Obtaining a full picture of the RRF –a multidimensional puzzle requiring various ECA efforts
Interview with Ivana Maletić, ECA Member
By Gaston Moonen
When, in the spring of 2020, the European Commission presented its first proposal regarding the Recovery and Resilience Facility (RRF), it became clear to the ECA leadership that the proposal, if adopted, would have major policy consequences. These would inevitably affect the work of the ECA as the EU’s external auditor, as already indicated in our 2021–2025 Strategy. ECA Member Ivana Maletić has been involved in both the internal and external discussions regarding the RRF, and has served as rapporteur for ECA publications on the topic, starting with opinion 6/2020 on the Commission’s proposal for the RRF Regulation. Below, she shares her experience of working on this topic — even before the 2020 proposals — and some of her concerns, while reflecting on RRF-related ECA projects in the pipeline.
RRF involvement avant la lettre
Ivana Maletić’s interest and experience in relation to initial efforts regarding an ‘RRF-type’ instrument date back to her time as a Member of the European Parliament (MEP) and even earlier during her time as a cohesion policy expert in Croatia. ‘As an MEP I was a member of the Economic and Monetary Affairs Committee — ECON — and the Regional Development Committee — REGI — a combination I very much liked. Already in 2017, the European Commission launched a three-year pilot project called the Structural Reform Support Programme to boost reforms in the Member States. In the new multiannual financial framework — the MFF 2021–2027, it should have been succeeded by the Reform Support Programme, worth €25 billion, intended to address both investments, like we know from cohesion policy, and reforms as were stipulated in the European Semester. I closely followed the implementation of the SRSP and was a rapporteur in the Regional Development Committee on the RSP at the time. I very much supported the idea of such an instrument, which would encourage and accelerate structural reforms in order to strengthen the effects of investments financed from the EU budget.’
She explains that with the COVID-19 crisis, however, this project, initially conceived as a pilot, received an enormous boost. ‘In the wake of the COVID-19 crisis in 2020, the RSP was put aside and got replaced by the almost 30 times larger RRF. The Commission rather suddenly proposed this huge one-off facility, worth €723.8 billion, primarily to boost country specific reforms stemming from the European Semester. Because they had problems in the European Semester. An issue I studied in more detail, as together with some colleagues I even published a book on the challenges related to the European Semester.’ She recalls that implementation of country-specific recommendations was continuously low. ‘The RRF was introduced to boost the reforms and to overcome the negative effects of the crisis on the public investments due to the huge increase in public deficit and debts all over Europe. For everybody it was clear that without reforms we could not, and actually cannot, recover from the sudden economic shock nor move forward.’
Crisis instrument…crisis deadlines, including for the
ECA
Given the need to address the economic consequences of the pandemic, the RRF proposal from the Commission came fast and the ECA had to keep pace in giving its opinion 6/2020 on this proposal. ‘We got the request from the European Parliament in June and worked right through summer, postponing holidays to finalise it in August 2020. We had to get the
right people with the right knowledge, review the design, identify potential weaknesses and risks for implementation, and in that sense also had to make alternative or additional suggestions to improve the text. It was very challenging to agree on a joint position in a few weeks. But looking back I have to say we managed to detect many of the main deficiencies of the proposal.’ Ivana Maletić recalls the team’s awareness of the relevance of their work. ‘We had to assess rather quickly a proposal on the largest EU instrument to date, which was completely new to us. We saw that a huge amount of money would be involved in a six-year implementation period, and we had to react fast.’
Size, urgency and political agreement in the European Council ensured that the heat was on, including for the ECA to write its opinion. ‘Take for example the allocation formula, based on the size of the population, GDP and unemployment rate, elements which we said were not clearly linked with the objectives of the RRF, which were very broad in themselves, and
even risk contradicting impacts. We pleaded for a clearer link between the RRF proposals and the EU objectives, all the more since it is not only about reforms at economic level but also about related investments covering greening, digitalisation, cohesion policy, etc.’
When discussing how much of an impact the ECA’s recommendations can actually have, the ECA Member is rather positive. ‘We can indicate the risks, raise design concerns, suggest changes that would ultimately improve the implementation, etc., and this is exactly what we did. An important aspect was that the European Parliament was also involved in the process as one of the co-legislators and took our observations very seriously, ultimately significantly changing the proposal.’ She gives an example relating to transparency and audit. ‘The proposal did not define the audit rights of the ECA or the roles of the European Anti-Fraud Office — OLAF — and of the newly established European Public Prosecutor’s Office — EPPO. Even the role of the Parliament itself was not clear in the Commission’s proposal. So this is what we emphasised also in our opinion and what was followed up by the European Parliament…successfully, fortunately, with the inclusion of what is now article 22.’
Not that this article solves everything. Ivana Maletić points out that the ECA, OLAF and EPPO have the right to audit or investigate the funds up to the end users and beneficiaries. ‘But the Commission sees RRF funds as Member States’ money and identifies them as final beneficiaries and focuses at that level when they execute payments, putting aside the main principles of the Financial Regulation. Payments in the RRF are only linked to the satisfactory fulfilment of milestones and targets, that is to say qualitative and quantitative outputs. So payments will be made regardless
of whether applicable sound financial management criteria were implemented or respected or not by the Member State concerned.’
She observes that Member States are expected to report such issues in their management declaration accompanying the payment request. ‘But this only relates to the “four sins”, namely fraud, corruption, conflict of interest and double funding. The Commission may also do ex-post checks but there is still some uncertainty on how it defines its responsibility beyond checking the fulfilment of milestones and targets. At our end, we think that the RRF Regulation cannot be interpreted in isolation but the RRF needs to be implemented in line with the direct management rules, and in conjunction with the provisions of the Financial Regulation.’
Auditing the RRF — not only by choice but in line with Treaty obligations
The nature of the RRF also poses several challenges for the ECA in view of the work for the annual Statement of Assurance (SoA), relating to financial compliance and the legality and regularity of the underlying transactions, as stipulated in the EU Treaty. According to Ivana Maletić, there is currently a discrepancy between what the ECA does for the RRF and what it normally has to do, which is visible in the pilot Chapter 10 of the ECA’s 2021 annual reports for 2021. ‘Regardless of the nature of an instrument, our Treaty obligation is to check the financial compliance and regularity and legality of the payment. Given that in the RRF payments depend only on the satisfactory fulfilment of milestones and targets, the Commission limited itself to checking that the fulfilment of a milestone or a target had actually taken place before it paid the money. However, to ensure regularity and legality in terms of the Financial Regulation, we need to be very careful about limiting our assessment to the fulfilment of milestones and targets rather than going beyond and tracing the funds to the end users.’
She explains that the ECA’s work for the SoA in relation to the first payment under the RRF — made to Spain — is rather different from what the ECA normally does regarding cohesion policy payments, where it checks if the money was spent according to the Financial Regulation rules relating to public procurement, eligibility criteria, etc. ‘For the RRF the question for us will be how much we can do and how deep we can go, also in view of the size of the RRF instrument, the new approach and the limited resources we have. As we are in the process of defining our approach to auditing this new instrument, given these limitations, our first pilot for our SoA audit focused on re-performing the Commission’s checks on the satisfactory fulfilment of milestones. Simultaneously we did our audit on the Commission’s assessment of the national recovery and resilience plans. For future payments we will need to continue working in parallel on our Statement of Assurance work and on special reports on the compliance and performance of the RRF, covering also proper use of the EU money at the level of the Member States and end users.’
Ivana Maletić adds that it was quite doable for 2021, with one RRF payment, but 2022 will be different. ‘For 2022 the number of payments might not be that high yet but the amount of milestones and targets will be huge and our sample size has its limitations. As I mentioned, for the RRF we have to do compliance and performance reports. Apart from the report on the Commission’s assessment of the national recovery and resilience plans — the NRRPs which we published last September — I am leading two additional audits on the subject — one on the RRF performance monitoring framework and another on the RRF absorption capacity. In addition, the ECA is finalising a report on the Commission’s control system for the RRF and is planning a number of RRF-related audits for the next year as well.’
She emphasises that the European Parliament is keeping a close eye on the RRF, and is very interested in how the money allocated to Member States has been spent on the ground, and on what exactly. This information forms part of the Parliament’s assessment for the annual discharge. ‘Here again there is this overall risk: can we realistically expect that this huge amount of money will be implemented in such a short time, while respecting the Financial Regulation and all sound financial management principles, preventing any irregularities, fraud and corruption? Do the Member States and the Commission have the resources to warrant this? Do we have enough resources to review this?’ She says that the European Parliament has already asked the ECA whether it can provide assurance that everything was properly done, and not only regarding the fulfilment of the milestones and targets. ‘They are keen to know about financial management and the proper application of the Financial Regulation. We can see that already.’
She explains that within the ECA there has been a lot of discussion over how to tackle the operational audit challenges relating to the RRF. ‘We have to audit this new instrument and we have to be innovative on how to do that. But it is also clear that we have only received very limited resources to audit the RRF in the way we would like to. And would be expected to!’
Performance aspects to be tackled at design phase
The first performance audit results relating to the RRF were published in special report 21/2022 reviewing the Commission’s assessment of the NRRPs, which the ECA considered appropriate overall. ‘For this audit we did not assess the individual NRRPs, but the way the Commission assessed them. We also did not audit the Commission’s methodologies for tagging of the six pillars, such as the green and the digital aspects, but actually assessed how the Commission applied this tagging to the measures we sampled. In this respect we did not find any loopholes.’
Ivana Maletić explains that in this audit the ECA detected weaknesses in the area of Country-Specific Recommendations (CSRs), the application of the ‘do no significant harm’ principle, milestones and targets, as well as national control and monitoring systems. ‘The RRF was supposed to create an incentive for Member States to implement the structural reforms addressed by the CSRs of 2019 and 2020. As the 2020 CSRs correspond to the broad objectives of the RRF, the six NRRPs that we sampled covered them very well with corresponding reforms and investments. However, we found that not all parts of the 2019 CSRs have been tackled, especially those for which Member States have been postponing implementation for years (e.g. pension system, health, taxation, etc.). In our sample, this was the case in the four Member States with the largest allocations from the RRF.’
In general, Ivana Maletić is concerned that no systematic comparative analysis was done of the RRPs. ‘Instead the Commission just assessed each RRP on its own merits rather than looking across NRRPs, as we indicated in our report, to be able to assess progress towards the overall targets set at the EU level and ensure a level playing field. On the “do no significant harm” principle, the Commission insisted on mitigating measures where Member States proposed measures that are likely to do harm to the environment.’
As to these mitigating measures, her concern is that they were not quantified and covered by a milestone or a target, which means that their implementation may not be checked. ‘For example, if a measure consists of building several kilometres of road, which is included in the RRP as a target, that will be mitigated by the planting of a certain number of trees, which is not included in the RRP as a target. Consequently, only the former will be checked by the Commission, but not the latter, as it is not a payment condition.’ In addition, Member States could decide to finance measures that are incompliant with the ‘do no significant harm’ principle from their national budget. ‘This openly contradicts the whole concept of the principle.’
Ivana Maletić emphasises that her main point of concern is how the milestones and targets have been set up, as they are the basis for payments. ‘Apart from the non-harmonised approach across Member States in defining them, we already see difficulties in their implementation, to which we pointed already in our special report. Some of them lack clarity, which may cause discussions between the Commission and the Member States on their fulfilment. Some cover only one aspect of implementing a measure or indicate the implementation of measures after the deadline of 31 August 2026, etc.’
She gives an example regarding the timing. ‘You can find targets such as “we will start the purchase of buses or construction works in the third quarter of 2026”. Be aware, by the end of 2026, the RRF should be finalised. This target might be formally fulfilled but the question is whether the purchase of buses or construction will ever actually happen, while the money has already been paid. Some plans do have and some do not have such elements, which allow them to continue implementation after the official RRF implementation period.’ She observes that it is ultimately also a question of the impact of fulfilling the milestones and targets. ‘In the report, we stressed that the milestones and targets are limited to measuring output or even input, so it will be very difficult, if not impossible, to assess, on the basis of such milestones and targets, the real impact of measures and the RRF as a whole.’
Ivana Maletić also stresses another important challenge, or rather weakness, of the RRF. ‘Since milestones and targets are, in most cases, steps of the implementation, their flexibility is limited and in reality many things may turn out different from what was planned. Therefore, the crucial question will be, where and how can or should we allow for some flexibility in implementing the RRF?’
The quality of milestones and targets is also one of the core elements of a performance audit that Ivana Maletić is currently working on as rapporteur. ‘We will look at whether the RRF performance framework is actually working well, including the Commission’s scoreboard mechanism and data behind it.’ She explains that in itself this audit is still an audit of design, looking at the performance characteristics the Commission is using. ‘At this stage, we want to examine the quality of the Commission’s performance measurement system. Because milestones and targets should be more than saying “we will start building 40 km of railway”.’
In this respect, she observes that these milestones and targets should aim even higher. ‘In our opinion 6/2020 we were pleading for common indicators for better monitoring and performance measurement of the RRF. This to measure the higher EU objectives of the RRF as compared to the national plans, but also to compare the RRF to other “traditional” policy instruments. ‘We should not forget that the RRF was designed as an answer to a crisis. But we have to be careful to propel it as the future solution for EU policy making in the long term before carefully reflecting on a number of weaknesses.’
According to Ivana Maletić, regarding the latter it will be very interesting to see the upcoming ECA review comparing the European Structural Investment Funds and the RRF. ‘In this non-audit product we analyse the design of the two instruments, which will also contribute to the debate on the performance nature of the RRF.’
Coming back to the special report on the NRRPs, she also mentions that some national control and monitoring systems were approved by the Commission before they were actually in place and were thus based on commitments. She refers back to the system in place for cohesion expenditure, which includes accreditation mechanisms and a clearly defined framework of audits and controls. ‘This is not the case in the RRF, where some of the Member States decided to create new systems. In cohesion payments, we see an estimated error rate well beyond the 2 % materiality level we set. Can we reasonably expect that for the RRF everything will work well? On top of this one should be aware of an inherent conflict of interest present in the RRF, because the Member States are getting the money, and they have to provide the management declaration that everything is spent according to the rules.’
Ivana Maletić also points to the rather low number of cross-border projects included in the NRRPs. ‘While areas of greening and especially energy are very much cross-border.’ She hopes that this kind of project will prevail at least in the new REPowerEU chapters, based on a recent Commission proposal commented upon by the ECA in its opinion 4/2022, for which Ivana Maletić was the reporting ECA Member. She is however concerned about how the new chapters will be tailored and the impact they will have, especially given that the revised NRRPs are not going to be submitted at the same time. It is also possible that the Member State that actually needs to implement an energy-related measure might not necessarily be the Member State that is going to benefit from it the most. ‘Why would, for example, France ask for a loan to finance the gas pipelines so that Spain or Germany can benefit from it?’
Besides those risks, she is concerned about comparability and identifying the initiatives that will provide the most added value. ‘For energy-related measures, you need the cross-border aspect if you want to make a change. Maybe with five or six capital projects in a few Member States one can solve 60 % of the energy problems in the whole EU. But if we have small individual plans with small allocations then this aspect may be overlooked.’ She is concerned that on these issues sometimes the action counts more than the actual impact. ‘Of course the invasion of Ukraine, triggering an “energy war” in the EU, is quite relevant here. But nevertheless, if you have limited resources you should try to use them strategically, there where they have most impact.’
The ECA Member laments the fact that the whole energy crisis shows the lack of built-in resilience when it comes to energy. ‘With the war’s disrupting effect on markets and economies this energy dependency translates directly to households and businesses.’ She observes that Member States, if not the EU, should have thought of this energy dependency a long time ago and explains that, as an MEP, she protested against the Nord Stream 2, which, as she puts it, ‘did not make everyone happy’. She also wonders whether the amounts allocated for REPowerEU will do the trick. ‘Support for households and businesses, implementation of strategic projects, short-term and long-term — will it be drastic enough to change the situation for real, already for the next winter?’
She refers to the ECA’s key observation on REPowerEU, namely design flaws. ‘The RRF is not that well suited to REPowerEU. If the EU wants to have a quick response to the current energy crisis, it should opt for a more truly EU-oriented solution instead of national ones.’ Ivana Maletić is very much aware that such a pan-European solution might, politically speaking, not be that popular. ‘But we need to realise that consequences of decisions taken today will be visible in the lives of people tomorrow. You need to be courageous enough to look ahead and try to help citizens instead of prolonging a challenge into the future.’
RRF poses a wide range of (audit) challenges
The RRF instrument poses several challenges, including for the ECA as the external auditor. ‘We will learn on a case-by-case basis. Our performance work and our compliance audits for our Statement of Assurance on the RRF will feed each other, based on the risky areas we detect along the way. They are inevitably intertwined.’
For the short term, the audit challenge for the ECA regarding the RRF relates to its SoA work. ‘In our 2021 annual report we basically have the RRF separated from the chapters on the multiannual financial framework — the MFF — and this is likely to be the case in the future years. It is true that also the European Parliament deals with them separately, with a separate discharge procedure for the MFF and the RRF, including two different rapporteurs. However, only for the MFF part they received from us estimated error rates.’ Ivana Maletić points out that for the RRF the situation is very specific. ‘Regarding reforms, they may be relatively straightforward but for the investment part, that is a different story. For example, if we say that in our work underlying the Statement of Assurance we found irregular payments at the level of the Member States, such as not respecting public procurement rules, this will not affect payments by the Commission. Because as long as the target has been achieved and thus the project implemented, the payment condition has been fulfilled.’ She emphasises that the ECA already warned of this in its opinion 6/2020.
She explains that the ECA will use compliance and performance audits to cover these issues as much as possible. ‘This might require also audits on the systems of the Member States because we cannot do that much at the level of individual projects. And we need to share a lot of knowledge in-house, to work together on this.’
An aspect that also characterises the RRF is the General Conditionality Regulation relating to the rule of law. According to Ivana Maletić, how concrete the ECA can be here also depends on how concrete the Commission is with its requirements in relation to RRF payments. Here, she also makes the link to the CSRs from the European Semester. ‘Everything the Commission put in these CSRs in relation to the rule of law is traceable and since these CSRs are often translated into RRF reforms it makes these rule-of-law aspects more concrete. If milestones and targets are not clear, you are in a difficult situation as an auditor, as is the Commission when assessing their achievement.’ Here she refers to the RRF observation made by the ECA in its 2021 annual report, in relation to Spain. ‘The discussion there was whether Spain should only design an information system — as Spain thought — or have it operational — as the Commission thought.’
Another aspect that she brings up relates to the RRF disbursement schemes in relation to the implementation of NRRPs, which were a result of a negotiation between the Commission and the Member States. ‘Our audit showed that reforms are mostly frontloaded. So in the beginning you do not have many costs. Such activities relate to starting a procurement procedure, adopting a law or publishing a call for expression of interest. These activities do not cost that much. You nevertheless will receive EU funds. This way, Member States will accumulate surpluses in the first few years. If you look at for example the payment plans of Italy and France, they will receive roughly 50 % of their allocation in the first two years. While in reality they might not have costs corresponding to the received funds.’ She identifies that as a risk, particularly for those cases where the final disbursements contain a higher number of milestones and targets for a relatively small instalment. ‘Member States can decide not to request the last instalment and not to fulfil the last targets for which the costs can be very heavy.’
She explains that the significant heterogeneity in disbursement profiles again speaks of the lack of a comparable and harmonised approach by the NRRPs in general. ‘It is worth mentioning that the Commission is still working on the methodology for the reduction of payment in cases of partial fulfilment of milestones and targets, while several payments to Member States have already been made. We are looking forward to see what the methodology will look like, especially as milestones and targets, and therefore the instalments to Member States, are not linked to any costs.’
Aiming to optimise exchange to address the challenge of proper RRF implementation
In order to encourage in-house discussions on the RRF, share knowledge and exchange ECA findings and experiences in auditing the RRF with external experts, representatives of national audit authorities and other relevant stakeholders, Ivana Maletić is launching ‘RRF exchanges of views’ in the form of webinars, starting in November 2022. ‘The aim of this initiative is to complement the ECA’s current work on the RRF, and give guidance and ideas for our future work on the RRF.’ The ECA Member indicates that it is important for her to get feedback from experts and policy practitioners. ‘So not only from research institutes analysing the RRF, but also from audit authorities from Member States. I think it is important to speak with them, with experts from Member States, either directly or through conferences, to raise awareness of the control and other dilemmas we face.’
She concludes with a remark that is perhaps typical for an auditor. ‘In the end people rely on us to make the score. Because in the beginning, when the RRF was presented as complete novelty in various respects, not the least its focus on performance, everybody was enthusiastic. But what looks nice on paper also needs to prove itself in reality. What are the merits, what are the drawbacks? Here we need to be both sceptical and constructive, also to see what can be improved for the future. In that respect, the RRF is a big challenge, not only for those executing it but also for us as auditors.’
This article was first published on the 2/2022 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.
