I thank the Chairman and members of the committee. It is a pleasure to be back again to present the 2018 annual report. We seem to have picked the wrong day to be here; we should have stayed in Luxembourg where all the action is happening. The one day we should have stayed there, we are in Dublin. It is a pleasure to be here nonetheless.
Before we start with the presentation of the report, I would like to thank the Chairman for taking time out to meet the president of the European Court of Auditors when he visited the House in November. I also thank the delegation who came to Luxembourg in April. We appreciate this ongoing engagement and, as the Chairman said, it is a good thing.
I will start with some of the key figures in the report. We audited €120 billion of the EU budget. Of that, €58 billion, or almost 50%, relates to natural resources, which covers agriculture and environment. Cohesion then follows with €23.6 billion and competitiveness with almost €18 billion.
The following are the results of our work in a nutshell. The EU accounts present a true and fair view, as we have been saying for a large number of years. The revenue for 2018 is legal and regular. Something that we do that most other auditors do not is we give an estimated level of error for the EU budget. For 2018, it has increased slightly to 2.6% from 2.4% in 2017. The figure for 2016 was 3.1%.
Breaking that down, there are two types of expenditure: low-risk expenditure and high-risk expenditure. The low-risk expenditure is generally free from material error. That means the error rate is below our materiality threshold of 2%. Almost 50% of the expenditure falls into this category.
However, the other 50%, approximately €61 billion, is high-risk expenditure. The overall estimated level of error for this type of expenditure is 4.5%.
I am responsible for cohesion, which had an error rate, in 2018, of 5%.
To put those figures into perspective, the EU budget for 2018 was almost €160 billion, to which Ireland contributed €2.6 billion. The main bulk of this budget, 66%, is based on gross national income, GNI, and traditional loan resources and VAT cover approximately another 24%. Depending on what happens today in Luxembourg, those figures for the customs and VAT that we collect on behalf of the EU could change substantially.
The spending in 2018 totalled €157 billion. This equates roughly to €300 for every EU citizen. It is the equivalent of 2.2% of total government expenditure across the EU member states and represents 1% of gross EU national income. That is to put the budget into context. Expectations are sometimes very big but, in relative terms, the amounts concerned are quite small, although it is still a lot of money.
Ireland has contributed €2.6 billion to the budget. We basically received back €2.064 billion, 76% of which comprises subsidies for agriculture. The rest of that amount is mainly for competitiveness and growth. The important part of that, in Irish terms, is the contribution we receive back for agriculture and the environment.
We had a net operating balance with the EU in 2018 of €315 million. This is the second year in a row that we have contributed more than we have received back. It does not tie in exactly with the funds flow because an accounting adjustment is made for all member states to reflect administrative overheads. In funds flow terms, we gave approximately €550 million but, as an operating budgetary balance, which is the basis on which the net contribution is calculated by the EU Commission, the figure is €315 million.
The €2.06 billion is broken down into €1.56 billion in sustainable growth and natural resources, of which €1.2 billion is for direct payments to farmers, and the other €320 million for rural development expenditure. That is the bulk of the funding.
We have gone through what we found in terms of the audit population. There is an important point to add about the error rates. We are confident that, based on the statistical sample we have taken, we can stand over an average estimated error rate of 2.6%. That 2.6% of the EU budget is €4 billion, which is still quite a lot of money. That is an error rate, so we try and emphasise that this is where the rules have not been fully complied with. EU-related funding, and the rules relating to it, can sometimes be complex. Depending on the nature of the expenditure and how it is dispersed, the error rates are higher, as we have seen earlier. We will go into a little more detail, for instance about cohesion, where the projects are complicated compared to, say, direct payments for farmers, which are more conditional on a requirement - a land parcel entitles one to so much - or an Erasmus grant for a student. Those examples are much more conditional compared to the cost reimbursement expenditure, which is where we have most of our problems. That is what I mean by high-risk expenditure. That is where we are talking about cost reimbursements.
I am responsible for the chapter in the annual report relating to cohesion. The amount that was subject to audit last year was €23.6 billion and there was an error rate of 5%. The error rate was 3% in 2017 so there was a significant increase for 2018 and it is more or less back to the level it was in 2016.
We explained last year that 2017, for cohesion especially, was a very unusual year. Little expenditure was submitted by the member states. The equivalent of the €23.6 billion for 2018 was approximately €8 billion in 2017. There has been a considerable increase in the expenditure for cohesion that was claimed by member states.
By its nature, this tends to be very complex. It includes large infrastructure projects that involve difficult and complicated public procurement procedures. We have issues with state aid and all sorts of other things that are not applicable in our low-risk expenditure.
We try and rely as much as we can on the work of the EU Commission and the other authorities in the member states that work on behalf of the Commission. We cannot fully rely on these figures. When we have gone back to recheck transactions that have been audited, we have found additional errors that were not originally detected either by the other authority or the Commission and we think the error rate that they have calculated is understated. We do our own computations and cannot fully rely on theirs yet.
The area of natural resources comprises agriculture and the environment. We have amounts, subject to audit, of €58 billion. The most likely error there is just above our materiality threshold of 2%.
It is 2.4%, which was the same as in the previous year. Ireland did not feature in the sample of transactions that were tested. Even within agriculture, there was a distinction, in that direct payments were free from material error while rural development and market measures were similar in measure to the cohesion expenditure and had a similar potential for errors. This page also discusses non-compliance with procurement or grant award rules. Rural development and market measures can be equated with higher risk cohesion-type cost reimbursement expenditure.
The error is 2.6%, which equates to almost €4 billion. This is not waste by nature. For example, projects where we find problems with strict compliance with the rules can deliver what they were supposed to. The impact of the projects has been positive, but from a purely legalistic point of view, we have had some problems. On the other hand, projects that are completely legally and regular may not deliver what was expected of them.
There are errors, waste and fraud. We are not fraud investigators as such but, as professional auditors, we must always be aware that there is the potential for fraud. Where we suspect fraud, we report it to the European Anti-Fraud Agency, OLAF. That happened in nine instances of suspected fraud during the 2018 audit. The reasons included declarations of cost not meeting eligibility criteria and procurement irregularities, the latter of which is always an area of concern. In other cases, people had artificially created the necessary conditions for EU financing. In the overall scheme of things, however, fraud was not a significant issue in our sample. Obviously, we would have preferred that there had been none, but nine is a low number.
Apart from financial compliance, we examined aspects of performance, which is an issue of equal importance. It essentially concerns whether EU policy objectives are being reached. Some shortcomings in the framework arose. For instance, indicators on which performance was supposed to be measured were sometimes not well chosen. In some cases, progress could not be calculated. In others, data were of insufficient quality or unavailable. Elsewhere, the targets set were not ambitious and would almost have been met by default, meaning they were not giving any added value.
As members can see from the chart, Ireland features second on the list of those states that absorb EU funds the quickest. We were at approximately 45% by the end of 2018. During the equivalent period of the previous programme in 2011, the figure was approximately 48%. It is a small drop and the rate remains quite high. The EU average has decreased from 33.4% to 27.3%, which is worrying at this stage, given that we are well into the 2014-20 programming period. We do not want all of the expenditure to arise at the end when the next programming period is starting, as that would bring complications.
Linked to the matter of absorption is that of the outstanding commitments per member state. Ireland figures well here, in that we were ranked low at €900 million of outstanding European social and investment, ESI, funds commitments by the end of 2018. It is quite a lot of money, but relative to general government expenditure, it is not significant. For example, Poland had €35 billion of outstanding commitments at the end of 2018, representing 17% of Poland's general government expenditure. The correlation between the two is high.
That was the financial end of things, but we also conduct performance reports. I have provided a brief introduction on the types of issue we encounter with the indicators and the framework. The next page outlines some of the special reports we issued in 2018. They are systematically provided to the committee. The page shows them by EU multi-annual financial framework, MFF, heading. There is a variety of tasks, including broadband, Horizon 2020, air passenger rights, the Turkey pre-accession aid and Turkey refugee facilities. Under the sustainable resources heading are renewable energy, carbon capture and storage, flood prevention and animal welfare. These climate issues are topical and we have started many more reports on them in our current work programme. The financial and economic governance heading is something of a carryover from the financial crisis. We still undertake some audits in that regard, but fewer than in the past. Now, it is more about examining whatever supervisory mechanisms are in place.
In 2019, we issued the reports listed on the next page. A number included Ireland in the sample. The reports on farmers' payment schemes and cross-border healthcare did not, but it was included in the reports on EU-wide stress tests for banks, organic products and the vulnerability of e-commerce to tax fraud, which is topical, given the ongoing negotiations on customs and borders. We also performed a review of the Commission's public consultation with EU citizens on various issues.
Of our upcoming reports in the next few months, some will be Irish-relevant. For example, Ireland will feature in the samples for reports on biodiversity on farmland and cost effectiveness of EU-funded energy investments in buildings. As such, there will be something to be said about Ireland in the final reports. Other reports of general interest to Irish policymakers will be on pesticides and the EU's response to dairy market disruptions. Reports of general public interest will include one on combating child poverty. I am a reporting member for that work. We will examine how the EU helps member states to address child poverty. That it is on the increase in many member states is a sad indictment of where we are today. Other reports will be on digitising European industry and trade defence instruments. These pages give a flavour of some of the reports that we have published or that are in the pipeline.
I thank members for their attention. I am open to questions.