Commission. In this respect, the monitoring framework has
not changed significantly, being still based on the following activities:
   Examination of the annual implementation reports (AIR) from the Member States (key document to take
   stock of their programmes each year; however, the extent and quality of the information reported vary
   significantly between operational programmes);
   Annual review meeting with the managing authority (opportunity to ask the Member State and the
   managing authority to take appropriate actions addressing any weaknesses contained in the AIR);
   Participation in meetings of the monitoring committee (even if decisions are taken which strongly
   influence the content and quality of the implementation, the Commission has only an advisory role);
   Approval of major projects (the role played by the Commission in their approval helps to ensure policy
   performance and sound financial management);
   Establishment of active contact with the responsible authorities and carrying out of on-site visits (crucial
   to the overall effectiveness of monitoring and to go beyond the regulatory framework).
46    This description is largely based on the conclusions of the Internal Audit Report on monitoring activities at the level of
      geographic units (see also point 3.1.1.5.c)


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For instance, DG Regional Policy has been very active in Hungary to encourage the definition of a special
Action Plan on Public Procurement at national level. These efforts have been continued following the recent
turn-over of experienced staff at middle management level in the managing authority / implementing bodies.
As a consequence, the national regulation governing management verifications of public procurement was
amended in December 2010. The scope of ex-ante verifications was expanded and the role of a Procurement
Control Department was significantly reinforced (veto rights).
Even if quantitative indicators may be provided for these monitoring activities, the assurance given by the
geographic units/directorates of DG Regional Policy is on overall opinion based on all information available
to them as programme managers and authorising officers.
For the preparation of the annual activity report, all Heads of DG Regional Policy geographic units have
been requested to assess the level of operational implementation based on a common methodology. The
result is presented under point 1.1.3. In addition, they have been requested to report issues and risks on the
functioning of the managing authorities based on an indicative list of criteria. This analysis of Heads of units
does not correspond to a formal opinion on the assurance and should be considered as complementary
information.


Main Indicators: Operational monitoring
                         Coverage                                                       Results
          Indicator            Target     2009    2010                      Indicator                 2009    2010
Annual implementation reports   317        313    317      Annual implementation reports:
submitted                                                  - accepted                                 294      308
                                                           - interrupted/on-going                               9
Major projects submitted          814     215      422     Major projects procedures:
(cumulative figure)                               (March   - accepted                                 87       221
                                                   2011)
                                                           - interrupted                                       127
                                                           - on-going (non interrupted)                         89
                                                                                                              (March
                                                                                                               2011)
Assessment of operational         317     317      317     Operational assessment                     Na     see part
achievements and risks                                                                                         1.1.3
regarding effective functioning
of managing authorities                                    Functioning of the managing authorities:    na
                                                           - Programmes for which elements are               220 (out
                                                           highlighted                                        of 745)

                                                           of which:
                                                           - agreement with the audit opinions               85-90%
                                                           - complementary information disclosed             10-15%



           F) Annual summaries of Member States' audit activities and declarations for the year 2010
The European Court of Auditors reported in its 2008 and 2009 Annual Reports that the Commission
supervised the annual summaries exercise well. The Commission revised the guidance for the 2009
Summaries (submitted in February 2010) and reiterated its encouragement to the Member States to add value
to the summaries by providing additional information which is not communicated in other reports. This can
be done by analysing the functioning of systems, diagnosing problems and their solutions, describing good
practices and providing a declaration as to the degree of assurance the Member States derive from their
systems. The revised guidance note takes on board some of the recommendations formulated in the study of
5 June 2009 on the annual summaries commissioned by the European Parliament. Finally, the Commission,
as recommended by the European Parliament in its 2008 discharge resolution, commissioned an external
study to take stock of the added value of annual summaries after three consecutive exercises and to envisage
the possible contribution of annual summaries to the assurance building process, particularly in view of the
revision of the Financial Regulation.
The external, independent analysis done by the consultancy firm on the Member States' annual summaries
submitted from 2007 to 2009 was based on desk reviews of submitted documents, on meetings with
European Commission audit representatives and with a sample of Member State audit authorities and on the
review of national declarations and annual control reports. The study, which will be finalised in April 2011
and made public thereafter, concludes that the annual summary in its current form has provided little added



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value. It also confirms that whilst there were improvements in the compliance elements of the summary over
the three year process, the same was not true of voluntary disclosures, which have remained limited.
Twenty-six Member States have complied with the minimum requirements of the Financial Regulation
regarding information to be provided. Where necessary, Member States which have not completely followed
the recommendations in the Commission's guidance note, have been requested to provide the additional
information. For one Member State (Spain), there were non-compliance issues (major elements of the annual
summary were missing for 2000-2006 programming period), therefore the Commission have requested a
revised annual summary.
Sixteen Member States have provided an overall analysis and eleven Member States have provided a
statement of overall level of assurance, following the Commission recommendations to maximise the value
of the annual summaries. In such cases, the Directorate General has used this to corroborate its own
assessment of the national management and control systems or to complete information provided to the
Commission in the ACR, in some cases. Namely, BG, CZ, EL and RO reported in their overall analysis
similar weaknesses as the ones identified by DG Regional Policy for programmes put in the reservations,
without though providing a similar level of overall assurance. The other Member States that have
programmes in the 2010 list of reservations did not provide an overall level of assurance.

The detailed analysis of the annual summaries submitted by Member States for 2010 is presented in annex 8.


Main Indicators: Annual summaries
                        Coverage                                                             Results
          Indicator           Target          2009      2010                       Indicator               2009   2010
Annual summaries submitted      27             27        27      Compliance with minimum requirements of    23     26
                                                                 Financial Regulation
Template of the guidance note       27         27        25      Action by Commission:
been followed                                                    - accepted                                6       11
                                                                 - accepted with follow-up                 17      15
                                                                 - non compliance letter                   4       1
Overall Analysis provided           27         15        16
(voluntary aspect)
Overall level of assurance          27         9         11
statement provided
(voluntary aspect)


          G) National declarations
Four Member States - the Netherlands, the U.K., Denmark and Sweden – submitted national declarations on
a voluntary basis to the Commission. The Commission supports these initiatives and encourages these
Member States to share the process they follow in order for the Commission to be able to optimise the
assurance it may draw from their declarations. Public declarations issued at senior national level make the
control process in the Member States more transparent and help identify changes needed to make the system
more effective.
The Netherlands has recently submitted a national declaration covering 2010 expenditure. The other three
Member States have also issued their 2009 national declarations. The Commission reviewed these
declarations which may provide added information on the management and control systems and other
elements within the multi-annual framework. The Commission has also examined in detail the scope and
content of the existing voluntary national declarations as a basis for guidance on elements which add value.
The Commission considers that the information contained in all four national declarations is almost identical
to the information already provided by the Member States in other reports (Annual Summaries, Annual
Control Reports, Annual Statements etc) and that it has not proved to contribute to a great extent to the
information needed for the annual activity reports of the Director-General responsible for Cohesion policy.
In this respect, the additional information provided is similar to that supplied by another eight Member
States47 who appended a statement of assurance to their annual summaries for the structural funds for the
year 2009.

47   Bulgaria, Cyprus, Greece, Finland, France, Hungary, Lithuania and Romania.


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Following this analysis, the Commission services elaborated guidance on national declarations for the use of
Member States authorities, made available to Member States in March 2011. This guidance notes that the
format of each of these national declarations is currently quite diverse and does not always provide detailed
information on the underlying work and audit opinion supporting the declaration. The timing of the
declarations should also better suit the timeframe of the AAR so that the Commission may draw additional
assurance from it (opinion should be on the 2010 reimbursements made by the Commission in the Member
States concerned). The guidance, while encouraging Member States to develop such national declarations that
would fulfil the conditions for adding value to the Commission assurance building process, also concludes
that the Commission proposal on management declarations in the revised Financial Regulation, signed at the
operational level, may constitute a first more practical and useful step that could later be endorsed at a
political level in the Member States.


          H) Impact of controls: Interruptions of 2007-2013 payments in 2010
DG Regional Policy interrupts payment deadlines as soon as there is evidence to suggest a significant
deficiency in the management and control system supported in an audit report. This new legal tool, available
for the 2007-2013 programming period, enables preventive measures to be taken and to rapidly agree
remedial actions with the Member States, if necessary. Interruptions are decided by the Director General for
a maximum period of 6 months (after which a formal Commission decision for suspension or financial
correction is necessary). This tool has been used for interrupting payment claims in 2010, concerning
programmes in 7 Member States (cf. also follow-up to the 2009 reservations). The remedial action taken by
the Member States allowed payments to be resumed in many cases (the required audits have been
implemented, procedures for management verifications have been improved or the requested information
was provided) but 8 interruptions concerning 4 programmes were still open at year end pending the
implementation of on going remedial actions. New interruptions are being decided in the beginning of 2011,
mainly as a follow up to the deficiencies reported in the AAR.
The table below also presents the interruptions of payment deadlines issued in the first quarter of 2011, up to
31 March 2011: 43 payments claims have been interrupted for a six-month maximum period, corresponding
to 31 operational programmes out of the 36 under reservations because of significant weaknesses in a part or
the totality of their management and control systems. This shows that DG Regional Policy has acted quickly
and diligently in order to safeguard the Union's financial interests.
DG REGIO as a precautionary procedure froze payments in January 2011 in order to analyse the annual
control reports and opinions sent by the National audit authorities.




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Impact indicators: Interruption of payments in 2010 by Member States (in EUR):
                                                         Programming period 2007-2013 (ERDF / Cohesion Fund) – Interruptions of payment deadlines
                   Programmes concerned    Number of        Amount of         Type of                Type of weakness                           Interruptions lifted                 Interruptions              Final
  Member                                     payment      payment claims    interruptio                                                               in 2010                         still pending         assessment
   State                                      claimss     interrupted (in        n                                                           following positive results           at the end of 2010         2010AAR
                                           interrupted         EUR)                                                                                                                                           (by OP)
                                             in 2010
                                                                                     Interruptions decided in 2010
 Bulgaria        OP Environment                5              14,619,196     Art. 91       Shortcomings identified by the audit                          0                                 5               No assurance
                 (2007BG161PO005)                                                         authority in its systems audit reports in
                                                                                            particular on public procurements
 Germany         OP Transport                  6             119,211,343     Art. 91         Late implementation of the audit                            6                                 0                 Limited A
                 (2007DE161PO005 )                                                                         strategy                     Audits carried and reported to the                                  New issue as
                                                                                                                                                   Commission                                                  public
                                                                                                                                                                                                            procurement
                                                                                                                                                                                                             not audited
                 OP Berlin                      1             56,000,000         -           Request for technical clarifications                         1                                0                R-Moderate
                 (2007DE162PO004)                                                                                                             Clarifications received
                 OP Brandenburg                 1             42,602.585     Art. 91         Late implementation of the audit                             0                                  1               Limited A
                 (2007DE161PO002)                                                                          strategy                                                              (lifted in March 2011)
 Spain           OP Andalucía                  21           1,477,274,643     Art 91       Delays in the implementation of audits                        21                                  0             R-Moderate
                 (2007ES161PO008)                                                         (non-compliance with the audit strategy)     The Spanish authorities carried out the                            But reservation
                 OP CF-ERDF                                                                                                           requested audits and reported on this to                                for 13
                 (2007ES161PO009)                                                                                                                the Commission                                            intermediate
                 OP Cantabria                                                                                                                                                                                 bodies
                 (2007ES162PO001)
                 OP Cataluña
                 (2007ES162PO006)
                 OP Baleares
                 (2007ES162PO007)
                 OP Aragón
                 (2007ES162PO008)
                 OP Castilla y León
                 (2007ES162PO009)
                 OP Valencia
                 (2007ES162PO010)
                 OP Canarias
                 (2007ES162PO011)
                 OP I.D.I.
                 (2007ES16UPO001)
                 OP Asistencia Técnica y
                 Gobernanza
                 (2007ES16UPO002)
 Hungary         OP Transport                   1              32,955,56      Art 91      Weaknesses in management verifications                         1                                 0                R-Moderate
                 (2007HU161PO007)




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                                                           Programming period 2007-2013 (ERDF / Cohesion Fund) – Interruptions of payment deadlines
                   Programmes concerned      Number of        Amount of         Type of                Type of weakness                             Interruptions lifted              Interruptions          Final
  Member                                       payment      payment claims    interruptio                                                                 in 2010                      still pending     assessment
   State                                        claimss     interrupted (in        n                                                             following positive results        at the end of 2010     2010AAR
                                             interrupted         EUR)                                                                                                                                      (by OP)
                                               in 2010
 Italy           OP Campania                        1           83,836,966      Art 91      Significant delay in the implementation                      1                                 0            No assurance
                 (2007IT161PO009)                                                                     of the audit strategy             Audits undertaken and reported to the                           New issue on
                                                                                                                                                    Commission                                          both audit and
                                                                                                                                                                                                          managing
                                                                                                                                                                                                          authorities
 Portugal        2007PT161PO001 (OP               1            103,280,025      Art 91      Inadequate management verifications on                         1                               0             R-Moderate
                 Competitividade                                                                financial engineering instruments       Establishment of adequate procedures
 United          Cornwall and the Isles of       10            183,573,581      Art 91       Qualified opinions on the effectiveness                      10                               0             Limited A
 Kingdom         Scilly (2007UK161PO003)                                                    of the management and control systems       Audit Authority lifted the qualification                            for 6
                 South East England                                                         in the Annual Control Reports for 2009      after key requirements have been met                            programmes
                 (2007UK162PO002)                                                                  (management verifications)          and after management verifications have                          due to a high
                 East of England                                                                                                       been executed properly; follow-up audit                           error rate
                 (2007UK162PO004)                                                                                                         by the Commission confirmed the
                 North East England                                                                                                           revised opinion of the AA
                 (2007UK162PO005)
                 London2007UK
                 (162PO006)
                 West Midlands England
                 (2007UK162PO007)
                 North West England
                 (2007UK162PO008)
                 Yorkshire and Humberside
                 (2007UK162PO009)
                 East Midlands
                 (2007UK162PO010)
                 South West England
                 programme
                 (2007UK162PO011)
                 South East England
                 (2007UK162PO002)
                 Lowlands and Uplands of         2              26,269,241      Art 91       Audit work of the audit authority not                           0                             2              Limited A
                 Scotland                                                                    completed and error rate not reliable
                 (2007UK162PO001)
                 Highlands and Islands of
                 Scotland
                 (2007UK161PO001)
 TOTAL in 2011                                   49           EUR 2.15                                                                                      41                             8
                                                                billion




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                                                                                                               3.1.1 - Shared Management / Assessment by DG Regional Policy / Impact of controls


                                                           Programming period 2007-2013 (ERDF / Cohesion Fund) – Interruptions of payment deadlines
                   Programmes concerned      Number of         Amount of         Type of               Type of weakness                         Interruptions lifted         Interruptions          Final
  Member                                       payment          payment        interruption                                                           in 2010                 still pending     assessment
   State                                      deadlines         requests                                                                     following positive results   at the end of 2010     2010AAR
                                             interrupted     interrupted (in                                                                                                                      (by OP)
                                               in 2010            EUR)
                                                                           Interruptions decided in 1st Quarter 2011
 Czech           OP Podnikání a inovace          2              130,366,820      Art 91       Inadequate management procedures                         N/A                      N/A             Limited A
 Republic        (2007CZ161PO004)                                                                      (selection of operations,
                                                                                                   verifications) and insufficient
                                                                                              monitoring of delegated audit bodies.
 Germany         Mecklenburg-Vorpommern           1             129,419,411      Art 91            Significant weaknesses in the                       N/A                      N/A             Limited A
                 (2007DE161PO003)                                                              methodology for system audits and
                                                                                                         audits of operations
                 OP Transport                    4                7,420,966      Art 91         Insufficient audit work regarding                      N/A                      N/A             Limited A
                 (2007DE161PO005)                                                                     public procurement rules
                 Baden-Württemberg                1               7,733,001      Art 91       Delayed implementation of the audit                      N/A                      N/A             Limited A
                 (2007DE162PO008)                                                                strategy and audit work not fully
                                                                                                compliant with international audit
                                                                                                                standards
                 Sachsen-Anhalt                   1             101,047,295      Art 91        Insufficient evidence that the audit                    N/A                      N/A
                 (2007DE161PO007)                                                                   recommendations hale been                Lifted in February 2011
                                                                                                              implemented
 Greece          Accessibility improvement       2              132,432,079      Art 91       Shortcomings identified by the audit                     N/A                      N/A             Limited A
                 (2007GR161PO004)                                                             authority in its systems audit reports
                                                                                              in particular on public procurements
 ETC             Euregio Maas Rijn                1               2,120,222      Art 91              Insufficient audit work and
                 (2007CB163PO001)                                                             inadequate management procedures
                                                                                                       (selection of operations,
                                                                                                              verifications)
                 Espania-Francia                  1              10,247,902      Art 91                 Significant delay in the                       N/A                      N/A             Limited A
                 (2007CB163PO006)                                                             implementation of the audit strategy
 Italy           Network and Mobility             1              40,309,542      Art 91       Inadequate management procedures                         N/A                      N/A             Limited A
                 (2007IT161PO005)                                                                      (selection of operations,
                                                                                                              verifications)
                                                                                                   Inadequate audit procedures
                                                                                                (separation of functions, systems
                                                                                                      audit, audit of operations)
                 Calabria                        2               36,281,606      Art 91       Inadequate management procedures                         N/A                      N/A             Limited A
                 (2007IT161PO008)                                                                      (selection of operations,
                                                                                                              verifications)
                                                                                               Inadequate audit procedures (audit
                                                                                                       trail, corrective actions)
                 Campania                        2               72,212,292      Art 91       Inadequate management procedures                         N/A                      N/A            No assurance
                 (2007IT161PO009)                                                                      (selection of operations,
                                                                                                              verifications)
                                                                                                   Inadequate audit procedures
                                                                                                (separation of functions, systems


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                                                             Programming period 2007-2013 (ERDF / Cohesion Fund) – Interruptions of payment deadlines
                   Programmes concerned        Number of         Amount of         Type of               Type of weakness                         Interruptions lifted         Interruptions          Final
  Member                                         payment          payment        interruption                                                           in 2010                 still pending     assessment
   State                                        deadlines         requests                                                                     following positive results   at the end of 2010     2010AAR
                                               interrupted     interrupted (in                                                                                                                      (by OP)
                                                 in 2010            EUR)
                                                                                                      audit, audit of operations)
                 Lazio                              1               8,284,980      Art 91       Shortcomings identified by the audit                     N/A                      N/A            No assurance
                 (2007IT162PO016)                                                               authority in its systems audit reports
                                                                                                    in particular on management
                                                                                                 verification and on certification; in
                                                                                                addition, incomplete annual control
                                                                                                                 report
                 Sardegna                          2               12,492,284      Art 91       Shortcomings identified by the audit                     N/A                      N/A            No assurance
                 (2007IT162PO016)                                                               authority in its systems audit reports
                                                                                                    in particular on management
                                                                                                   verification and on certification;
                                                                                                  incomplete annual control report
 Lithuania       Economic Growth                    1              31,861,254      Art 91       Shortcomings identified by the audit                   N/A                        N/A             Limited A
                 (2007LT161PO002)                                                               authority in its systems audit reports       Payment request withdrawn
                                                                                                    in particular on management
                                                                                                verification within one Intermediate
                                                                                                                  Body
 Spain           Galicia                           15             176,428,486      Art 91       Shortcomings identified by the audit                     N/A                      N/A            R-Moderate
                 (2007ES161PO005)                                                               authority in its systems audit reports
                 Andalucia                                                                      regarding some intermediate bodies
                 (2007ES161PO008)
                 Cantabria
                 (2007ES162PO001)
                 País Vasco
                 (2007ES162PO002)
                 Navarra
                 (2007ES162PO003)
                 La Rioja
                 (2007ES162PO005)
                 Baleares
                 (2007ES162PO007)
                 Aragón
                 (2007ES162PO008)
                 Comunidad Valenciana
                 (2007ES162PO010)
                 Investigación, Desarrollo e
                 innovación por y para el
                 beneficio de las empresas
                 (2007ES16UPO001)
                 Asistencia Técnica y
                 Gobernanza
                 (2007ES16UPO002)




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                                                          Programming period 2007-2013 (ERDF / Cohesion Fund) – Interruptions of payment deadlines
                   Programmes concerned     Number of         Amount of         Type of              Type of weakness                        Interruptions lifted         Interruptions         Final
  Member                                      payment          payment        interruption                                                         in 2010                 still pending    assessment
   State                                     deadlines         requests                                                                   following positive results   at the end of 2010    2010AAR
                                            interrupted     interrupted (in                                                                                                                   (by OP)
                                              in 2010            EUR)
 United          North East England              6             109,284,094      Art 91        High errors reported by the audit                     N/A                      N/A            Limited A
 Kingdom         (2007UK162PO005)                                                             authority in the Annual Control
                 London England                                                              Report linked to non fully effective
                 (2007UK162PO006)                                                            management and control systems.
                 North West England
                 (2007UK162PO008)
                 Yorkshire and Humberside
                 England
                 (2007UK162PO009)
                 East Midlands England
                 (2007UK162PO010)
                 South East England
                 (2007UK162PO011)

 TOTAL in 2011                                  43            EUR 1.00
                                                                billion




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                                                          3- Building blocks towards reasonable assurance
                        3.1.1 - Shared Management / Assessment by DG Regional Policy / Impact of controls

           I) Impact of controls: Suspension decisions in 2010
DG Regional Policy established a policy in 2008 to ensure more rapid adoption of decisions for suspension
of payments and financial corrections, when serious weaknesses are detected. The more rigorous approach is
demonstrated by the adoption of 6 suspension decisions in 2008 and 6 in 2009 compared to one in 2007. No
additional suspension was decided in 2010: 1994-1999 programmes are closed, most 2000-2006 programmes
reached the 95% threshold for payments (no Commission payment necessary before closure and where
necessary, financial corrections decisions will be taken at closure) and for 2007-2013 programmes the
Director General's new payment interruptions instrument which operates on a preventive basis allowed
timely action to be taken without requiring a formal Commission decision. 3 suspension decisions for 2
German and 1 Interreg 2000-2006 programmes remained in force at year end as the identified deficiencies
(management verifications and audit function) were not solved and the closure procedure is interrupted
(DE). In the case of the Interreg DK/SE programme, payment will be resumed when it is agreed to
implement the necessary financial corrections following audit results at closure (Interreg DK/SE
programme).


           J) Impact of controls: Financial corrections in 2010
The more rigorous policy towards financial corrections taken by DG Regional Policy in 2008, when serious
weaknesses are detected, is demonstrated through the increase in the overall figure for financial corrections in
2008, 2009 and 2010 compared to the years before the 2008 Action Plan. Cumulative financial corrections
for ERDF/CF imposed on Member States by EU audits in the period 2000-2010 amounted to EUR 6.7
billion, while the corresponding figure for the 2008-2010 period only amounted to EUR 3.9 billion. Financial
corrections presented in the table below include corrections decided by the Commission or agreed by the
Member States for ERDF/CF, as a result of Commission and Court of Auditors audits or OLAF
investigations. EUR 6.5 billion or 97% of these decided/agreed corrections have been implemented through
recovery orders from the Commission or withdrawals by the Member States from previous expenditure
statements, so that the EU budget is protected. The remaining EUR 187 million of financial corrections
decided or agreed will be implemented by closure of programmes. Additional financial corrections for the
2000-2006 programmes are expected during the closure process in 2011 and DG Regional Policy will audit
closed programmes in 2011 and 2012 to verify that the residual risk of error, following all corrections, is low.




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Impact indicators: Financial corrections decided or agreed in 2010 by period, fund, country (in EUR) 48
       Member            Cumulative           Reservation                           Cohesion Fund                                       Structural Funds (ERDF)                              Cumulative          Reservation
        State              amount              2009 AAR              Period            Period                 Period              Period          Period      Period                           amount             2010 AAR
                         01/01/2010                                  1994-99           2000-06                2007-13             1994-99        2000-06      2007-13                        31/12/2010
     Austria                     502,007           NO                                                                                                                                               502,007             NO
     Belgium                   6,360,327           NO                                                                                                       136,307                               6,496,634             NO
     Bulgaria                  2,419,771           YES                                     18,473,452                                                                                            20,893,223             YES
     Cyprus                                        NO                                                                                                                                                                   NO
     Czech Republic              113,008           NO                                       6,814,711                                                     4,261,711                              11,189,430             YES
     Germany                 325,587,123           YES                                                                                   79,645             489,249                             326,156,017             YES
     Denmark                   1,827,798           NO                                                                                                                                             1,827,798             NO
     Estonia                     130,195           NO                                                                                                        9,172              132,914             272,281             NO
     Greece                1,419,136,627           NO                      31,141            -157,142                                1,483,098          40,116,637                            1,460,610,361             YES
     Spain                 2,513,005,841           YES                    115,666         103,933,920                              115,612,377         169,610,287                            2,902,278,091             YES
     Finland                     446,954           NO                                                                                                                                               446,954             NO
     France                  108,867,441           NO                                                                                                   16,451,573                              125,319,015             NO
     Hungary                  44,728,469           NO                                                                                                       38,764              286,990          45,054,223             YES
     Ireland                  47,788,768           NO                                         627,640                                                    1,840,682                               50,257,091             NO
     Italy                   876,990,181           YES                                                                                   32,222         97,294,389                              974,316,792             YES
     Latvia                      866,081           NO                                         506,270                                                                                             1,372,352             YES
     Lithuania                   714,989           NO                                          30,177                                                                                               745,166             YES
     Luxembourg                  320,852           NO                                                                                                                                               320,852             NO
     Malta                                         NO                                                                                                                                                                   NO
     Netherlands               7,812,102           NO                                                                                                                                             7,812,102             YES
     Poland                   92,385,991           NO                                     111,246,392                                                      -355,007              20,708         203,298,084             NO
     Portugal                214,268,139           NO                                      12,925,561                                1,891,132              282,602             479,517         229,846,950             NO
     Romania                   9,683,079           NO                                       1,728,070                                                                                            11,411,149             YES
     Sweden                      493,541           NO                                                                                                        95,028                                 588,569             NO
     Slovenia                                      NO                                                                                                                                                                   NO
     Slovakia                 38,090,877           NO                                       1,668,163                                                      168,773                               39,927,813             NO
     United Kingdom          213,559,147           YES                                                                               6,010,491          28,646,647                              248,216,286             YES
     INTERREG                  8,912,096           YES                                                                                 122,202           8,995,328                               18,029,627             YES
     TOTAL               5,935,011,407                                    146,807         257,797,214                     0        125,231,167         368,082,142              920,128       6,687,188,866




48   Includes corrections made by Member States, following agreement under the relevant procedure or as a result of implementation of action plans (which may cover many programmes) and formal Commission decisions.




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Financial corrections reported by Member states
In 2010 Member States reported EUR 3.56 billion of cumulative financial corrections resulting from their
national audit work at the end of 2009 for the 2000-2006 programmes (total withdrawals of EUR 1.855
billion and recoveries EUR 1.7 billion). These figures were considerably updated, following the Commission's
analysis and requests for clarifications to Member States. The on-the-spot audit work undertaken by DG
Regional Policy under the 2008 Action Plan to audit the national systems for recoveries for 2000-2006
programmes was completed in 2010 for the last six Member States. Even if the latest results are still
preliminary, the results of the whole enquiry as well as the audits carried out by the Court of Auditors in the
last two annual reports showed that Member States' authorities generally follow the requirements, although
significant weaknesses still existed in respect of the completeness of data and the system for recording and
reporting irregularities for some 2000-2006 programmes in Italy, Spain, France and the Netherlands. To a
lesser extent, weaknesses also existed in programmes in the UK, Slovenia, Finland, Sweden and Latvia. Even
if improvements have been identified in all Member States during the years 2007-2010 by the Commission
audits, the Commission has remained prudent at closure and requested all programmes authorities to report
the follow-up (including financial corrections) that was given at national level to all irregularities registered in
the debtor's ledger for each programme. The Commission will not close programmes until it assesses this
information as coherent and complete.
Member States also reported for the first time financial corrections (EUR 6 million) and pending recoveries49
(EUR 1.59 million) for the 2007-2013 programming period in March 2010, in accordance with the new,
standardised template for reporting. DG Regional Policy continued to contribute to the regular reporting to
the European Parliament on financial corrections. The 2010 figures will be reported by end March 2011 and
DG Regional Policy intends, after a thorough analysis of these reports for any inconsistencies or
incompleteness, to start an enquiry in 2011 on the systems for recoveries in Member States where risks
(doubts, inconsistencies) will have been identified, taking also account of other available audit results on the
functioning of the responsible certifying authorities.
Financial correction procedures in the pipeline
At the end of 2010, correction procedures for the 1994-1999 programming period and previous periods were
in progress at Commission level for approximately 180 programmes/projects. The diminution in the number
of procedures and amounts compared to the previous years reflects the fact that most financial corrections in
the pipeline in 2010 have now been decided and/or implemented and financial corrections are now expected
only at closure of the 2000-2006 programmes.
For 2007-2013 few Commission corrections are already in the pipeline, since a low level of errors has been
detected by Community audits on the first years of implementation of these programmes. DG Regional
Policy will remain attentive and will carefully check the recoveries and withdrawals to be reported by Member
States at 31 March 2011, to ensure that there is consistency between reported recoveries and the national
audit findings reported in 2010 by the Audit Authorities (see above).


                   Fund                          Number of procedures in the                   Estimated amount in EUR
                                                   pipeline (Commission)
                                                    1994-1999 and pre-1994
             Cohesion Fund                                    1                                          540,522
                ERDF                                          38                                        18,455,195
                                                           2000-2006
             Cohesion Fund                                    90                                       261,018,412
                ERDF                                          48                                       178,025,609
                                                           2007-2013
                ERDF/CF                                       3                                          966,299
                  Total                                      180                                       459,006,037




49   This amount reported by Member States in March 2010 may include part of the EUR 989 and 66 million (ERDF and CF
     respectively) reported to OLAF as pending or potential recoveries through notified irregularities, in accordance with regulation
     1681/94 as modified.


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                                                            3.1.1 - Shared Management / Results from audits in 2010

3.1.1.4. Building block 2: Results from audits in 2010
             A) European Court of Auditors' main findings and recommendations
                A.1) Annual report and DAS 2009
Relevant findings of the European Court of Auditors
In its Annual Report for 2009, the European Court of Auditors (the Court) concluded from its audit work
that the reimbursement of expenditure for Cohesion policy projects was affected by a material level or error
(most likely above 5%), as was the case in the previous 3 years. It estimated that at least 3% of the total
amount reimbursed should not have been reimbursed because it did not meet the required conditions. The
corresponding figure was 11% in 2008 and 2007 and 12% in 2006. All errors noted by the Court are
followed-up by the European Commission. The Court audited the Commission’s follow-up work in 2010 in
relation to 2006, 2007 and 2008 and concluded that it was satisfactory.
The drop in the error rate demonstrates a significant improvement compared to the 2008 Annual Report.
Other improvements include the reduction in the frequency of errors, which has continuously decreased over
the last three years (from 69% in 2006 to 36% in 2009) and the improvement in the quality of the Member
States' audited management and control systems, as none of the 16 audited systems was considered this year
to be ineffective (classified in "red"). DG Regional Policy wishes to remain prudent about these
improvements which, in its view, indicates the positive impact of the preventive and corrective actions taken
under the Commission Action Plan to strengthen its supervisory role50 and the security net (compliance
assessment procedure) provided by the reinforced control framework for the 2007-2013 programmes. DG
Regional Policy will continue to closely monitor the situation and to take rigorous actions, when there is a
risk or detection of deficiencies or serious irregularities.
As regards the Annual Activity Report, the Court gave for the first time an "A" rating to the Structural Funds
DGs’ Annual Activity Reports for their usefulness as a source of information for the Court’s annual
Statement of Assurance (DAS) and for its overall assessment of the functioning of the supervisory and
control system for structural actions (partially compliant)
The Court made recommendations in its Annual Report for 2009 to encourage the Commission to continue
its strict supervision of the management and control systems in the Member States and to tackle the main
source of errors in its DAS 2009 audits, public procurement:
- encourage Member State authorities to apply corrective mechanisms before certification of expenditure to
    the Commission;
- ensure that substitution of ineligible with new expenditure does not lead to new irregular expenditure
    being declared;
- ensure an effective functioning of national management and control systems for 2007-2013;
- and finally, monitor closely the application of EU Directives on public procurement in Member States.
With regard to the first recommendation, the Commission carried out up to 2010 a rigorous examination to
ensure that management and control systems were correctly set up and foresaw appropriate mechanisms to
prevent, detect and correct irregularities before certification of expenditure to the Commission. DG Regional
Policy also started in 2009 to audit high-risk audit authorities to verify that appropriate and reliable audits
were in place to timely audit high risk programmes and bodies and verified that appropriate financial
corrections had been applied where necessary. These two enquiries form the basis of DG Regional Policy's
audit work for 2011.
With regard to the second recommendation, the Commission is closely following up this risk at closure of
the 2000-2006 programmes. DG Regional Policy is particularly attentive during the closure process to the
inclusion of retrospective projects into the 2000-2006 programmes by Member States.
On the third recommendation, the Commission continues its work to verify the functioning of management
and control systems through its own audit work and building on the annual audit opinions provided by the
audit authorities. The Commission continued to take rigorous actions in 2010 by interrupting payment claims
amounting to EUR 2.2 billion.

50   Communication from the Commission to the European Parliament, the Council and the Court of Auditors: An action plan to
     strengthen the Commission's supervisory role under shared management of structural actions. COM(2008)97.



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Finally, on public procurement, the Commission is taking active steps to clarify and simplify the rules. The
Commission published a Green Paper on public procurement with concrete, open questions for adapting the
Directives in the framework of the Single Market Act and is working on a comprehensive evaluation of how
the current provisions have served the functioning of core procurement disciplines. The Commission also
proposed to the Court to discuss the quantification of errors related to public procurement, as it disagrees
with the approach of quantifying errors at either 0% or 100% as the Commission imposes proportionate
corrections to Member States, namely 2%, 5%, 10%,25% or 100%.
Through the examination of functioning systems the Court concluded on the compliance of systems for 11
programmes. It found the managing authorities partially compliant in 8 cases out of 11, the certifying
authority partially compliant in only one case and the audit authority partially compliant in 2 cases.
Sometimes the lack of compliance was very focused on detailed procedures. This was an improvement
compared to the Court’s reports in previous years. The Commission is following up all ECA’s findings.
For DAS 2009, 9 out of 18 cases are open, most in contradictory procedure or to be treated at closure. These
cases are: Interreg DE/CZ, DE Sachsen Anhalt, DE Niedersachsen, FR Pays de la Loire, LU SPD Objective
2, LT Economic Development, Interreg UK/IE, SE/Mellerstra Norrland and SK CF projects.

                                             Court of Auditors – DAS 2009
      Member               ECA           DAS 2009 –Description of                 Commission actions underway
   State/Region/       assessment of    weaknesses identified by the
    Programme/            MCS /                   Court
                         corrective
         Fund            capacities
                                           2007-2013 programming period
 HU / Economic          Compliant      Ineligible        expenditure     Member State agrees to a Financial correction
 Development /                         identified of EUR 171 681.        of EUR 39 857. REGIO closed the follow-up.
 ERDF 07-13
 EL              /      Compliant      N/A                               Closure letter to be sent by EC
 Competitiveness
 and
 Entrepreneurship
 / ERDF 07-13
 DE / Sachsen-           Partially     Breach of public procurement      Follow-up letter to be sent after clarification of
 Anhalt                 compliant      rules (award of the fund          REGIO position on financial engineering (new
 Convergence /          (Managing      management via negotiated         COCOF guidance note).
 ERDF 07-13             Authority)     procedure); risk of double
                                       declaration of expenditure to
                                       the Commission; weakness of
                                       management            controls;
                                       ineligible processing fees; use
                                       of interest generated and
                                       resources returned to cover
                                       the cost of national co-
                                       funding.
 DE            /         Partially     Shortcomings in procurement       Follow-up letter to be sent.
 Niedersachsen          compliant      procedure in one project
 (Lüneburg)    /        (Managing      audited    by the Court
 ERDF 07-13             Authority)     (competitive         tendering
                                       followed by direct award).

 EE           /          Partially     Second level intermediate         Member State revised and improved
 Development of         compliant      body had not implemented          procedures; finding is closed; REGIO has sent
 Economic               (Managing      procedures for on the spot        out the final position letter on 25/01/2011
 environment  /         Authority)     verifications.                    (ARES(2011)82254). Member State accepted
 ERDF 07-13                                                              the correction.
                                       Management       verifications
                                       should       be    improved.
                                       Ineligible       expenditure
                                       identified of EUR 5 691
 SE / Mellersta          Partially     Shortcomings in one project       REGIO has sent out the final position letter to


Regio_aar_2010_final                                                                                              Page 52
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                                                             3.1.1 - Shared Management / Results from audits in 2010
                                                 Court of Auditors – DAS 2009
      Member                   ECA           DAS 2009 –Description of                   Commission actions underway
   State/Region/           assessment of    weaknesses identified by the
    Programme/                MCS /                   Court
                             corrective
         Fund                capacities
 Norrland              /    compliant      audited by the Court were not      the    Member       State   on    19/01/2011
 ERDF 07-13                 (Managing      picked-up during the on-the-       (ARES(2011)58615). Member State shall reply
                            Authority)     spot checks of the MA. Total       by 5 April 2011. REGIO has proposed the
                                           Ineligible        expenditure      Financial correction of EUR 180 464.
                                           identified is EUR 180 437.
 FR / Pays de la             Partially     Weaknesses in separation of        REGIO has sent out first follow-up letter to
 Loire / ERDF               compliant      functions. Checklist for the       the Member State on 16/02/2011.
 07-13                      (Managing      Art. 13 checks was not
                            Authority)     sufficiently detailed on public    According to the Commission guideline on
                                           procurement.          Ineligible   Public Procurement (COCOF 07/0037/03/FR)
                                           expenditure identified of          Financial correction of 25% of EUR 1 626 861
                                           EUR 1 626 861 (100% of the         is proposed by DG Regional Policy.
                                           contract).                         Member State has until the 16/04/2011 to
                                                                              reply.
 LT / Economic               Partially     1. Management and Control          REGIO will send out a final position letter to
 growth / ERDF              compliant      System description was not         the Member State in March 2011.
 07-13                      (Managing      complete
                            Authority)
                                           2.      Checklists     required
                                           verifying that certain selection   This programme has been included in the reservation.
                                           criteria, however, no such
                                           checks were carried out.
                                           3. Shortcomings in checklists
 HU            /             Partially     MA: Weaknesses in checklists       REGIO has closed all findings. It has sent out a
 Environment and            compliant                                         final closure letter to the Member State.
 Energy / CF 07-            (Managing      CA: 1. Lack of review of the
 13                        Authority and   certifying authority of the        Member State accepted the financial correction
                            Certifying     rules of procedures of the         of EUR 350 000 according to the guide line of
                            Authority)     intermediate bodies                the Commission. DG REGIO accepted it and
                                                                              closed the finding.
                                           2. Shortcomings in the IT
                                           system
                                           Ineligible       expenditure
                                           identified of EUR 1 178 403
                                           (100% of the contract)
 Interreg / UK-IE            Partially     MA: Inadequate monitoring          REGIO has sent out first follow-up letter to
 / ERDF 07-13               compliant      by the MA of the Joint             the Member State on 16/02/2011.
                            (Managing      Technical Secretariat.
                           Authority and                                      Waiting for MS reply.
                              Audit        AA: 1. Lack of a final version
                            Authority)     of the Audit Authority's
                                           Manual of Procedures
                                           2. Insufficient audit trail is
                                           kept of the audits carried out.
 ES / Castilla La            Partially     Insufficient systems audits.       REGIO has closed the finding without financial
 Mancha / ERDF              compliant                                         correction, as explained in the Commission
 07-13                        (Audit       Ineligible       expenditure       answer to the Annual Report 2009 (4.20d).
                            Authority)     identified of EUR 16 803 354       Correction had been done by the Member
                                           (100% of the contract)             State. It has sent out a follow-up letter to the
                                                                              Member State.


For 2000-2006 programmes, the Court audited only one aspect of the systems in the Member States, the
recording and reporting of errors and financial corrections. It found that systems are partially satisfactory and
that the reporting of the figures on withdrawals and recoveries to the Commission had some room for
improvement. This finding coincides with what was noted by the Commission in its report. By the end of



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2010, DG Regional Policy had carried out audit missions to 25 Member States51 to assess their reliability and
completeness of the data on withdrawals and recoveries for all structural funds and has issued
recommendations whenever appropriate. In 2010 DG Regional Policy checked all figures on financial
corrections that were provided by the Member States for 2009. In the context of the closure procedure for
the 2000-2006 programmes, DG Regional Policy will focus among others on verifying the reliability and
completeness of the data provided by the Member States, and for 2007-2013 programmes DG Regional
Policy will launch a special enquiry to verify the functioning of the systems for recoveries in programmes
identified as risky.


Main Indicators: Court of Auditors
                           Coverage                                                             Results
          Indicator             Target       2008       2009                      Indicator                  2008       2009
Size of sample52                 N/A         170        180       % payments in the sample affected by     43% (73)   36% (64)
                                                                  errors (number of transactions in the
out of which ERDF                             94         118      sample affected by errors )*                        40% (47)
out of which CF                               27         18                                                           33% (6)
                                                                  ERDF only
                                                                  CF only
Number of programmes              N/A         18         23       % payments with errors affected by       62% (45)   47% (30)
audited by the Court                                              quantifiable errors (number of
                                                                  transactions in the sample affected by
out of which ERDF prog.                       10         15       quantifiable errors 52
out of which CF projects                      3          3
                                                                  ERDF only                                           38% (18)
                                                                  CF only                                             17% (1)
                                                                  Error rate
                                                                  Lower error limit                         11%          3%
                                                                  Most likely error                         > 5%        > 5%


                A.2) Performance audits
In 2010, the European Court of Auditors issued several special reports to assess the performance of EU
investments concerning rail infrastructures, supply of water for domestic consumption and the support to
research infrastructures. The findings and recommendations of these audits have been presented and
discussed with the European Parliament and the Commission.
SR 2/2010: The effectiveness of the Design Studies and Construction of New Infrastructures support schemes under the Sixth
Framework Programme for Research.
This report focused mainly on the 6th Framework Programme (FP) for research. The conclusions of the
Court of Auditors relative to DG REGIO indicated that complementary structural funding sources were not
adequately used. The Commission referred to the developments and progress made in the 7th FP, the work
made with a view to making potential applicants aware of funding possibilities, the systematic screening of
funding opportunities made by DG REGIO and the creation in 2010 of an Expert Group on synergies
between Research, Innovation and Cohesion policies. In the line of the Communication on "Regional policy
contributing to smart growth in EU 2020", the action of the Commission will be focused on the
complementary use of Regional policy for supporting research infrastructures.
SR 8/2010: Improving transport performance on Trans-European rail axes: Have EU rail infrastructure investments been
effective?
The Court of Auditors concluded in this report that the EU contributed to providing new possibilities for
trans-European rail transport. Areas of improvement include the need to ameliorate analysis of bottlenecks
for cross-border locations, the partial use of high-speed services and weakness in approval of Cohesion Fund
projects. Its recommendation relevant to Cohesion policies concerns ensuring that procedures for approving
projects are robust, as regards the review of technical characteristics and the risk of cost escalations. The
Commission is taking this recommendation into account: it is investing significant resources to contribute to
the improvement to project preparation and appraisal. As far as the technical characteristics of projects are

51   no reporting obligation for Romania and Bulgaria for the 2000-2006 period
52   Global sample, including ESF


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                                                              3.1.1 - Shared Management / Results from audits in 2010

concerned, their review will be greatly improved through the continued development of Technical
Specifications for Interoperability (TSIs). The Commission uses its technical assistance to consult external rail
infrastructure experts in appraising the projects which are submitted to the Commission for approval.
SR9/2010: Is EU Structural Measures spending on the supply of water for domestic consumption used to best effect?
The Court concluded that structural measures contributed to improving supply of water for domestic use,
but better results would have been achieved at lower cost. It observed that forecast for future needs did not
take into account downward trends for water consumption, that some projects were not operational because
of missing complementary infrastructure and that all projects experienced cost increases and delays, also
because the Commission should have paid more attention to the ability of projects to generate revenues. The
Court recommends an improvement of ex ante analysis of needs by the Member States, improved
monitoring of planning and achievements and improved quality of Cost-Benefits Analyses (CBA), with a
view to gaining a better consideration of the ability of projects to generate revenues. The Commission in its
replies referred to the fact that a different legal framework was in place at the time when projects were
initiated and the fact that implementation of Structural Funds' projects lies primarily with the Member States.
It also refers to the increasing awareness of downward trends for water consumption in the last years and the
important achievements in improving CBA taken on through the 2007-2013 legislation and Commission's
guidelines and approval procedures. It furthermore refers to the progressive implementation of the water
framework directive, which will contribute towards improving efficient use of EU funds for water supply
projects. Finally it points out the complexity of big infrastructure water projects and agrees that long delays
and significant cost increases should be avoided.
           B) IAS main findings and main recommendations
In 2010, the IAS performed an audit on DG Regional Policy's Control Strategy – Audit and Financial
Correction. The objective was to assess whether the audit strategy designed is adequate, whether the Audit
Directorate has established a sound quality assurance system and whether the DG has adequately disclosed
the level of assurance obtained for shared management in its 2009 AAR, whether the DG's measures to build
up Member States capacity are adequate. The IAS recognises the efforts made by DG Regional Policy to
improve its supervisory role and its Audit Directorate to improve its processes and procedures, having
become a well established audit service. IAS recommendations should be seen as necessary improvements to
an already established audit service and relate to the current balance between on-the-spot audit work, desk
reviews and other horizontal tasks, to the level of details of the audit strategy, the need for a three year rolling
audit plan and to a more comprehensive quality assurance programme and to build a more comprehensive
capacity building plan. DG Regional Policy is of the opinion that the audit report does not question the
effectiveness of the audit strategy, the supervisory system and the quality of the assurance provided in the
annual activity report.
More information is disclosed in the IAS overall opinion.
Main Indicators: Internal Audit Service (IAS)
                            Coverage                                                          Results
         Indicator                Target       2009    2010                        Indicator                 2009     2010
Number of new audits                 2           1      153     Opinions issued following new audits:
                                                                - reasonable assurance except for …            1       1
                                                                - adverse                                      0       0
Number of follow-up audits            4          0      3       Number of "critical" recommendations           0       0
                                                                Number of "Very High" recommendations          2       3
                                                                Recommendations accepted by DG Regional      100%    100%
                                                                Policy
              C) Internal Audit & Advice main findings and recommendations:
     The primary objective of the Internal Audit & Advice (IAA) unit with DG Regional Policy is to provide
     the Director-General and consulting services with assurance as to the effectiveness and efficiency of
     internal governance, risk management and control processes within the DG. Based on the results of audits
     carried out during 2010, the IAA is of the opinion that the internal control system in place in DG
     Regional Policy provides reasonable assurance regarding the achievement of the business objectives set up
     for the processes audited, except for, in the area of shared management, the following:

53     Another audit was launched at the end of 2010


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     Monitoring of implementation of 2007-13 - audit side - a need to ensure: a more detailed overview of
     audit work, including an estimate of the coverage of the audit work of the Audit Authorities; that Member
     States are applying satisfactory procedures to establish the level of error rates and that preventive and
     corrective mechanisms are adequately set up; and to propose management declarations by the Managing
     Authorities for the next programming period.
     Monitoring of implementation of 2007-13 - horizontal and operational sides - with a need to ensure: a
     stronger role for the Commission in the next programming period; set-up a monitoring database for
     major projects; and maximize the benefits of REGIO Vista (for interpretative notes).
     Reliance on winding-up bodies (programming period 2000-06) - with a need to better document the risk
     assessment methodology.
Main Indicators: Internal Audit & Advice – Audits in the field of shared management
                             Coverage                                                        Results
         Indicator                 Target       2009    2010                      Indicator                2009     2010
Number of audits                    754          5        4      Opinions issued by IAA following audits
                                                                 during the year:
                                                                 - unqualified                              1         1
                                                                 - qualified                                5         3
                                                                 - adverse

Number of follow-up audits              0        1               Number of “critical” recommendations       0         0
                                                                 Number of “very important”                 17        20
                                                                 recommendations
                                                                 Recommendations accepted by               100%    nearly
                                                                 management                                        100%55



3.1.1.5. Building block 3: Follow-up of 2009 reservations and action plans for audits from
         previous years
             A) Follow-up of 2009 reservations
             A.1)      Follow-up in 2010 of 2009 AAR reservations for ERDF and Cohesion Fund (2007-
                       2013)
       Reason for reservation                                Corrective actions
                                Bulgaria, part of 1 programme affected
The reservation concerns priority In 2010, the Ministry of the Environment and Water employed an
Axis 1 of the Environment OP external consultancy company to carry out the review of the operations.
2007-13. The problems include a As a result of this review, a number of operations have been cancelled,
lack of strategic allocation of fully or partially withdrawn or made subject to additional conditions and
funds, inadequate design of modifications in order to make them compatible with the priorities of
projects and inaccurate cost the national strategy in the water sector. These actions led to the
estimates.                         submission of new corrected payment claims by the Bulgarian
                                   authorities.
                                   However, based on the findings of a 2009 national systems audit report,
                                   and in the absence of adequate assurance with regard to the area of
                                   management verifications, DG Regional Policy interrupted payment
                                   claims in 2010. Confirmation from the Audit Authority that the
                                   corrective actions have been properly implemented is still awaited.

                                               Conclusion: The reservation is maintained as the confirmation to be
                                               provided by the Audit Authority is still awaited.
                                                 Italy, 1 programme affected
The     programme        concerned          is The Commission received additional information and concluded that
54   The audit period was changed to end 31 December (instead of 31 March). Therefore, some audits planned for 2010 were
     transferred to the 2011 work plan.
55   One recommendation partly accepted regarding the audit on Monitoring of the implementation of 2007 – 2013 Programming
     Period (review mission at the level of Managing and certifying authorities)


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                                                   3.1.1 - Shared Management / Follow-up of 2009 reservations

      Reason for reservation                                     Corrective actions
Campania,      for    which      the   the audit authority had fulfilled its obligations. Therefore, the
Commission        has     identified   Commission has lifted the 2009 interruption of payment claims.
deficiencies in the audit function     In addition, the Commission reviewed (on the spot) the work of the
(delays in implementing the audit      audit authority and has concluded that the information transmitted was
strategy and poor quality of the       misleading. The analysis of the 2010 Annual Control report still
audit reports) - an interruption of    indicates weaknesses. Moreover a complementary audit on the
payment letter was sent for this       Managing Authority has put in evidence general weaknesses, in
programme.                             particular in respect of "Selection of operations" and "Management
                                       verifications".

                                       Conclusion: Reservation maintained.
                                       Germany, 3 programmes affected
For the 3 programmes the audit         For Brandenburg audit missions were carried out in June and September
strategy was not implemented as at     2010 and payments were interrupted in October 2010 as the audit
31/12/2009 and/or there are            authority had not implemented the audit strategy. The Commission is
significant      deficiencies  or      closely monitoring the progress made by the audit authority. Systems
uncertainties with regard to the       audit reports have been received in February 2011. A meeting with the
quality of the systems audits.         Audit Authority was scheduled for February 2011 and an audit mission
                                       has been carried out in March/April 2011. Based on the results of the
                                       audit mission, the interruption will either be lifted or a suspension
                                       decision will be adopted in case the significant deficiencies continue to
                                       exist.
                                       For Mecklenburg-Vorpommern audit missions were carried out in June
                                       and October 2010 and revealed deficiencies in the work of the audit
                                       authority.. Payment claims have been interrupted in 2011. A follow up
                                       audit mission is planned for May/June 2011.
                                       With regard to the Federal Transport programme, an interruption of
                                       payment letter was sent in February 2010. A follow-up audit mission
                                       was carried out and the national authorities submitted the required
                                       information, which resulted in the lifting of the interruption in June
                                       2010. However, the analysis of the 2010 annual control report revealed
                                       that audits of operations on the expenditure declared in 2009 have not
                                       covered verification of compliance with national and EC rules on public
                                       procurement.

                                       Conclusion: For the three programmes the reservations are maintained.
                                        Spain, 23 programmes affected
The absence of audit work at the       In response to the interruption letter sent by the Commission, the
end of 2009 indicated a significant    Spanish authorities submitted a series of documents to the Commission
delay in the implementation of the     in order to comply with the Commission requests.
audit strategies. Therefore in         These documents provided details on state of implementation of the
February 2010 a letter was sent to     audit work carried out and the corresponding level of reliability of the
the Spanish authorities interrupting   control and management system. Consequently, the interruption was
the payment claims                     lifted by letter of 17 May 2010.

                              Conclusion: 2009 reservation was lifted. However new deficiencies
                              have been revealed by the national audit authorities in the 2010 annual
                              control report for some intermediate bodies.
                            Compliance assessment not approved
Compliance assessment not yet As of 31 December 2010, the Commission had received the documents
approved                      for all programmes, except one ETC Cross-border programme. As of 1
                              February 2011, these documents were finally submitted.


             A.2)      Follow-up in 2010 of 2009 AAR reservations for ERDF or Cohesion Fund (2000-
                       2006)

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                                                   3.1.1 - Shared Management / Follow-up of 2009 reservations

       Reason for reservation                                 Corrective actions
                             Bulgaria, Cohesion Fund / environment sector
The reservation concerns the In November 2010 the managing authority accepted proposed
environment sector only and is corrections of approximately EUR 18 million and will implement the
primarily due to breaches of public corrections by offsetting against future expenditure declarations.
procurement rules concerning the Proposed corrections amounting to approximately EUR 0.6 million are
illegal use of the negotiated still disputed by the Member State and this matter is being followed up
procedure.                          by DG Regional Policy. However, most of the required corrective
                                    action has been taken by the national authorities.

                                       Conclusion: reservation lifted.
                                         Italy, 9 programmes affected
Audits have shown a high level of      The Commission has requested the Member State to carry out a general
irregularities related to public       enquiry on all ERDF programmes to verify the existence of
procurement procedures due to          irregularities. These have been carried out by the relevant managing
inadequate            management       authorities under the supervision of IGRUE (national coordination
verifications performed by the         body for controls). Partial results have been communicated to the
managing authorities.                  Commission indicating that irregularities have been detected and that
                                       appropriate financial corrections have been applied. The Commission
                                       will ensure that final results are fully taken into account during the
                                       closure of programmes.

                                       Conclusion: The reservation expressed in the 2009 AAR can be lifted
                                       for three out of the nine programmes where audits were closed during
                                       2010. For six programmes reservations are maintained (contradictory
                                       procedure still ongoing; information still to be transmitted).
                                       Germany, 2 programmes affected
Reservations       remain      since   In the case of Saarland, DG Regional Policy carried out a mission at the
2008AAR. Deficiencies, in the          end of March 2010 and concluded that progress is generally satisfactory,
system affecting key control           except for the finalisation and follow up of audit reports for sample
elements, in the case of Saarland,     checks of operations. The suspension of interim payments can therefore
in particular the audit function, in   not be lifted. The Commission will interrupt the closure procedure and
the case of Baden Wuerttemberg,        will ask the Winding-Up Body to carry out additional audit work.
in particular the management           For Baden Württemberg DG Regional Policy was not in a position to
verifications, the audit function      conclude on the reliability of the work carried out in the context of the
and the winding-up body                action plan or on the financial impact of the errors identified. The
                                       Commission has interrupted the closure procedure. A follow-up audit
                                       took place from 15-26 November 2010, which will enable the
                                       Commission to formulate a closure proposal.

                                   Conclusion:
                                   Saarland: additional audit work to be carried out by MS in 2011.
                                   Baden Württemberg: analysis and decision early 2011 for closure
                                   proposal.
                                      UK, 1 programme affected
High error rate as a result of The UK authorities have accepted the correction of 10% as regards the
serious shortcomings in public University of Cornwall.
procurement rules was detected by
the Court of Auditors for the Conclusion: Reservation lifted.
programme Cornwall and the Isles
of Scilly.
                                  Interreg, 15 programmes affected
Audit work has shown significant In 2009, 6 INTERREG programmes were suspended.
deficiencies for 7 programmes For 3 of them (Greece-Italy, France-UK and Italy-Albania), the
which affect key elements of the suspension was lifted without financial correction.
systems.                           For the programme IIIB MEDOOC, a 5% financial correction on


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                                                         3.1.1 - Shared Management / Follow-up of 2009 reservations

      Reason for reservation                                        Corrective actions
Furthermore, the analysis of annual        expenditure declared until December 31, 2007 has been applied and
control reports received has shown         amounts to EUR 4,332,783. As a consequence, 5 reservations were
that for 9 more programmes the             lifted in 2010.
quality of the control reports is not      For INTERREG IIIB ARCHIMED, a financial correction decision was
satisfactory, as they do not provide       taken on 31 May 2010. EUR 1,267,205 will be offset against the final
sufficient details or conclusions          payment at closure.
from the results of the audit work
(information on error rates,               For the programme IIIA Sweden-Denmark Öresund, the outstanding
amounts/percentages of checked             risks will be dealt with in the context of the closure of the programme.
expenditure, proper functioning of         The suspension remains until the closure of the programme.
systems), and frequently audit             Regarding the closure exercise of INTERREG III programmes under
work is delayed.                           reservation in 2009, 12 closure declarations have been submitted and 3
                                           have not been received. All 12 winding-up declarations received have
                                           been interrupted for additional information.

                                           Conclusion: The reservation is maintained until closure for 9
                                           programmes.


             A.3)      Main indicators: follow-up of 2009 reservations
                          Coverage                                                         Results
           Indicator             Target     2009      2010                     Indicator                     2009      2010
Action plans launched                                 100%     ERDF-Cohesion Fund 2000-06
                                                               Follow-up of 2008 / 2009 Reservations :
                                                               - Nr Ops for which reservation lifted          32        1156
                                                               - Nr Ops for which reservation maintained      10        1757
                                                               ERDF-Cohesion Fund 2007-13                     na
                                                               Follow-up of 2008 / 2009 Reservations :
                                                               - Nr OP for which reservation lifted                     4258
                                                               - Nr OP for which reservation maintained                 959


             B) Follow-up of action plans for audits from previous year
             B.1)      Follow-up of ECA findings DAS 2008: correction of errors
DG Regional Policy follows up thoroughly all errors identified by the Court of Auditors, as noted by the
Court in its 2009 Annual Report (annex 4.4). In March 2011, out of 15 DAS cases reported by the Court in
2008, 10 cases were closed and 5 cases are on-going. These concern:
     PT Acessibilidades & Transportes: a letter was sent on 11 March 2011 to the Member State with
     conclusions of the hearing held at the end of 2010; a financial correction decision is under preparation
     UK Cornwall and the Isles of Scilly: a hearing took place in September 2010 and as a result a letter was
     sent to the Member State in February 2010 to confirm the level of financial correction (including the need
     for additional corrections, total of EUR 0,69 million requested).
     For PL CF projects, Interreg ES/PT and LT CF projects, the contradictory procedures are ongoing with
     final position letters sent to the Member States.
In addition, 3 cases from earlier DAS exercises went through the final steps of contradictory procedures in
2010. All 3 cases are in the process of being closed (one Commission decision of correction being to be
adopted in April for a 2006 case ES Baix Llobergat; one agreement by the winding up body to make the
financial correction at closure for UK OP Peace II; result of the analysis of the member State reply to be
included in the closure letter for CZ/OP Infrastructure).

56   Reservations lifted in: Bulgaria (1), Italy (3), UK (1), ETC/INTERREG (6)
57   Reservations maintained in Italy (6) ,Germany (2) and Interreg (9)
58   23 OPs in Spain for which the interruptions were lifted in 2010 as well as 19 reservations linked to the approval of the
     compliance assessment (DE:2; IT:3, ETC:14)
59   One OP in Bulgaria, three in Italy and four in Germany.


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                                            3.1.1 - Shared Management / Follow-up of audits from previous years


Main Indicators: Follow-up of ECA findings DAS 2008
                            Coverage                                                 Results
           Indicator              DAS      DAS     DAS                          Indicator                       DAS
                                  2006     2007    2008                                                         2008
                                                                                                                and
                                                                                                               before
Number of ECA findings             12       13      15    Follow-up of ECA findings by DG Regional Policy
                                                          (ERDF/CF/IPA cases):
                                                          - closed (with correction where necessary)            32
                                                          - financial correction under preparation or under
                                                          implementation                                         4
                                                          - on-going contradictory procedure (expected
                                                          corrections)                                           4


             B.2)      Follow-up IAS recommendations (audits until 2009)
At the beginning of 2010, DG Regional Policy had only one open recommendation. Out of the 6 new
recommendations added in 2010, 4 were already implemented at the end of 2010. These recommendations
relate to the design and the implementation of the audit strategy for the current programming period. In
addition, DG Regional Policy has 3 open Issues for Consideration on which some progress has been
reported.


Main Indicators: Follow-up IAS recommendations
                            Coverage                                                 Results
           Indicator              Target   2009   2010                      Indicator                   2009   2010
Action plans launched             100%     100%   100%    IAS "very important" recommendations           0      0
following IAS                                             past-due for more that 6 months at the end
recommendations                                           of the year
On-time update of the IAS         100%     100%   100%    IAS recommendations reported as                 9      4
data base                                                 implemented by DG Regional Policy during
                                                          the year
                                                          - of which on time                              8      4
                                                          - of which late (more than 6 months)            1      0
                                                          Implemented recommendations:
                                                          - closed by IAS                                0      12
                                                          - reopened by IAS                              na      1


             B.3)      Follow-up IAC recommendations (audits until 2009)
 The risks linked to "very important" observations raised in audit reports issued prior to 2010 were not yet
 mitigated as at 31 December 2010:
 As regards the assurance for shared management
    2009- Major projects - public procurement rules are not interpreted and applied correctly by national
    authorities. Public procurement irregularities have also been consistently highlighted by the European
    Court of Auditors (ECA) in their annual reports as a main contributor to the "error rate" for Cohesion
    policy. DG Regional Policy, and other concerned DGs, should ensure an adequate follow-up and
    response to public procurement issues.
    2008&2009- Ex-post controls on payments - Significant progress has been made in the follow-up of all
    financial corrections and their accurate and timely reporting. However, it remains for the most part a
    manual system. The DG will in 2011 explore possible IT developments to better integrate the process in
    its workflow and provide exhaustive monitoring and reporting on the corrective mechanisms.
    2009 - Territorial Cooperation Programmes - A greater rationalization, and therefore a more efficient
    spending, of the actions financed under the territorial cooperation objective and greater flexibility in
    implementation are currently considered in the reflection on the future of Cohesion policy. Furthermore,


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    there is a need to increase the assurance obtained from audit work and the adoption of a “selective” audit
    approach.
    2008- Direct grants - Senior management needs to think about the possible future of the JEREMIE and
    JESSICA financial engineering instruments. DG Regional Policy believes that JEREMIE and JESSICA
    will be further developed substantially in the remaining years of the 2007-2013 period and in the next
    programming period.

3.1.2.          Other Activities
3.1.2.1. Building block 1: Assessment by DG Regional Policy
         A) Activities under decentralised management IPA/ISPA
ISPA (for Croatia) and IPA (for Croatia, Turkey and the Former Yugoslav Republic of Macedonia) are
managed under decentralised management, with the EU delegations carrying-out ex-ante controls on
procurement procedures. There are inherent risks linked to the following issues:
    Incorrect application of procurement rules and the inadequacy of financial management and control
    procedures represent the greatest potential risks to EU funds, resulting in project delays. This risk is
    mitigated by the fact that the EU delegations give an ex-ante approval on tendering and contracting. Their
    comments and the reasons for rejections mirror the performance quality of the operating structures and
    contribute to administrative capacity building in the countries concerned.
    The recruitment of experienced staff in the EU delegations, as well as for the implementing authorities
    continued to be an issue in 2010, reinforced by the creation of the European External Action Service.
    Implementing authorities suffer from weaknesses in terms of poor management of human resources
    (including recruitment, salaries and working environment), high turnover of staff, and lack of trained and
    experienced personnel (especially in internal audit and public procurement). This risk could be mitigated
    by continuous knowledge transfer from the Ministry of Finance to the line ministries.
    Ongoing risk of fraud against EU funds as well as the adverse impact on the business climate hampers
    economic development. This issue will continue to be closely followed up by the Commission.
DG Regional Policy’s audit work for IPA/ISPA in 2010 consisted of 4 missions to Croatia, Turkey and the
Former Yugoslav Republic of Macedonia. The first Commission audits on ISPA projects started in March
2010. The Commission issued an unqualified opinion on the basis of the work performed.
For the IPA programmes, implementation was very slow in 2010, raising concerns regarding the absorption
capacity. As a consequence, payments were limited to advance payments. In 2010 the first interim payments
were issued, for Croatia, Turkey and the Former Yugoslav Republic of Macedonia, based on the EU
accreditation of the management and control systems.
The IPA introduced new features in assistance to candidate and potential candidate countries. Decentralised
management is a precondition for implementation (Article 10(1) of Commission Regulation No 718/2007).
The necessary structures must therefore be in place and accredited by the Commission prior to the signature
of financing agreements covering each operational programme (starting date for eligibility of expenditure).
Croatia, Turkey and the Former Yugoslav Republic of Macedonia are all in the stage of fulfilling the
remaining findings, which are often conditions in the decision for conferral of management powers. Croatia
is the most advanced in this respect. The proper functioning of their management and control system will be
audited from 2011 onwards.
On the basis on the analysis carried out and in particular to the involvement of EU delegation for an ex-ante
approval of all public procurement procedures, the level of assurance is assessed by DG Regional Policy as
'reasonable with moderate impact'.




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                                                              3.1.2 Other activities / Assessment by DG Regional Policy

Main Indicators - Activities under decentralised management
                             Coverage                                                         Results
           Indicator                  Target        2009   2010                     Indicator                 2009   2010
Number of audits                      N/A                   4     Works well, minor improvements                -     2
Covering ISPA                                               1     Works but some improvements needed                  0
Covering IPA (follow up of                                  3     Works partially, significant improvements           2
conferral of management*)                                         needed
                                                                  Does not work                                        0
* including amendment of the CoM decision for Turkey.

             B) Activities under centralised management
             B.1)       Direct management
As mentioned earlier in this report, expenditure managed under direct management (mainly for operational
and administrative technical assistance for ERDF and the Cohesion Fund) represented less than 0.1% of all
expenditure managed by the Directorate General. The specific difficulties with this type of management were
addressed and risks mitigated by several steps. Firstly, the Internal Committee on public procurement and
grants checks the regularity of the public procurement process. During the examination of the files the
Committee often needed to request clarifications and made observations concerning namely the drafting of
the evaluation reports and the letters of information to the tenderers. Secondly, the Resources Directorate
and the legal unit train and advise staff as appropriate on the most suitable procedure to follow for specific,
or particularly complex public procurement contracts or grants. Thirdly, payments are approved only upon
completion of appropriately designed financial circuits following the four eyes principles (each file is double-
checked both on operational and financial aspects).
             B.2)       Regional programmes of Innovative actions (Indirect management)
DG Regional Policy also manages and monitors a series of 181 regional programmes of Innovative actions in
EU 15 Member States. These programmes have indirect centralised management but some of their
management methods were conceived by analogy with the mainstream 2000-2006 ERDF programmes. In
2010, DG Regional Policy closed 24 projects (176 already closed out of a total of 181) for which specific
difficulties were overcome: need for clarifications before closure, further analysis to identify interest accrued
from the advance payments, insufficient segregation of functions between implementation and payment
mitigated by a request for an additional sample check of at least 25% of the declared eligible expenditure,
specific audit missions for 6 programmes in 2010 (i.e. where the quality of the documentation in support of
the final claim was found to be suspect).
             B.3)       Solidarity Fund (Indirect management)
The European Union Solidarity Fund (EUSF) is managed with the objective of granting financial assistance
in the event of major natural disasters. The national authority of the affected country submits an application
to the Commission no later than 10 weeks after the occurrence of the first damage. DG Regional Policy
together with other Commission departments prepares a decision of the college on whether to propose the
activation of the EUSF together with the amount of the aid considered appropriate. If a positive decision is
taken it proposes the mobilisation to the budgetary authority and presents a draft amending budget to make
the necessary budget appropriations available. After adoption of the budget the Commission takes a formal
grant decision and concludes an implementation agreement with the beneficiary state, following which the
aid is paid out in a single instalment. The beneficiary state is responsible for the implementation of the grant
including the selection of projects under the terms of the grant decision and the Agreement as well as for
carrying out the control and audit of the spending. The grant has to be used within one year of the date on
which the Commission has disbursed it. No later than six months after the expiry of the one-year period
from the date of disbursement, the beneficiary state shall present a report on the financial execution to the
Commission including a declaration established by an independent body giving assurance of the legality of
the spending. On this basis, the Commission winds up the assistance from the Fund. During the
implementation phase the Commission undertakes missions to monitor the implementation of the grant.
Audit and control missions may be carried out at any time.
In 2010, the Commission adopted three grant decisions and one grant was paid out. Two monitoring
missions were carried out by the unit during 2010, to Italy (Abruzzo earthquake 2009) and France (storm
Klaus 2009).


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                                                                          3- Building blocks towards reasonable assurance
                                                                3.1.2 Other activities / Assessment by DG Regional Policy

Audit and control of EU Solidarity Fund grants is primarily a responsibility of the beneficiary state. Together
with the implementation report on the use of the grant the beneficiary state has to present to the
Commission a validity statement giving assurance on the legality and regularity of the spending. The
statement must be based on the audit and control work carried out by an independent body. This declaration
is assessed by DG Regional Policy. The opinion of other Commission services, in particular of OLAF is
sought. The main inherent risk is that owing to the emergency nature of the events, there is no prior
assessment on whether or not specific individual expenditure items are eligible for EUSF funding or whether
certain obligations, for example in the field of public procurement, have been respected.
In 2010, the Commission received four final implementation reports for grants made in 2008. At the end
2010, a total of 13 open cases were being assessed or verified by the Commission whereas for a number of
cases additional information needed to be requested from the Member States concerned. In 2010, DG
Regional Policy's audit directorate analysed seven closure files (validity statements, supporting audit reports
and the final implementation reports). Two validity statements were not accepted by the audit unit without
further information from the Member States concerned. For five files, certain elements were lacking such as
information on the operations controlled on the spot, percentage and amount of errors detected, etc. and had
to be requested from the Member States. During the second semester of 2010 additional information
presented by Member States enabled 2 interventions to be closed.
Moreover, DG Regional Policy's audit directorate carries out annual audit missions to beneficiary countries.
The audits are planned following a risk analysis which takes into account the financial exposure and other
risk factors such as the quality of the validity statement and the implementation report, the decentralised level
of implementation etc. In 2010, the first phase of the audit in the UK covering the 2007 floods for a total
grant of EUR 162 million was carried out. The main finding was that only limited reliance could be placed on
the validity statement. No assurance could be obtained as to whether public procurement rules had been
respected. A substantial amount of ineligible expenditure was detected. The second phase (substantive
testing) of the audit is being completed in March 2011.
In 2010, four EU Solidarity fund files were closed, two of them with a limited recovery order for unspent
funds or ineligible expenses: Slovakia (windstorm in 2005), Bulgaria (flooding of August 2005), Latvia
(windstorm of January 2005) and Austria (flooding of August 2005).
Overall, this process did not give rise to issues which would prevent DG Regional Policy from having a
reasonable assurance on the use of resources.
              B.4)       Activities under joint management
DG Regional Policy has transferred EUR 30 million to the International Fund for Ireland (IFI). IFI is an
independent international organisation established by the British and Irish governments in 1986. The
Commission has received annual certified accounts. This process did not raise issues which would prevent
DG Regional Policy from having a reasonable assurance on the use of resources.
              B.5)       Article 66(2) of the Financial Regulation
Finally, with respect to article 66(2) of the Financial Regulation, no decision within the responsibility of the
Authorising Officer by Delegation was irregular or contrary to the principles of sound management and
referred to the delegating authority. Thus there are no instructions confirmed by the delegating authority to
report on.
Main Indicators - Activities under centralised management
                              Coverage                                                          Results
              Indicator               Target      2009   2010                          Indicator                  2009   2010
Public procurement procedures         All files                    Number of public procurement procedures:
checked by the dedicated Internal                                  - accepted                                     41      36
Committee                                                          - accepted with observations
- number of files                                 41      36       - rejected
- value of the contract checked                   39      39
(EUR million)
Number of payments validated by          All       na    1,064     Number of payments validated which have been    na
AOSD (except                           trans-                      returned for correction/clarification:
shared/decentralised management)      actions                      - by the operational verifiers                         na
after the operational and financial                                - by the financial verifiers                           174
verification




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                                                                        3- Building blocks towards reasonable assurance
                                                              3.1.2 Other activities / Assessment by DG Regional Policy

                              Coverage                                                            Results
              Indicator             Target   2009      2010                          Indicator                         2009    2010
EU Solidarity Fund:                  Risk                        EU Solidarity Fund:
- audit on-the-spot                 based     1          1       - error rate following the audit on-the-spot                   n.a.
                                      all                        - validity statements accepted following the first     2        2
- review of external auditors' s              3         7        review
statements (validity statements)                                 - validity statements accepted following additional    1        3
                                                                 request



3.1.2.2. Building block 2: Results from audits during the reporting year
Internal Audit Capability (IAC)'s opinion and its contribution to building assurance:
Based on the results of audits carried out during 2010, the IAA is of the opinion that the internal control
system in place in DG Regional Policy provides reasonable assurance regarding the achievement of the
business objectives set up for the processes audited, except for the following:
     IPA - a need to ensure frequent participation of EU Delegations in evaluation committees; to increase the
     EU Delegations on-the-spot visits and participation in committees and mutually agree on monitoring
     plans and their subsequent reporting; to ensure a smooth transition of EU delegations to the European
     External Actions Service and to clarify the follow-up procedure required for projects which are "approved
     with comments or recommendations".


Main Indicators: Internal Audit & Advice – Other management modes
                              Coverage                                                            Results
             Indicator              Target   2009      2010                          Indicator                         2009    2010
Number of audits                         4    1         3        Opinions issued by IAA following audits
                                                                 during the year:
                                                                 - unqualified                                                   1
                                                                                                                        2
                                                                 - qualified                                                     3
                                                                                                                        2
                                                                 - adverse
Number of follow-up audits               1    3         1        Number of “critical” recommendations                   0        0
                                                                 Number         of      “very    important”             4        8
                                                                 recommendations
                                                                 Recommendations accepted by DG Regional               100%   Nearly60
                                                                 Policy management                                             100%



3.1.2.3. Building block 3: Follow-up of previous years' reservations and action plans for
         audits from previous years
Nothing to report.

3.1.2.4. Building block 4: Assurance received from other Authorising Officers in cases of
         crossed sub-delegation
          A) Crossed sub-delegations regarding IPA/ISPA
For the year 2010, the Director General of DG Regional Policy (as Authorising Officer by Delegation-AOD)
has delegated some powers to the Directors General of DG RELEX as well as to the Heads of the EU
Delegations in Croatia, the Former Yugoslav Republic Of Macedonia (FYROM) and Turkey.
Authorising officers by cross or sub-delegation have reported to the Director General of DG Regional Policy
on their management of the delegated funds covering the year 2010. These reports did not give rise to any
reservations and provided reasonable assurance as to the legality and regularity of the financial operations,
including sound financial management of funds.
However, some key operational issues were brought to the attention of the AOD.

60   One recommendation refused regarding the review on year end accounting closure (recording of a contingent asset regarding
     the closure of Cohesion projects in one Member State)


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                                                              3- Building blocks towards reasonable assurance
                                                                  3.1.2 Other activities / Other building blocks

For Croatia it is reported that there were significant difficulties with the ISPA waste water treatment plant at
Karlovac whereby the project may have to be terminated, giving rise to doubts about the administrative
capacity to manage funds. For 2007-13, significant delays were also highlighted with potential negative
consequences concerning possible application of the N+3rule.
In FYROM, several risks were highlighted regarding the absorption of the funds for some major projects
which could lead to a risk of decommitment.
In Turkey, the speed of progress of preparations for taking over procurement functions and contracting from
the CFCU had been slower than anticipated for both the Transport and Regional Competitiveness Operating
Structures and it was expected that the transition period would continue until at least mid to end 2011.
Progress had been comparatively greater at the Ministry of Environment and Forestry (MoEF).
           B) Crossed sub-delegations regarding other activities
In addition, for the year 2010, the Director General of DG Regional Policy (as Authorising Officer by
Delegation-AOD) has delegated some powers to the Directors General of DG ECFIN, ENTR, ESTAT, and
DIGIT for operations linked to the pilot project on micro-finance, the monitoring of the URBAN ATLAS
project, regional/urban statistics and geographical information, ITIC services, IT management services.
Authorising officers by cross or sub-delegation have reported to the Director General of DG Regional Policy
on their management of the delegated funds covering the year 2010. These reports did not give rise to any
reservations and gave assurance as to the legality and regularity of the financial operations, including sound
financial management of funds.

3.1.3.          Completeness and reliability of the information reported in the
                building blocks
As a general rule, DG Regional Policy seeks to base its assessment on complete and reliable data. Different
complementary sources of information are used. The level of assurance was assessed for each operational
programme following a comprehensive analysis through a bottom-up approach and after discussions with all
actors within DG Regional Policy. This represents a major strength for this process.
For the programmes under shared or decentralised management for the 2007-2013 period, the assessment
has still to take into account the intermediate stage of implementation of the programmes. The annual
control reports submitted by Member States were quite comprehensive for the first time in 2010. However
not all the individual control mechanisms have brought complete data, which could be used or extrapolated
to build the assurance for 2010 expenditure. In particular, as requested by the legal basis, the audit of
operations carried out by the national authorities focused on 2009 payments made to projects which
correspond to relatively low/medium risk projects such as technical assistance, small/medium size projects,
setting-up of financial engineering funds, etc. Moreover, the reliance on the national audit work is not yet
complete even if an initial analysis is promising: the audit coverage is adequate in most of the cases but the
implementation of the agreed audit strategies has been delayed for some programmes; and the basis for the
error rates indicated by the audit of operations for some of the operational programmes is not completely
explained and therefore not fully reliable. These limitations are expected to decrease in the coming years
when programme implementation and related audit work will have progressed especially for the most
complex projects, taking into account all feedback provided by the Commission after the first exercises and
when a significant number of audit authorities will have been reviewed by the Commission services. DG
Regional Policy will continue its guidance, support and capacity building efforts to the single audit approach
in practice both by indicating detailed comments in response to each annual control report and by discussing
the implementation of the audit strategy with Member State audit authorities in bilateral meetings. In the
meantime, DG Regional Policy has also taken into account various other elements of information available to
build the assurance, including the opinion of the Authorising Officer by Subdelegation, results from the set-
up of the systems, and experience learnt from previous years and in particular the result of its own audit
work and the audit work carried out by the Commissions audit services.
For the programmes under shared or decentralised management for the 2000-2006 period, the assessment is
mainly based on audit evidence following significant audit activities undertaken by DG Regional Policy and
comprising both desk research and on the spot audits, other Commission audit services, the national audit
bodies and the European Court of Auditors. In particular, in view of the 2000-2006 closure, the Commission
relies on the Winding-up Declarations submitted by Member States for most of the programmes as part of


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                          3.1.3 Completeness and reliability of the information reported in the building blocks

the closure documents, taking into account all audit results available from its own audit work during the
entire programming period. For this period, it is worth mentioning the significant amount of financial
corrections which have been implemented throughout to remove identified irregularities. All these elements
constitute a solid basis to assess the level of assurance.
For the activities under centralised (direct/indirect) and joint management, the information related to the
building blocks (internal control, internal audit opinion, ex-post controls) is considered as complete and
reliable for the purpose of the declaration of assurance.



3.2.            Reservations
3.2.1.          Overall opinion and analysis of residual financial risks
The process used to establish the final opinion of the Directorate General on the assurance provided by the
management and control systems in the Member States is based on an audit opinion from the Audit
Directorate of the Directorate General and on a management assurance declaration from the Authorising Officers
by Sub-Delegation.

3.2.1.1. DG Regional Policy's audit opinion on the functioning of national management
         and control
DG Regional Policy Audit Directorate has prepared assessment fiches and issued an audit opinion on the
functioning of the systems for the operational programmes in all Member States and beneficiary countries.
These fiches indicate for each system and programme whether any deficiencies have been found (and if so
whether they were significant) and give an overall audit opinion.

This assessment is based on the audit work of the Audit Directorate, the results of the analysis of the annual
control reports of the Member States, information from system audit reports received from the national audit
bodies, and from audits of the European Court of Auditors and other Commission audit services in charge
of Structural Funds, up-to-date information obtained from the most recent bilateral meetings with national
audit authorities, and in certain cases the results of the follow-up of action plans agreed with Member States
including financial corrections implemented. The Audit Directorate has taken into account in its evaluation
information on error rates as reported by the national audit bodies and its own review of the quality of the
work of the audit authorities.

The assessment has first been made at the level of the key control elements of the system according to the
following four categories: works well – minor improvements required; works, some improvements required;
works, substantial improvements required; does not work. An overall assessment of the system has then been
made using the same four categories and taking account of any compensating controls or mitigating factors.
There is a disclaimer (i.e. no audit opinion) in the cases where there is no reliable audit evidence. This
concerns systems which have not been audited by DG Regional Policy or by other audit bodies on whose
work it is possible to rely.

Main Indicators: DG Regional Policy's audit opinion on the functioning of national management and
control




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                                                                         3- Building blocks towards reasonable assurance
                                                             3.2.1 – Overall opinion and analysis of residual financial risks
                             Coverage                                                                  Results
               Indicator                Target   2009      2010                              Indicator                 2009       2010
Number of OPs assessed                                             DG REGIO's audit opinion (for all OPs – shared
(shared management)                      755     755       755
                                                                   management)
- ERDF 2000-06: 379 programmes                                     - unqualified                                       226        314
- Cohesion Fund 00-06: 49 sectors                                  - qualified (moderate impact)                       362        351
- ERDF/CF 2007-13: 317 Prog.                                       - qualified (significant impact)                     30        68
- IPA ETC 2007-13: 10 Prog.
                                                                   - adverse                                            28        12
                                                                   - disclaimer of opinion                             109         9
                                                                   - Not applicable                                                1
Number of OPs assessed (decentralised                              DG REGIO's audit opinion (for OPs – decentralised
management)                              10      10         10
                                                                   management)
                                                                   - unqualified                                        0          4
                                                                   - qualified (moderate impact)                        3          2
                                                                   - qualified (significant impact)                     0          4
                                                                   - adverse                                            0          0
                                                                   - disclaimer of opinion                              7          0


3.2.1.2. Assessment of the functioning of national management and control by DG
         Regional Policy authorising officers by subdelegation
Each operational Head of unit prepared a contribution to the management assurance taking into account the annual
reports from the Member States, the annual meetings, new information in the annual summaries, payment
requests, the Monitoring Committee meetings and the contacts with regional and national programme
managers. Based on the fiches from the Audit Directorate and audit opinions, the fiches from the operational
heads of unit, and other information from the management activities, the Authorising Officers by Sub-
delegation have issued a management assurance for all Member States and beneficiary countries in the
framework of article 4.8 of the Charter of Authorising Officers by Sub-delegation. This opinion contains
their own judgement on the appropriateness of management and control systems in the Member States and
any identified risk which ought to be disclosed in the Annual Activity Report or gives rise to a reservation to
the declaration of assurance.

Main Indicators: Assessment of the functioning of national management and control by DG Regional
Policy authorising officer by subdelegation
                            Coverage                                                                  Results
             Indicator               Target        2009          2010                       Indicator                    2009     2010
Number of OPs assessed                                                  AOSD assurance (for all OPs – shared
                                      755          755           755
(shared management)                                                     management)
- ERDF 2000-06: 379 programmes                                          - reasonable assurance                              246    334
- Cohesion Fund 00-06: 49 sectors                                       - reasonable assurance (moderate impact)            404    345
- ERDF/CF 2007-13: 317 Prog.                                            - limited assurance                                  36    62
- IPA ETC 2007-13: 10 Prog.
                                                                        - no assurance                                       24     6
                                                                        - no opinion                                         6      8
Number of OPs assessed                                                  AOSD assurance (for all OPs – decentralised
                                           10         10          10
(decentralised management)                                              management)
                                                                        - reasonable assurance                              0       0
                                                                        - reasonable assurance (moderate impact)            10     10
                                                                        - limited assurance                                 0       0
                                                                        - no assurance                                      0       0
                                                                        - no opinion                                        0       0

3.2.1.3. Overall assessment of the functioning of national management and control
           A) Overall assessment of ERDF and Cohesion Fund61 programmes (activities 13.03 and
              13.04) for the 2007-2013 and 2000-2006 programming periods:
The final stage of the evaluation process was a detailed review of operational programmes in each Member
State and beneficiary country by the Annual Activity Report Board of DG Regional Policy in order to ensure
the quality and consistency of the management assurance declarations, to resolve any cases of discrepancy
between the audit opinions and management assurance declarations, to agree on any modifications required
61   For 2007-2013, the Cohesion Fund is linked to ERDF operational programmes.


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                                                                                                 3.2.1 – Overall opinion and analysis of residual financial risks

as a result of developments during the first quarter of the current year, and to identify the systems for which
a reservation should be made.

The table below presents the assessment of all ERDF/Cohesion Fund programmes for both programming
periods by Member States, following the methodology described in annex 4:

             Member States                   REASONABLE                           REASONABLE                                  LIMITED ASSURANCE                               NO ASSURANCE                                     Total number of
                                              ASSURANCE                         ASSURANCE WITH                                 WITH SIGNIFICANT                                 (MATERIAL
                                                                                                                                                                                                                                Programmes
                                                                               MODERATE IMPACT                                      IMPACT                                   DEFICIENCIES OR
                                                                                                                                                                                 LACK OF
                                                                                                                                                                              INFORMATION)



                                 ERDF/CF 2007-13




                                                                               ERDF/CF 2007-13




                                                                                                                               ERDF/CF 2007-13




                                                                                                                                                                             ERDF/CF 2007-13




                                                                                                                                                                                                                           ERDF/CF 2007-13
                                                   ERDF 2000-06




                                                                                                  ERDF 2000-06




                                                                                                                                                 ERDF 2000-06




                                                                                                                                                                                               ERDF 2000-06




                                                                                                                                                                                                                                             ERDF 2000-06
                                                                  CF 2000-06




                                                                                                                 CF 2000-06




                                                                                                                                                                CF 2000-06




                                                                                                                                                                                                              CF 2000-06




                                                                                                                                                                                                                                                            CF 2000-06
     Austria (AT)                    8             11                              1                                                                                                                                         9               11
     Belgium (BE)                    2              6                              2                 5                                                                                                                       4               11
     Bulgaria (BG)                                                                 2                               2               2                              1              1                                           5                                3
     Cyprus (CY)                     1                1             2                                                                                                                                                        1                1               2
     Czech republic (CZ)                                                        9                    4             4               5                                                                                        14                4               4
     Germany (DE)                    4             21                          10                    7                             3                2                            1                                          18               30
     Denmark (DK)                    1                                                               2                                                                                                                       1                2
     Estonia (EE)                                     1             3           2                                                                                                                                            2                1               3
     Spain (ES)                      1                                         21                 35               4               1                                                                                        23               35               4
     Finland (FI)                    1              6                           4                                                                                                                                            5                6
     France (FR)                                   40                          31                                                                                                                                           31               40
     Greece (GR)                                                    4           9                 27                               1                                                                                        10               27               4
     Hungary (HU)                                     1                        13                  3               2                                              1                                                         13                4               3
     Ireland (IE)                    2                                                             6               2                                                                                                         2                6               2
     Italy (IT)                      9             19                          12                 10                               1                8                            6                                          28               37
     Lithuania (LT)                                                             1                  1               3               1                                                                                         2                1               3
     Luxembourg (LU)                                  1                         1                                                                                                                                            1                1
     Latvia (LV)                                                                                                   3               2                1                                                                        2                1               3
     Malta (MT)                      1              1               3                                                                                                                                                        1                1               3
     The Netherlands (NL)                           4                           4                  3                                                1                                                                        4                8
     Poland (PL)                 16                 1                           4                  3               3                                                                                                        20                4               3
     Portugal (PT)                                 13               3          10                 10                                                                                                                        10               23               3
     Romania (RO)                                                               3                                  3               2                                                                                         5                                3
     Sweden (SE)                     7                7                         1                                                                                                                                            8                 7
     Slovenia (SI)                   2                1             3                                                                                                                                                        2                 1              3
     Slovakia (SK)                                                  1            9                  3              2                                                                                                         9                 3              3
     The United Kingdom (UK)      3                 24                           5                  8                           8                                             1                                             17                32
     ETC (cross-borders coop.)   20                 54                          37                 19                          11                 9                           2                                             70                82
     TOTAL                       78                212            19           191                146            28            37                21               2          11                                            317               379            49
     TOTAL                                         309                                            365                                            60                                            11                                            745

For around 60% of the 2007-13 programmes, DG Regional Policy was able to rely on the opinions given by
the national audit authorities (in some cases as a result of its on-the-spot review of their methodologies). This
was complemented for around one third of the programmes by the results of the desk reviews performed by
DG Regional Policy's audit directorate on the systems audit reports and the annual control reports. For some
programmes, this review has found that the agreed audit strategy had not been sufficiently implemented.
Other significant issues were also identified. In addition, DG Regional Policy used the conclusions of its on-
the-spot audits to define the final opinion for around a further 10% of the programmes. In a limited number
of cases, DG Regional Policy's authorising officers (geographic directorates) have highlighted complementary
information based on their knowledge of the managing authorities to adjust the audit opinions either to
confirm that mitigating / corrective measures were already implemented (e.g. financial corrections already
deducted from subsequent payment claims), or to reinforce the audit opinions regarding significant
deficiencies. For a limited number of programmes, the opinion has mainly been based on the results of other
bodies (e.g. European Court of Auditors / DAS 2009 – 2010).
The table next page summarises the opinion for each Member State and each Fund taking into account the
2010 interim (or final if applicable) payments and presents the estimation of the residual financial impact.



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                                                                                                                                                                                                                                                                                                                                                                   3.2.1 – Overall opinion and analysis of residual financial risks
Shared management: assessment of national control systems
                                                                                                                 Total Payments in 2010 per level of assurance (in EUR million)                                                                                                                                                                                        Estimate of 2010 payments at risk of irregularities (in EUR million)
                                         Intermediate and final payments in 2010 per Member State and per Fund distributed on the basis of the level of assurance on the functioning
                                                                                      of the national management and control systems.

          Member States                                      REASONABLE                                     REASONABLE                                                  LIMITED ASSURANCE     NO ASSURANCE                                                                                         Total all Funds                                                Programming period                            Programming period                       Total
                                                              ASSURANCE                                   ASSURANCE WITH                                                 WITH SIGNIFICANT  (MATERIAL DEFICIENCIES
                                                                                                                                                                                                                                                                                                                                                                      2007 - 2013                                   2000 - 2006                    estimated amount
                                                                  (a)                                    MODERATE IMPACT                                                      IMPACT      OR LACK OF INFORMATION)
                                                                                                                                                                                                      (d)                                                                                                                                                                                                                                               at risk
                                                                                                                (b)                                                              (c)                                                                                                                                                              Number of     Number of     Total estimated amount      Number of       Total estimated amount
                                                                                                                                                                                                                                                                                                                                                 Programmes interruptions               at risk          Programmes                at risk                 (e)
                                                                                                                                                                                                                                                                                                                                                     under      of payment                (e)                under                   (e)
Classified on ascending order on the                                                                                                                                                                                                                                                                                                              reservation    deadlines                                reservation
                                           ERDF/CF 2007-13                                                                                                                                                                                                                                                                                     [total number of   (2010 +                              [total number of




                                                                                                         ERDF/CF 2007-13




                                                                                                                                                                         ERDF/CF 2007-13




                                                                                                                                                                                                                                  ERDF/CF 2007-13




                                                                                                                                                                                                                                                                                      ERDF/CF 2007-13
basis of the total estimated amount of


                                                                   ERDF 2000-06




                                                                                                                                 ERDF 2000-06




                                                                                                                                                                                            ERDF 2000-06




                                                                                                                                                                                                                                                         ERDF 2000-06




                                                                                                                                                                                                                                                                                                         ERDF 2000-06
        2010 payments at risk.                                                                                                                                                                                                                                                                                                                   programmes]     1Q2011)                                 programmes]




                                                                                       CF 2000-06




                                                                                                                                                     CF 2000-06




                                                                                                                                                                                                                CF 2000-06




                                                                                                                                                                                                                                                                        CF 2000-06




                                                                                                                                                                                                                                                                                                                             CF 2000-06
     When the risk is considered
 manageable on a multiannual basis,
       the order is alphabetical.


                                                                                                                                                                                                                                                                                                                                                                                Min          Max                            Min          Max        Min            Max
Austria (AT)                                                 53                    1                                       13                                                                                                                                                            66                              1
Belgium (BE)                                                 65                   24                                       32                                                                                                                                                            97                             24
Cyprus (CY)                                                  54                                                                                                                                                                                                                          54
Denmark (DK)                                                 20                                                                                                                                                                                                                          20
Estonia (EE)                                                                                        38              426                                                                                                                                                                 426                                               38                                    Risk considered                            Risk considered          Risk considered
Finland (FI)                                                  0                                                     111                                                                                                                                                                 111
France (FR)                                                                        2                                821                                                                                                                                                                 821                              2                                                     manageable on a                             manageable on a         manageable on a
Ireland (IE)                                                 45                                                                                                                                                                                                                          45
Luxembourg (LU)                                                                                                            3                                                                                                                                                              3                                                                                    multiannual basis                          multiannual basis        multiannual basis
Malta (MT)                                     61                                                    0                                                                                                                                                                                   61                                           0
Poland (PL)                                 3,349                                                         2,535                                             894                                                                                                                       5,884                                         894                                                (e)                                         (e)                      (e)
Portugal (PT)                                                                                 237         1,713                                                                                                                                                                       1,713                                         237                               1
Slovakia (SK)                                                                                               975                                                   61                                                                                                                    975                                          61
Slovenia (SI)                                         360                                           12                                                                                                                                                                                  360                                          12
Sweden (SE)                                            78                          0                         15                                                                                                                                                                          93                              0
The Netherlands (NL)                                                                                         82                                 49                                                         16                                                                            82                             65                                                                               1 [8]              0.8           1.6        0.8           1.6
Hungary (HU)                                                                                              1,622                                                   29                                                         18                                                       1,622                                               46                          1                                  1 [7]              0.9           1.8        0.9            1.8
ETC (cross-borders coop.)                                    90                   49                        261                                 13                                  102                    28                                       0                                   453                             90              13         [70]   (f-h)       2          5.1         10.3        9 [82]             1.4           2.8        6.5          13.0
Romania (RO)                                                                                                 38                                             209                     166                                                                                                 203                                         209 2          [5]     (f)                   8.3         16.6                                                    8.3          16.6
Lithuania (LT)                                                                                              478                                              30                     166                                                                                                 644                                          30 1          [2]     (g)         1         8.3         16.6                                                    8.3          16.6
Spain (ES)                                  1,321                                                         2,206                          348                603                     190                                                                                               3,716                       348               603 22         [23]    (g)        36         9.5         19.0                                                    9.5          19.0
Germany (DE)                                  703                                 86                        814                                                                     200                                                                                               1,717                        86                    4         [18]    (h)        15        10.0         20.0        2 [30]                                     10.0          20.0
Latvia (LV)                                                                                                                                                       37                276                                                                                                 276                                          37 2          [2]                          13.8         27.6        1 [4]                                      13.8          27.6
Bulgaria (BG)                                                                                                75                                                   76                278                                      39                     1                                   354                                         115 3          [5]                 5        14.0         28.1        1 [3] (g)          2.0           3.9       16.0          32.0
Greece (GR)                                                                                   240         1,501                                 16                                  478                                                                                               1,978                             16          240 1          [10]                2        23.9         47.8                                                   23.9           47.8
The United Kingdom (UK)                               161                         47                        112                                 51                                  475                                                             42                                  791                             98               9         [17]               18        28.0         58.1                                                   28.0           58.1
Czech republic (CZ)                                                                                         886                                                   83                986                                                                                               1,872                                          83 5          [14]                2        49.3         98.6                                                   49.3           98.6
Italy (IT)                                            171                          1                        556                          398                                         98             550                                      286                                      1,110                       948                    7         [28]   (h)          9        33.5         81.3        8 [37]            27.5          55.0       61.0          136.2
TOTAL                                      6,529                           210               527 15,273                                  875         2,021               3,414                      593                      57             330                                      25,547              1,679               2,605
TOTAL                                                             7,266                                                         18,170                                                     4,064                                                         330                          29,830         69             92                                                         203.7         423.9     23                 32.5           65.0      236.2          488.9
                                                                                                                                                                                                                                                                           estimated amount at risk as % of 2010 payments                                                      0.8%          1.7%                         0.8%           1.5%      0.8%           1.6%
(a) no material deficiencies in key elements of the systems                                                                                                            (c) material deficiencies in key elements of the systems and risk for payment is medium
(b) material deficiencies in key elements of the systems but risk for payment is low                                                                                   (d) material deficiencies in key elements of the systems plus no assurance on the functionning of the systems and risk for payment is high
(e) Methodology used for the estimation of the amount at risk:
For programmes with reasonable assurance and reasonable assurance with moderate impact, the risk for payments is estimated at less than 2% and 5% respectively; this risk is considered as acceptable during programme implementation because payments cannot exceed 95% of committed funds prior to
programme closure and it can be managed by multiannual national and Commission corrective procedures including at programme closure. There is no residual risk (above materiality level) to quantify.
For programmes with limited assurance and no assurance, the residual risk for payments is estimated between 5% and 10% (medium risk) and between 10% and 25% (high risk) respectively of the 2010 payments.
(f) Reservations for reputational reasons and potential risks without legal ground to interrupt payment deadlines (RO, one ETC programme)
(g) Partial reservations: Spain, for 21 programmes reservation applies to 13 (out of 145) intermediate bodies; Lithuania, reservation on one intermediate body; Bulgaria, reservation on one project
(h) Compliance assessment not approved (one German programme, 2 Italian programmes, one ETC programme)




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                                                                                                 3.2.1 – Overall opinion and analysis of residual financial risks



        B) Overall assessment of IPA / ISPA (activity 13.05) for both programming periods 2000-
            2006 and 2007-2013:
Decentralised management: assessment of national control systems
                                Interim Payments in 2010 per level of                                                                         Estimate of 2010 payments at risk of
                                    assurance (in EUR million)                                                                                  irregularities (in EUR million)
  Member States / Candidate     REASONABLE    NO ASSURANCE                                          Total all Funds
                              ASSURANCE WITH    (MATERIAL
                                                                                                                                         Programming period               Programming period
         Countries
                                 MODERATE    DEFICIENCIES OR                                                                                 2007 - 2013                      2000 - 2006
                                  IMPACT         LACK OF
                                              INFORMATION)
                                                                                                                                         Number of      Total estimated   Number of      Total estimated
                                                                                                                                         Programmes     amount at risk    Programmes     amount at risk
                                                                                                                                             under                            under
                                                                                                                                          reservation                      reservation
                                                     ISPA 2000-06




                                                                                  ISPA 2000-06




                                                                                                                          ISPA 2000-06
                                IPA 2007-13




                                                                    IPA 2007-13




                                                                                                     IPA 2007-13
Cross Borders                   0,2                                                                  0,2                                      6
Croatia (HR)                    4,3              14,1                                                4,3              14,1
Former Yugoslav Republic of
Macedonia (MK)
Turkey (TR)                     21,3                                                                 21,3
TOTAL                           25,7                 14,1                                            25,7                 14,1
TOTAL                                         39,8                                                                 39,8                       6               0                0               0

NB: All reservations are linked to reputational reasons


            C) Impact evaluation for other activities
For the activities under the other management modes (centralised and joint management), the assurance was
not qualified. As a consequence, the financial impact is expected to remain below the materiality threshold.

 3.2.1.4. Material deficiencies and correctives measures
 Following the methodology defined in annex 4, the programmes for which DG Regional Policy has "no
 assurance" or a "limited assurance with significant impact" should be carefully analysed to decide whether or
 not to include them in a reservation.
              A) Programming period 2007-2013: detailed explanations for the reservations


 Following the preparation of this Annual Activity Report and the identification of programmes under
 reservation, immediate actions have been launched to protect the EU financial interests.
 All programmes subject to a reservation (with the exception of a small number of reputational reservations
 for reputational reasons) have been interrupted if a payment claim had been submitted. The interruption
 letters count as a pre-suspension letter, warning Member States of a suspension within 6 months if the issues
 identified in the interruption letter are not resolved.
 For the programmes without a payment claim submitted, there was no payment deadline to interrupt.
 However, DG Regional Policy will act in order to inform the Member State by letter of the weaknesses
 identified and what must be done to address the identified weaknesses. Where appropriate, these letters will
 also count as a pre-suspension letter, warning Member States of a suspension if the issues identified are not
 resolved. In addition, for the programmes under a reservation for reputational reasons specific information
 letters will be envisaged to highlight DG Regional Policy's concerns. A first level has been sent in March 2011
 for one cross-border programme (IPA Adriatico, managed by the Abruzzo Region in Italy).
 As a parallel exercise, DG Regional Policy is also writing formal, more political, letters to certain Member
 States where the overall audit and control situation is not effective enough on the ground. This will take the
 form of a single letter at national level, identifying the key concerns of the Commission.



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DG Regional Policy will strictly follow-up the remedial actions requested from Member States and will lift the
interruptions only on evidence that irregularities have been corrected and, if appropriate, systemic deficiencies
have been addressed.


The additional actions envisaged for the programmes under reservation are presented below:
              Reason for reservation                                       Action plans
                                      Bulgaria, 3 programmes affected
Most managing authorities continue to face a The President of the Commission recently addressed a
shortage of administrative resources. Serious letter to the Prime Minister requesting increased efforts
deficiencies have been identified in 3 operational particularly in the weakest sectors like road, rail or water,
programmes           (Regional        development, under the lead of the Minister in charge of the EU funds
Development of the competitiveness, Environ- and using all the Technical Assistance resources available
ment) including weaknesses in management from the different International Financial Institutions.
verifications, poor quality of works carried out, DG Regional Policy has scheduled audits in 2011 for
and the absence of effective procedures for each of the 3 operational programmes affected by high
making financial corrections.                        error rates and other systems related weaknesses.
In addition, high error rates of between 6 and The relevant action plans agreed at national level will be
18% have been identified for these 3 operational followed up in order to obtain assurance from the audit
programmes and although corrective action has authority that the necessary corrective actions, both in
been implemented in some cases, further terms of financial corrections and changes to the
corrective action still needs to be implemented in management and control systems, have been made.
some areas.
                                   Czech Republic, 5 programmes affected
General issues concerning some weaknesses of In 2011 DG Regional Policy will closely follow up the
the methodology of the Audit Authority, lack of audits carried out in 2010.
supervision of and insufficient independence of In order to increase the coverage of operational
the Delegated Audit Bodies. In addition, programmes audited, DG Regional Policy plans to
inadequate coverage of systems audits.               continue the review of the work of the Audit Authority
In some cases, there is information on serious in 2011.
deficiencies     affecting     the     management DG Regional Policy also plans to carry out, in 2011,
verifications, the public procurement procedures audit missions on high risk programmes.
and deficiencies in the projects selection process. Moreover, the follow up of the issues linked to the
(OP Entreprise and innovations, Environment, reservations in the 4 affected programmes will be closely
research and Development, transport, Noth-West) monitored. Intensive contacts will be maintained with
                                                     and advice provided to the relevant Czech authorities on
                                                     the measures to be taken in order to resolve the
                                                     problems within a reasonable time frame.
                                      Germany, 4 programmes affected
For 1 programme (Saarland), the compliance For the Saarland programme, the Commission has
assessment had not been submitted at the end of informed the Managing Authority of potential losses of
2010.                                                ERDF financing in the absence of an adequate and
For the 3 other programmes (Mecklenburg- quick reaction.
Vorpommern, Baden-Württemberg and the Concerning the OP Mecklenburg-Vorpommern, Baden-
Federal Transport OP), the analysis of the Annual Württemberg and the Federal Transport OP, meetings
Control reports sent by the Member State show with the Managing Authorities in charge have been
serious delays in the implementation of the audit organised for them to address any open audit finding
strategy (or even failure to carry out the audit without delay and to provide their full support to the
strategy) leading to insufficient coverage for the execution of the audit strategy by the Audit Authorities.
systems audits and/or for the audit of operations Moreover, the relevant three audit authorities have been
already declared in 2009 and reimbursed by the asked to increase their efforts and catch up the delayed
Commission.                                          audit work. DG Regional Policy will closely monitor the
Where partial audit conclusions exist, they progress made in the implementation of their respective
sometimes revealed high error rate and the risk audit strategies, and the results of the audit work,
that expenditure is not legal and regular.           through analysis of information submitted and in
                                                     bilateral meetings. Additionally, follow-up audit missions


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                Reason for reservation                                       Action plans
                                                       by DG Regional Policy are planned for the Federal
                                                       Transport OP and Mecklenburg-Vorpommern in 2011.
                                        Greece, 1 programme affected
For one programme (Reinforcement of DG Regional policy will monitor the implementation of
accessibility), the national auditors have revealed remedial measures requested from Greece including the
deficiencies in the management and control improvement of first level verifications related to public
system. Errors of systemic nature relating to procurements and in particular the modification of
public procurement have been identified at the procurement contracts.
level of the managing authority of this programme DG Regional Policy will carry out further audit work in
                                                       relation to public procurement in Greece in 2011.
                                         Italy, 7 programmes affected
In Italy, ERDF programmes are governed by A meeting between the Commissioner and the
distinct management and control systems . In corresponding Italian Minister has already taken place in
some cases (Calabria, Campania, Network & order to discuss the main issues of concern, both at the
Mobility), audits carried out by DG Regional level level of the effective implementation of the ERDF
Policy have shown serious weaknesses both at the in Italy and of the legality and regularity of the co
level of the managing and the audit Authorities. financed actions. Following this meeting the
Moreover, significant issues are recurrent in the Commissioner will meet the Presidents of the regions
area of public procurement: e.g. additional works, where effective implementation is at risk at the
rules regarding rejection of abnormally low bids. beginning of April in Italy. In parallel, DG Regional
Other issues are related to the eligibility of Policy will participate with the Italian central managing
'retrospective' projects. Moreover, the audits authorities in the preparation and implementation of a
carried out by ECA have found evidence of restructuring and acceleration plan for the Italian
systemic irregularities in two programmes. programmes and DG Regional Policy will continue to
(Network and mobility, Sardegna).                      avail of every opportunity to check improvements
                                                       obtained and define new solutions wherever possible.
For one programme (Lazio), the national audit Among others, the Annual meeting, the meetings of the
strategy has not been adequately implemented due Monitoring Committees and the annual meeting will be
to the changes in the managing authorities.            used for this purpose. The Annual Meeting with the
                                                       Italian audit authorities will also be used to discuss
In addition, for 2 programmes (Attratori culturali, capacity building actions.
naturali e turismo; Research and competitiveness),
the compliance assessment had not been DG Regional Policy audit plan for 2011 has placed
approved at the end of 2010.                           particular emphasis on the Italian programmes where
                                                       deficiencies have been detected:
                                                       - review of the audit work performed by the national
                                                       Audit Authorities identified as high risk;
                                                       - audits or follow up missions on the identified risky
                                                       programmes or areas such as the funding of
                                                       retrospective projects or management verifications;
                                                       - specific capacity building actions in particular in the
                                                       area of public procurement for which focused training
                                                       seminars will be organised for particular programmes.
                                                       For 2 programmes, for which the compliance
                                                       assessment had not been approved at the end of 2010,
                                                       DG Regional Policy has regular contacts with the Italian
                                                       authorities in order to obtain the necessary information
                                                       to ensure that these programmes have been fully
                                                       compliant with the regulations from the outset and
                                                       eventually to approve the compliance assessment reports
                                                       which will have to be provided in due course by the
                                                       Italian authorities.
                                        Latvia, 2 programmes affected
The fact finding mission organised by DG Some institutional changes in the set up of the
Regional Policy in October 2010 revealed management & control system were agreed in a meeting
evidence to suggest significant weaknesses in the with the responsible State secretary in February 2011,

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           3.2.1 – Overall opinion and analysis of residual financial risks / Deficiencies and correctives measures
               Reason for reservation                                        Action plans
functioning of the management and control            mainly the strengthening of the functional independence
systems, in particular in relation to an adequate    of the Audit authority. The implementation of the
segregation of duties and quality of the systems     recommendations made in the audit report, particularly
audits. (all 2 ERDF programmes concerned)            on financial engineering measures, will be closely
                                                     followed up by DG Regional Policy.
                                                     In addition, DG Regional Policy will carry out audits in
                                                     2011 to review the work carried out by the Audit
                                                     authority.
                           Lithuania, 1 intermediate body of 1 programme affected
Significant deficiencies identified in the A letter informing of the interruption of payment
functioning of the management and control deadline for this programme was sent to the Lithuanian
system in one intermediate body ("Transport authorities on 13/01/2011. By letter of 31 January 2011
Investment Directorate" of the Programme the Lithuanian authorities indicated that the Managing
"economic growth"), where the controls for Authority has already undertaken or will implement
management verifications work only partially. The corrective measures in order to address deficiencies
projected error rate is largely attributed to related to the management and control system in one
irregularities related to public procurement at one intermediate body. DG Regional Policy agrees that the
intermediate body. Presence of untreated systemic proposed actions are satisfactory. However, concern still
errors without quantification.                       remains in relation to expenditure incurred by the
                                                     intermediate body in question following the annual
                                                     control report and annual audit opinion issued by the
                                                     Lithuanian Audit Authority. DG Regional Policy will ask
                                                     the managing authority and the intermediate body to
                                                     take all appropriate steps including the identification of
                                                     all such irregularities, to estimate their financial impact
                                                     and apply corrections in their next expenditure
                                                     declarations. A tight monitoring system will be set up.
                                       Romania, 2 programmes affected
Reservation mainly for reputational reasons The President of the Commission has written to the
(possible impact on future operations). Despite Romanian Authorities at the highest level in order to
mitigating measures taken in relation to propose some exceptional remedial measures: the need
verification of public procurement issues for a strong coordinator for EU funds at a political level;
(experience criterion), DG Regional Policy's last an ambitious action plan for the mobilisation of all the
mission performed on 2010 certified expenditure, stakeholders and associated resources (called the "EU
revealed additional deficiencies in the public investment delivered" initiative).
procurement process (deadlines for submission of As a follow-up of President Barroso's initiative, the
tenders and quality of the evaluation process ). Romanian authorities are expected to draft a priority
(OP Regional development and Environment)            action plan to increase the absorption capacity of
                                                     structural and cohesion Funds, including actions
                                                     regarding the improvement of the public procurement
                                                     process.
                                                     As the 2010 reservation has been made for reputational
                                                     reasons, there are no grounds to interrupt the payment
                                                     deadlines.
                                                     Additional audit missions with a focus on specific risk
                                                     areas for each OP will be carried out in 2011, as well as
                                                     the     monitoring      of    the    implementation      of
                                                     recommendations proposed in the systems audit reports
                                                     to be received in 2011.
             Spain, part of all programmes affected by deficiencies in 13 intermediate bodies
In Spain all the tasks of the managing authorities The Member State has defined action plans to address
have been delegated to 145 intermediate bodies the deficiencies detected. DG Regional Policy will
and some intermediate bodies are involvedin monitor the implementation of these action plans during
more than one programme. They are divided into 2011, through targeted audit missions and follow-up
national intermediate bodies which manage reviews.
operations in all operational programmes and

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              Reason for reservation                                        Action plans
regional intermediate bodies.                           There are three areas where DG Regional Policy will
                                                        take further steps to resolve the issues: Melilla,
This reserve for Spain applies to 22 operational        Communitat Valenciana and the Direccion General de
programmes. However, in practice, the                   Investigacion (DGI). DG Regional Policy will follow
reservation is linked to serious deficiencies in the    this up at the Annual Coordination Meeting and the
management and control systems of 13                    monitoring committees as well as normal bilateral
intermediate bodies which operate in all                contacts with the national and regional authorities to
operational programmes. These deficiencies              communicate the importance of correcting the systemic
concern, for example, insufficient management           problems and the irregularities and advise them on
verifications, high error rates resulting from audits   possible solutions.
of operation.
List of intermediate bodies under reservation:          The majority of the follow up of the reserves will be
- DG Cooperación Local                                  carried out in the context of the monitoring of the work
- DGI (Dirección General de Investigación)              carried out by the regional and national auditors. Desk
- Enisa                                                 officers for the programmes affected by the problematic
- Ciudad Autónoma de Melilla                            intermediate bodies will closely monitor and check
- Xunta de Galicia                                      progress made with remedial actions at national level
- Gob. Cantabria                                        during the monitoring committees and will report any
- Gob. País Vasco (Diputación Foral de Bizkaia,         information.
Diputación Foral de Gipuzkoa, Diputación Foral
de Alava, Azaro Fundazioa)
- Gob. Navarra
- Comunidad de Madrid
- Gob. Balear
- Gob. Aragón
- C. Valenciana
- Ayuntamiento Zaragoza

Given the number of intermediate bodies in the
programmes, the systems are not always clear and
the lists of intermediate bodies in the programmes
are indicative, which means that some
intermediate bodies may be operating in
programmes where they are not listed in the
programming documents.

In addition, in one programme (Melilla), the
adverse opinion is due to the absence of evidence
of any audit work.
                              The United Kingdom, 9 programmes affected
For England, qualification was given due to the For England, DG Regional Policy plans to carry out in
provisional high error rates for 6 programmes 2011 an additional audit mission for the review of the
reported by the National Audit Authority (East Audit Authority (based on the re-performance on a
Midlands, London, North East, North West, sample of operations focusing on public procurement).
South West, Yorkshire and Humberside)              In addition, it will follow-up the monitoring and
For Scotland, the reservation is due to incomplete supervision activities of the Managing Authority with
administrative checks by the Managing authority regard to the management verifications delegated to the
and insufficient audit work.                       Regional Development Agencies, and in particular the
For Northern Ireland the reservation is due to monitoring reports on management verifications the UK
systemic issues in the management control system was asked to provide with each payment claim.
leading to a high error rate.                      For Scotland and Northern Ireland, DG Regional Policy
                                                   will follow-up the deficiencies detected and ensure that
                                                   all remedial actions, including financial corrections
                                                   where appropriate, are taken. In addition, DG Regional
                                                   Policy will follow-up the implementation of the action
                                                   plan established by the Northern Ireland authorities


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                Reason for reservation                                       Action plans
                                                    comprising the removal of the corresponding ineligible
                                                    expenditure from the next payment claim and remedial
                                                    work - including training on eligibility, compliance and
                                                    financial control issues within the Managing Authority
                                                    and Intermediate Bodies.
                                       ETC, 13 programmes affected
For 7 programmes, the analysis of the Annual The majority (7) of Programmes have been issued a
Control reports sent by the audit authorities show reserve in reservations because of delays in
serious delays in the implementation of the audit implementation of audit strategy. For some of those
strategy, supported by either no or very limited programmes requests for additional information and
audit work, and leading in some cases to no or justification on the delays and additional information on
insufficient audit coverage of expenditure already progress made in the audit work has already been sent.
declared in 2009.                                   Information and revised timetables are in the course of
(Austria - Czech Republic, Slovakia-Austria, being submitted. Follow up in deficiency areas will be
España-Francia,       Bayern-Czech        Republic, ensured at the programme level.
Lithuania-Poland, Alpine Space, Central Europe).
                                                    For those 4 programmes with a high error rate, DG
                                                    Regional Policy intends to request responsible
For the 4 other programmes, the national auditors
                                                    authorities to take remedial actions (including financial
have identified serious deficiencies in the
                                                    corrections where needed) and to undertake additional
management systems supported in most cases by
                                                    activities to clarify eligibility issues at project level. DG
high error rates. This indicates that management
                                                    Regional Policy will monitor the implementation of
verifications (Key requirement 4) are not
                                                    these remedial actions with the respective audit
adequate. (Italia-Francia frontiera marittima;
                                                    authorities which will be requested to provide an
Greece-Italia,        France-Wallonie-Vlaanderen,
                                                    updated assessment of the situation. In addition, it may
Euregio Maas Rijn).
                                                    offer training possibilities through the Interact
                                                    programme on eligibility rules and compliance.
For the programme Germany (MV/BB) – Poland,
the limited implementation on the ground and as For the programme Germany/Poland DG Regional
a consequence the limited audit work did not policy will monitor progress on the ground, with respect
bring sufficient evidence of the functioning of the first to implementation and subsequently to audit work
management system. This programme is under a to be carried out by the audit authority. Further actions
reservation for reputational reason.                will depend on reported progress.
                                                     For the programme Espana-Fronteras Exteriores 2008,
For 1 programme (Cooperación Transfronteriza
                                                     DG Regional Policy requested the Audit Authority in
España-Fronteras Exteriores), the compliance
                                                     March 2011 to send additional informational on
assessment and the audit strategy were not
                                                     compliance assessment and the audit strategy.
submitted at the end of 2010. The compliance
assessment has been submitted on 01/02/2011
and was rejected in March 2011.
                           IPA Cross-broder Coorperation, 6 programmes affected
For four programmes, the compliance assessment DG Regional Policy will monitor the progress on the
has not yet been approved (Bulgaria-Turkey, adoption of the remaining compliance assessment in
Greece-FyROM,          Greece-Albania,      Adriatic 2011 and on audit work effectively carried out on the
programme).                                          ground by the responsible audit authorities for those
                                                     programmes where compliance assessments have been
For two other programmes (Bulgaria/Serbia, adopted.
Bulgaria/FyROM), the reservation is mainly for
reputational reasons as only limited work has been
launched on the ground and DG Regional Policy
has little evidence that the operations are managed
properly.


             B) Programming period 2000-2006: detailed explanation for the reserves
                                       Reason for reservation
                             Bulgaria, Cohesion Fund, 1 project affected

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                                             Reason for reservation
New reservation (Cohesion Fund)
Reasons for reservation are linked to the only remaining infrastructure project being implemented by the
National Roads Authority in the transport sector (i.e. Construction of Liulin Motorway, Sofia Ring road –
Daskalovo Road Junction) regarding public procurement rules.
                       Germany, 2 programmes affected (Saarland and Baden Würtenberg)
Continuation of previous year reservations until the finalisation of the closure process for Saarland and
Baden-Württemberg.
Reasons for reservation are related to preliminary analysis of WUD (additional work on projects which WUB
were not able to audit before the closure) and action plan unsatisfactorily implemented with regard to sample
checks on operations, procurement procedures and implementation of corrective measures.
                              Hungary, Cohesion Fund (transport sector) affected
New reservation (Cohesion Fund).
The rate of errors reported by the National Management Authority for transport projects was above the
materiality level (3.8%). Furthermore, the audit by DG Regional Policy in December 2009 detected several
public procurement irregularities and proposed significant financial corrections (EUR 1.79m).
                                    Italy, 8 programmes affected (NAME)
Continuation of previous year reservations until the finalisation of the closure process (Calabria, Campania,
Sicilia, Transport, Urban Caserta, Urban Taranto). However, two new programmes are included in this
reservation (Sardegna, Urban Mola di Bari).
In some cases, the Winding-Up Bodies will be requested to justify the unqualified opinion provided in the
context of high residual error rates. In addition, additional clarifications are also necessary on public
procurement.
                                         Latvia, 1 programme affected
New reservation for the main ERDF programme.
Same bodies and deficiencies for both programming periods 2007-13 and 2000-06. The final assessment is
aligned to the opinion for Programming Period 2007-13.
                                   The Netherlands, 1 programme affected
New reservation for Stedelijke gebieden.
Comprehensive action plan already agreed. Despite application of corrections under action plan, high error
rate for last 2 years.
                                      Interreg, 9 programmes affected
Continuation of previous year reservations until the finalisation of the closure process:
- Germany (Mecklenburg-Vorpommern Brandenburg) / Poland (Wojewodschaft Zachodniopomorskie);
- Austria / Germany / Switzerland (Alpenrhein-Bodensee-Hochrhein );
- Ems Dollart;
- España-Portugal;
- Germany (Sachsen) / Poland;
- Germany (Sachsen)- Czech Republik;
- Sweden / Denmark (Oresund);
- Netherlands / Belgium (Grensregio Vlaanderen-Nederland);
- Italia-Adriatico.
Audit work has shown significant deficiencies which affect key elements of the systems regarding Articles 4,
9, 10, and 19 of Regulation 438/2001.
For the 9 programmes under reservation, 8 winding-up declarations have been received and have been
interrupted for additional information.


The action plan for these reservations will mainly consists of the continuation of the on-going closure
procedure since the Commission has already all the means to apply financial corrections. In certain cases,
these programmes might be selected for an additional audit before or after the closure.




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                                                                                3.2.2 – Reservations 2010

3.2.2.          Reservations 2010
3.2.2.1. Reservation concerning the ERDF/Cohesion Fund/IPA management and control
         systems for the period 2007-2013 in several Member States
DG                         Regional Policy
Title of the reservation   Reservation concerning the ERDF/Cohesion Fund/IPA management and
                           control systems for the period 2007-2013 in:

                           1. Delayed implementation of the agreed audit strategies by Member
                           States and/or significant issues regarding the effective functioning of the
                           management and control systems:

                           BULGARIA:       3 programmes (Regional Development, Development
                                           of the Competitiveness, Environment)
                           CZECH REPUBLIC: 5 programmes (Entreprise and innovations,
                                           Environment, Research and Development, North-
                                           West, Transport)
                           GERMANY:        3 programmes (Mecklenburg-Vorpommern, Baden-
                                           Württemberg, OP Transport)
                           GREECE:         1 programme (Reinforcement of accessibility)
                           ITALY:          5 programmes (Network and Mobility, Calabria,
                                           Campania, Lazio, Sardegna)
                           LATVIA:         2 programmes (Entrepreneurship and Innovation,
                                           Infrastructure and Services)
                           LITHUANIA:      1 intermediate body of 1 programme (Economic
                                           Growth)
                           SPAIN:          13 intermediate bodies (out of 145) involved in 21
                                           programmes and 1 entire programme (Melilla)
                           UNITED KINGDOM: 9 programmes (England 6 OP - East Midlands,
                                           London, North East, North West, South West,
                                           Yorkshire and Humberside -, Scotland – 2OP,
                                           Northern Ireland – 1OP)
                           ETC:            11 programmes: Austria - Czech Republic; Slovakia-
                                           Austria; España-Francia; Germany (Bayern)-Czech
                                           Republic; Lithuania-Poland; Alpine Space; Central
                                           Europe; Italia-Francia frontiera marittima; Greece-
                                           Italia; France-Wallonie-Vlaanderen; Euregio Maas
                                           Rijn.

                           2. Compliance assessment not yet approved:
                           ITALY (2 programmes: Attrattori culturali, naturali e turismo; Ricerca e
                           competitività), GERMANY (Saarland), European Territorial Cooperation
                           programme (Cooperación Transfronteriza España-Fronteras Exteriores) and
                           IPA / Cross-border cooperation component (4 programmes: Greece/former
                           Yugoslav Republic of Macedonia; Greece/Albania; Bulgaria/Serbia; Adriatic).

                           3. Reputational risks or lack of evidence for the assurance:
                           ROMANIA (2 programmes: Regional Operational Programme; Environment),
                           European Territorial Cooperation programme (Germany MV-BB /Poland Z)
                           and IPA / Cross-border cooperation component (2 programmes:
                           Bulgaria/former Yugoslav Republic of Macedonia; Bulgaria/Turkey)

                           For 11 programmes out of the 75 programmes affected, no interim payment was
                           executed in 2010, either due to non-validation of management and control
                           systemsor slow implementation on ground.


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                                                                               3.2.2 – Reservations 2010

Domain                 Structural Funds carried out under 'Shared Management Responsibility'
ABB activity           13.03 ERDF, 13.04 Cohesion Fund, 13.05 IPA
                       Payments in 2010 linked to shared management programmes for the 2007-2013
                       period: EUR 25.6 billion
Reason for the         1.A. The effective functioning of the national audit authorities is an essential
reservation            element of the control framework for the 2007-13 programming period. For
                       some programmes, the implementation of the audit strategies agreed between the
                       Commission and the national authorities has been delayed leading to insufficient
                       coverage in terms of both systems audits and audits of operations. In some cases,
                       the work already performed has not been assessed as reliable enough.

                       1.B. National audit reports and opinions have revealed serious deficiencies in
                       management and control systems for these programmes. These conclusions have
                       sometimes been complemented by the audit activity of the Commission and/or
                       the European Court of Auditors. In particular, these deficiencies concern one or
                       several of the following key elements:
                        − compliance with public procurement rules,
                        − management verifications before payment,
                        − certification activities,
                        − high error rates.

                       2. The Compliance assessment is an essential step in the design of the 2007-2013
                       programmes. Late submission / approval of compliance assessments may result
                       in underlying operations validated by control procedures not being fully
                       compliant. This risk has been highlighted by the European Court of Auditors and
                       by the Internal Audit Service.

                       3. For some programmes, the operations already audited may not be
                       representative of the complexity of the 2010 operations and risks exist regarding
                       the adequacy of the management and control systems. In addition, for IPA
                       (cross-border cooperation component), the national audit authorities have issued
                       a disclaimer of opinion and the Commission could not identify complementary
                       sources of assurance. However, no interim payment was executed for these IPA
                       programmes.
Materiality            Significant deficiencies at the level of the key elements of the management and
criterion/criteria     control systems.
Quantification         For quantification only interim/final payments have been taken into
                       consideration. The risk has been quantified by using the error rates reported by
                       the national audit authorities (if available) and with minimum flat rates of 5 or
                       10% on payments made in 2010 to the programmes concerned, in accordance
                       with the Guidelines used for the determination of financial Corrections.

                       Total quantification: between EUR 200 million and 430 million (respectively 0.8%
                       or 1.7% of the ABB activities concerned).

                       The quantification gives rise to a low amount due to the fact that payments were
                       not executed for some of these programmes in 2010.
Impact on the          DG Regional Policy has not been able to obtain reasonable assurance that key
assurance              elements of the management and control systems of the programmes concerned
                       functioned effectively, so as to provide reasonable assurance that statements of
                       expenditure are correct and that the underlying transactions are legal and regular.




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                                                                                   3.2.2 – Reservations 2010

Responsibility for the   The expenditure concerned is under shared management, in which the Member
weakness and its         State is primarily responsible for implementing the management and control
remedy                   systems. Therefore, the designated national and regional authorities of the
                         programmes concerned are responsible for undertaking corrective measures.
                         The Commission supervises the national authorities in this respect (monitoring
                         of execution of the remedial measures).
Corrective action        1. Delayed implementation of the agreed audit strategies by Member
                         States and/or significant issues regarding the effective functioning of the
                         management and control systems:
                         In each case, the Commission has undertaken or planned specific actions which
                         include, if necessary:
                         -    interruption of payments following Art. 91 of regulation 1083/2006,
                         -    launch of suspension and correction procedures,
                         -    complementary guidance and support for national authorities especially on
                              the coverage and quality of the audit activities,
                         -    analysis of the most problematic authorities regarding their compliance with
                              public procurement rules,
                         -    audit work to check the ability of national auditors to fulfil their obligations,
                         -    on-the-spot audits on operations or on systems on a risk-based approach.
                         The objective in all cases is either to obtain assurance that the required corrective
                         measures have been completed or to take action leading to the application of
                         financial corrections.

                         2. Compliance assessment:
                         No interim payment will be executed before the approval of an operational
                         programme's compliance assessment. The Commission has already undertaken or
                         planned specific actions including bilateral meetings and fact-findings missions.
                         In addition, specific audit activities will be planned at Member State or
                         Commission level to confirm that expenditure incurred before the approval of
                         the compliance assessment is legal and regular.

                         3. Reputational risks or lack of evidence for the assurance:
                         The Commission will coordinate its control activities with the audit authorities
                         designated for the programmes concerned so that the combined audit coverage
                         and the results will allow a proper assessment of assurance.




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                                                                                  3.2.2 – Reservations 2010

3.2.2.2. Reservation concerning the ERDF/Cohesion Fund management and control
         systems for the period 2000-2006 in some Member States
DG                         Regional Policy
Title of the reservation   Reservation concerning the ERDF/Cohesion Fund management and
                           control systems for the 2000-2006 period in:

                           BULGARIA:                   1 project for the Cohesion Fund
                           GERMANY:                    2 programmes: Saarland, Baden-Württemberg
                           HUNGARY:                    1 sector of the Cohesion Fund (transport) (*)
                           ITALY:                      8 programmes: Calabria, Campania, Sardegna (*),
                                                       Sicilia, Transport, Urban Caserta, Urban Mola di
                                                       Bari (*), Urban Taranto
                           LATVIA:                     1 programme – main ERDF programme (*)
                           the NETHERLANDS:            1 programme: Stedelijke gebieden (*)
                           INTERREG:                   9 programmes: Germany (Mecklenburg-
                                                       Vorpommern Brandenburg) / Poland
                                                       (Wojewodschaft Zachodniopomorskie); Austria /
                                                       Germany / Switzerland (Alpenrhein-Bodensee-
                                                       Hochrhein ); Ems Dollart; España-Portugal;
                                                       Germany (Sachsen) / Poland; Germany (Sachsen)-
                                                       Czech Republik; Sweden / Denmark (Oresund);
                                                       Netherlands / Belgium (Grensregio Vlaanderen-
                                                       Nederland); Italia-Adriatico

                           For 15 programmes out of the 23 sectors/programmes, no interim payment was
                           executed in 2010, either due to formal decisions of suspension of payment or
                           because these programmes had already reached the maximum level of
                           prefinancing (95%).

                           (*) new reservation
Domain                     Structural Funds carried out under 'Shared Management Responsibility'
ABB activity               13.03 ERDF and 13.04 Cohesion Fund
                           Payments in 2010 linked to shared management programmes of the 2000-2006
                           programming period: EUR 4.3 billion
Reason for the             Even if most of the 2000-2006 programmes/projects have already reached the
reservation                final closure stage, the reservation made in previous years will be maintained
                           until most of the issues have been solved by the application of appropriate
                           financial corrections. In limited cases, new programmes have been added to this
                           reservation as the analysis of the winding-up declarations sent by Member States
                           revealed significant deficiencies not yet adequately corrected.

                           Significant deficiencies exist in the management and control systems for these
                           programmes, in particular as regards one or several of the following key
                           elements:
                               − Article 4 of Regulation 438/2001 (implementation of first level
                                    controls; management verifications);
                               − Article 8 of Regulation 438/2001 (arrangements for the recovery
                                    procedure);
                               − Article 9 of Regulation 438/2001 (certification process);
                               − Article 10 of Regulation 438/2001 (adequate sample checks and
                                    systems audits)
                           In addition, the following issues affect certain programmes: insufficient follow
                           up by bodies in charge to remedy deficiencies, issues of compliance with public
                           procurement rules, weaknesses in the quantity or quality of work of audit
                           authorities/winding up bodies.


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                                                                                    3.2.2 – Reservations 2010

Materiality                 Significant deficiencies at the level of the key elements of the management and
criterion/criteria          control systems.
Quantification              For the quantification only interim/final payments have been taken into
                            consideration. The risk has been quantified by applying a rate of 5 or 10% of
                            payments made in 2010 to the programmes (or parts of programmes)
                            concerned.

                        Total quantification: between EUR 32 million and 65 million (respectively 0.7%
                        or 1.5% of the ABB activities concerned). The quantification gives rise to a low
                        sum due to the fact that payments have not been executed for some of these
                        programmes in 2010. However, the deficiencies not yet corrected may have
                        affected more that one year of expenditure.
Impact on the assurance DG Regional Policy has not been able to obtain reasonable assurance that
                        financial corrections have been implemented to compensate for, the deficiencies
                        in the management and control systems, so as to provide reasonable assurance
                        that the residual risk of error after closure is acceptable.
Responsibility for the  The expenditure concerned some under shared management, in which the
weakness and its        Member State is primarily responsible for implementing the management and
remedy                  control systems. Therefore, the designated national and regional programme
                        authorities are responsible for undertaking corrective measures.
                        The Commission supervises the national authorities in this respect (monitoring
                        of execution of the remedial measures).
Corrective action       Corrective measures have already been taken for these programmes in the
                        context of the closure process: analyses of winding-up declarations have been
                        interrupted for clarification and in some cases for additional audit work;
                        confirmations have been requested that the conclusions of previous
                        audits/remedial action plans have been implemented, etc.
                        The objective in all cases is either to obtain assurance that the required
                        corrective measures have been completed or to have taken action leading to the
                        application of financial corrections during the closure procedure.
                        In addition, the Commission will finalise a risk analysis to assess the residual risk
                        of errors and launch a complementary ex-post audits campaign.

The combined estimated residual amount at risk for both ERDF and Cohesion Fund for the periods 2000-
2006 and 2007-2013 is between 0.8% and 1.6% of the total interim/final payments made in 2010.

3.3.            Overall conclusions on the combined impact of the
                reservations on the declaration as a whole
For the purposes of the declaration of the Authorising Officer by Delegation, DG Regional Policy must take
full account of the fact that the control arrangements for structural actions as fixed by the applicable
regulations operate on a multi-annual basis. The assessment of the functioning of the systems in the Member
States and beneficiary countries have led to an evaluation of the risk in relation to payments made in the
course of the year.
Accordingly, DG Regional Policy has to be satisfied that the exercise of the supervisory functions of the
Directorate General under the shared management system is adequate to ensure the correction of possible
irregularities in expenditure from those systems for which an unqualified opinion cannot at this stage be
given. Having regard to the actions which are underway or which are planned, DG Regional Policy is
satisfied that this is the case.
There are two reservations concerning both 2007-2013 and 2000-2006 programming periods. All the
reservations concern risks and/or deficiencies in systems of management and control at the national level
and not within the Directorate General. The reasons for the reservations are of a different nature.
    For the 2007-2013 period, the current control framework requires Member States to undertake a
    significant audit role. For several programmes, this audit activity has revealed major deficiencies in the


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                                                                                      3.3 – Overall conclusions

    operated systems and in most of the cases corrective measures have already been launched at
    national/regional level by deducting flat rate financial corrections from the subsequent payment claims
    sent to the Commission and in parallel by reinforcing the control mechanisms on the ground. In other
    cases, the audit work has been delayed without acceptable reasons: this in itself represents a breach of the
    legal requirements and may lead to irregularities in the underlying operations not being detected. DG
    Regional Policy considers that the significant changes introduced by the current legislative framework
    especially regarding the single audit approach require more time to be fully effective on the ground for all
    operational programmes.
    For the 2000-2006 period, the reasons are linked to the lack of evidence that financial corrections have
    been applied following material deficiencies identified either recently by the national winding-up bodies or
    in the past following extensive audit enquiries launched in 2004 by DG Regional Policy. The closure
    process will be interrupted until clarifications are received. The objective is to reduce the residual risk of
    error for programme closure and the payment of the balance.
It is important to note that in building-up assurance and arriving at the estimated risk of error for the
purposes of the AAR, many elements are taken into consideration. The methodology followed for the AAR
is based on a bottom-up management assessment of the assurance gained and the risk of errors remaining in
each programme, taking into account various sources of information from both the audit and operational
services of DG Regional Policy. These elements which include the multi-annual mechanisms, such as
financial corrections applied, action plans effectively implemented and other corrective actions, allow the
classification of all programmes into four categories, each category having an imputed level of risk (see annex
4).
                                                                               ERDF/CF 2007-2013
                                                                           2009 AAR       2010 AAR
Amount of interim payement (EUR million)                                         9,419         25,547
Number of Programmes under reservation                                              51             69
Number of Member States with at least one reservation (*)                            4             10
% of interim payment affected by significant risks                           13.4%          14.6%
Estimation of 2010 payments at risk                                           0.7%       0.8% / 1.7%
(*) ETC / INTERREG excepted
For the 2007-13 period, the number of programmes under reservation is higher than in 2009 (see table) and
affect a larger number of Member States (including both old and new Member States). This represents a
lower level of assurance compared to the improvements noted last year and limits the assurance at this stage
on the legality and regularity of the underlying transactions.
These increases result from two main causes: a considerable higher volume of operations with a higher
complexity and the increased capacity of DG Regional Policy in cooperation with Member States through the
single audit approach to detect weaknesses at an early stage.
With the progress of the implementation of the programmes on the ground, as reflected by the significant
number of approved major projects for large infrastructure and the number of projects in research and
innovation, the tasks related to project preparation and operational / financial management have become
more challenging.
The increased control capacity is due to the new regulatory framework that foresees many control
mechanisms at Member States and Commission levels which were fully deployed for the first time in 2010
(nearly all national audit authorities have issued detailed audit opinions on the functioning of the systems,
first audits of operations have been executed with a coverage reported as much higher than previously, DG
Regional Policy supervisory capacity has been reinforced by the new possibility to interrupt payment
deadlines). Even though improvements in the functioning of the single audit approach are still needed, DG
Regional Policy considers that the assessment performed for this annual activity report gives a true and fair
understanding of the risks.
The specific difficulties met in 2010 should not hide the good results in the majority of Member States
including those that are large beneficiaries and thus manage a large amount of funds proving that the



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                                                                     3- Building blocks towards reasonable assurance
                                                                                            3.3 – Overall conclusions

regulatory framework when implemented works. Furthermore, it is very encouraging to see some Member
States that have overcome past difficulties (e.g. Portugal).
The residual risk of irregular expenditure in the 2010 intermediate payments in those programmes for which
DG Regional Policy has a limited or no assurance due to material deficiencies in the functioning of the
national management and control systems is between 0.8 and 1.7% (for the 2007-13 period).
The programmes for which DG Regional Policy has a reasonable assurance or a reasonable assurance with
minor observations present estimated risks of irregular expenditure that can be appropriately addressed62 by
the regular audit work carried out at national and Commission levels. Although the value of irregular
expenditure in the 2010 payments stemming from these programmes can exceed 2% of the 2010 payments,
the programmes in the two categories of reasonable assurance are not subject to a special reservation in the
Director General's declaration of assurance.
The percentage for materiality presented by DG Regional Policy in the reservations for the 2010 annual
activity report cannot be compared with the error rate determined by the European Court of Auditors for the
Cohesion policy in its annual report. Whilst in both cases the figures are an estimate, they are founded on
different elements and measure different concepts: on the one hand, an evaluation of the estimated risk of
irregular expenditure (taking into account its multiannual corrective capacity) only in those programmes for
which DG Regional Policy has no assurance or a limited assurance on the national systems (because of
significant deficiencies) and on the other hand, an extrapolated error rate for all of Cohesion policy based on
audits of a sample of programmes and of operations using a statistical approach for one particular year.


3.4.            Overall action plan to tackle residual weaknesses at
                Member States level for the programming period 2007-2013
As a general rule, the Commission will continue to rigorously exercise its supervisory role by asking Member
States to address the weakest points in their management and control systems, by focusing its audits on the
main risks identified (areas and programmes where risks have been identified repeatedly), by completing the
review of the quality of the audits undertaken by the audit authorities and by applying interruptions and
suspensions of payments, and financial corrections whenever necessary. This shall include monitoring the
effective and timely programme implementation.


In addition, DG Regional Policy will also apply the following initiatives to mitigate the main risks:
     Targeted Assistance
     Addressing systemic deficiencies for key programmes under reservation
     Specific action plans have been defined for each programme under reservations (as described in part
     3.2.1.4). DG Regional Policy will meet with every managing authority concerned to discuss and prioritise
     actions.
     Rapid Intervention Mechanism
      As soon as DG Regional Policy discovers a significant issue hampering proper programme
     implementation it will mobilise its key experts (operational, audit, legal as appropriate) into a new ad-hoc
     "Rapid Intervention Team", in order to dialogue with the managing authorities and assist them in
     identifying the root causes of the deficiencies and decide on measures to address problems and
     strengthen the control mechanisms. Additionally, this process will more effectively identify the conditions
     linked to deciding or lifting interruptions of payment deadlines or the size of potential financial
     corrections.
     DG Regional Policy has already established in early 2011 a specific "Interruption Committee" chaired by
     the Authorising Officer by Delegation to regularly review the reasons for interruptions of payment
     deadlines and/or for pre-suspension letters. This board will facilitate and accelerate the decision making
     process as well as the consistency of the corrective actions launched at DG level. It will also identify
62   As explained in annex 4, advances and intermediate payments should not exceed 95% of the entire amount of any programme
     (or 80% for the Cohesion Fund 2000-2006): any error below 5% identified through national and/or Commission control
     procedures at closure will be deducted from the payment of the balance.


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                                                                      3- Building blocks towards reasonable assurance
                                                                3.4 – Overall action plan to tackle residual weaknesses

     significant bottlenecks either in a specific Region or Member State or of a more cross-cutting nature that
     deserve management attention and follow-up.
     Political awareness and commitment
     DG Regional Policy has brought the main elements of the reservations to the attention of Commissioner
     Hahn. In 2011, every opportunity to have a dialogue at a high political level with representatives of
     Regions and Member States will be used to present in a fair and transparent way the latest opinion of DG
     Regional Policy regarding the administrative and financial implementation of the programmes and to seek
     for commitment that the highest possible attention will be devoted to the systemic recurrent issues.


     Compliance with Public Procurement rules
     The complexity of EU rules on public procurement and their interaction with national legislation is well
     known and led the Commission to announce in the Single Market Act63 that it will conduct EU wide
     consultations in order to make legislative proposals in 2012 at the latest with the view to simplifying and
     updating the public procurement legislation.
     Nevertheless, because of the very nature of their scope of assistance, problems in relation to public
     procurement law remain the single most important cause of irregularities in Regional policy. In fact,
     experience shows that delayed or incorrect transposition of EU directives into national legislation,
     difficulty to interpret the rules, including certain provisions and principles of the Treaty applicable to
     public procurement and weak administrative capacities are most often the reasons leading to
     irregularities.
     In order to continue reducing the possibility of errors, actions at DG level, in cooperation with DG
     Internal Market and with Member States will be carried out in 2011. In particular:
       -    At DG Regional Policy level, an in-depth analysis of characteristics of public procurement
            problems by Member State will be carried out and discussed with the public procurement
            administrations of the Member States in order to help them to develop a more targeted approach.
       -     The dialogue on harmonisation of the approach to quantify public procurement errors between
            the Commission and the Court of Auditors will be continued, with the aim of reaching common
            conclusions.
       -    At Commission level, DG Regional Policy and DG Internal Market have set-up a think tank with
            the view to coordinating efforts towards the clarification of certain public procurement rules and
            the implementation of actions which could help reduce error rates for projects co-financed by the
            Structural funds and Cohesion Fund.
       -    In cooperation with Member States, the focus will be on providing guidance, reminding that
            auditing compliance with the rules on public procurement is a key priority and that providing
            guidance to final beneficiaries and following up the audit findings and recommendations related to
            public procurement rules are also needed. DG Regional Policy in cooperation with DG Internal
            Market will also provide assistance to the Member States in their capacity building activities on the
            ground where recurrent weaknesses have been revealed and/or where major projects have a high
            inherent level of risk regarding the compliance with public procurement rules.


     Clarification of the eligibility of retrospective projects:
     The eligibility rules applicable to "retrospective projects" (projects already selected and started in previous
     years) may not be easily understood and/or checked. This has led to significant irregularities.
     As a result, DG Regional Policy will:
       -    Further analyse the cases where retrospective projects have been considered as eligible;

63   Communication from the Commission to the European Parliament, the Council, the Economic and Social Committee and the
     Committee of the Regions: Towards a Single Market Act – For a highly competitive social market economy of 27 October 2010
     – COM(2010)608.


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                                                                3- Building blocks towards reasonable assurance
                                                          3.4 – Overall action plan to tackle residual weaknesses

       -    Develop complementary guidelines both common and targeted to specific operational programmes
            to clarify the eligibility rules and prerequisites;
       -    Increase awareness among managing authorities and certifying authorities to check the eligibility of
            retrospective projects as soon as they are included in the operational programmes.


    Management of financial engineering schemes:
    The role of financial engineering instruments in Regional policy has increased significantly in the current
    programming period. The Commission is aware that some Member States and regions face significant
    challenges in the development and implementation of financial engineering instruments funded under
    shared management. Indeed, for some Member States and regions financial engineering instruments are a
    new form of assistance for public funds and they lack the know-how and capacity to set up complex
    financing structures, requiring very technical negotiations with financial institutions. The eligibility rules
    for the current programming period are in specific cases not fully appropriate for an effective
    implementation. The correct and timely mobilisation of funding in favour of enterprises (SMEs) and
    projects (urban development) is sometimes difficult to obtain.
    As a result, to ensure sound sound management of financial engineering instrument, DG Regional Policy
    will:
       -    Review legal issues regarding the eligibility for some financial engineering schemes;
       -    Define a common audit methodology to audit the financial engineering instruments together with
            the Member States' Audit Authorities in close cooperation with the European Court of Auditors;
       -    Reinforce the monitoring system of financial engineering instruments in order to have timely and
            proper information on the state of play of their.


    Updated DG Regional Policy's audit strategy:
    The audit strategy continues to be focused on the main risks (areas and or programmes where risks have
    been repeatedly identified) and risk assessments have been updated to focus on the main risks areas
    detected in 2010. The demanding work linked to the launching of the current programming period are
    now nearly completed (compliance assessments, audit strategies, guidance, etc). This will free resources
    for more on-the-spot activities.
    The actions focused on audit authorities will be continued in order to finalise the review of the reliability
    of the national audit authorities, to increase the audit on authorities and to ensure capacity building
    (technical meetings on cross-cutting issues like the audit opinion, bilateral meetings and review missions
    to assist the weakest authorities, etc). DG Regional Policy will reinforce its monitoring of national audit
    authorities to complete the common methodologies and guidance documents following the conclusions
    drawn from the comprehensive analysis of the strengths and weaknesses of the first experience of Annual
    Control reports with detailed opinions and error rates resulting from the first audits of operations. Audit
    authorities will be invited to better adjust their audit strategy to most problematic risk areas, to identify
    practical recommendations and to ensure that appropriate action plans are defined and implemented
    following systems audits.
    In addition, DG Regional Policy will increase its on-the-spot specific audits to complement the work of
    the national audit authorities when it considers that there is an assurance gap, for the riskiest programmes
    and/or entities. In addition, since 2010 DG Regional Policy has launched horizontal audits to cover the
    main risk areas such as public procurement, financial engineering, corrective capacity/recoveries and
    management verifications performed by managing authorities. In 2011, financial engineering in some
    Member States will also be specifically audited.




Regio_aar_2010_final                                                                                        Page 85
4. THE DECLARATION OF ASSURANCE
I, the undersigned,
Director-General of DG Regional Policy
In my capacity as authorising officer by delegation
Declare that the information contained in this report gives a true and fair view64.
State that I have reasonable assurance that the resources assigned to the activities described in this
report have been used for their intended purpose and in accordance with the principles of sound
financial management, and that the control procedures put in place give the necessary guarantees
concerning the legality and regularity of the underlying transactions.
This reasonable assurance is based on my own judgement and on the information at my disposal,
such as the results of the self-assessment, ex-post controls, the work of the internal audit capability,
the observations of the Internal Audit Service and the lessons learnt from the reports of the Court of
Auditors for years prior to the year of this declaration.
Confirm that I am not aware of anything not reported here which could harm the interests of the
institution.

However the following reservations should be noted:
      Reservation concerning the ERDF/Cohesion Fund/IPA management and control
      systems for the period 2007-2013 in several Member States:
      This reservation concerns 69 ERDF/Cohesion Fund programmes in Bulgaria, Czech Republic,
      Germany, Greece, Italy, Latvia, Lithuania, Spain, United Kingdom, Romania and European
      Territorial Cooperation as well as 6 IPA pre-accession (cross-border cooperation component)
      programmes. For the Spanish and the Lithuanian programmes, the reservation only concerns
      some intermediate bodies.
      This reservation is different in scope and nature from the reservation issued last year. The
      regulatory framework for the 2007-13 programming period foresees many control mechanisms
      at Member States and Commission levels that was deployed for the first time in 2010 allowing
      me to identify more systematically and more precisely the deficiencies in the national
      management and control systems. I have immediately taken measures to protect the EU financial
      interests (interruptions of payment deadlines) and I am taking further measures to address, with
      Member States, the underlying systemic problems.
      Reservation concerning the ERDF/Cohesion Fund management and control systems for
      the 2000-2006 programming period in some Member States:
       This reservation concerns 23 programmes (or sectors for the Cohesion Fund) in Bulgaria,
       Germany, Hungary, Italy, Latvia, the Netherlands and INTERREG programmes. I will use all
       necessary means at my disposal to solve the outstanding issues during the on-going closure
       process including financial corrections.

                                                                                                                    Brussels, 31st March 2011

                                                                                                                                      [signed]
                                                                                                                                 Dirk Ahner

64   True and fair in this context means a reliable, complete and correct view on the state of affairs in the service.


Regio_aar_2010_final                                                                                                                 Page 86
                                                  List of operational programmes in the 2010 reservation

                                           2007-2013 programming period                                                           2000-2006 programming period
   Member States
                            OP Number                                    OP Title                                 OP Number                                     OP Title
  Bulgaria (BG)       2007BG161PO001           Regional Development                                          Cohesion Fund           Transport Project (1)
                      2007BG161PO003           Competitiveness of the Bulgarian Economy
                      2007BG161PO005           Environment
  Czech republic (CZ) 2007CZ161PO004           Entreprise and innovations
                      2007CZ161PO006           Environment
                      2007CZ161PO007           Transport
                      2007CZ161PO008           North-West
                      2007CZ161PO012           Research and Development
  Germany (DE)        2007DE161PO003           Mecklenburg-Vorpommern                                        2000DE162DO003          Saarland
                      2007DE161PO005           Transport                                                     2000DE162DO008          Baden-Württemberg
                      2007DE162PO002           Saarland (3)
                      2007DE162PO008           Baden-Württemberg
  Greece (GR)         2007GR161PO004           Reinforcement of accessibility
  Hungary (HU)                                                                                               Cohesion Fund           Transport Project
  Italy (IT)          2007IT161PO001           Attrattori culturali, naturali e turismo (3)                  2001IT160PC002          Caserta
                      2007IT161PO005           Reti e mobilità                                               2001IT160PC007          Urban
                      2007IT161PO006           Ricerca e competitività (3)                                   2001IT160PC009          Taranto
                      2007IT161PO008           Calabria                                                      1999IT161PO005          Transport
                      2007IT161PO009           Campania                                                      1999IT161PO006          Calabria
                      2007IT162PO004           Lazio                                                         1999IT161PO007          Campania
                      2007IT162PO016           Sardegna                                                      1999IT161PO010          Sardegna
                                                                                                             1999IT161PO011          Sicilia
  Latvia (LV)         2007LV161PO001           Entrepreneurship and Innovations                              2003LV161DO001          Latvia
                      2007LV161PO002           Infrastructure and Services
  Lithuania (LT)      2007LT161PO002           Economic growth (1)
  The Netherlands (NL)                                                                              2000NL162DO002                   Stedelijke gebieden
  Romania (RO)        2007RO161PO001           Regional Operational Programme (2)
                      2007RO161PO004           Sectoral Operational Programme Environment (2)
  Spain (ES)          2007ES161PO001           Región de Murcia (1)
                      2007ES161PO002           Melilla
                      2007ES161PO004           Asturias (1)
                      2007ES161PO005           Galicia (1)
                      2007ES161PO006           Extremadura (1)
                      2007ES161PO007           Castilla La Mancha (1)
                      2007ES161PO008           Andalucía (1)
                      2007ES161PO009           Fondo de Cohesión (1)
                      2007ES162PO001           Cantabria (1)
                      2007ES162PO002           País Vasco (1)
                      2007ES162PO003           Navarra (1)
                      2007ES162PO004           Madrid (1)
                      2007ES162PO005           La Rioja (1)
                      2007ES162PO006           Cataluña (1)
                      2007ES162PO007           Baleares (1)
                      2007ES162PO008           Aragón (1)
                      2007ES162PO009           Castilla y León (1)
                      2007ES162PO010           Comunidad Valenciana (1)
                      2007ES162PO011           Canarias (1)
                      2007ES16UPO001           Investigación, Desarrollo e innovación (1)
                      2007ES16UPO002           Asistencia Técnica y Gobernanza (1)
                      2007ES16UPO003           Economía basada en el Conocimiento (1)
  The United Kingdom 2007UK161PO001            Highlands and Islands of Scotland
  (UK)                2007UK162PO001           Lowlands and Uplands of Scotland
                      2007UK162PO003           Northern Ireland
                      2007UK162PO005           North East England
                      2007UK162PO006           London England
                      2007UK162PO008           North West England
                      2007UK162PO009           Yorkshire and Humberside England
                      2007UK162PO010           East Midlands England
                      2007UK162PO011           South West England
  ETC (cross-borders 2007CB163PO001            Euregio Maas Rijn                                    2000CB160PC006                   Germany (MV/BB) - Poland
  coop.)              2007CB163PO002            Austria - Czech Republic                            2000CB160PC010                   Austria-Germany-Switzerland
  IPA (cross-borders) 2007CB163PO003           Slovakia-Austria                                     2000RG160PC003                   Ems Dollart
                      2007CB163PO006           España-Francia                                       2000RG160PC005                   España-Portugal
                      2007CB163PO009           Bayern - Czech Republic                              2001CB160PC004                   Germany (Sachsen) - Poland
                      2007CB163PO014           Alpine Space                                         2001CB160PC005                   Germany (Sachsen)- Czech Republic
                      2007CB163PO019           Germany (MV/BB) - Poland (2)                         2001RG160PC004                   Oresund (Sweden-Denmark)
                      2007CB163PO031           Lithuania - Poland                                   2001RG160PC011                   Netherlands - Belgium
                      2007CB163PO033           Italia-Francia frontiera marittima                   2002CB160PC001                   Italia-Adriatico
                      2007CB163PO060           Greece - Italy
                      2007CB163PO061           Central Europe
                      2007CB163PO063           France-Wallonie-Vlaanderen
                      2008CB163PO001           Transfronteriza España-Fronteras Exteriores 2008 (3)
                      2007CB16IPO001           Adriatic (IPA) (3)
                      2007CB16IPO006           Bulgaria-Serbia (IPA) (3)
                      2007CB16IPO007           Bulgaria - Former Yugoslav Republic of Macedonia (IPA
                      2007CB16IPO008           Bulgaria-Turkey (IPA) (2)
                      2007CB16IPO009           Greece - Former Yugoslav Republic of Macedonia (IPA
                      2007CB16IPO010           Greece-Albania (IPA) (3)

                       (1) Partial reservations: Spain, for 21 programmes reservation applies to 13 (out of 145) intermediate bodies; Lithuania, reservation on one intermediate body; Bulgaria,
                       reservation on one project

                       (2) Reservations for reputational reasons and potential risks without legal ground to interrupt payment deadlines (RO, one ETC programme, 2 IPA-CBC programmes)


                       (3) Compliance assessment not yet approved (one German programme, 2 Italian programmes, one ETC programme, 4 IPA-CBC programmes)




Regio_aar_2010_final                                                                                                                                                                    Page 87

				
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