Committee Reports > List of Committees > Dáil > 1983 > Committee of Public Accounts > Interim and Final Report - Appropriation Accounts 1978 - 1979

MIONTUAIRISC NA FIANAISE

(Minutes of Evidence)

Déardaoin, 14 Eanáir, 1988.

Thursday, 14 January, 1988.

The Committee met at 11.20 a.m.

DEPUTY G. MITCHELL in the chair.

Mr. P. L. McDonnell (An tArd-Reachtaire Cuntas agus Ciste) in attendance.

COURT OF AUDITORS OF THE EUROPEAN COMMUNITIES: ANNUAL REPORT CONCERNING THE FINANCIAL YEAR 1986.

Mr. R. Ryan, Member of the Court of Auditors, called and examined.

Chairman.—I would like to welcome Mr. Richie Ryan, Member of the Court of Auditors of the European Communities and his Chef de Cabinet, Mr. Gilbert Johnston. In keeping with the protocol of introducing distinguished strangers, I want to introduce Mr. Michael Murphy who is a former member of the Court of Auditors. I am sure the Committee will be very pleased to see Mr. Murphy here. The Committee is departing from tradition to some extent to discuss with Mr. Richie Ryan matters of mutual concern to the national Parliament, to the European Parliament and to the Council of Ministers. It is an historic occasion for the Committee of Public Accounts to discuss with a Member of the Court of Auditors of the European Communities matters of mutual interest and concern. Since the national taxpayer makes a contribution to the running of the Community, it is in our interest to be aware of problems or difficulties which may arise there, if there is fraud or if there is a problem with the way funds are accounted for. It is in both the European Communities interest and the national interest that this sort of event takes place. It would be a desirable event if the Dáil debated annually the official report of the Court of Auditors but there is a huge backlog of reports which the Dáil already has waiting for debate. Perhaps we might make this an annual event but that is a matter for further discussion. I welcome Mr. Ryan. I will ask him to say a few opening words and then we will throw the discussion open to the members who might have questions to ask.

Mr. R. Ryan.—Thank you very much, Mr. Chairman and members, for the warmth of your welcome. The Court of Auditors was very pleased to receive your request for the attendance of a Member of the Court at the committee while you were discussing the Annual Report of the Court for the financial year 1986. I would like to say at the beginning that I am here in a personal capacity because the Court never speaks except as a college and never expresses an opinion except it expresses an opinion in the name of the 12 Members of the college. When, as now, a Member of the Court attends any meeting, be it of the European Parliament, the Budget Control Committee or a national Parliament, the Member always makes the point that anything said by him is said in a personal capacity. However, you can reasonably assume that what I say will not knowingly depart from what would be the view of the Court.

This is the second occasion on which a Member of the Court has met members of the Committee of Public Accounts. I am glad to see in the gallery my Irish predecessor Member of the Court, Mr. Michael Murphy, who served the Court exceptionally well for the better part of nine years. The Court is anxious that all Member States, their public and their parliamentarians in particular, would have a better understanding of the financial workings of the European Community and of the work of the Court of Auditors in particular.

The Court of Auditors, in so far as it has a master, works to the Budget Control Committee of the European Parliament and also to the budget committee of the Council of Ministers, bodies who most frequently call upon the Court of Auditors for advice and assistance in their work. As, in many cases, expenditure by the European Community in Member States is matched by an equivalent amount of money from voted moneys of Member States, there is obviously a common interest between Member States and the European Community in ensuring that all money is spent in a regular and lawful manner and that there is value for money. I understand, Mr. Chairman, that one of the reasons why you extended an invitation to the Court to come and talk to you is so we might discuss those areas where European Community expenditure is matched by equivalent expenditure in Member States. There is also the very important aspect that the funds upon which the European Community depends for its operations are collected in Member States. However, one very important error frequently made by Member States—and made in Ireland I am sorry to say as well—is that they look upon the resources of the European Community as something donated by Member States to the European Community. This is not the case.

I want to return for a moment to the collegiality of the Court of Auditors. As I emphasised, it operates as a college but each Member of the Court has an area of special responsibility. The area for which I have responsibility at present is the area of the income of the Community. You will be receiving — if you have not already received — a small booklet which explains the operations of the Court of Auditors and at the end of that there is a list of the areas of responsibility of Members. There has been a slight amendment to that booklet since it was published in that I have been now charged with the responsibility for all income of the Community. That covers value-added tax as well as customs duties and agricultural levies.

It is not generally appreciated that all customs duties collected within the European Community belong to the Community and not to Member States. It is, therefore, wrong that Member States should give the impression that they are donating, out of the goodness of their hearts, customs duties collected by them. The resources in question are by law the property of the European Community and when customs officers collect customs duties they do not collect them for Member States, they collect them for the European Community. I will be making the suggestion, which I hope will be taken in good part by everybody, that in the Irish financial accounts, particularly the appropriation accounts and the reports of the Comptroller and Auditor General, it ought to be clearly indicated that customs duties are the property of the European Community and they do not belong to the Irish Exchequer.

In the Central Fund note, paragraph 7, page iv of the 1986 Report of the Comptroller and Auditor General, customs and excise duties combined in one heading are indicated at £1.4 billion and are described as a statement of receipts into the Central Fund. It is true that they go into the Central Fund but they are not the property of the Irish Exchequer. The money is collected for and on behalf of the European Community and it might be helpful if in that statement it were clearly indicated that the customs duties amounted to £80.2 million and that they were collected for and on behalf of the European Community. The gross figure for value-added tax is also shown in the same table but there is no indication that about 1.4 per cent of value-added tax collected is not the property of the Irish Exchequer but is by law the property of the European Community. Agricultural levies are shown at £13 million, most of which is, again, the legal property of the European Community, but is not so described. I draw attention to that in passing and I would not wish anybody to think that this was a failing which was unique to Ireland because I am sorry to say the majority of Member States are still misdescribing the property of the European Community in their national accounts as though it belongs to the Member States when by law it does not. One of the reasons why we are glad to avail of opportunities like this is to draw the attention of national authorities to the need to present the receipts and expenditures of the European Community in a transparent way so that they can be more easily understood by parliamentarians and by citizens of their own countries.

The Court of Auditors is not dissimilar to the institution of the Comptroller and Auditor General in Ireland. We audit the accounts of the expenditure and revenue of the Community and in so doing we report upon any weaknesses which we find. In the first instance we make our reports to the Commission in Brussels or to the Member States as the case may be. The more significant findings in our audits are then published in the Annual Report which you have before you. We do more than issue an annual report, which itself is a very useful document; we issue reports also on specific matters such as, in 1987, a report on the milk levy, reports on the financial aspects of wine distillation and tobacco growing and from time to time opinions on draft legislation of the Community having financial aspects, for instance, the regulation which was made recently for the disposal of butter stocks.

When a financial regulation is about to be made by the Council of Ministers, there is an obligation to consult the Court of Auditors. The Council of Ministers is not obliged to follow the opinion of the Court of Auditors, sometimes it does and sometimes it does not.

It can be said that a great deal of the financial difficulties in the EEC at present arise from the fact that the opinions of the Court of Auditors have been ignored very frequently by the Council of Ministers.

The Annual Report is very useful, not merely in describing the result of audits that have taken place, but in setting out in graphic colours in pie charts and so on — which I suspect you may envy compared with Government publications in Ireland — the financial situation in a manner which makes it easily understandable. At the back of the Report there are replies from the institutions audited by the Court and upon which comments have been made. Every autumn the Court prepares a work programme of the audits which it intends to conduct in the following year. By July of the following year it draws up its first draft report for the preceding financial year. The Court is obliged to send its draft to the institutions being criticised so that they may have an opportunity of making their contribution by way of reply and then the Report and the replies are published the following November and issued both to the Council of Ministers and to the Parliament and published in the official journal of the Community.

The Parliament is very active in studying the work of the Court of Auditors and it has a statutory function to grant or withhold discharge in matters of financial administration. On two occasions in the past it has refused to grant discharge. There are different interpretations put on the consequences of a refusal, and it has been described by the Commissioner responsible for the budget as tantamount to a vote of no confidence. It has not led to the toppling of the executive such as might happen in a Member State but obviously it is a vote of censure on administration. Bad administration in many cases is the fault of the Council of Ministers rather than the Commission because it is the Council of Ministers who have the legal authority for legislation and it is the inadequate financial controls in the EEC which underline many of the difficulties which exist at present.

The Parliament has not yet given discharge for the administration of the 1985 budget. Normally the Parliament debates the discharge resolution in April but last April the Parliament was so concerned about financial maladministration and the unsatisfactory state of the European budget that it refused at that stage to give discharge. I understand that the 1985 discharge is to be debated again next week in the Parliament, and, hopefully, next April the Parliament will debate the 1986 Report of the Court of Auditors.

I would like to advert briefly to the areas with which many of you are familiar where national expenditure has to more or less match Community expenditure. These areas relate to the Social Fund, the Regional Fund, FEOGA expenditure in the agricultural field both in relation to guaranteed prices and to agricultural development, the Guidance Fund, fisheries and fisheries surveillance and Food Aid. As you know, these involve considerable amounts of money. The administration of them in all countries, including I am sorry to say in Ireland, leaves a certain amount to be desired. The reason for this is due less to inefficiency on the part of Member States than to unsatisfactory legislation. The Commission has made nearly 140 recommendations for financial legislation in the last 20 years upon which the Parliament has expressed an opinion and many upon which the Court of Auditors has also expressed opinion but the legislation has not been implemented by the Council of Ministers. As a consequence of that, many of the reforms recommended by the Court of Auditors, by the Commission and by the Parliament have not been translated into legislation which would give the Commission tighter control over financial matters. It is important to remember that the Commission is responsible for financial management. The Court of Auditors is not a financial managerial institution. Its purpose is to audit. The first and primary responsibility for financial control and financial management lies on the Commission. The Commission is not entirely to blame for many of the administrative weaknesses at present because its powers are severely limited by the inadequacy of existing EEC legislation.

The Court of Auditors in its 1986 Report describes the budget of the Community as “an illustion” because it has on paper the appearance of being in balance when, in fact, there are serious deficits. The Treaty requires that income and expenditure in any year be balanced and it requires that the budgets be presented on an annual basis. The debts of the Community, in other words, expenditure incurred or legally binding which has not been covered by income, now amount to about IR£28 billion.

If this figure was revised in the light of the fall in the value of the Dollar over the last year, the figure would probably be nearer to IR£35 billion. This exceeds the annual budget of the Community which can be said to be in or about IR£30 billion. That that should be so is in absolute breach of the obligation in the Treaty to balance the accounts. Unfortunately, it is largely due to weaknesses in the Common Agricultural Policy, as a result of which enormous stores of agricultural produce, at a current cost of about £9 billion, had been financed in the past, or financed on paper I should say, in the past out of illusory income or payments that have been postponed to the future. These are legal obligations which the Community will sooner or later have to pay. Having regard to the difficulties which exist in meeting even the current budget, it will be seen that the situation is a very serious one and it is one upon which the Court of Auditors has been commenting for the last four or five years. We are sorry to say we have had to return to it in a very critical manner in the Report for 1986.

The Court does not give audit certificates for most of the expenditure of the Community. It is statutorily required to audit and grant certificates in respect of only some institutions like the Coal and Steel Community, the Dublin Foundation for the Improvement of Working and Living Conditions, the Vocational Centre in Berlin and so forth, but as far as the general accounts are concerned, the Court is not required to issue certificates, for the simple reason that the Court has not the staff available to it to conduct a 100 per cent audit of all Community revenue and expenditure. This might be as well because if the Court was required to give certificates the Court would refuse to give a certificate for the way in which the accounts are presented at the present time because, to use the description we use in the Report itself, they are an illusion. They do not give the true position of the indebtedness of the European Community. You will find the true position more clearly set out in the Report which is before you.

Finally, as I made reference earlier to the Report of the Comptroller and Auditor General and the Appropriation Accounts, perhaps I might be excused for just returning to them briefly. We are particularly pleased to see that in the 1986 Report of the Comptroller and Auditor General there is considerable reference to the management of EEC funds in Ireland, critical reference indeed, as we would always expect from the Comptroller and Auditor General whenever something is not entirely correct.

I would make this plea, that the authorities in Ireland consider giving more information about European Community funds. For instance, the Report of the Comptroller and the annual Irish Finance Accounts simply give a global figure for the European Regional Fund. The figure is £74 million or thereabouts in the latest account, but there is no indication of the projects upon which that money has been expended, or in relation to which that money has been granted. This is partly a consequence of the fact that all Member States, Ireland included, prefer to have the Regional Fund grants as a global addition to national expenditure. It is unsatisfactory from the point of view of allowing people to understand precisely what the Regional Fund is about if the details of EEC funds and Irish State grants are not published in conjunction with the annual accounts. I know the practice in Ireland is that when the Commission makes decisions in relation to the Regional Fund a statement is made from the Department of Finance indicating the projects which have been considered as eligible for European Regional Fund grants but it is not giving an adequate picture of the situation if just the global figure is given in the annual accounts.

Another resource for Ireland, which is about £126 million annually, is the Social Fund. The situation in relation to the Social Fund is even more imprecise in the presentation of public accounts in Ireland. This is a consequence of the fact that a great deal of the Social Fund does not, in fact, come into the Exchequer. It goes direct to the beneficiaries, but although it goes to the beneficiaries — and in some cases does come through the Exchequer — the Exchequer has to put up roughly an equivalent amount of Irish taxpayers’ money. It should not be a very difficult task, if only by way of a footnote, to indicate what money has been received from the European Social Fund and for whatever specific purposes. I know of two Member States which issue the most detailed particulars about the expenditure of European funds; it is not done in all Member States. The inadequacy of the information in Ireland is, unfortunately, a reflection of what happens in some other states but the Commission and the Court of Auditors are most anxious that more information should be made available so that people would see the extent to which Community expenditure and national expenditure dovetail into one another and, therefore, need to be very carefully scrutinised by distinguished people like yourselves in parliamentary life. It may be though by some people that this is a function that should be discharged entirely by the European Parliament equivalent of your own committee, but when you realise that actual administration of EEC expenditure lies in the hands of Member States, you will see the need to scrutinise such expenditure very carefully at the national level. It is simply is not possible for the European Parliament, or the Council of Ministers, or the Commission, to give that attention to detail which I know you do in the Public Accounts Committee in Ireland.

Chairman, I think my thoughts have rambled over a wide area. I have not dealt at any great length with specific figures because they are all before you but, needless to say, I will only be too happy to answer any questions, or to receive any criticisms which members may like to offer.

Chairman.—That was a very interesting outline of the situation for us. Just from listening to that, it is obvious to the committee that it is a very worth while exercise for us to have this review. It is only fair to say, and I think you will endorse the fact, that Ireland is among the better countries in the Community at making returns to the European Community. I really think that should be put on record. Do I understand you to say that your predecessor did speak at a Public Accounts Committee in the past?

Mr. R. Ryan.—I do not think it was a formal meeting of the Committee, but he did meet the Public Accounts Committee I think in 1978.

Chairman.—I did not think there was a previous formal meeting. There are a couple of matters I want to raise and perhaps we could get your response to them. First, I do not expect your response to the first point I want to make but I want to put it on record that from going through the Report of the Court of Auditors it nails the nonsense and the scurrilous attack made on the people of Dublin by Mark Killilea, MEP, last week when he said that a disparate amount of funds was going to the Dublin area as against what was going to his own constituency. I certainly have nothing against people in his constituency, but it is an unfair comment to be left on the record. With regard to this devastating deficit of £28 billion, or £35 billion if you take the exchange rate fluctuations, how does this come about since the Community is required to balance its budget? What can be done at national Parliament level to see that the Community does not get to a stage where it has pushed so much of its deficit forward that the whole future of the Community will be in serious doubt? This would have a devastating effect, particularly in countries like our own which depend on, in particular, Common Agricultural Policy funds. What can we do as a national Parliament to try to ensure that some sort of sense is brought back to this insane situation?

Mr. R. Ryan.—I would not presume to advise parliamentarians on how they should go about their work, or how they should bring pressure on the authorities that have the power to improve things but I can answer the question as to how this debt has arisen. There are a number of elements in it and they are spelled out in the first chapter of the Annual Report. If you consider, for instance, the food mountains that are spoken of: Member States have financed the creation of the food mountains because they have the legal obligation to pay the set price for agricultural produce which is surplus to immediate market requirements and goes into intervention stores. They have the obligation then to meet the rental cost of those stores and when, but only when, the intervention agricultural produce is sold out of those stores do Member States get a refund of their money which they have already spent in buying the agricultural goods into storage. However, they do receive a subsidy towards the interest which they pay on money which is borrowed to finance the purchases of intervention and the maintenance of intervention storage. In Ireland’s case, the subsidy is much less than the market interest rate which Ireland has to pay. As a result Ireland has to bear a significant proportion of the financial cost of the operation of intervention. The European Community will have to refund to Member States the full cost of the purchase price of intervention stores less almost giveaway sale prices and this amounts to about one-third of the total indebtedness of the Community. I refer members of the Committee to tables 1.5 and 5.5 of the Courts Report. You will notice in the presentation of accounts that the Community speaks of payments and commitments. Commitments are the creation of legal obligations on the part of the Community to finance some particular project, or group of projects, or scheme in Member States. These legal debts will have to be met sooner or later. The budget has been balanced, theoretically, in recent years by simply postponing payment of these commitments to future years, but the debts are there and they will have to be met. That is what we speak of as the total indebtedness of the Community. It is something that cannot be run away from by pretending that it does not exist. It does exist and it will have to be met.

Chairman.—Let me quote from the Report, Mr. Ryan, which says that the Court is particularly concerned about the flouting by the Communities of the fundamental principles of their financial organisation including, first and foremost, the principle laid down in Article 199 of the EEC Treaty, namely that the expenditure of each financial year must be covered by the equivalent annual revenue. It is very clear, since this deficit has got to IR£28 billion, or IR£35 billion if one takes the exchange rate figure, that that is not being done, that Article 199 of the EEC Treaty is not being complied with. Does the Court of Auditors, or the Commission, not have a duty or a right to ensure, perhaps by approaching the Court of Justice, that this Article of the Treaty is complied with?

Mr. R. Ryan.—You raise an interesting question. I should answer it in this way. The Court of Auditors itself does not have the power to institute legal proceedings against the other institutions. That power lies with the Parliament, the Council of Ministers, or the Commission as the case may be, against the other authorities. The power does not lie with the Court of Auditors as such. The Parliament and the Commission, you may have read recently, have announced their intention to introduce legal proceedings against the Council of Ministers who have failed to discharge their treaty obligation to produce a budget for 1988. Why the Commission and Parliament have not taken legal action against the Council for some of its failures in the past the Court of Auditors cannot say. You will appreciate that even were the Court of Justice to issue a judgment unfavourable to the Council, it would be the Council that would have the responsibility for discharging its obligations as set out in such judgment. We can merely guess as to what the reaction in such circumstances might be if, for instance, Member States were to have a fine imposed upon them for their failure to discharge a treaty financial obligation. Would they pay that any more readily than they meet the other expenditure of the Community which are a legal obligation of theirs at present? It is an unsatisfactory situation.

Chairman.—The problem is that if disorder reigns the whole thing will disintegrate. I note also that the situation is now so critical that the budgetary authority, that is, the Council of Ministers and the European Parliament, have not been able to agree a budget in 1988. The Report says that the Court of Auditors regards the Community’s agricultural stocks as a visible expression of the inherent flaws in the Common Agricultural Policy although it regards the problem as going far beyond that of stocks. Could I ask if you are aware that in this country there is £750 million worth of intervention stocks and can you tell us what it would cost to keep those stocks in intervention? Do you have any estimate as to what the cost would be?

Mr. R. Ryan.—I am sorry, I do not have any figures available to me at present to answer that question, but I can certainly have it examined. I suspect that the Department of Agriculture would be able to give you a figure.

Chairman.—I have asked for it from them. The last question I want to ask about is this question of fraud. One distinguished witness who appeared before the European Parliament estimated that the fraud annually perpetrated against the Community was of the order of £2.8 billion or 10 per cent of the annual budget. What are your comments on that?

Mr. R. Ryan.—My comments are that the Court of Auditors does not have available to it any evidence to support that assertion nor has the Commission available to it any evidence which would support that assertion. By its very nature, fraud and irregularity, like sin, can be difficult to detect. There is a legal obligation on Member States to furnish information about fraud to the Commission but I am sorry to say it is an obligation which is honoured more in the breach than in the observance. The obligation to report fraud is stronger in the agricultural FEOGA area than it is in the revenue area. The Commission has made six proposals to tighten the powers of the Commission in relation to revenue and its supervision but, unfortunately, its requests for legislation have been ignored, which is a matter upon which the Court of Auditors comments unfavourably. You were right in saying earlier that Ireland has, deservedly, a good reputation for its administration of Community funds and in the collection of Community revenue. In both the 1985 and 1986 Reports of the Comptroller and Auditor General there are references to some cases of irregularity and fraud and I am sorry to say that those cases were not reported by the Irish authorities to the Commission although they should have been. The rate of reporting frauds varies considerably. I would think that Germany is probably the best in reporting fraud. I make that statement because if I did not come to that conclusion then I would have to believe that there was more fraud in Germany than in any other Member State because the Germans report more fraud than other Member States do. In truth, I think it is simply that they fulfil their obligation better. The necessity to report fraud is this; the Commission has an obligation to ensure good financial administration and to prevent fraud and irregularity and it is in the interest of all the people of Europe that fraud and irregularity should be stamped out. To do so one must have information about the way in which fraud and irregularities are committed.

The International Customs Union which, of course, is far greater than the EEC, operates a system of pooling information about fraud and irregularities so that people can be alert and on the watch to prevent fraud. I am sorry to say that Member States do not adequately fulfil their obligations in this area and until they do furnish the information in a clear, comprehensive and systematic way then I am sorry to say the Commission’s hands will be seriously tied in this battle against fraud.

Deputy Naughten.—First, I would like to join with the Chairman in extending a warm welcome to Mr. Ryan and to thank him for coming. I am just going through the document that was circulated here, and indeed from reports, whether within or outside this country, it seems that the Common Agricultural Policy is about to be dismantled, or there are attempts to dismantle it. One could argue that it was possibly the most successful area of policy in the whole of the Rome Treaty. Would it not have a devastating effect for the Community if, in fact, the Common Agricultural Policy as we know it today were dismantled?

Mr. R. Ryan.—Reading the reports of the Public Accounts Committee over the years, I have frequently observed the comment being made by the Accounting Officer or possibly the Comptroller and Auditor General himself that the question posed is in the area of policy. The subject of your question is not the responsibility of the Court of Auditors and, therefore, I would not wish to get into the policy area. I can say what has been said in the Report, that the lack of financial control in the agricultural area has contributed greatly to the financial difficulties of the Community. It is not merely a question of lack of control, but that agricultural policies which might have been appropriate ten or fifteen years ago are not appropriate today when productive capacity has very substantially increased and when the market situation is very different. The weakness that has occurred in this area has been the failure to adjust to the changing circumstances. I think adjustments can be made without doing serious violence to Europe’s capacity to be self-sufficient in food. Many policies were introduced at a time when Europe was not self-sufficient in food, but it has now gone beyond self-sufficiency. That, in itself, has created enormous difficulties, not only within Europe but elsewhere.

Deputy Naughten.—A question was asked earlier as to the cost of keeping the huge surpluses that we have here in cold storage, and that cost is substantially greater when one talks about the cost to the whole Community. Has the Court of Auditors examined the possibility of disposing of or getting rid of those stocks much faster? For example, quite recently large quantities of butter were sold for a nominal sum when, had that butter been unloaded three or four years ago, it could have saved the Community gigantic sums of money. Has the Court of Auditors examined that in any great detail?

Mr. R. Ryan.—As I mentioned, the Court is not a legislative body but it does not run away from the possibility of indicating solutions to deal with the butter problem, for instance. As we know, the Council of Ministers on the recommendation of the Commission in 1987 adopted a financial regulation to achieve a solution which would dispose of a large portion of butter stocks at a cost of 3.2 billion ECUs. The exchange rate of the ECU is .77 to the IR£. In one way, the Court was delighted to see that steps were being taken for quick disposal of the butter, though we have some doubts as to whether or not the objective will be achieved.

We criticised the financial proposal that was made in relation to it, because under the Treaty, the Community has an obligation to meet at the time of disposal the cost of the disposal of that butter which meant compensating the Member States for the butter disposed of, by paying them the price at which they originally had bought it in less the much lower sale price. In direct breach of the Treaty, the Council of Ministers decided that they would not pay immediately, but that they would spread the repayment over the next four years. So, part of the budget for 1988, 1989, 1990 and 1991 has already been written by the Council of Ministers, who incidentally do not have the power to do it on their own, because the budget must be written by both the Council of Ministers and the Parliament. From a financial and a legal point of view what they did was quite irregular. The Court commented, from a financial aspect, that it would be cheaper in many cases to totally destroy the stocks than to operate some of the schemes for disposal which are at present in operation. The Court, not being a legislative body, does not make any proposals but it pointed out that from a financial point of view there could be logic in destruction of stocks rather than in keeping them in costly storage for a very long time during which, inevitably, because they are perishable, they decline in value. The cost of disposal after lengthy storage inevitably increases because all costs of storage and depreciation have to be compensated for in the long run.

Deputy Colley.—I join with the Chairman in welcoming Mr. Ryan and in thanking him for giving us such an informative talk first of all on the workings of the Court of Auditors with which, as a new member to this Committee, I am not familiar. I am still grappling with the workings of this one. I am becoming more and more disturbed by reports from the EEC about the lack of effort being made to balance the budget, and where it is leading. You mentioned that certain payments are deferred rather than have a budget deficit, and you also made the point that this cannot continue indefinitely. You referred to the fact that there are inadequate financial controls. Is that within the European Commission, or the Member States or in both relating to budgetary overruns?

Mr. R. Ryan.—The principal financial difficulties have arisen by virtue of decisions by the Council of Ministers in clear breach of treaty obligations. The trouble has also arisen, of course, because the Common Agricultural Policy, for instance, has not been adapted to meet totally different agricultural and market situations. The difficulty in financial administration is that Member States are left an immense amount of discretion. Inevitably, because of 12 different cultures and administrations, they have different approaches to public administration. The Commission is in the difficulty that it is unable to achieve a harmonised response to its own directions. On the revenue front, for instance — I think I can say without naming any State — both the Commission and the Court of Auditors have reason to fear that some Member States are not as efficient in collecting value-added tax as others are. I know of a study in one region which indicated that the value-added tax return is about 60 per cent of what it should be when one takes into account known expenditure patterns. This clearly indicates that the Member State concerned, for instance, is paying less into the Community than it ought to pay.

Chairman.—Is this in the area of Sicily or somewhere like that? It would not be quite an ordinary part of the Community. Would it be typical?

Mr. R. Ryan.—My mind is a blank as far as the Member State or the region is concerned, Chairman, you will understand why.

Chairman.—But it would not be typical? A figure of 60 per cent would not be typical?

Mr. R. Ryan.—No, 60 per cent is not typical. Again, if I could just explain the area of my own responsibility in revenue. Member States have a different approach to write-offs of tax. Tax may be written off for a multitude of reasons, bankruptcy, collapse, death and so on. Interpretation of humane justification for writing off tax can be quite different in Member States. This, again, will have its impact upon revenue from customs duty and from value-added tax or what have you. Under the legislation which confers this revenue upon the Community, the administration is left to Member States according to their own practices and traditions which can vary enormously, so that while there is the illusion that all Member States are paying at a settled rate, in practice they may not be doing so and it is very difficult to get from Member States the detailed information to enable a uniform system of taxation to be imposed. The Commission had undertaken to produce before the 31st December, 1987 a new proposal in relation to value-added tax but it has not done so, I am sorry to say. It promises to do so early this year. I believe the delay may in part be due to the more significant Commission financial “Delors” proposals to increase the income of the Community by bringing in a fourth resource which is to have a percentage of gross national product contributed to the Community. Until there is more specific administrative legislation which the Commission can enforce upon Member States, for instance, in the revenue area, we will continue to have considerable doubts about the equity of the present system.

Deputy Colley.—What you are saying also is that the Council of Ministers do not have the political will to produce it and that, even though the Commission is made up of representatives of each of the Member States and they can reach agreement on the direction the Community should take, when it comes to the Council of Ministers it just is not followed through.

Mr. R. Ryan.—That, unfortunately, is the position.

Deputy Colley.—Regarding the customs duties collection services, again the position is similar to that in regard to VAT. It appears that Member States have arbitrarily reduced their customs duties collection services because the EEC is the recipient of that money, rather than themselves and they only get 10 per cent back. Is there any sanction which can be imposed on Member States which arbitrarily do that?

Mr. R. Ryan.—Unfortunately, no. As the Court stated in the Annual Report of 1986, when the Council of Ministers decided that Member States would receive back from the Community 10 per cent of customs duties and agricultural levies collected by them they laid down no minima criteria in administration to be observed by the Member States. We state in the report that if Member States are to be given some money for discharging functions on behalf of the Community the Community should lay down very specifically the criteria which must be observed in discharging those functions. In the conduct of audit in Member States we have observed that in nearly all Member States there have been substantial reductions in the number of personnel devoted to customs duties. This is in part due to increased computerisation. In fact, there is now a legal obligation on Member States to computerise their customs accounts. It must be done if we are to have free movement of goods within the Community by 1992. Nonetheless, we are concerned that the reductions that have taken place may have led to a less efficient collection of custom duties than would otherwise have been the case. It is interesting that the European Parliament originally called for the abolition of the 10 per cent refund but more recently they have taken the view that unless Member States get something back from what they collect they might become even less concerned about collection. Some Member States, because of their position in the Community, import an enormous, amount of goods from outside the European Community for consumption in other Member States. Although a Member State collects the revenue on behalf of the Community it gets 10 per cent back of what is collected at its own ports and airports, even though in fact a large proportion of the goods in question will not be consumed in that country but consumed in some other EEC State.

Chairman.—Another briefing note which I received suggested that if this refunded 10 per cent which is retained were to be abolished it would actually profit Ireland to the extent of about £28 million. Would that be correct?

Mr. R. Ryan.—There are two elements involved in that. In 1986, Ireland received back 10 per cent of customs duties and agricultural levies collected in Ireland, amounting to £9.2 million, towards the cost of collection. On the other hand, if the 10 per cent refund were to be abolished right across the Community and if that money were to go into the Community’s coffers and if Ireland was to receive the same proportion of Community funds which it receives at the moment, 5.2 per cent, then Ireland would benefit to the tune of £28 million net benefit. Ireland would get £37 million by reason of the increase in the size of the largesse which the Community could distribute. It would only lose £9.2 million, so there would be a net gain to Ireland of about £27.8 million.

Chairman.—That is a good point worth drawing out since these discussions are being formally recorded and will be published.

Deputy Colley.—When discussing the issue of fraud I was not clear of what, in fact, was deterring Member States from reporting fraud. It may just be inertia but could you indicate what process ensues if fraud is reported by a Member State to the Commission?

Mr. R. Ryan.—The obligation to report fraud lies on the Member State and the information should be furnished to the Commission. It could have the consequence, of course, that disclosure could lead to the Member State having to pay back money which the Community has already paid out. In other words, if some person has defrauded the Community and the national authorities, the national authorities would then have to pursue the fraudulent person to recover the money. In part, one of the reasons for the reluctance to give the information is that Member States do not want to be chased too readily for money which they have already paid out or which they have not collected in customs duties, levies or taxes themselves.

Deputy Colley.—Would they then have to chase up whoever was perpetrating the fraud?

Mr. R. Ryan.—Yes. The Commission has sought the power, and the Court of Auditors has supported them in this, to pursue fraudulent people or fraudulent organisations. At present only Member States have that power. The European Community is not permitted to pursue people in respect of fraud committed on the European Community. That is a weakness.

Deputy Colley.—That must be a grave weakness because there is no doubt that Governments will be deterred from doing it. If the fraud has, as you say, been directly perpetrated on the Commission, there seems to be no reason why the Commission should not follow it up.

Mr. R. Ryan.—Unfortunately, the legal framework is not there at present and that, again, is wholly undesirable.

Chairman.—Is it not fair to say on that particular point that if a Member State reports a fraud and subsequently does not recover the funds from the person or company perpetrating the fraud then it has to compensate the Commission? Is that not a fact?

Mr. R. Ryan.—Yes.

Deputy Colley.—That is a disincentive to a Member State to report fraud.

Mr. R. Ryan.—That is true. On the 10 per cent refund of customs duties and agricultural levies which we spoke about earlier, it is argued that the reason why the 10 per cent was given was not merely to cover the cost of administration — incidentally the Court of Auditors has been unable to justify the 10 per cent on the basis of the cost of collection; there is no evidence to suggest that it costs 10 per cent of customs duties to collect them — but also to compensate Member States when they have to pay over the money fraudulently won from them or not collected in customs duties or taxes which they ought to have collected. This 10 per cent was a kind of insurance compensation for the penalty they would have to pay because of fraud committed within their jurisdiction.

Deputy Desmond.—In welcoming Mr. Ryan, may I ask why the Court is considering issuing a special report on the administration of the Social Fund?

Mr. R. Ryan.—The reason is that the Court, as will be noticed from previous Annual Reports, is very unhappy about the operation of the Social Fund and it was felt that the necessarily abbreviated account which it could give in the Annual Report would not do justice to the seriousness of the problem. Therefore, it made an exhaustive study of the operation of the Social Fund throughout Member States and it has drafted a report which is at present before the Commission for consideration.

Without anticipating what the report may say — it has yet to be formally adopted by the Court after consideration by the Commission: I am merely repeating what has been said in Annual Reports — one of the difficulties in relation to the Social Fund is that it is extremely small and tries to cover too much. It represents no more than 4 per cent of the social expenditure by Member States so clearly it is only a topping-up process. It has at any moment some 20,000 projects in operation in Member States and this makes it extremely difficult to control financially. Many of the beneficiaries of the Fund are charitable organisations and they are not as well managed financially as a commercial organisation might be. The result is that the monitoring of expenditure and the monitoring of projects and schemes is extremely lax. The criteria are very loose and the approach appears to be one of what we call the watering can — spreading the money around without being terribly concerned about whether or not objectives are achieved. One of the difficulties with the European Social Fund is that because it has so many priorities it has no priority at all. Everything is considered to be important, such as the relief of unemployment for people over 25 years of age. It is considered important to have a whole variety of not necessarily conflicting objectives but ones that cannot all be really satisfactorily serviced. Thus you have a scheme which is no more than simply a redistribution, and a very limited redistribution, of money given to the European Community. I am afraid that a lot of money is distributed with no or insufficient analysis of applications to ensure the viability of the projects proposed.

Deputy Desmond.—Without asking you to comment on my view that the Irish record in that regard is quite good in terms of accountability, what is your view on the fact that at present we get about IR£160 million a year and that that is gold dust to the Labour, Health and Education Votes? Admittedly it is a small fund and we get 13 per cent of it. Is it likely that that is going to drop substantially in the years ahead because other countries are sending in multiple applications from new applicants.

Mr. R. Ryan.—I do not like to anticipate legislation.

Deputy Desmond.—What would be an audited feeling on it?

Mr. R. Ryan.—As you know, there is a proposal from the Commission for a doubling of the Structural Funds which, of course, would include the Social Fund. The policy in the social area is laid down by a committee consisting of Member States. As Deputy Desmond will recognise, that committee and the Commission have recognised the need for generous expenditure of social funds in Ireland. On the basis of what has happened in the past one may reasonably assume that Ireland’s needs will be recognised in the future.

Chairman.—There is one other question I would like to ask on the Regional Fund. Our briefing note suggests that there is a slackness in the administration of the Regional Fund and that the Court had various recommendations to make. The document goes on to say that it is in Ireland’s interest that the Regional Fund should operate efficiently and effectively. Could you expand on the various recommendations that the Court of Auditors did make in this area?

Mr. R. Ryan.—Yes, I will try to do so. The Court has criticised the management of the Regional Fund on a number of grounds. One criticism is that it does not carry out technical analysis of applications and, as a consequence, more than 50 per cent of regional projects overrun the estimated cost, are not completed within the time quoted in the application and do not achieve the employment objectives which were intended. In those circumstances, the Court is right to criticise the operation of a fund which can produce such a common pattern of lack of reaching targets. Considerable difficulty in management, of course, arises by virtue of the fact that all Member States treat the Regional Fund as a global addition to their own expenditure on regional matters. Nonetheless, the justification for getting Regional Fund aid is related to specific projects and we have found that these are not managed as efficiently as they should be. The Court had also found that in some cases projects had not even commenced at the time they were intended to start and some have not commenced at all. Cases have been found where four to five years after decisions approving Regional Fund projects have been made, the projects have not even commenced. Unfortunately, we found that the Commission was not as efficient as it should be in a follow-up of regional projects. You may say, “well, what of it if a project is not started there is no expenditure”. That is not quite true. When a decision is made to assist any scheme or project, there is a commitment; money is set aside and a legal obligation is created on the part of the Community to pay out that money. That money cannot be spent on anything else once the commitment is made for a particular project. Therefore, one can be in a situation of tying-up money which could be better spent on some schemes that could be put into operation without delay. There has been quite an amount of that. However, there has been an improvement. What I have said today and what is said in the report might give the impression that there is an awful lot wrong with the Community but it would be wrong to think that progress has not been made. There has been considerable improvement over the years. A great deal of those improvements have occurred without mention in the Annual Report. The Annual Report by its nature tends to draw attention to continuing weaknesses so that the Council of Ministers and Parliament can be informed and they can bring pressure to bear on the administration. Like your own committee, your power to embarrass others is perhaps the greatest sanction that you have and that is the function of the Court’s Annual and other Reports. There have been improvements in administration. The Commission has sought additional powers so as to ensure more efficient administration of the Regional Fund but these powers are denied to it by the Council of Ministers.

Chairman.—With regard to the question of the change of funding for the Community, the completion of the market and the promised change of funding from VAT to a percentage of GNP, which was very prominent in the debate on the Single European Act, how will your Court of Auditors audit the calculation of the percentage which each country will contribute? Have you given any thought to that? What is the likely commencement date for that change in funding? Have you any comments on that?

Mr. R. Ryan.—Sometimes I wish we could look into the future but maybe it is as well not to be able to do so. As you know, there will be a Council summit meeting in February in Brussels to consider the proposals from the Commission which would involve, if agreed, a contribution from Member States related to their GNP. The Court, while not a legislative body, does give thought to what might occur in the future and we are at present considering the skills which would be necessary to properly assess a contribution based upon GNP. The Commission is primarily engaged in work in this area already because the contribution from value-added tax depends upon statistical economic information as well as upon revenue returns. So considerable work has been done in this field, but we clearly need to improve our skills in interpreting economic data from Member States. Again, I want to emphasise the need to strengthen the powers of the Commission. At present the Commission and the Court of Auditors are being denied the access which they consider to be their entitlement in the area of auditing value-added tax. The countries which are denying access to the Court of Auditors at the level at which we consider we must examine figures are Italy, France, Germany and Luxembourg. In order to make a proper assessment we must have access to all relevant data and to the calculations made on that data. The four member countries in question have denied access which is given by other Member States, including Ireland. The Court of Auditors does not itself have the power to bring the Member States in question to the Court of Justice. The Parliament has seized upon the matter and has addressed some questions to the Council of Ministers. I have seen their draft resolution for discharge on the 1985 accounts which will be debated next week. They are perturbed about it. I cannot go any further than that at the moment as to what action might be taken. I think I could make the observation that the reason why the Commission has not taken action — and it is easier for the Commission to take legal action than it is for the Parliament — is that it has this Delors financial proposal in relation to the future financing of the Community and it does not want to queer the pitch while those big proposals are being discussed. But if we are to have proper assessment of the returns from the gross national product, then quite clearly we will have to have access to all relevant data. We cannot simply take a declaration from a Member State without going behind that declaration to ensure it is correct.

Chairman.—That has been a very useful and most helpful exchange. I propose that what we should do, since this is outside the normal report of the committee, is that we arrange for the minutes of evidence to be printed and circulated. It can be done in the next ten days and placed in the Library and Members of the Dáil and Seanad can draw on it as necessary for parliamentary purposes. It would be a very useful background document for us to have. I do not think there is any point in writing to incorporate this meeting as part of the actual minutes and report because it is quite separate from the normal report. It remains for me to thank you again. It has been a very useful exercise and something we might consider doing annually. Perhaps we will have the opportunity to meet again in the not too distant future at another venue.

Mr. R. Ryan.—Thank you, Chairman. Will I have an opportunity to see the minutes before they go to print in case I have committed any technical inaccuracy?

Chairman.—It is not uncommon for the auditor to be consulted before it is actually finally printed as to the crossing of the t’s and the dotting of the i’s.

Mr. R. Ryan.—Thanks, Chairman.

The witness withdrew.

The Committee adjourned.