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Good Practice Note 09/04: Managing risk in federal government

Principles

(1) Federal government departments and agencies are exposed to risks in mission performance. Once a risk has materialised this fact may impact temporarily or permanently on the capability of government bodies to perform their tasks in an efficient and effective manner. In the worst case, they may no longer be in a position to deliver service at all. In order to prevent such a situation from arising, government bodies need to identify approaches to address risk.

(2) Appropriate risk management would help federal government departments and agencies to perform their duties in a proper and efficient manner.

(3) By means of risk management, federal government could systematically and proactively deal with potential risks that may impact on mission delivery. This would include the following steps:

• identify risks,

• assess risks,

• develop a customised risk strategy structured to identify an adequate risk response treatment in each case,

• manage risks accordingly and

• monitor the effectiveness of risk management.

(4) Responsibility for appropriately managing risks lies with federal government leadership.

Background

In the years 2009 and 2015, the German SAI studied to what extent federal government bodies managed risks to mission delivery. Our findings are as follows:

(1) At federal government level, mission delivery is exposed to a variety of risks. Some risks relate to strategic decision-making, other risks relate to operational activities. Distinction can be made between material risks and immaterial risks. Material risks refer, for example, to mission performance, processes or financial resources. Immaterial risks refer to human resources, reputation or integrity.

Currently, federal government bodies do neither have a common understanding of risk nor a basis for implementing comprehensive and systematic risk management. In particular, there are no statutory or other mandatory regulations and rules in place that would serve as a yardstick for customised risk management.

(2) Comprehensive and systematic risk management would enable government bodies to detect potential threats to mission delivery in a timely manner. Based on a coherent strategy, government bodies could avert such threats before they cause damage or, where a risk actually materialises, arrange for appropriate response.

Such an approach is still not an integral part of risk management in the federal environment. Relevant approaches are exceptions rather than the rule. Risk management efforts often do not encompass overall mission delivery. Instead risk management efforts are limited to isolated cases or to subject-matter tasks most of the time.

Many federal leaders do not seem to be aware of the merits of structured and systematic risk management. They neither use risk management in discharging leadership functions nor as a safeguard against alleged accusations of non-compliance with official duties.

We hold that federal government bodies should make risk management an official priority and put structures in place to address risk. In our view, the lack of comprehensive and systematic risk management poses a risk in itself.

(3) To develop appropriate risk management, leadership needs to identify and

assess potential risk in the first place. The next step is to develop a risk strategy to address the risks identified. The aim is to reduce potentially adverse effects on mission delivery to a tolerable level. To this end, risks may be

• avoided (substantive change),

• reduced (procedural change),

• transferred (to third parties e.g. through insurance), or

• accepted (by means of an informed decision).

A formalised approach helps view risks from across a body’s portfolio of responsibilities in a comprehensive, realistic and sustainable manner.  Such a structured approach also supports efficient and risk-based resource allocation.

Risk management initiatives should cover all activities carried out by a government body. To this end, risk management needs to consider both material and immaterial risks. If this is done properly, mission delivery is largely safeguarded against risk. 

Government bodies should adopt a systematic approach covering the full spectrum of a body’s risks and make risk management a permanent and integral part of a sound and effective governance. The role of risk management should be clearly defined as a leadership and management tool.

(4) Leadership is responsible for ensuring that a body performs all its missions in a proper manner. Therefore, leadership needs to adopt a forward-looking approach to assess the likelihood of and adequate response to risks emerging.

It is not a top leadership task to implement the risk management policy. However, leadership is required to put in place structures serving to institutionalise day-to-day risk management operations. Once this has been accomplished, relevant staff is in a position to manage risk self-reliantly in their area of responsibility.

Notes

In April 2017, the Federal Performance Commissioner published an advisory report presenting his risk management approach. The Commissioner presents a systematic approach that highlights how government bodies can identify risk and to assign them to appropriate monitoring and management tools. In addition, they can assess the actual situation, define the target situation and determine what action they need to take to accomplish the goals set. The Commissioner uses a risk tool matrix to illustrate his proposals.

 

 

2017 - Report of the Task Force on European Banking Union to the Contact Committee of Supreme Audit Institutions of the European Union and the European Court of Auditors

A comprehensive audit mandate assessing the supervisory review and evaluation process of banking supervision is no guaranteed in the Single Supervisory Mechanism (SSM). Before November 2014, national Supreme Audit Institutions audit scope went far beyond what the ECA is able to exercise today vis-à-vis the ECB. These are the findings set out in a report published jointly by several Supreme Audit Institutions.

0 Executive summary

0.1 Point of departure

As from 2008, Europe was hit by a financial crisis and a subsequent sovereign debt crisis. Many governments supported failing financial institutions with public funds amounting to hundreds of billions of euros. In response, the countries of the euro area introduced the European Banking Union, including a Single Supervisory Mechanism. In this Mechanism, the European Central Bank is directly responsible for prudential supervision of all ‘Significant Institutions’. National Competent Authorities are directly responsible for supervising the ‘Less Significant Institutions’, based on guidance of the European Central Bank.

0.2 Auditing banking supervision in the Single Supervisory Mechanism

The Supreme Audit Institutions of Austria, Cyprus, Finland, Germany and the Netherlands carried out a parallel audit to examine banking supervision at national level. The objectives of the parallel audit were:

  1. to gain insight into differences among EU Member States in the way supervisors have set up and carry out prudential supervision for LSIs, and
  2. to collect evidence about possible ‘audit gaps’ that may have emerged as a result of the introduction of the Single Supervisory Mechanism.

 

0.3 Key finding 1: Differences in regulatory transposition, design and practice of banking supervision

The regulatory framework regarding banks in the EU is characterised by complexity and has been subject to a number of changes since the outbreak of the financial crisis. We identified differences in how EU rules are transposed into national law. We found that within one common Supervisory Mechanism different national rules and regulations apply.

Furthermore we found differences in the institutional design of prudential supervision:

  • Frequently, the National Central Bank is responsible for prudential supervision but in some countries, the prudential supervisor is set up as a separate institution or responsibilities are shared between the Central Bank and a National Competent Authority.
  • Supervisory costs are charged to the supervised entities, but to different degrees.
  • Often the Ministry of Finance has a central role in supervising the supervisor, while in two countries Parliament and representatives of the regulated institutions are involved in this supervision.

 

We also found the following significant differences in supervision practice:

  • Methods designed either by the European Central Bank or national approaches are used for categorizing banks according to their systemic relevance and for assessing risks.
  • The proportionality of the annual assessment in the Supervisory Review and Evaluation Process for Less Significant Institutions varies.
  • Substantive focus in the Supervisory Review and Evaluation Process is either on assessing risks to capital, liquidity and sustainability of funding, or on assessing banks’ business models and adequacy of governance and risk management.
  • Either quantitative interventions (capital add-ons) are used by the National Competent Authority, or primarily qualitative interventions.

Key results

  • The way banking regulation is transposed, and banking supervision is designed and conducted, varies across different EU Member States. Within the Single Supervisory Mechanism, the single rulebook has to be adhered to. Nevertheless, the set-up and conduct of supervision can be tailored to specific national situations and national rules and regulations.
  • Future efforts by NCAs and the ECB are needed to strike a balance among harmonisation, proportionality and supervisory flexibility to match national specific circumstances. We encourage the European Commission and national decision makers to closely follow-up on how supervisory practice develops in the Member States.

 

0.4 Key finding 2: Audit gaps confirmed and increasing

The audit mandate of the European Court of Auditors with respect to the supervisory activities of the European Central Bank is narrowly defined as an examination of the operational efficiency of the management of the European Central Bank. At the time the Eurogroup considered the issue in December 2015, it argued that this narrow definition has its roots in primary law rather than the SSM regulation. However the resulting effects should be examined as they may give rise to differences in the depth of audit at European compared to national level in some Member States. The Special Report of the European Court of Auditors on the Single Supervisory Mechanism of November 2016 confirmed that the loss of mandate by some national SAIs after the introduction of the Single Supervisory Mechanism is not compensated by the mandate of the European Court of Auditors.

The European Commission’s review of prudential supervision by the European Central Bank states that the European Court of Auditor’s mandate “is indeed more limited than the mandates of certain national Supreme Audit Institutions over national banking supervisory authorities.” It encourages the European Court of Auditors and the European Central Bank to conclude an inter-institutional agreement that specifies the modalities of information exchange in view of granting the European Court of Auditors access to all information necessary for performing its audit mandate.

We agree that an inter-institutional agreement can be a first step to improve external accountability of the European Central Bank´s supervisory function. However, ultimately we deem it necessary to clarify the audit mandate of the ECA, as this has a direct effect on the range of information the ECB is able to share with the ECA. The European Court of Auditors claims for itself the right to interpret the scope of its audit mandate. In our opinion, the clarification of its mandate should highlight inter alia that the provisions of Article 27.2 of the ESCB Statute are intended to protect the independence of monetary policy. The other ECB function – prudential supervision – needs to be subject to more stringent control and accountability than monetary policy. This could be achieved, for example, by giving the ECA the possibility to perform comprehensive audits of banking supervision pertaining to significant institutions as was the case in several countries including Germany and the Netherlands prior to the introduction of the SSM. The ECA’s audit mandate may need to be clearly defined by means of an amendment of secondary law (Single Supervisory Mechanism Regulation) and possibly primary law to generate greater legal certainty and create a sustainable solution. In this parallel audit, we also found that Supreme Audit Institutions with a mandate to audit the supervision of Less Significant Institutions are facing increasing difficulty accessing relevant information. A growing number of documents pertaining to Less Significant Institutions are subject to rules and standards of the European Central Bank. As a result, information of the European Central Bank relevant to audits on Less Significant Institutions is not shared with Supreme Audit Institutions. This new ‘audit gap’ will increase in importance as the European Central Bank issues more harmonizing guidance and methodology regarding the prudential supervision of Less Significant Institutions in the years to come.

Ten Supreme Audit Institutions in the euro area have a limited or no mandate to audit banking supervision of Less Significant Institutions and/or are facing difficulties exercising this right. As a result, supervision of Less Significant Institutions in these countries is largely not subject to external audit.

Key Recommendations

  • The European Court of Auditors and the European Central Bank should conclude – as a first step – an inter-institutional agreement specifying the modalities of their information exchange. However, ultimately we deem it necessary to clarify the audit mandate of the ECA with regard to supervision of Significant Institutions, as this has a direct effect on the range of information the ECB is able to share with the ECA. It may be necessary to cement this clarification in either secondary law and, if needed in primary law, with a view to generating greater legal certainty and creating a sustainable solution.
  • National Competent Authorities should authorise disclosure of information relating to prudential supervision of Less Significant Institutions to their respective Supreme Audit Institutions, in line with Art. 59 (2) of the Capital Requirements Directive (see Appendix 2).
  • National governments and parliaments in the EU should examine whether their Supreme Audit Institution has been given the de jure and de facto mandate to audit banking supervision. Where necessary and feasible they should seek an extension of their audit mandates in line with Art. 59 (2) of the Capital Requirements Directive.

 

2017 - Intended Implementation of harmonised European Public Sector Accounting Standards (EPSAS) in the Member States of the European Union

The German SAI speaks out against plans to implement harmonised European Public Accounting Standards EPSAS. The project will not accomplish the goal of sustainable public budgets.

0 Executive Summary
The European Commission (the Commission) intends to introduce harmonised European Public Sector Accounting Standards (EPSAS) in the Member States of the European Union. These standards are intended to provide better comparable data and a more reliable basis for economic and fiscal governance within the EU, thus helping to avoid future sovereign debt crises.

The EPSAS are to be based on accrual accounting and to be binding for all levels of government. According to estimates made by the Commission, the costs of implementing EPSAS in Germany alone are expected to amount to €3.1 billion. However, the reliability of such estimates is doubtful. We believe that the actual financial burdens will be higher.

0.1
The Commission did not submit an overall strategy for the project. Furthermore, the Commission has not explained to what extent the mandatory introduction of EPSAS can actually achieve the intended objectives. It has not considered any alternative options (numbers 4.1 and 4.5).

0.2

Since 2015, the Commission has promoted the voluntary transition to accrual-based accounting systems in the Member States, including by making EU funds available for this purpose. By doing so, the Commission practically pre-empts a decision (number 4.3).

0.3
The Commission closely involves private sector audit firms in the decision-making processes. These firms are key players and exert considerable influence on the development of EPSAS. We consider this a matter of concern because the mandatory introduction of EPSAS would also create business opportunities for management consulting and audit firms (number 4.4).

0.4
By introducing EPSAS, the Commission intends to strengthen confidence in the financial stability of the European Union and to improve fiscal monitoring, thereby helping to avoid future sovereign debt crises.

However, the issue in the European Union is not a lack of information or awareness but of enforcement of European fiscal rules. Past experience has shown that despite grave violations of fiscal rules no financial sanctions have been imposed. The problem is therefore not the lack of high-quality financial data but of a sound fiscal policy and of strict compliance with the European fiscal rules. Neither of these requirements can be enforced by any sort of accounting systems (number 5).

0.5
According to the Commission’s approach, EPSAS is to be the means by which the Member States obtain more robust data, thus rendering better account of the use of public funds. By introducing EPSAS, the Commission also intends to enhance transparency and comparability of public budgets.

The EPSAS are to be aligned with Anglo-American standards oriented towards the capital market. Thus, they are meant to provide investors with information useful for decision-making and are therefore more future-oriented. However, the government must render account of the use of the public funds. In contrast to the accounting of a private-sector enterprise, public sector accounting mainly serves the purpose of ex post oversight (number 6).

Furthermore, the implementation of EPSAS would furnish data on public budgets that only appear to be more reliable and better comparable. In order to actually achieve these qualities, it would be necessary to restrict the influence of subjective factors and to effectively prevent tampering. This, however, is not ensured. On the contrary: Discussions within bodies at EU level show that the introduction of EPSAS would provide the Member States with a wide discretionary scope for choosing among different options (number 7).

0.6
The EPSAS are to furnish additional information on the financial position of the Member States which, from the Commission’s point of view, will provide a more robust basis for decisions.

Recent decisions taken by the German Parliament suggest that, also in the future, the German budget legislator intends to exercise its constitutional right to pass the budget by means of cash-based data. Thus, EPSAS would not be more effective in facilitating parliamentary control.

We assume that, if EPSAS were introduced at the federal level on a mandatory basis, it would be necessary to retain the cash-based system and to introduce an accrual-based system in parallel. As a result, this would mean high implementation costs for Germany not matched by any real benefits. The operation of a parallel system would impose additional burdens on the German budget (number 8).

0.7
The Federal Government should assert its weight at the European level and prevent the mandatory implementation of EPSAS in Germany. Furthermore, it should take steps to ensure that the Commission consider alternative options that would permit any necessary improvements of the transparency and comparability of the Member States’ financial reporting. In this context, consideration should be given to the different administrative and accountability structures of the Member States.

0.8
The German Federal Ministry of Finance stated that it strongly agrees with the German SAI’s key issues of concern. The Ministry also assured us that the Federal Government would continue to intensively monitor the EPSAS implementation process in conjunction with the federal states and would ensure that consideration will be given to Germany’s interests.

 

2016 Annual report Volume II No. 8 - Federal Ministry of the Interior improves transparency of the Federal Government’s sponsoring reports

Based on our recommendation, the Federal Ministry of the Interior intends to disclose the benefits granted by sponsors in favour of the Federal Agency for Technical Relief more specifically in the Federal Government’s sponsoring reports. This will enhance transparency in connection with sponsoring.

Sponsoring is the way in which private entities support Federal Government operations. Every two years, the Federal Ministry of the Interior submits a report to Parliament and the public about the sponsoring of Federal Government operations by private entities (Federal Government’s sponsoring report).

The goal is to achieve as much transparency as possible.

We audited sponsoring in favour of the Federal Agency for Technical Relief. We found that, in most cases, the sponsoring report named associations formed to support the activities of the Relief Agency as donors. These non-profit associations have been set up under private law. They are not part of the Relief Agency.

In many cases, private enterprises gave vehicles or other equipment to the support associations that passed them on to the Agency. The sponsoring reports did not disclose those private enterprises. Moreover, the Agency often used equipment made available to it free of charge by private third parties in addition to its own equipment. The Ministry did not disclose such benefits in the sponsoring report either.

We acknowledged the commitment of associations supporting the operations of the Relief Agency. However, we expressed concerns about the fact that this reporting practice makes it impossible for Parliament and the public to identify the donors. This contravenes the requirement of transparency.

In response, the Agency and the Ministry promised to complement the sponsoring reports and name the donors who give benefits worth more than €5,000 through support associations. Moreover, they would disclose loans of equipment.

We consider the complementing of the reports as some progress since it enhances transparency.

 

2017 Report - Curtailment of the German SAI’s audit mandate in the field of banking supervision and at financial institutions

In its report dated 18 November 2016, the European Court of Auditors stated that the scope of its audit mandate regarding significant financial institutions is not comparable to the national mandate the German SAI had before. In the course of its audit, the European Court of Auditors had fundamental difficulties in accessing documents of the European Central Bank.

Following the German SAI’s recommendation, the Budget Committee of German Parliament affirmed its intent to make the point for extending the audit mandate of the European Court of Auditors. The aim is to achieve, also at the European level, a high quality audit and oversight standard comparable to the standard ensured nationally by the German SAI with a view to ensuring comprehensive external audit.

 

2015 Annual Report – spring report - No. 2 - Federal Ministry of Justice and Consumer Protection omits corruption prevention in legislative procedures

No effective anti-corruption measures have been in place in those sections of the Ministry which are responsible for drafting legislation. It did not comply with the obligation in force since 2004 to review all areas of activity for potential corruption risks and to take preventive measures where necessary.

Cases of corruption may fundamentally weaken the trust in the integrity and capability of the public administration. The Federal Government’s Anti-Corruption Directive therefore requires all administrative entities to check, at regular intervals or as warranted,

• which areas of activity are especially vulnerable to corruption and

• which countermeasures may be necessary (e.g. cross-check procedures, greater transparency in decision-making).

The Ministry came to the conclusion that the preparatory work for legislation was in no way vulnerable to corruption and that no countermeasures were required in this respect. According to the Ministry, all activities of the sections responsible for drafting legislation were “obviously not particularly vulnerable to corruption”. The Ministry argued that, while its sections frequently influenced the content of the legislation, it was Parliament that formerly passed the law.

We cannot concur with this opinion. It is true that federal statutes are passed by the lower house of the German Parliament before they are sent to the upper house. However, parliamentary approval does not generally rule out a particular vulnerability to corruption in the Ministry’s sections in charge of preparing legislation. The Bills introduced by the Federal Government in Parliament are usually drafted in the Ministry’s sections. Precisely during this stage, the relevant section bears a high degree of responsibility. The leaking of information may give unauthorised third parties a knowledge lead and may decisively influence the public or parliamentary debate.

We therefore urged the Ministry to review without delay the vulnerability to corruption of all areas of activity of the sections responsible for drafting legislation. The Ministry promised to start the review immediately. We expect the review to be carried out speedily, with sound methodology being applied. The result of the review needs to be documented in a transparent way.

 

2014 Annual Report – spring report No. 1 - Decommissioning of air-raid shelters lack a structured approach

The Federal Interior Ministry is arranging for decommissioning, dismantling or selling all 1,300 public air-raid shelters. In order to carry out the pertinent transactions efficiently in terms of nature, scope and timing, it must obtain a complete overview of the condition, legal status and costs for the maintenance and dismantling of all public air-raid shelters.

The Federal Government maintains public shelters in order to protect the population in a state of defence or tension. Up to the 1990’s, the Federal Government spent €1.1 billion on the construction of public air-raid shelters. Additional expenditure of €100 million was incurred for the furnishing and technical installations and another €100 million for maintenance. In 2007, the Ministry decided to decommission the public air-raid shelters. This includes measures such as dismantling or selling the shelters and decommissioning wells and technical installations. The Ministry justified its decision by arguing that, given the damage and very short warning time to be expected in case of a military attack, the public shelters cannot afford protection. Up to now, the Ministry has not yet informed Parliament about the consequences and costs of its decision.

According to estimates made in 2008, the Federal Government will have to spend up to €60 million for dismantling the shelters. The Ministry has not obtained an overview of the conditions and legal status of the public shelters. It has not developed an overall decommissioning strategy. For instance, no regulations have been developed as to which costs the Federal Government will have to bear when shelters or wells are dismantled. In practice, this has already resulted in large differences of the dismantling costs of similar structures.

We criticised the failure to inform Parliament. We have asked the Ministry to obtain a complete overview of the condition and legal status of the shelters. On this basis, it should plan the decommissioning operations in terms of type, scope and timing and should estimate the costs.

The Ministry announced that it would inform Parliament about the decommissioning during the 2014 budget deliberations. It rejected compiling a full inventory for basing plans on a sound legal footing and for cost estimates of the proposed project.

With a view to the assessment of the changed security situation, the budget funds spent on building the shelters and the considerable costs of their decommissioning, we consider Parliament needs to be involved. Furthermore, the Ministry will have to show how the shelters can be commissioned in an expedient and cost-effective way.

 

2014 - Report on the proposed implementation of harmonised European Public Sector Accounting Standards (EPSAS) in the Member States of the European Union

The European Commission plans to introduce a set of harmonised and binding European Public Sector Accounting Standards (EPSAS) based on accrual accounting. Supplementary to the status report on the relevant facts and figures developed by the Federal Ministry of Finance (Budget Committee Paper 18/0027), the German Supreme Audit Institution (Bundesrechnungshof) advises the Budget Committee on the matter. In the present report, the Bundesrechnungshof discusses unresolved issues, chances and risks associated with the proposed EPSAS implementation.

Apr 02, 2014

0 Executive Summary
The European Commission plans to introduce a set of harmonised and binding European Public Sector Accounting Standards (EPSAS) based on accrual accounting. Supplementary to the status report on the relevant facts and figures developed by the Federal Ministry of Finance (Budget Committee Paper 18/0027), the German Supreme Audit Institution (Bundesrechnungshof) advises the Budget Committee on the matter. In the present report, the Bundesrechnungshof discusses unresolved issues, chances and risks associated with the proposed EPSAS implementation.

0.1 Situation at European level

  • In order to enhance the quality and comparability of reportable financial and statistical data of the public sector, the European Commission aims at introducing EPSAS in all EU Member States. By doing so the Commission hopes to reduce expenditures on the European Statistical System (see item 2.1).
  • So far, the Commission has not considered any alternative option to EPSAS implementation. A study on costs and benefits of EPSAS is expected by mid2014 (see items 2.2-2.4).
  • Germany on its own would not be in a position to thwart European framework legislation on EPSAS governance as proposed by the Commission. It can also not be ruled out that the EU Member States may have little influence on the adoption of individual EPSAS (see item 2.5).


0.2 Situation in Germany

  • In Germany, the introduction and implementation of uniform accounting standards would affect some 17,500 individual public budgets at all three government levels and social security bodies. This would entail a major collective effort (see item 3.1).
  • Statistical data reported from Germany have so far largely complied with the quality requirements of the European System of national and regional Accounts (see item 3.2).


0.3
Introducing uniform accounting standards involves significant risks. These include cost risks and the risk of temporarily deteriorating data quality (see item 4), particularly in the current financial crisis.

0.4
The Bundesrechnungshof has compiled

 

Good Practice Note 01/01: Principle of self-insurance pursuant to item 11 of the Administrative Regulations on Art. 34 Federal Budget Code

Principles

(1) As a matter of principle, risks of damage to persons, property and assets of the Federal Government should not be insured (principle of self-insurance).

(2) Where exceptions are made from this principle of ‘self-insurance’, prior approval from the Federal Finance Ministry shall be sought. The cost-effectiveness of taking out insurance has to be proven in two steps:

1. Why is insuring that risk cost-effective for the Federal Government?

2. Which of several offered insurance policies is the most cost-effective?

(3) The principle of self-insurance does not apply where the Federal Government is obliged by statute or local by-law to take out insurance.

Background

Pursuant to item 11 sentence 1 of the Administrative Regulations on Art. 34 Federal Budget Code, risks of damage to persons, property and assets of the Federal Government are not to be insured (government is its own insurer). Where damage occurs, the related expenditure is borne from the federal budget. The principle of ‘non-insurance’ is based on the notion that, due to the large number of people and objects, risk is spread out evenly in line with the ‘law of large numbers’. By refraining from taking out insurance cover, the profit and administrative cost components of the insurance premiums can be saved.

The principle of self-insurance applies to the federal departments and agencies. It also has to be observed by non-departmental federal bodies where legal provisions, e.g. Acts of Parliament, charters or financial management regulations make reference to the provisions of the Federal Budget Code. Pursuant to item 1.4 of the Auxiliary Terms and Conditions for institutional grants, the same applies to recipients of federal grants where they are mostly financed from public funds. In contrast to the federal administration, these grant recipients may also insure risks of damage to persons, property and assets where parties to a contract make this an absolute pre-condition for entering into the contract.

Pursuant to item 11 sentence 3 Administrative Regulations on Art. 34 Federal Budget Code, exceptions from the principle of self-insurance require the consent of the Federal Finance Ministry.

In the years 2010-2014, we studied cases in which federal departments and agencies or recipients of institutional grants that receive at least 50 per cent of their funding from public resources had insured risks. We developed the following findings.

(1) Some federal entities and grant recipients were not familiar with the principle of self-insurance and insured potential damage in contravention of the general rules. As a rule, the federal entities and grant recipients did not carry out the necessary efficiency appraisal during the planning stage before taking out insurance cover. The efficiency appraisals that precede invitations to tender have to prove that taking out insurance cover results in good value for money for the Federal Government. The subsequent invitation to tender merely identifies the most cost-effective way of procurement for an insurance that has been identified as providing good value for money. In a number of cases, the authorities only assessed whether taking out insurance cover was cost-effective within the remit of their government department. The results may differ where e.g. an authority takes out comprehensive insurance cover for vehicles, makes the vehicles available for use by other authorities and charges the insurance costs to them.

In a number of cases, the authorities did not really know which persons or equipment come within the Federal Government’s domain. There were uncertainties e.g. in case of leased vehicles. In our opinion, application of the principle of self-insurance is not contingent upon the equipment being federal property. Rather than that, the decisive criterion is that the Federal Government has actual control of the equipment. As a rule, this only requires actual possession. Where the Federal Government has leased vehicles, they are to be considered as federal chattels.

(2) The Federal Finance Ministry was often not informed that insurance cover had been taken out. The reasons given by federal departments and agencies for this omission, e.g. shortage of staff, avoiding legal disputes or inadequate knowledge of federal budget law did not justify taking out insurance cover without the consent of the Federal Finance Ministry. Most of the applications submitted to the Finance Ministry for permitting an exception from the principle of self-insurance, did not include any proof that taking out the insurance cover was cost-effective for the Federal Government.

Most of the applications submitted to the Federal Finance Ministry seeking permission for derogation from the principle of self-insurance lacked proof of the cost-effectiveness for the Federal Government of taking out the respective insurance cover.

(3) Where insurance cover is obligatory by virtue of law or local by-law, the principle of self-insurance does not apply. However, there is no clear legal definition of the term ‘local by-law’. This resulted in uncertainties especially for federal entities and grant recipients that are active abroad. These often justified taking out insurance cover by arguing that doing so was customary in the foreign place concerned. We therefore recommended that the Federal Finance Ministry issue detailed explanations on the term ‘local by-law’.

Notes

In its budget management circular 2014, the Federal Finance Ministry repeated and complemented its 2012 guidance on self-insurance:

  • Pursuant to item 11 sentence 3 of the Administrative Regulations on Art. 34 Federal Financial Regulations, derogations from the principle of self-insurance require the consent (prior approval) of the Federal Finance Minister as the minister responsible for the budget.
  • The principle of self-insurance generally also applies to recipients of institutional grants (cf. item 1.4 of the Auxiliary Terms and Conditions for institutional grants).
  • Where several insurance options are considered, the first step required should be to examine – and document – whether insurance to cover a specific risk is to be taken out at all. Only the second step are considerations about which of several insurance policies is the most cost-effective for the Federal Government. Applications by budget officers for permission of exceptions need to be addressed to the respective ‘shadowing division’ of the Budget Directorate-General. All entities in question have to justify the considerations and reasons underlying the decision to derogate from the self-insurance principle.
  • Pursuant to item 11 sentence 2 of the Administrative Regulations on Art. 34 Federal Budget Code, the principle of self-insurance does not apply where insurance is obligatory by virtue of statute or local by-law. The assessment whether insurance is obligatory by virtue of a local by-law shall exclusively be governed by legal reasons. The existence of a ‘local custom’ calling for insurance cover cannot justify derogation.

 

The Federal Finance Ministry requested future compliance.

 

2012 Annual report No. 81 - Inadequate contract management of real properties sold at reduced prices

The Institute for Federal Real Estate did not sufficiently monitor whether cities and municipalities meet their contractual obligations when they have acquired federal properties at a reduced price. Therefore, the Institute was unable to claim additional payments. In one case, it waived a claim of €2.3 million in order to avert the threatening cancelation of a zoning plan.

In the years 1991-2004, the Federal Government sold properties to cities and municipalities at reduced prices. These local authorities entered into contractual obligations to use the properties for specified purposes within an agreed period, e.g. for building schools. The Institute for Federal Real Estate did not sufficiently monitor this. Therefore it was unable to demand from the purchaser the payment of the full difference between the reduced selling price and the full selling price. Purchasers must pay this difference, if they do not appropriately use the properties for the agreed purposes.

15 years after the purchase of a property, a municipality had still not used the premises for building a school. Under a lump sum arrangement, the Institute only demanded an additional payment of €300,000, considerably less than the difference between the reduced price and the full price. By waiving a claim of €2.3 million, the Institute hoped to avert potential disadvantage to another project within the municipality. Concerning this latter project the Institute had not exercised its right to build during seven years. Therefore, the municipality was able to threaten the Institute with cancelling the zoning plan without any compensation.

We demanded that the Institute improve its contract management. The Institute has now reinforced its monitoring of the purchasers‘ compliance with the specified use. It already demanded additional payments from several municipalities and received €624,000 from one of them.

The Institute pointed out that, without agreeing to the lump sum arrangement, it would have run the risk of losing €4 million, and argued that it could never have asserted the calculated additional payment. Therefore, its decision to waive a claim of €2.3 million had been justified.

We acknowledged that the threatening loss in the range of millions of euros may justify the lump sum arrangement from hindsight. However, the Institute, due to its hesitant action, is to blame for having weakened its own bargaining position. We therefore demand that, in future, the Institute react early and consistently whenever cities and municipalities do not comply with agreements about the use of a property.

 

2012 Annual report No. 30 - Federal Employment Agency must adopt a more broadly based approach to managing its office space

The Agency steered its office space only by means of a single key indicator. When calculating the indicator, it did not take all office space into account. It also failed to take regard to costs related to individual properties. Thus, it has generated a distorted picture about the use of office space and its cost. The Agency needs to broaden the basis for its space management.

The Agency steers its office space via an indicator. This is calculated by determining the ratio between net office space and the number of persons to be accommodated. It used this indicator to determine whether it had reached its office space reduction goals.

We found that the Agency did not take all office space into account when calculating this indicator. Furthermore, its space management did not take regard to costs related to individual properties, e.g. rents or operating costs. Moreover, it did not distinguish between new and already existing buildings, although it had set separate targets for these.

We demanded that the Agency take all office space into account when calculating the indicator. Furthermore, it should use additional indicators that reflect the costs related to individual properties and distinguish between new and already existing buildings.

We expect the Agency to improve its space management. It has to broaden its basis for steering its office space and to calculate the relevant indicators on complete bases and in a transparent way.

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