Report by the Court of Auditors on the operational efficiency of the management of the European Monetary Institute and the European Central Bank for the financial year 1998 together with the replies of the European Central Bank
12. 5. 2000 EN Official Journal of the European Communities C 133/1 I (Information) COURT OF AUDITORS REPORT BY THE COURT OF AUDITORS on the operational efficiency of the management of the European Monetary Institute and the European Central Bank for the financial year 1998 together with the replies of the European Central Bank (2000/C 133/01) CONTENTS Paragraph Page INTRODUCTION. EXAMINATION OF THE EMI S ACTIVITIES. THE LIQUIDATION OF THE EMI. ACTIVITIES IN 1998. THE EFFICIENCY OF THE MANAGEMENT IN 1998. Budgetary management and monitoring. Project management and monitoring. Extraordinary bonus. 1-3 4-8 9 10-12 13-22 14-17 18-20 21-22 Annexes 1-4. 2 2 2 3 3 3 4 4 6 Replies of the European Central Bank. 10 C 133/2 EN Official Journal of the European Communities 12. 5. 2000 INTRODUCTION 1. The European Central Bank (ECB) replaced the European Monetary Institute (EMI) on 1 June 1998. The EMI had been in existence since 1 January 1994, with the task of contributing to the realisation of economic and monetary union (EMU), in par- ticular by realising the conditions necessary for the transition to the third stage of that union and the introduction of a single cur- rency. 2. The Court has presented four reports on the results of audits carried out as part of the examination of the efficiency of the EMIís management for the financial years 1994 to 1997 (1). In 1998, the ECB completed the task of preparing for the third stage, which had been started by the EMI, and took over on its own account management of the tasks that had previously been car- ried out by the latter. During that year it was not carrying out normal central bank activities and went through a transitional period marking the continuation, rather than the breaking off, of the work of the EMI, which went into liquidation on 1 June 1998. An annual report presenting both the financial statements of the ECB as at 31 December 1998 and the final accounts of the EMI as at 31 May 1998 was published in April 1999. 3. As the Courtís mandates with regard to the EMI (2) and the ECB (3) are identical, it is reporting for 1998 on the efficiency of the management, of the EMI (for the first five months) and of the ECB (for the remainder of the year). Two sections are devoted to an examination of the EMIís activities and its liquidation respec- tively. EXAMINATION OF THE EMI S ACTIVITIES 4. The EMIís main object was to carry out the necessary prepara- tory work for the third stage of EMU, leading up to the establish- ment of the European System of Central Banks (ESCB), the pur- suit of a single monetary policy and the introduction of a single currency. In order to achieve that the EMI was given the task of strengthening the coordination of national monetary policies, with the aim of ensuring price stability and improving the con- vergence between the economies of the Member States. (1) These reports were all published in the Official Journal (OJ C 394, 31. 12. 1996 for 1994 and 1995; OJ C 42, 9. 2. 1998 for 1996; OJ C 164,10. 6. 1999 for 1997). (2) Article 17(4) of the Protocol on the Statute of the EMI (annexed to the EC Treaty) reads, The provisions of Article 248 of this Treaty shall only apply to an examination of the operational efficiency of the management of the EMIí. (3) Article 27(2) of the Protocol on the Statute of the ESCB and of the ECB (annexed to the EC Treaty) reads, The provisions of Article 248 of this Treaty shall only apply to an examination of the operational efficiency of the management of the ECBí. 5. This work took the form of publications, studies, working papers, consultations, opinions and recommendations, prepared by members of the EMIís staff and by subcommittees and work- ing groups of experts from the EMI and the national central banks. Among the subjects covered were: monetary policy, exchange- rate policies, macroeconomic and monetary statistics, payments systems, the issue of euro banknotes and coins, harmonisation of accounting rules and standards, information and communica- tions systems, banking supervision and legal questions. In opera- tional terms, this involved the development, testing and integra- tion of ECB and ESCB systems and procedures, together with the completion under strict time constraints of a considerable num- ber of major projects. 6. In addition to the four annual reports for the financial years 1994 to 1997 the EMI published around 40 reports, some of which were particularly important, notably the reports on the single monetary policy in the third stage of EMU, the progress reports on the Trans-European Automated Real-time Gross settle- ment Express Transfer system (TARGET) project and the reports on convergence in the European Union (EU). 7. Between 1994 and 1998 the EMI replied to 123 requests for consultation on areas covered by its terms of reference: from the Council (24) and the Commission (five) in relation to proposals for Community regulations, and from the authorities of EU Mem- ber States (94) in the case of draft national texts of a legislative or executive nature. 8. Since the establishment of the EMI financial investments have generated total interest income amounting to some ECU 144 mil- lion, whilst extraordinary income amounted to ECU 24 million. Expenses amounted to ECU 185 million in total, which breaks down as ECU 96 million for staff costs, ECU 77 million for other administrative expenses, ECU 11 million depreciation and ECU 1 million valuation differences. Investments accounted for ECU 40 million over the full period. THE LIQUIDATION OF THE EMI 9. In accordance with the provisions of Article 23 of the Statute of the EMI, all assets and liabilities of the EMI automatically passed to the ECB (4) when the EMI went into liquidation on 1 June 1998. The procedure for liquidating the EMI was laid down in Decision (4) Article 23(1) of the Protocol on the Statute of the EMI (annexed to the EC Treaty) reads, In accordance with Article 109l of this Treaty, the EMI shall go into liquidation on the establishment of the ECB. All assets and liabilities of the EMI shall then pass automatically to the ECB. The latter shall liquidate the EMI according to the provisions of this Article. The liquidation shall be completed by the beginning of the third stageí. 12. 5. 2000 EN Official Journal of the European Communities C 133/3 No 10/98 of the EMI Council of 5 May 1998. The negative bal- ance on liquidation of the EMI, amounting to ECU 17 625 220, was offset against the national central banksí contributions to the resources of the EMI. THE EFFICIENCY OF THE MANAGEMENT IN 1998 ACTIVITIES IN 1998 10. The number of permanent staff employed by the EMI, which was 334 at 31 December 1997, was 407 persons on 31 May 1998. Of that total, 402 were transferred to the ECB on 1 June 1998 and 375 of them subsequently signed contracts of employment with the ECB for periods extending beyond 31 December 1998. As of 31 December 1998 the ECB had a permanent staff of 534 per- sons, 54 of whom held managerial positions. 11. The ECBís Annual Report for 1998 describes, firstly, the pre- paratory work for the third stage of EMU and the changeover to the single currency and, secondly, the activities of the ESCB. Some 20 legislative texts have been adopted by the ECB in that context. 12. 1998 was the last year before the start of the third stage of EMU and the introduction of the euro. The ECB took over from the EMI, which had already made significant progress in prepar- ing the operational framework for the Eurosystem (1) surround- ing the implementation of monetary policy. In September 1998, for example, the ECB published a report presenting the instru- ments of this monetary policy, which include a minimum reserve requirement (2), open market transactions (3) and standing facili- ties (4). (1) The Eurosystem comprises the ECB and the national central banks of the Member States that adopt the euro in the third stage of EMU. It is administered by the Governing Council and the Executive Board of the ECB. (2) The requirement for institutions to hold minimum reserves with their central banks. In the minimum reserve framework of the Eurosystem, the reserve requirement of a credit institution is calculated by multi- plying the reserve ratio fixed for each category of items in the reserve base by the amount of those items in the institutionís balance sheet. (3) Operations executed on the ECBís initiative in the financial markets and involving one of the following transactions: (1) buying or selling assets outright (spot or forward); (2) buying or selling assets under a repurchase agreement; (3) lending or borrowing against underlying assets as collateral; (4) the issue of central bank debt certificates; (5) the collection of deposits; (6) foreign exchange swaps between domes- tic and foreign currency. (4) An ECB facility available to counterparties on their own initiative. The Eurosystem offers two standing facilities: the marginal lending facil- ity, which allows counterparties to receive overnight credit, and the deposit facility, whereby they may make overnight deposits at the ECB. 13. Following its audits the Court sent observations and recom- mendations to the ECBís management. Some of these warrant mention in this report. Budgetary management and monitoring 14. On 6 January 1998 the Council of the EMI adopted a budget covering the full financial year 1998 for EMI but not for ECB, as at that time the future organisation of the ECB and the precise rank mix of its initial staff complement remained to be decided. The first ECB budget was then intended to comprise two parts, namely the part of this EMI budget transferred to the ECB and the additional resources needed for the ECB. Given the uncertainties as to the precise foundation date of the ECB, the EMI management decided to assume 1 July 1998 as a starting date for the first ECB budget and to implement the EMI budget until that date. They also decided to include items from the EMI budget in the ECB budget only after review of their necessity. At its first meeting on 9 June 1998, the Governing Council of the ECB confirmed the validity of the EMI budget as being up until approval of the ECB budget for the second half of 1998. The latter was approved by the Governing Council on 7 July 1998 at a provisional level of ECU 96,7 million and subsequently reduced, in September 1998, to ECU 79,8 million. 15. However, the EMI budget was not revised following the deci- sion to change its horizon from December to June 1998. The report on the implementation of the budget as at 30 June 1998 thus attributes to the EMI an outturn of ECU 48,5 million for expenditure for the first half of 1998 and compares this figure with ECU 110,2 million (the amount budgeted for the EMI up to December 1998), thus giving an apparent rate of implementation of 44 %. No comparison was provided in terms of the budget for the first five months or the first six months of 1998. 16. The report on the implementation of the budget at 31 Decem- ber 1998 provides an analysis of budgetary implementation for the second half of 1998 only. It shows a sum total of ECU 60,3 million for expenditure, compared with the revised budget of ECU 79,8 million, giving an implementation rate of 75,5 %. This includes, however, EMI expenditure for which invoices were received after 30 June 1998. In any case, having regard to the way in which budget implementation for the first half year was analy- sed (see paragraph 15), information about the consolidated bud- get outturn for the 1998 year was not available and thus could not be forwarded to the Governing Council. C 133/4 EN Official Journal of the European Communities 12. 5. 2000 17. Due to the divergence between accounting and budgetary periods, the service responsible for budget monitoring did not carry out any reconciliation of the expenditure outturn and the expenses shown in the profit and loss account, whether for the ECB (period 1 July to 31 December 1998) or for the EMI (first five months of the year). In consequence, the reliability of the infor- mation presented has not been verified by arithmetical or account- ing checks. FCRS 1 budget and accepted a supplementary budget, for which part of the amounts had already been committed as of the date when it was adopted. The FCRS 2 budget of DEM 450 000 was thus used to cover the overruns on FCRS 1 before they had been authorised. In addition, a firm of consultants was engaged as from the beginning of July 1998, although the contract was not signed until 2 October. Moreover, the contract in question is somewhat vague as to the consultantsí remit and obligations vis-à-vis the ECB, especially as regards deadlines and costs. Furthermore, as of end-1998 the ECB had still not designated a full-time manager for this project, although that was essential for monitoring the work of the consultants. Project management and monitoring (1) 18. Project monitoring procedures could be improved to render assessment of the state of progress of projects easier and better, in respect of both timepath and budget utilisation. (a) The method adopted does not always guarantee that the monitoring is objective and reliable. The progress of a project is, in fact, assessed mainly in terms of the consumption of resources, which, taken on its own, as an indicator, does not reflect how far the project has progressed, especially in the case of complex, interdependent projects, and does not allow any overruns of resources or time limits to be pointed out in good time, as in the case of the foreign currency reserves sub- ledger (FCRS) projects (2). This weakness is accentuated by the fact that there is no commitments accounting system; (b) it is difficult to track project development simply and coher- ently between years; over a period of time projects are, in fact, renumbered, re-named, re-scaled, merged or subdivided, and the list that appears in the budget monitoring report does not allow fast, clear identification; moreover, the monitoring reports do not provide information on transfers of funds, so that it is not possible to ascertain the position regarding the funds available for each project. In the case of the FCRS projects, which are intrinsically linked 19. and intended to monitor the foreign currency reserves accounts, DEM 2 million was spent in the first half-year of 1998, a figure which already exceeded the total budget for the year, which was adopted in April 1998 (DEM 1,78 million). In the second half-year the competent internal authority formalised the cost overruns ret- rospectively by means of transfers from the FCRS 2 budget to the (1) The term project covers the work of fitting out buildings as well as the development of IT systems and the work associated with the vari- ous stages of EMU (statistics, databases, introduction of banknotes and coins, etc). (2) See also the Courtís Annual report concerning the financial year 1997, 20. The department responsible for providing organisational support for market operations and the related risk management (middle office) used the Eurosystem software for managing the pool reserves, even though the software in question proved to be inadequate as an automated solution. Part of the middle office budget (DEM 850 000) was spent on making it possible for the system to be operated manually at the beginning of the third phase. DEM 300 000, which was, theoretically, for the fees of the consultants needed to research and develop the computer speci- fications, was spent on analysing the software capabilities and producing a set of middle office procedures. Extraordinary bonus 21. On 24 March 1998 the EMI Council, in the capacity of bud- getary authority, decided to grant an extraordinary bonus to part of the EMIís staff on the occasion of the establishment of the ECB, in recognition of the effort made by them. This bonus was to come on top of the normal merit pay distributed every year since 1996. The Council had set a figure of DEM 1,9 million as the total amount to be distributed by way of the extraordinary bonus (3) but, as a result of the way in which the decision (4) was imple- mented, the total cost was DEM 2,8 million and some employees received bonuses of up to 38 % of their annual basic salaries, even though, theoretically, the maximum was 13,5 % (5). (3) The additional budget for the merit payments was, in the words of the Council decision, ádirected especially at those who did not receive compensation for overtime performance and was differentiated accord- ing to performance and duration of employment at the EMIí. (4) The Council decision stipulated that the extraordinary bonus would cover the 18-month period 1 July 1997 to 31 December 1998. How- ever, when the measure was implemented the annual performance rate was multiplied by the period of service, which could be as long as 54 months. (5) Highest given per year, 9 % of basic salary, which is equal to 13,5 % paragraphs 12 and 13, OJ C 164, 10. 6. 1999, and p. 3. for a period of 18 months. 12. 5. 2000 EN Official Journal of the European Communities C 133/5 22. The DEM 0,9 million overspending was funded by a transfer from the normal merit pay budget following the executive ser- viceís decision not to apply the normal merit pay procedure for the second half of 1998. Neither that decision nor the transfer to the extraordinary bonus budget was authorised by the Council. This report was adopted by the Court of Auditors in Luxembourg at the meeting on 6 April 2000. For the Court of Auditors Jan O. KARLSSON The President C 133/6 EN Official Journal of the European Communities 12. 5. 2000 ANNEX 1 Balance sheet of the ECB as at 31 December 1998 Assets Liabilities 31. 12. 1998 I. Claims on non-euro area residents denominated in I. Intra-ESCB liabilities foreign currency Balances with banks and security investments, external loans and other external assets 343 047 II. Claims on non-euro area residents denominated in euro Balances with banks, security investments and loans 3 739 796 II. Other liabilities Off-balance-sheet instruments: revaluation differences Accruals and deferred income Sundry items III. Other assets Tangible and intangible fixed assets Other financial assets Accruals, deferred expenditure and sundry items III. Provisions 30 112 25 277 4 012 IV. Revaluation accounts V. Capital and reserves 59 401 VI. Profit for the year (ECU 1 000) 31. 12. 1998 0 725 4 173 78 551 83 449 31 007 698 3 999 550 27 540 Memorandum item Forward claims denominated in euro 282 930 Memorandum item Forward liabilities denominated in foreign currency 282 930 Total assets 4 142 244 Total liabilities 4 142 244 12. 5. 2000 EN Official Journal of the European Communities C 133/7 ANNEX 2 Profit and loss account of the ECB from 1 June to 31 December 1998 (ECU 1 000) Expenses Income 1. 6. -31. 12. 1998 1. 6. -31. 12. 1998 Interest expenses Write-downs on financial assets and positions Staff costs Other administrative expenses Depreciation of (in)tangible fixed assets Profit for the year Total expenses 2 684 22 249 29 745 30 230 8 076 92 984 27 540 Interest income Realised losses/gains arising from financial operations Other income 97 852 22 182 490 Total income 120 524 Total 120 524 Total 120 524 C 133/8 EN Official Journal of the European Communities 12. 5. 2000 ANNEX 3 Balance sheet of the EMI as at 31 May 1998 (ECU 1 000) Assets Liabilities 31. 5. 1998 31. 12. 1997 31. 5. 1998 31. 12. 1997 I EMS-related assets Holdings of gold Holdings of US dollars I EMS-related liabilities ECU issued to EU central banks 23 765 015 40 324 022 26 228 411 38 791 624 64 089 037 65 020 035 II Other assets II Other liabilities Cash and bank sight accounts 7 590 24 164 Time deposits Tangible assets Other assets 594 708 597 500 29 554 24 751 4 121 2 346 635 973 648 761 Creditors and other liabilities Provision for pensions and similar obliga- tions Other provisions Contributions from EU central banks (pur- suant to Article16(2) of the EMI Statute) General reserve fund Deficit for the year 64 089 037 65 020 035 64 089 037 65 020 035 20 093 11 535 7 397 10 534 615 574 4 402 (22 027) 6 131 11 120 615 574 17 124 (12 723) 635 973 648 761 Total assets 64 725 010 65 668 796 Total liabilities 64 725 010 65 668 796 Memorandum item Forward claims in ECU (from revolving quar- terly swaps) Memorandum item Forward liabilities in gold and US dollars (from revolving quarterly swaps) 64 089 037 65 020 035 64 089 037 65 020 035 12. 5. 2000 EN Official Journal of the European Communities C 133/9 ANNEX 4 Profit and loss account of the EMI for the period 1 January to 31 May 1998 (ECU 1 000) Expenses Income 1. 1. -31. 5. 1998 1. 1. -31. 12. 1997 1. 1. -31. 5. 1998 1. 1. -31. 12. 1997 Staff costs Other administrative expenses Depreciation of tangible assets Valuation loss 14 850 19 010 2 729 Total expenses 36 589 24 927 28 613 3 012 464 57 016 Interest income Extraordinary income Valuation gains realised at liqui- dation 10 240 1 249 3 073 Total income 14 562 Deficit for the year 22 027 Total 36 589 57 016 Total 36 589 43 377 916 44 293 12 723 57 016 C 133/10 EN Official Journal of the European Communities 12. 5. 2000 REPLIES OF THE EUROPEAN CENTRAL BANK Paragraph 17 (Budget management) As regards the Courtís observation on the non-establishment of an annual summary reconciliation for 1998, the ECB would like to emphasise that such an exercise was only suspended for 1998 and only on an exceptional basis. This exception was acknowl- edged by the ECB Governing Council when considering the 1998 Year-end Quarterly Budget Monitoring Report in March 1999. The exception derived from the non-availability of homogeneous data due to the differences in accounting principles, in charts of accounts and IT systems in use. The common practise of estab- lishing such an annual summary reconciliation shall be resumed for the years 1999 onwards. Paragraph 18 (Project management) The EMI project organisation and control procedures in force in 1998 were revised in 1999 thereby building on lessons learned during the lifetime of the EMI. The referred renaming, re-scaling and some mergers of individual projects were unavoidable given operational circumstances in a fast-moving environment and were duly examined and authorised by the relevant ECB decision-making bodies. In order to identify projects over time, individual project codes similar to budget centre numbers existed for each project in the ECBís budget sys- tem since 1996. From mid-1999 onwards, this code was also pro- vided as additional information in in the Quarterly Budget Moni- toring Reports, thereby enhancing the ability to better track project development over time. Paragraph 21 (Extraordinary bonus) The ECB acknowledges that the wording of the EMI Council Deci- sion may lead to the conclusion that a special budget of DEM 1,9 million was created for the payment of the extraordinary bonus and that this only covered the 18 month period from 1 July 1997 to 31 December 1998. Actually, when sending the request to the EMI Council, the intention of the proposal was to ask for an increase in the existing budget with a view to covering the extraor- dinary bonus which would reflect service up to the full lifetime of the EMI, i. e. four-and-a-half years. In doing so, account was taken of the likely underspending of the normal merit pay budget for 1998 and the utilisation of the resulting surplus funds for the payment of the extraordinary bonus. The actual combined expen- diture on both measures was in line with the budget which had been enhanced in this manner, and the highest extraordinary bonus amounted to 9 % per year of service with the EMI. The extraordinary bonus was merely an acknowledgement rather than a compensation of the high number of extra hours worked by the EMI staff