Cohesion policy reflects what the EU is all about — and will remain for the ECA one of the most important areas to audit
The ECA’s ‘Investment for cohesion, growth and inclusion’ audit directorate is the largest one in terms of staff. But why? Only because of the size of the cohesion policy budget, or does it also reflect the fact that auditing cohesion is particularly complex? For Martin Weber, who has already worked twice as an audit director in this area, what makes this field so interesting is not just the extent to which cohesion policy has evolved over time, but also the significant socio-economic impact of the various policies and measures that are financed with cohesion policy funds. At the same time, while cohesion policy has clearly helped convergence between Member States and regions since its inception in the 1980s, assessing its precise socio-economic impact remains a major methodological challenge. Meanwhile, Martin is as enthusiastic today as he was ten years ago about being responsible for auditing this ever-evolving policy area. Because, in his view, this policy is about the core purpose of the EU project: solidarity.
By Gaston Moonen.
Cohesion: a multi-faceted concept
Martin Weber clearly knows the ins and outs of cohesion policy. He has been in charge of auditing cohesion policy twice in his career already: in 2014, Martin was appointed as a director for the first time, having previously worked as a head of unit in the same area; he then joined the field again in 2021. He believes that cohesion policy exemplifies what the EU stands for. ‘Cohesion policy illustrates what the EU is all about: as it is stated at the very beginning of the Treaty, in Article 3, the Union is there to promote economic, social and territorial cohesion and solidarity among Member States’.
In his view, the concept of cohesion can be looked at from different angles. ‘One approach involves equality, i.e. striving for equal opportunities and equal treatment for all. Another way to understand cohesion is in terms of convergence and compensation. Rather than focusing on equal treatment, the focus is on equity, or a policy intervention which aims to achieve the same outcome. This may then require varying levels of support, based on differing needs, to achieve greater fairness in economic and social outcomes. A third way to see cohesion focuses on the need to go beyond compensation by reducing or eliminating structural barriers that are responsible for inequities’. Another idea that stands out for Martin is the need to make productive use of interdependencies between regions, places and social groups, by creating stronger and more resilient links and networks. But most importantly, he thinks the essential aspect is solidarity. ‘This idea that we are all in this together: a union of Member States and regions is inscribed in the very DNA of cohesion policy’.
Another aspect of cohesion policy that Martin finds fascinating is that it never ends. ‘Cohesion policy is here to stay, because we will never reach a perfect state of equality, equity and justice. To put more positively, we will forever remain united in diversity… ’
Knowledge is the key to doing a proper job in auditing cohesion policy
According to Martin, auditors in his directorate need to be well equipped to do a proper job. ‘First, they need to be familiar not only with the rather detailed EU legal framework and sectoral regulations, but also state aid and public procurement rules. They also need to know the legal and administrative characteristics of each of our Member States, and how those rules are applied by them’.
Even more important, however, is their interest and willingness to learn all the time. ‘Our auditors often need to develop specialist knowledge in a very short time, because the range of topics we audit is so broad’. In this connection, he mentions his directorate’s recent efforts to invest more in knowledge management. ‘One of the initiatives we have recently started in our area is to set up a new knowledge-management system, which focuses on four main nodes, broadly corresponding to the policy objectives specified in the 2021–2027 Common Provision Regulations: Competitiveness and innovation, Networks, People and living conditions, and the transversal node of Governance and audit’.
A third challenge is the need for more data-driven audits and analysis of much larger data sets, comprising public and non-public data, such as traffic-flow data to assess the cost-effectiveness of a rail or road project. As an example, he cites the Bertelsmann study (see page 146) which attempted to combine different data sets. ‘Currently, we do not have enough staff who are well trained in such audits’.
Lastly, as independent external auditors, Martin believes that his staff also need to think about the future of the policy, and not just look at how things were done in the past. He says: ‘Not only think-tanks but also people in other institutions are thinking about how to improve policies further. We need to interact: to learn from them, and to share our findings more actively’. Last year, with this in mind, his directorate launched the ‘Cohesion talk’ series. ‘Once a month, we invite external experts to exchange views with us on cohesion policy issues. This has proved to be a very stimulating forum for debate. Usually, around 60–80 auditors participate, and we have very active and thought-provoking exchanges’.
Cohesion: more than a system of financial redistribution in a single market?
When asked about the need for cohesion policy, i.e. the European Regional and Development Fund (ERDF), the Cohesion Fund (CF) and the European Social Fund (ESF), Martin makes the link with the EU’s single market. In part, he sees cohesion policy as a vehicle for financing investments and policies that support the effective functioning of the single market. However, he also agrees that there is a redistribution element. ‘Cohesion policy also compensates for some of the negative economic effects that
the single market might have on certain regions. Clearly, this is one of the traditional justifications for the policy’.
This leads to one long-standing criticism: that cohesion policy is a rather complicated and costly system for re-distributing taxpayers’ money from the economically strong to the economically weak. Martin is not convinced. First, he points out that cohesion policy has evolved from a purely regional policy to a much broader investment policy. ‘Beyond this idea of redistribution and compensation, there are also — and increasingly so — other policy objectives that cohesion policy is supposed to finance. Just think of the competitiveness of our economies and industries. Or the Green Deal, and investments in climate-neutral technologies. Think of the support we want to provide to certain socially disadvantaged groups. Or the idea that the EU should play a role in supporting reforms in Member States, rather than just financing public investments’.
Another aspect is the rise of ‘conditionalities’ in cohesion policy. Nowadays, Member States have to fulfil an increasing number of conditions to receive cohesion policy money. ‘These EU requirements are meant to support and help Member States in making sure that the money actually gets to where it is politically intended to go’. He believes that this creates positive spill-over effects in the management of national public finances, because EU requirements are often more demanding than those of Member States. He explains: ‘With a simple budget support mechanism, you would not see such effects’. Lastly, Martin believes that a budget transfer system between regions — as it exists in most nation states — is simply not a politically viable option in the EU. ‘We do not yet have the necessary level of trust between Member States; the so-called ‘net payers’ therefore have a tendency to request additional safeguards to ensure that their taxpayers’ money is properly invested’. In Martin’s view, this also explains some of the complexities and red tape in cohesion policy.
Martin clearly has doubts that the cohesion policy we have nowadays would exist if EU policies were designed from scratch. ‘This is a policy that has evolved over many cycles, and so changes were built in gradually, and were often added on rather than replacing something else’.
Critical yet constructive audit reports aiming for further improvements
The ECA is known for issuing critical audit reports on different aspects of cohesion policy. For Martin, this comes with the job. ‘Our role as the EU’s independent external auditor is to assess EU policies and spending with a critical eye. Our audit reports are not meant to be flattering’. He goes on to explain that with a focus on risks, there is an almost natural tendency to identify weaknesses and shortcomings. ‘But we want to do this in a constructive manner, and we want to help the system to improve and to operate better. This is not criticising a policy as such’.
Martin identifies three key factors that may hamper the successful implementation of cohesion projects. ‘Many of these investments work best when they are embedded in a meaningful territorial strategy and linked to others. Often, these strategies are not sufficiently robust. Moreover, planning connected projects is a particular challenge, in particular across borders’. As examples, he cites EU-funded seaports and their missing connections with hinterlands, and the building of regional airports with excess capacity that compete with other EU-funded airports in relatively close proximity.
Another factor he mentions is size. ‘In Europe, we are not very good at deriving maximum benefit from economies of scale. If you think of distance-learning equipment and applications, everybody develops their own distance learning, and this is very often EU-funded. Meanwhile, such tools already exist on the market’. The same is true of procurement, where he believes that the joint procurement of COVID-19 vaccines was a highly successful EU initiative. ‘But this is not sufficiently acknowledged’.
A third challenge is the tendency to spend large amounts of money on ‘lighthouse’ projects, i.e. spending too much money on a particularly visible project, rather than looking at how you could reach the outcome in the most economical way. He gives an example ‘We have already audited the Brenner base tunnel linking Austria and Italy, but more broadly northern and southern Europe, several times. Without any doubt, this cross-border megaproject is an essential link on one of the most congested routes of the trans-European rail network. However, without the feeding lines in Germany and Italy that still need to be built, we will not see a significant increase in traffic on this line’.
And of course, he mentions the issue of cost overruns that bedevil almost all public investment projects, whether EU-funded or not. ‘Interestingly, we have recently carried out a benchmarking study which showed that EU projects are not necessarily more exposed to running over budget than similar projects in the USA, Canada or Australia’.
Ineligible projects or costs, and non-compliance with public procurement or state aid rules, are the main types of irregularities in cohesion policy
Cohesion policy has traditionally been one area of the EU budget where the ECA finds the most irregularities. Ineligible projects or costs, and non-compliance with public procurement or state aid rules, are the main types of irregularities in cohesion policy. ‘However, this does not necessarily mean that the money has been wasted, nor does it mean that it has been embezzled. What our audits show is that there is an issue where compliance with rules is concerned. And there are different factors contributing to that’. Meanwhile, he emphasises the need to differentiate, as not all programmes are affected by irregularities to the same extent. ‘In fact, when you look at the 2014–2020 period as a whole, our audits have shown that more than 40% of all the programmes we have audited were not affected by a material level of error’.
Moreover, since 2007, the level of irregularities has fallen substantially. Martin believes that this is at least partly due to the work of audit authorities in the Member States. ‘In each Member State and for each programme, these audit authorities carry out sample-based checks of the expenditure declarations submitted by managing authorities. Obviously, this comes at an additional cost. But from an audit point of view, it gives the Commission additional assurance about the regularity of the spending’.
The RRF — a new instrument in parallel with cohesion
Martin and his colleagues in the directorate also observe very closely how the Recovery and Resilience Facility (RRF) works in practice. There may be differences between the RRF and cohesion policy, but there are also many similarities. ‘Interestingly, in the budget system it goes together with cohesion. If you look at the investment areas where financing takes place, they largely overlap. The main difference is that the RRF can also finance reforms in the Member States’.
He continues: ‘We are at a very interesting moment in time, because with the RRF there is a new investment initiative with an equally large amount of money, maybe even a little bit bigger, which will be distributed according to different rules and with slightly different objectives, but for very similar areas of investment. In the coming years, the Commission and the Member States will operate the RRF and cohesion policy largely in parallel. This will be a fascinating opportunity to learn whether a different model for spending money can be more effective and more efficient’.
When it comes to the cost of operating the RRF, Martin is convinced that this will be significantly lower than for cohesion policy programmes. ‘There are fewer controls built in. It is also true that everything is programmed in considerable detail, so there may be a higher ex-ante effort’. However, he thinks that once everything is set out in the national recovery and resilience plans, the execution itself will be rather straightforward. ‘This means that both the Commission and the Member States are likely to need fewer resources per euro spent to run this initiative’.
Martin’s audit directorate is currently carrying out a comparative analysis of cohesion policy and the RRF. ‘Right now, we are actually carry out a review to analyse the risks and opportunities of coordinating the European Structural and Investment Funds and the RRF in relation to the funding of public investments. We hope to publish our review in the second half of this year’.
For Martin, the RRF offers a sort of a real-life counterfactual that will help to identify the advantages and shortcomings of the different deployment mechanisms more clearly. ‘As far as I am aware, this is — at least in Europe — the first time that we have had a situation where two competing models for spending public money are being run in parallel’.
The RRF is the EU’s first performance-based budget
Martin particularly emphasises the performance orientation of the RRF, which is really built into the programme’s design from the beginning. ‘The objectives of the national plans are specified in terms of milestones and targets, and these are followed up and reported on, so you can easily monitor the performance aspects of the initiative’. However, Martin believes that this will not necessarily make it easier to assess the overall impact of the RRF, also because of the very significant (and cross-national) multiplier effects of such programmes.
At the same time, Martin also observes that the ratio between the results achieved and the financial input made by the EU will be difficult to establish, even for auditors. ‘When you talk about the RRF, there is no clear or direct link between performance aspects and the costs of the actual reforms or investments implemented on the ground. In other words, you simply cannot know — even ex-post — how much this or that element has cost. You only know whether the milestones and targets that were agreed have actually been achieved or not. You can then discuss to what extent they were fully met, fully achieved or only partially achieved. But there is, I think, a built-in impossibility of linking it to any costs’. In cohesion policy, by comparison, the situation is different. ‘For most forms of cohesion policy financing, the link between the costs and the outputs of investments is clear. What is more difficult to monitor is whether the financed measures have actually achieved the impacts that were intended. Combining the two — I must admit — is not often that simple’.
Martin believes that the European Commission must be particularly vigilant in the early phases of RRF implementation. ‘The difficulty with the RRF is that you must be extremely diligent and careful when you are negotiating and agreeing on the programme. You must make a sort of ex-ante assessment of whether these milestones and targets are worth the money that you are contributing. It really matters how well you negotiate the programme to get the best value for your money’. But the Commission has only very limited time and resources to devote to this negotiation.
He also thinks that the RRF requires a change of mind-set for all parties involved in EU budgetary management, whether at the Commission, the European Parliament, the Council or the European Court of Auditors. ‘We need to realise that this RRF design is revolutionary. It is a completely different way of spending public money. It is really a performance-based budget. It ticks all the boxes of the OECD classification’.
When it comes to parliamentary scrutiny, Martin can see real benefits in this new way of spending public money. ‘If you are an MEP, this approach allows you to see immediately which outputs and results you are getting for the money that has been spent. You can negotiate specific milestones and targets, and monitor whether Member States have achieved them. For many politicians, but also for the Commission, this may look like a very attractive situation because you can be much more specific about what you are requesting, and what you might or might not get’.
This new budgetary system also has implications about how to deal with fraud and corruption. ‘The issue of misuse of public money, and what Member States do to prevent, detect and mitigate the risks of fraud and corruption, is not off the table. The difference between the RRF and cohesion is the extent to which the Commission has an insight into how the money has been spent on the ground. There is obviously a big difference’. As regards cohesion policy, Martin concludes that the Commission has full supervision powers and responsibility, together with the Member States. For RRF expenditure, however, the Commission mainly intervenes in cases of suspicion, because Member States are in charge of implementing the national recovery and resilience programmes.
Absorbing funds may not have necessarily become more difficult, despite a significant increase in EU spending
One of the issues the ECA has reported on for several years now is absorption problems and delays in policy implementation. In several causes, according to Martin. ‘This might indicate administrative difficulties, or problems in planning or implementing investment projects. But absorption can also be looked at as an indicator for high-quality spending. This is an issue we sometimes highlight, because when there is still a lot of money around, the temptation might be to use it for any reason, rather than lose it’.
At the same time, he does not believe that absorption will necessarily become a bigger problem now that we have the RRF. ‘You may think so from an arithmetical point of view, because there is nearly twice as much money around. As Member States have not really increased their administrative capacity to implement this additional funding, this could mean that absorption will become more difficult’.
However, Martin puts this into perspective. ‘First of all, a number of simplifications have recently been introduced, in response to the COVID-19 pandemic and Russia’s invasion of Ukraine. In particular, the Commission has relaxed EU state-aid rules, so it has become much easier to spend the money. Second, the rate of inflation has increased considerably, which will reduce the risk of money not being absorbed, because you will simply spend more money on the same thing. Third, only a few Member States have made use of the RFF’s loan components. This may change in the coming weeks, but a large part of the RRF budget has not yet been activated. Plus, we have some Member States that have not even submitted their plan (e.g. the Netherlands), or where the Commission is still assessing it (e.g. Hungary). This means that they may forgo some of the money from the start’. He also notes that for some Member States, the additional money will just be used to replace national recovery spending, e.g. in Germany and France, and so aggregate demand will not significantly increase.
He also points to the delays in launching the 2021–2027 cohesion policy programmes, and what this implies for absorption. ‘So far, only a few partnership agreements have been adopted and hardly any programmes, and spending has not yet started even though we are already in 2022, meaning that there have been two years without spending’. Martin explains that the eligibility period for cohesion policy is much longer than for the RRF. For the RRF, it will end in 2026. Cohesion policy will run until 2029, i.e. 2027 plus two. ‘What we might see is that, in view of the staggered programme periods, the Commission and Member States will look at how far they have come with the RRF and then continue with the cohesion policy programmes’. He adds, ‘Of course, we have the n+3/n+2 rule in place, which imposes budgetary discipline on Member States. Nevertheless, in two or three years, we may see additional flexibility in budgetary plans, and a postponement of 2021–2027 cohesion spending towards the later years of the period. This may be a further way to deal with potential absorption problems’.
Overall, Martin does not believe that absorption might become a bigger problem than in previous periods. Nevertheless, he agrees that certain Member States — in particular those where the bulk of public investment is already EU-financed — may face problems. ‘You have some Member States where EU funds before the COVID-19 pandemic already accounted for 80 %-90 % of public investment. For those Member States, you could indeed anticipate certain difficulties in absorbing all this additional money’.
RRF governance differs from that of cohesion policy
As for governance of the RRF, Martin points out that there is quite a difference with cohesion policy. ‘The RRF is direct management, so Member States are fully in charge of managing RRF expenditure. Meanwhile, the Council — in other words, the Member States collectively — also plays a different role. The Commission assesses and negotiates the national recovery and resilience programmes, but, in order to be approved, they also need to obtain a positive opinion from the Council. This is also the case for disbursements’. Martin thinks that the Council’s involvement in approving programmes is the counterweight to this ‘extraordinary budgetary solidarity — ‘which was put in place to mitigate the economic and social consequences of the COVID-19 pandemic’.
However, this new arrangement will bring new challenges further down the road. ‘The Council may find itself in a rather sensitive position, because it will create a situation where disbursements to Member States — or rather the Commission’s assessment of whether milestones and targets have been achieved fully, partially or not at all — are subject to the scrutiny of the others’. He does not expect that the Council would reject the Commission assessments, as this would require a two-thirds majority in the Council. However, the additional Council scrutiny may embolden the Commission to propose withholding parts of the payments if weaknesses are identified. ‘It might actually strengthen the Commission’s position, but it is too early to say yet’.
Martin agrees that the creation of EU debt financing is another game changer. ‘But the key question has been kicked down the road, i.e. how it will be paid back. But it will clearly increase the pressure for a more fundamental reform of the EU and its financing’.
The new ‘rule of law’ conditionality matters, both for cohesion policy and for the RRF
In January 2021, the new ‘rule of law’ conditionality came into force, and this is already showing its effects on the EU’s financial management. ‘The Commission has now initiated this procedure for the first time, against Hungary’. By doing so, the Commission publicly states that it believes it can no longer assume that the Hungarian authorities can ensure that all EU spending is legal and regular. ‘Which is clearly a worrying signal for EU finances’.
Martin believes that only time will tell how this new conditionality will be implemented in practice. ‘It is a process that will take several years, and, in all likelihood, will end up at the European Court of Justice’. In the meantime, the ECA will need to take account of the fact that the Commission has triggered this conditionality. ‘Because if the Commission, as the manager of EU funds, already states that there are concerns about the regularity of spending in a specific Member State, then we clearly cannot ignore that in our audits’.
At the same time, he believes there is only so much the ECA can do. ‘There are certain things that go beyond our remit, and where we do not necessarily have the requisite technical expertise. But what we can do is consider how the Commission has assessed the situation in the different Member States, and whether that assessment was fair and based on robust criteria’. He sees an analogy here with the ECA’s work on the Stability and Growth Pact, or the European Semester.
For Martin, this additional condition to protect the EU’s financial interests may inadvertently matter even more for the RRF than for the traditional spending programmes. ‘Concerns about the rule of law have certainly meant that the national recovery and resilience programme for Hungary has not yet been approved. In any case, one would expect that the Commission could only assess them positively if they were to include appropriate milestones and targets that would ensure that the EU’s financial interests are well protected’.
More socio-economic convergence in the EU because of cohesion policy?
One of the big questions, also from an auditor’s perspective, is whether cohesion policy is successful as an engine for convergence. ‘I would say that up to the 2008 financial crisis, there clearly was convergence. Since then, we may have witnessed a levelling-off and even a partial reversal of the trend, in the form of increasing divergence between urban and rural areas. At least this is what the data recently published by the Commission in its 8th Cohesion Report show. In the coming years, we will also have to see what effects the last two crises — the COVID-19 pandemic and Russia’s invasion of Ukraine — will have had on the socio-economic development of the various regions of the EU and its Member States’.
Overall, however, Martin thinks that cohesion policy has made a very positive contribution. ‘It is difficult to imagine where the EU would be without cohesion policy. And whether it could have withstood all these crises without it. In the end, the financial support provided through cohesion policy is the most concrete expression of solidarity between Member States. Quite simply, we are better off together’.
This article was first published on the 1/2022 issue of the ECA Journal. The contents of the interviews and the articles are the sole responsibility of the interviewees and authors and do not necessarily reflect the opinion of the European Court of Auditors.