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2013

ANNUAL REPORT ON FEDERAL FINANCIAL MANAGEMENT Abridged Version

BUNDESRECHNUNGSHOF (Supreme Audit Institution of the Federal Republic of Germany)

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C o n t e n t s

Introduction

Part I (General financial management) Financial audit of the federal accounts for FY 2012 Trends in federal public finance

Part II (Cross-boundary and government-wide audit findings)

Part III (Development of departmental budgets and department-related audit findings) Federal President and Federal President’s Office The Two Houses of Federal Parliament Federal Chancellor and Federal Chancellery Federal Foreign Office Federal Ministry of the Interior Federal Ministry of Justice Federal Ministry of Finance Federal Ministry of Economics and Technology Federal Ministry of Food, Agriculture and Consumer Protection Federal Ministry of Labour and Social Affairs Federal Employment Agency Pension Insurance Federal Ministry of Transport, Building and Urban Development Federal Ministry of Defence Federal Ministry of Health Federal Ministry for the Environment, Nature Conservation and Nuclear Safety Federal Ministry for Family Affairs, Senior Citizens, Women and Youth Federal Constitutional Court Federal Ministry for Economic Cooperation and Development Federal Ministry of Education and Research Federal Debt General Fiscal Administration Activities and Budget of the German SAI

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2013 Annual Report

Introduction

1 Subject of the report Germany’s Supreme Audit Institution (SAI) audits the entire financial management of the Federal Government including federal off-budget funds and industrial or trading funds (Art. 88.1 German Federal Budget Code). Where the result of its audit may be significant for granting discharge to the Federal Government in respect of the budget and capital accounts, the SAI reports to the two Houses of Parliament (Art. 97.1 German Federal Budget Code). According to Art. 97.2 German Federal Budget Code, special emphasis is put on the following questions: • Do figures stated in the budget and capital accounts tally with those stated in the relevant accounting documents? Are revenue and expenditure duly backed up by vouchers? • In what significant cases did the audited federal departments and agencies not comply with the underlying rules and principles of financial management? • What are the key results of the audit on the Federal Government’s management of its shareholdings in businesses incorporated under private law? • What future action do auditors recommend? The annual report deals with the Federal Government’s revenue and expenditure, assets and liabilities. The report may address all measures that have a financial impact on the federal budget. When reporting on our audit findings, we also comment on the trend in federal financial management. Moreover, we provide key financial data and information on individual departmental budgets. The purpose of our departmental budget items is to increase transparency for parliament and understanding of the general public and to place our audit work in the relevant financial management setting. In our capacity as external audit body, we do not evaluate policy decisions that comply with the law as it stands. For instance, it is not our task to assess the merits of paying certain grants. Nevertheless, we can audit and report on whether the facts and assumptions on which the policy decision is based are accurate and whether the grant-funding has led to the intended outcomes. We may recommend legislative amendments, if our audits have generated information indicating that existing legislation does not lead to the outcomes intended by the Legislature. Thus, we meet our statutory duty to point out in our annual report what action to recommend for the future (Art. 97.2 no. 4 German Federal Budget Code). We thereby also comply with the Parliament’s request to inform the Parliamentary Appropriations Committee about audit findings that are of importance for proposed legislative projects.

2 Procedure for drafting and adopting the annual report The annual report is based on our audit findings and deliberations and on the advisory work of the SAI’s President in his capacity as Federal Performance Commissioner. They are compiled in accordance with a structured procedure. The German SAI sends a draft of each annual report item to the respective audited bodies, giving them the opportunity to comment. This part of the procedure especially serves to once more verify the audit evidence which, as a rule, our auditors have already discussed with the audited bodies during the preceding audit exercise. Where opinions about the facts and figures presented differ, this is expressly stated in the annual report. Where the bodies concerned have expressed divergent opinions as to the conclusions drawn, these opinions are also stated in the annual report. The annual report is adopted by the SAI’s Board (Art. 14.1 no. 2 Bundesrechnungshof Act). After that, the SAI’s President communicates them to the two Houses of the German Parliament and to the Federal Government and presents them to the general public. Our annual report is a major basis for the annual parliamentary discharge procedure when the two Houses of Parliament individually grant discharge to the federal government for annual financial management (cf. Art. 114.1 Basic Law). The procedure is based on the annual accounts to be submitted by the Federal Ministry of Finance on all

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federal receipts, expenditures, assets and debt. Our annual report supplies relevant information to Parliament on the shortcomings found in the annual accounts and financial management of the previous financial year which they need to consider in their decision-making.

Figure 1

Annual reporting procedure

Submission Parliament B Annual report u Presentation Public n d Board e s Comment r e Draft annual report Transmission c h Audited n body u Comment n Audit findings g Audit opinion s

The Bundestag (the directly elected Lower House of the German Parliament) passes on our annual report to the Appropriations Committee, which has a leading role in the deliberation. The Appropriations Committee in turn passes the report to a sub-committee, the Public Accounts Committee. The resolutions adopted are communicated to the Appropriations Committee to prepare the decision on discharge incumbent on the lower House of Parliament. The resolution on recommended action adopted by the Appropriations Committee also includes the demand addressed to the Federal Government to implement the decisions made in our annual report, to introduce or pursue efforts to enhance efficiency and to report on the progress made in due time. This is to ensure that the results achieved can be duly taken into account in the budget deliberations. When deciding on granting discharge, the Bundestag plenary session places reliance on the recommended action included in this resolution. During the parliamentary procedure for granting discharge to the Federal Government, our annual report may prompt the Bundestag to impose requirements on the Government (Art. 114.2 Federal Budget Code) or expressly disapprove of specific matters under scrutiny (Art. 114.5 Federal Budget Code).

3 Topicality The scope of the annual report is not limited to FY 2012, for which a grant of discharge is sought. It may also cover subsequent or preceding financial years (Art. 97.3 Federal Budget Code).

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Drafting the annual report requires some lead time. This is needed especially in order to take into account audited bodies’ comments on the draft report items. Timelier reporting is the result of joint reflection by the Public Accounts Committee and the German SAI. To reduce this time lag, we developed supplementary spring reporting. The findings of federal financial management generated after the conclusion of the traditional annual reporting process are communicated to the Public Accounts Committee for deliberation early in the following FY. This new procedure provides a more up-to-date basis for the decision on granting discharge for the last but one FY to the Federal Government which is scheduled for June each year.

4 Structure of the annual report The annual report on federal financial management consists of three parts: The General Part of the annual report (Part I) sets forth our audit findings on federal budget and capital accounts for FY 2012 and findings on trends in federal public finance during the medium-term financial planning horizon (2013- 2017). This part also deals with the impact of the economic and financial crisis on the federal budget. Part II highlights audit findings not closely associated with receipts or expenditure items in individual departmental budgets. Such findings may concern, for example, topics on which audit focus has been placed for one year and that have been investigated as cross-cutting issues. In this part, we also report on audit findings produced in government- wide audit work on public sector management. We also designate the pertinent federal government department having lead responsibility for a matter which should in our view take leadership in addressing any shortcomings stated. Part III reports on our audit work on individual departmental budgets in chronological order of the federal budget. The reporting items are classified as A items referring to budgetary trends, B items deliberated by the Public Accounts Committee or C items, i.e. other audit and advisory findings. Each reporting item has the following structure: first briefing information is presented on the major revenue and expenditure items, commitment authorisations and staffing costs. Then, data on the budget structure and recent trends is given and audit findings are presented that we have discussed with the audited bodies (A items). Our comments on the individual departmental budgets focus on the 2012 budget, for which the Federal Government has to obtain discharge from Parliament. However, they also refer to current trends and to budget planning for FY 2014. Nevertheless, owing to the general elections that took place in September 2013, the 2014 draft budget is subject to discontinuity (Art. 125 of the German Parliament’s Standing Orders) and has to be introduced anew during the life of the new Parliament. Therefore, our analysis focuses on long-term trends and the structural aspects of the departmental budgets as laid down in the draft budget by the previous Federal Government. Apart from that, major audit findings are reported on cases on which no agreement has been reached between the German SAI and the audited body. Those cases are usually submitted to the Public Accounts Committee for deliberation and decision-making (B items). As a rule, the annual report items on other results of audit and advisory work do not need any further parliamentary endorsement. These items include cases where our audit recommendations have been followed. These reporting items also cover advisory work done by the German SAI’s President in his ex officio capacity as Federal Performance Commissioner and advisory work pursuant to article 88.2 Federal Budget Code (C items). All reporting items in parts II and III are supplemented by a note indicating to which of the ABC categories they belong. Report items belonging to categories B and usually also C have a standard structure: A summary of the contents (XX.0) is followed by a presentation of the audit evidence (XX.1), the conclusions drawn from it (XX.2) and the comments of the relevant authorities (XX.3). The last section presents our final evaluation and, where appropriate, our recommendations and suggestions (XX.4). Executive summaries on reporting items are included in the blue pages.

5 Impact of the restructuring of the federal budget on our annual report Key issues addressed especially in Part I of our annual report and the comments on the individual departmental budgets (Part III, category A) are the annual federal budget and the budget accounts. Beginning with the 2013 draft budget, the Federal Finance Ministry has started to restructure the departmental budgets in order to achieve greater transparency in the presentation of expenditures and revenues. Therefore, programme expenditures are to be highlighted more strongly. In the 2013 federal budget, the new structure has been introduced for departmental budgets

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08, 09 and 10. The target is to restructure all departmental budgets – with the exception of 32 and 60 – on or before the day on which the Federal Government’s second draft of the 2014 federal budget is introduced. In the course of restructuring, all titles will be transferred to new chapters; in a number of cases, several titles will be merged into a new title. As a result, the target figures in the draft budget are no longer readily comparable with the estimates and actual outcomes stated in the budgets and budget accounts for previous years. In order to facilitate comparison between the key expenditure items addressed in our comments on departmental budgets, the relevant estimates for FYs 2012 and 2013 are presented in the tables in accordance with the new (2014) structure of chapters and titles, without regard to the structure of chapters and titles pertaining to FYs 2012 and 2013.

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Summary

Part I General financial management

1 Financial audit of the federal accounts for FY 2012

As provided for by Art. 114.2 of the German Constitution, we audited the regularity of the annual accounts. In doing so, we did not find any variances significant for the discharge procedure between the figures stated in the accounts and in the underlying records. In budget execution, expenditures totalled €306.8 billion and thus where lower than estimated by €4.8 billion. Total revenues1 exceeded the budgeted amount by €0.8 billion. At €22.5 billion, net new borrowing was by €5.6 billion lower than budgeted. The new constitutional debt rule, which was binding for the first time in 2011, was complied with. The volume of commitments entered into totalled €123.6 billion. By the end of FY, the Federal Government and its off-budget federal entities had granted guarantees in the amount of €462.6 billion. The Federal Government’s net worth was €215 billion, including off-budget federal entities. Liabilities (including contingent liabilities for public service retirement and health care benefits) amounted to €1,699 billion.

1.1 Status of discharge procedure Concerning FY 2011, the two Houses of Parliament granted discharge. The respective resolutions were based on the 2011 annual accounts and our 2012 annual report on federal financial management including the supplementary audit findings presented in April 2013.

1.2 Budget and capital accounts 2012: no irregularities found Since FY 2009, the Federal Ministry of Finance has presented the budget and capital accounts separately rather than as an aggregated annual account. In conjunction with its field offices, the German SAI conducted sample audits to verify the regularity of these accounts. We did not find any deviations significant for the discharge procedure between the amounts stated in the accounts and those in the underlying records. On the basis of samples, we checked the extent to which federal budget revenues and expenditures were properly supported by vouchers. A mathematical-statistical method was used to do so. 1,304 of the individual booking entries recorded in the Federal Government’s accounting system were chosen by random selection. We found significant errors in 4.37 per cent of the audited booking entries. This permits the conclusion that the proportion of payments not properly supported by vouchers is similar. Accordingly, the individual booking entries recorded in the accounting system were duly supported by back-up documents in most cases.

1.3 Budget execution and supplementary budgets The 2012 Budget Act of 22 December 2011 provided for revenues and expenditures of €306.2 billion. The Federal Finance Ministry’s net borrowing power was limited to €26.1 billion. According to the new debt rule enshrined in the German Constitution since 2011, the general ceiling for net borrowing was €40.5 billion. Due mainly to the obligatory payment of the first two tranches towards Germany’s share in the stock capital of the European Stabilisation Mechanism and the increase of the capital stock of the European Investment Bank, two supplementary budgets had to be adopted in the course of FY 2012. Under the first supplementary budget, the estimated revenues and expenditures totalled €312.7 billion with net borrowing of €32.1 billion. Under the second supplementary budget, revenues and expenditures were estimated at €311.6 billion with net borrowing of €28.1 billion.

1 without proceeds from net borrowing and seigniorage

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1.4 Overview of financial statements on budget execution Budget execution developed more favourably than expected. With €306.8 billion, actual expenditure fell short by €4.8 billion of the €311.6 billion stated in the second supplementary budget. Revenues (excluding net new borrowing and seigniorage) were by €0.8 billion higher than provided for in the second supplementary budget. The new debt rule (stipulated in Arts. 109, 109a, 115 and 143d of the German Constitution) was applied for the first time in 2011. This rule is to ensure long-term sustainability of the federal and state budgets. The new debt rule was complied with both by the budget estimates and by the supplementary budgets, and by budget execution. The actual amount of structural net borrowing in FY 2012 was €8.5 billion, equivalent to 0.34 per cent of gross domestic product (GDP). Thus, structural net borrowing in FY 2012 was already lower than the ceiling of 0.35 per cent of GDP prescribed as from FY 2016. Revenues (excluding net new borrowing and seigniorage) were by €5.4 billion or 2.0 per cent respectively higher than in the previous year. Tax revenues increased by €8.0 billion, while other revenues declined by €2.6 billion. In 2012, total budgeted expenditure increased by €10.5 billion or 3.6 per cent compared to the previous year. This increase is essentially attributable to additional expenditure provided for in the first and the second supplementary budget.

1.5 Details of revenues and debt As from 2010, the portion of the profit of the Bundesbank (German central bank) that exceeds the relevant federal budget estimate and is not needed to repay the debts of the Redemption Fund for Inherited Liabilities is paid into the Investment and Redemption Fund. Revenues from Bundesbank profits totalled €0.6 billion, which was equivalent to the respective budget estimate. Thus, it was impossible to retire any debts of the Investment and Redemption Fund in 2012. The 2012 Budget Act conferred borrowing powers of €28.1 billion for covering expenditures. In addition, there was a residual borrowing authorisation of €31.1 billion from the previous year. Since the borrowing powers conferred by the 2012 Budget Act were not fully exhausted, it was not necessary to use the residual borrowing authorisation from 2011. It lapsed with the expiry of the year 2012. Residual borrowing powers from 2012 in the total amount of €5.6 billion are available for the 2013 budget. As disclosed by the capital account, the Federal Government’s credit market liabilities totalled €1,114.8 billion at the end of FY 2012. Other Federal Government reports and publications give differing figures. As from 2011, the Federal Finance Ministry’s financial reports have included a comparison of the differing disclosures accompanied by reconciliation accounts and explanations. Moreover, the Ministry refers to the explanations in its financial report in all relevant publications.

1.6 Excess and extraordinary budget expenditure In FY 2012, the Federal Government incurred excess expenditures of €102.9 million and extra-budgetary expenditures of €2.3 million. The aggregate amount is equivalent to 0.03 per cent of budgeted total expenditures. At €105.2 million, the amount is significantly lower than in the previous year, when it totalled €2.4 billion. All excess and extra-budgetary expenditures were set off by expenditure reductions on other budget items. In five cases, government departments exceeded the appropriated expenditures without approval by the Federal Finance Ministry. This concerns expenditure in the aggregate amount of €10.9 million. In view of Parliament’s power to control spending, we expect all financial management officers in the ministries and subordinate agencies to prevent excess and extra-budgetary expenditure lacking approval by the Federal Finance Ministry.

1.7 Unexpended balances The amount in which the ministries recognize unexpended balances from the past financial year is usually not yet known when the budget account is drawn up. Here we can therefore only present an overview of the past FY’s expenditure authorisations that are eligible for carry-forward and report on the unexpended balances recognized in the previous year. At the end of FY 2011, €17.2 billion were eligible for carry-forward. Out of this amount, the ministries recognised unexpended balances of €9.3 billion, i.e. €2.6 billion more than at the end of FY 2010.

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In FY 2012, €12.3 billion of expenditure authorisations that qualified for carry-forward were not used. As a matter of principle, this amount is available for recognising unexpended balances. It is €4.9 billion lower than in the previous year. A special feature of expenditure authorisations which come under devolved budget management is that, as a matter of principle, they need not be compensated for by savings in the relevant ministry’s own departmental budget. They are available without any time limit. The ministries recognised unexpended balances of €1.485 billion out of the €1.529 billion of expenditure authorisations that are eligible for carry-forward into FY 2012. According to this, the ministries want to have more than 97 per cent of the unused expenditure authorisations at their disposal in future years. In view of Parliament’s power to control spending, we expect all ministries to apply a rigorous standard when recognising unexpended balances. They may recognise such balances only if there is a concrete need for doing so.

1.8 Commitment authorisations The FY 2012 budget provided for commitment authorisations of €45.3 billion. Extra and extra-budgetary commitment authorisations of €3.4 billion were appropriated. Actual commitments made under these authorisations totalled €33.6 billion. The utilisation rate thus was 69 per cent. Even though utilisation increased over the previous year’s figure, we uphold our demand that commitment authorisations should only be budgeted in the amount actually needed. This is required by the principles of budget transparency and accuracy, efficiency and economy. As of 31 December 2012, payments to be made under commitments entered into still totalled €123.6 billion. Of the aggregate amount of commitments entered into, €35.7 billion refer to FY 2013 and €24.2 billion to FY 2014. These figures do not yet take into account new commitments made in FY 2013.

1.9 Guarantees Sureties, guarantees or other warrantees are instruments by which the Federal Government supports projects meriting assistance in terms of public interest. They also back up the Federal Government’s financial commitments vis-à-vis international financial institutions. The 2012 Budget Act had authorised the Federal Finance Ministry to grant guarantees up to an amount of €436.9 billion. In the previous year, this guarantee ceiling was €445.6 billion. At year-end 2012, the Federal Government had actually assumed guarantees in the amount of €335.6 billion. In addition, the Monetary Union (Financial Stability) Act authorised the Federal Finance Ministry to assume guarantees of €22.4 billion as collateral for loans from KfW (Germany’s development loan corporation). It used this authority in the full amount to guarantee loans to Greece. Under the Act on the Assumption of Guarantees in Connection with a European Stabilisation Mechanism of 22 May 2010, the Federal Finance Ministry was authorised to assume guarantees of €211 billion for financing operations carried out by the European Financial Stability Facility. The Ministry had used this authority up to €100.1 billion per year-end 2012.

1.10 Funds under devolved financial management Expenditure authorisations may be budgeted as funds for devolved financial management, if this promotes economical use. In contrast to other budget funds, they remain available for the specified purposes in future years without any time limit. If budget funds are brought under the devolved management regime, the amounts concerned need to be posted as expenditure and are thus stated in the budget account. However, they actually need not yet have been paid to third parties. This adversely affects the fair presentation of the accounts rendered by virtue of a constitutional requirement and thus also Parliament’s ability to control spending. For the first time, the Federal Finance Ministry included an aggregate overview over the balance of funds subject to the devolved management regime in the 2009 budget account. This balance totalled €931 million of funds belonging to nine departmental budgets at year-end 2012. Compared to the previous year’s €987 million, the aggregate balance decreased by €56 million, equivalent to 5.7 per cent.

1.11 Capital account The valuated federal assets including those of the off-budget federal entities totalled €215 billion at year-end 2012. Liabilities (including provisions) totalled €1,699 billion. These figures do not include assets and liabilities of federal bodies that constitute separate legal entities. Major assets, e.g. the federal real estate with infrastructure assets included and moveable assets are not yet recorded. Debts and liabilities are not fully stated either.

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We uphold our support of the plans of the Federal Finance Ministry to complement the federal capital account. In order to disclose intangible assets, moveable property and stocks, we recommend that the administrative regulations that govern bookkeeping on and accountability for the assets and liabilities of the Federal Government be speedily completed.

1.12 Off-budget federal funds The budget account discloses 26 separate property, special-purpose and trust funds of the Federal Government. To fund measures under the Act to Safeguard Employment and Stability in Germany, the Federal Government set up the Investment and Redemption Fund as off-budget federal entity in 2009. In the years 2009-2011, the Fund had an amount of up to €20.4 billion at its disposal to finance programmes to stimulate the economy, most of which were investments. On expiry of the Fund’s ‘active life’, its winding-up and redemption phase has started. Accordingly, the Fund’s expenditure in FY 2012 only consisted of €352.9 million in interest payments. According to the FY 2012 budget account, the Fund had revenues of €24.1 million from the refund of and interests receivable on grant funds used for other than the stipulated purposes. The resulting revenue deficit of €328.8 million was covered by proceeds from borrowing. The Financial Market Stabilisation Fund set up in response to the financial crisis was designed to help financial institutions to overcome liquidity shortages and to strengthen their equity capital base. The Fund is managed by the Federal Agency for Financial Market Stabilisation. The Fund was authorised to provide financial assistance up to 31 December 2010. The guarantees and capital injections granted up to that date continue to exist until expiry or repayment. In the subsequent years, the Legislature extended the deadline for funding applications. The latest extension was provided for by the Third Financial Market Stabilisation Act which entered into force on 1 January 2013. This enables the Fund to grant financial assistance up to year-end 2014. As of 31 December 2012, the volume of outstanding guarantees totalled €3.7 billion, i.e. 86.9 per cent less than in the previous year. Moreover, the Fund strengthened the equity base of financial institutions by capital injections, which totalled €18.8 billion at year-end 2012. The deficit accumulated since the establishment of the Fund totalled €21.5 billion on 31 December 2012. The loss will be carried forward until the Fund is wound up. Any loss remaining after the Fund’s winding-up will be shared by the Federal Government and the German states in the proportion 65:35, with the states bearing losses in the amount of up to €7.7 billion. Another off-budget federal entity, the Energy and Climate Fund, is to provide the resources for promoting an environmentally friendly, reliable and affordable energy supply and national as well as international climate change mitigation. To finance programme expenditure, the proceeds from auctions of tradable emissions allowances are to be allocated to the Fund. The prices for CO2 certificates in 2012 were lower than originally forecast and this led to a reduction of the Fund’s revenues. In response, the Federal Finance Ministry allocated only 0.5 billion of the originally budgeted €0.8 billion to the seven line ministries in charge of managing Fund resources.

In 2012, the uncertainty as to the amount of the Fund’s revenues from selling CO2 certificates led to planning uncertainty on the part of both the financial managers and the potential contractors. Up to now, we cannot see to what extent the partial segregation of the Fund’s resources from the federal budget leads to a better discharge of functions and more efficient financial management. To ensure the efficient, transparent and coordinated use of resources, it would be more expedient to state all resources in the federal budget. Against this background, we do not see any necessity to maintain the Fund.

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2 Trends in federal public finance – good prospects for a financial budget without net borrowing

2.0 The key estimates that provide the financial framework for the 2014 draft budget and the medium-term financial plan up to 2017 reflect the Federal Government’s expectation that the stable economic trend will continue. The 2014 draft budget estimates net borrowing at €6.2 billion. Up to 2015, annual net borrowing is to be reduced to zero. Increasing budget surpluses are expected for the years 2016 and 2017. The favourable estimates for key items of the budget are largely attributable to lower estimates of interest expenditure, expected higher tax revenues, lower expenditures on labour market policy and the reduction of the 2014 federal grant towards the Umbrella Health Fund. The improvement in key budget figures will be achieved without additional consolidation efforts. In our estimate, there are a number of financial burdens, planning risks and predictive uncertainties which might adversely affect the Federal Government’s favourable budgetary position and thus cast doubts on the feasibility of avoiding net borrowing as from FY 2015. Above all, these potentially adverse factors include the impact of the European sovereign debt crisis and further financial concessions of the Federal Government to the German states. Therefore, the Federal Government should use the continued stability of the economic situation to reduce its deficits and its high debt ratio.

2.1 Key budgetary figures and ratios up to 2017 The positive expectations concerning the economic trend have an impact on the key figures of the 2014 draft budget and the medium-term financial plan up to 2017. According to the 2014 draft budget, expenditures will decline by €14.6 billion compared to the estimate stated in the supplementary budget for 2013. This is attributable to low interest and labour market expenditure and the cancellation of the grant to the Reconstruction Aid Fund and of one annual tranche of capital otherwise payable by Germany towards the capital stock of the European Stability Mechanism (ESM). Tax revenues are estimated to increase to €268.7 billion. Net new borrowing is forecast to decline to €6.2 billion, while the 2013 target figure is €25.1 billion. The expenditures of the Energy and Climate Fund are budgeted outside the federal budget. The Fund’s separate budget calls for expenditures of €1.6 billion in 2014. Apart from revenues from CO2 emission rights trading, the Fund is for the first time to receive a €655 million grant from the federal budget. We uphold our opinion that the Fund requires critical assessment in terms of budgetary law and financial management. According to the medium-term financial plan, expenditures will rise to €308.1 billion up to 2017. If taking the redemption expenditure of the off-budget Investment and Redemption Fund into account, expenditures total €317.7 billion. Tax revenues in the period 2014-2017 are expected to increase by €40 billion, or 15.3 per cent compared to the 2013 target figure (by 2017). For the first time since 1969, the 2015 federal budget is not to include any net borrowing. For 2017, a €9.6 billion target surplus of revenues over expenditures has been scheduled. Compared to the previous medium-term financial plan, the key figures on net borrowing have improved for the 2014- 2016 period. The favourable development of key budget figures is larged attributable to significantly lower estimates of interest expenditure, expected higher tax revenues, lower labour market expenditure and the reduction estimated for 2014 of the federal grant to the Health Fund. Compared to the previous medium-term financial plan, estimated lower interest expenditure and higher tax revenues for the 2014-2016 budgets account for a €26 billion improvement. In contrast, the improvement of the financial balance (difference between revenues and expenditures) for the same period only amounts to €16 billion. The improvement of key budget figures will be achieved without additional structural consolidation efforts. A larger degree of consolidation would be quite possible. For instance, the measures provided for under the 2010 consolidation programme (‘future package’) have so far been implemented either not at all or only in part. This also is true for our recommendations on the modification of the VAT regime. Moreover, there are additional strains on the federal budget, i.a. as a result of the financial commitments made for repairing the flood damage. Further challenges result from a series of financial concessions made by the Federal Government to the states. In addition, there are long-term risks that derive from the consequences of the European sovereign debt crisis. Up to now, the impact of these risks on the federal budget has been limited.

2.2 Compliance with the debt restriction rule By 2016, the Federal Government must have reduced its structural new borrowing in equal steps to what will then be the binding borrowing limit of no more than 0.35 per cent of gross domestic product (GDP) (reduction path). According to the government draft, the 2014 federal budget is to result in a structural surplus of 0.08 per cent of GDP.

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Beginning with the 2015 budget, real surpluses are to be achieved, which are to be used to redeem debts incurred by the Investment and Redemption Fund. This clearly meets the debt rule requirements, even if the calculation of the reduction path – following our recommendation – would be based on actual net borrowing in FY 2010. Actual net borrowing should be significantly below the permitted borrowing limit in order to have sufficient leeway in case of an adverse financial trend and to be able to absorb new burdens without exceeding the borrowing limit. Concerning the application of the debt rule in budget execution, we wish to draw attention to the following aspects: • Based on the favourable results of budget execution in 2011 and 2012, the control account has shown a large surplus of €56.9 billion after only two years. In our opinion, such ‘credit notes’ are incompatible with the function of the control account. The Legislature responded to this assessment by amending Article 9 of the Act implementing the modification of Article 115 of the German Constitution to the effect that the cumulative balance of the control account will be cancelled at year-end 2015. This is to prevent that credit balances in the control account accumulated during the transitional period will be transferred to the ‘normal operation’ of the debt rule from 2016 onwards. • The figures for the cyclical component are negative for each of the years 2012-2016. The regular review and further development of the cyclical adjustment procedure should ensure that the procedure does not lead to an uninterrupted series of negative cyclical components beyond the economic cycle. Such an additional discretionary scope for new borrowing would not be consistent with the purpose of the debt rule of largely achieving a structurally balanced budget. • The payments from the federal budget to the ESM in the total amount of €21.7 billion are not taken into account for the purpose of calculating the deficit. It remains unclear whether these payments to the ESM will in the long run generate an equivalent growth of assets. Should the ESM Member States become obliged to pay up further portions of callable capital in order to cover losses of the ESM, such payments will have to be taken into account for calculating the deficit.

2.3 Top-down approach and decision on financial framework figures Since 2012, the Federal Government has drawn up its budget proposal by means of the top-down procedure. At the beginning of this procedure, the Federal Government adopts a financial framework with key figures for all departmental budgets and the medium-term financial plan. The ceilings for net borrowing set in the financial framework decision of 13 March 2013 were undercut both in the 2014 draft budget and the medium-term financial plan up to 2017. Based on the lessons learnt in three successive budget procedures, it appears that the top-down method is suitable to streamline the budget process and to set strategic targets early, taking regard to the borrowing limit. It remains to be seen whether the top-down method will also prove successful in case of an economic downturn.

2.4 Trend and structure of expenditures Social expenditure and interest expenditure are major items of the federal expenditure budget. Social expenditure has declined after its previous peak in 2010. However, according to the 2014 draft budget, social expenditure accounts for nearly one half of total expenditures. This is attributable mainly to increasing grants from the federal budget to the social security schemes (which have contribution-based budgets of their own) and the increase in federal funding of benefits and services that formerly had to be financed by the states and local authorities. The Federal Government’s financial contribution towards the costs of basic income support for senior citizens and pensions for beneficiaries with reduced earning capacity will amount to €28 billion in the medium-term financial planning period (2013-2017). The second-biggest spending block is interest expenditure. Taken together, social and interest expenditures are equivalent to more than two thirds of federal tax revenue. Until the end of the medium-term financial planning period, the share of investments (capital expenditure) will decline to 8 per cent. Expenditures for supporting the various retirement benefit schemes (statutory pension insurance, special schemes for federal workers and employees of the formerly government-owned railway, postal and telecommunications services, farmers and beneficiaries of special retirement benefit schemes that originated in the former German Democratic Republic) amount to more than €105 billion. This accounts for one third of the total federal expenditure budget. The major item in this category is federal grants of €82.5 billion to the statutory pension insurance system. Notwithstanding the previous pension reforms, payments from the federal budget to the pension insurance system will increase in the medium term due to the reduction of the contribution rate effective from 1 January 2013 and are estimated to reach more than €90 billion in 2017.

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Expenditure on labour market policy is disclosed in the federal budget and the separate budget of the Federal Employment Agency. The reduction of unemployment since the economic and financial crisis has had a mitigating effect on the trend in labour market expenditure. In spite of the abolition of the federal funding contributions to the cost of employment promotion and the simultaneous waiver by the Federal Government of the integration contribution previously charged to the Agency, the Federal Employment Agency is expecting a minor deficit for 2013. However, surpluses are expected to be achieved in the medium term. In the federal budget, labour market expenditure has dropped strongly from its all-time high in 2010. In the 2014 draft budget, the amount of this item has been estimated at €30.4 billion. This would be the lowest level since the 2004 labour market reform. The expenditure of the statutory health insurance scheme increased by 38 per cent between 2000 and 2012. Revenues from contributions did not keep up with this spending increase. In order to avoid deficits, the Federal Government has made increasing funding contributions to the scheme since 2004. The medium-term financial plan estimates the amount of the grants in the period 2013-2017 at €66 billion. A federal grant of €10.5 billion has been estimated in the 2014 draft budget. To stabilise the financial situation of the statutory health insurance scheme, the Statutory Health Insurance Financing Act and the Pharmaceutical Market Reorganisation Act were promulgated in early 2011. Together with the favourable economic trend, this has contributed to statutory health insurance budget surpluses in 2011 and 2012. It remains to be seen whether the efforts to sustainably stabilise the finances of the statutory health insurance scheme and thus to avoid at least an increase of the federal budget grant to this scheme will be successful. According to the 2014 draft budget, interest expenditure is to drop to €29.1 billion. Compared to the previous financial planning estimates, the reductions for the years 2014-2016 will total €20 billion. The reduction in interest expenditure already forecast in last year’s forward projection of the medium-term financial plan thus continues. The Federal Government continues to benefit from the all-time low in interest rates. However, an increase in the level of interest rates resulting in higher interest expenditure cannot be excluded and would have a considerable impact on federal interest expenditure due to the large volume of annual gross borrowing.

2.5 Trend and structure of revenues Tax revenues are by far the biggest source of federal revenues. There has been a continuing increase since 2010 (€226.2 billion). According to the 2014 draft budget and medium-term financial planning up to 2017, this trend will continue. For FY 2014, €268.7 billion have been budgeted under this item. Up to 2017, tax revenues are to reach the amount of €300.5 billion, thus for the first time exceeding the €300 billion level. These projections take into account the effect of the Fiscal Drag Reduction Act, which provides for the increase of the tax-free personal allowance. Since there is still uncertainty about the introduction of a financial transaction tax, no additional revenue from this has been included in the 2014 draft budget. It remains to be seen whether it will be possible to actually generate additional revenues of €2.0 billion from 2015 onwards as estimated in the medium-term financial plan. Notwithstanding the forecast increase of tax revenues in the federal budget, the Federal Government’s share in total tax revenues will decrease by approx. one percentage point compared to the 2011 figure until the end of the financial planning period. The supplementary federal grants paid under the vertical financial equalisation scheme have declined since 2008. According to the 2014 draft federal budget, they will total €10.4 billion. The major portion of these supplementary federal grants goes to the eastern German states and Berlin. The primary purpose of these supplementary federal grants for special needs is to compensate for extra burdens stemming from Germany’s former partition, the disproportionately low financial strength of local authorities and the costs of structural unemployment in the eastern German states. Although these grants from tax revenues are decreasing and will be phased out in 2019, the Federal Government’s financial commitments under Solidarity Pacts I & II remain at a high level. The 2014 draft budget estimates a decline of other revenues by €3.8 billion to €20.5 billion. This is mainly attributable to the reduced estimate for the proceeds generated by the sale of shareholdings and other capital assets of only 0.2 billion (2013 target: €4.4 billion). The medium-term financial plan does not estimate any significant amount of revenues from privatisations.

2.6 Net new borrowing New borrowing was necessary in the past to balance the successive annual budgets. Since the early 1990’s, the so- called borrowing ratio, i.e. the amount of net borrowing as a percentage of total expenditure, repeatedly exceeded 10 per cent. Even in years with normal or even favourable economic growth, the Federal Government’s net borrowing regularly was in range of tens of billions of euros. Last but not least to the stricter limitations imposed by the new debt rule, net borrowing as estimated in the 2014 draft budget is to be significantly lower. As from the 2015 federal budget, no net borrowing has been projected.

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2.7 Outstanding debt and debt service The Federal debts consist of core budget debt and debts incurred by the off-budget federal entities. At year-end 2012, aggregate federal debt totalled €1,287.5 billion of which €1,072.9 billion was part of the core budget and €214.6 billion of the off-budget federal entities. The current debt level is thus five times higher than in the early 1990’s. The large debt increase in 2010 is attributable primarily to the transfer of toxic securities of the bank Hypo Real Estate to a newly established resolution agency known as FMS Wertmanagement. An assessment of whether the financial market crisis will permanently increase the debt ratio can only be made after the completion of all financial assistance measures. The federal debt has not only increased in absolute terms but also in relation to Germany’s economic strength. As a result of growing debt levels, the Federal Government must borrow ever higher amounts in order to replace previous years’ loans falling due. According to the medium-term financial plan, annual gross borrowing will be in the range of €220 billion. In view of the current all-time low in interest rates, the federal budget is exposed to considerable risks due to interest rate fluctuations in the money and capital markets.

2.8 Guarantees Burdens and risks with a medium and long-term impact include indemnification risks from sureties, guarantees and other warranties assumed. The Budget Act significantly increased the aggregate ceiling for the assumption of guarantees in connection with the measures to avert the economic crisis. The 2014 Budget Act provides for a guarantee ceiling of €477.5 billion. Outstanding guarantees totalled €335.6 billion at year-end 2012. In addition to the guarantees authorised by the Budget Act, the Federal Government granted additional guarantees of up to €400 billion in favour of certain financial institutions. The Third Financial Market Stabilisation Act temporarily authorised new stabilisation assistance up to year-end 2014. The amount of guarantees given so far has been declining and totalled €1.1 billion in mid-2013. At the beginning of 2011, the Restructuring Fund was set up. It is to help stabilise financial institutions in distress. The Fund has been authorised to grant guarantees of up to €100 billion. This authority has not been used so far. Germany’s guarantee commitments in connection with the European measures to stabilise the euro and to secure the solvency of the euro area countries are not included in the ceiling authorised under the Budget Act. This covers the loans to Greece of €52.9 billion under the first assistance programme for that country. Lending of up to €60 billion is authorised under the European Financial Stabilisation Mechanism. In case of need, European Union loans are available to fund this lending. The time-limited special-purpose vehicle European Financial Stability Facility (EFSF) is to avert any threatening insolvency of the euro area member states. As collateral for refinancing in the capital market, the EFSF was granted guarantees of up to €780 billion from the euro area member states. As from 2013 and after an initial phase of parallel operation, the EFSF has been replaced by a permanent crisis fund, the European Stability Mechanism (ESM). The ESM was provided with an authorised capital stock of €700 billion. The ESM is financed from a mix of paid-in capital of €80 billion and callable capital of €620 billion. In the period 1991-2012, federal revenues from guarantees exceeded federal expenditures on compensation payments for defaults by €17.1 billion. However, this favourable financial result has to be seen in light of increased risks due to financial assistance under the euro rescue measures. The German share in the financial assistance granted so far totalled about €310 billion. This includes the maximum amount of German liability under the ESM. Whether and to what extent the risks assumed by giving guarantees will materialise as a burden on the federal budget will depend on the further development of the European sovereign debt crisis.

2.9 European fiscal rules and the national debt rule One result of the European debt crisis is that the Member States reinforced the monitoring and coordination procedures at the European level. Since 2011, various reform measures have been initiated. One element is the reformed Stability and Growth Pact with a series of European legal instruments designed to tighten fiscal discipline in the Member States. Other measures include a separate procedure for the surveillance of national economic policies, deeper fiscal coordination and monitoring under the European Semester arrangements and the fiscal compact. The medium-term fiscal objective set by the fiscal compact is that the structural deficit is not to exceed 0.5 per cent of GDP. The aggregated German public budgets met this target already in 2012. However, Germany’s public debt to GDP ratio is expected to be significantly higher than the reference value of 60 per cent, the forecast being 80 per cent of GDP at year-end 2013. Up to the end of the medium-term financial planning period in 2017, the ratio is to drop to 68.5 per cent and thus will comply with the debt ratio reduction targets laid down in the fiscal compact. The country-

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specific recommendations adopted by the European Council call on Germany to pursue a sound fiscal policy. In addition, the debt brake is to be implemented coherently in all German states. The Fiscal Compact Implementation Act amended the Budgetary Principles Act, imposing a 0.5 per cent of GDP ceiling for the aggregate structural deficit of Germany’s public sector. Moreover, the early warning system for preventing fiscal distress at federal and state level was complemented. The Stability Council as key agent within this early warning system has been given additional rights to monitor compliance with the deficit ceilings. Nevertheless, it has not been given powers to impose sanctions for non-compliance in order to give its recommendations greater weight. A targeted implementation of the budget monitoring procedure must be of special concern to the Federal Government, since the government has for years had proportionally higher deficits and debt ratios than states and local authorities. Additional financial burdens result from the government’s consolidation aids to five of the German states granted since 2011 with a view to support the introduction of the debt rule. Due to the financial concessions made to the states in the context of the national implementation of the fiscal compact, there seems to be no further scope for Federal Government action. Thus, the Federal Government should use estimated surpluses for consequently reducing the debt to GDP ratio in order to be prepared for future fiscal challenges.

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Part II Cross-boundary and government-wide audit findings

3 Legal provisions on the assignment of public functions to private individuals or entities

The Federal Ministry of the Interior has so far failed to lay down basic legal regulations for the assignment of public functions to private individuals or entities (arrangements known as concessions) This results in considerable weaknesses in administrative practice. We hold that it is necessary to provide guidance to federal departments and agencies to enhance quality assurance in connection with the granting of such concessions. The performance of certain public functions may be entrusted to concessionaires. These are private individuals or entities that discharge certain government functions. The purpose of granting such concessions is to have public tasks performed effectively and, above all, efficiently. This is possible especially where existing expertise and structures of the concessionaires are used. The granting of a concession requires an enactment. However, there is no overarching federal legislation on concessions. Concession authorisations and prerequisites for granting them are governed by various Acts of Parliament. In connection with various concessions granted, the governing legal provisions were ambiguous so that it was not clear whether the concession conferred public authority on the concessionaire. Therefore, one federal ministry was not certain as to whether concessions granted to private entities conferred public authority or not. The purpose of concessions was to avoid the enlarging of the departments or agencies. However, the necessary structures were then built up within the concessionaires. In one administrative procedure, a new organisation was set up first and then granted a concession. In another case, a federal ministry, after analysing the issue, concluded that granting concessions to private service providers generated good value for money. It remains unclear, whether federal expenditure was actually reduced by this arrangement. Transparent and competitive procedures need to be applied in the selection of concessionaires and the extension of concessions. Nevertheless, a federal ministry conferred administrative tasks similar to a nation-wide monopoly on a private sector contractor in 1986. When that individual retired in 2011, the concession was extended in favour of the retiree’s successor without inviting competitive bids. The disadvantage caused by the lack of general legal regulations becomes especially apparent in case of concessionaire’s misconduct. Claiming damages from the concessionaire requires a provision on recourse in the respective Act of Parliament. In most of the cases audited, such a provision did not exist. This means that, if damage occurs, it will eventually have to be borne by the taxpayer. We therefore recommended that the Federal Government clarify the legal concept of concession and provide relevant guidance to federal departments and agencies, thereby ensuring compliance and good performance and improving quality assurance. More legal certainty and clarity could be achieved by adopting a legal framework. Such overarching legislation would have to lay down fundamental provisions whose repetition in special enactments could then be dispensed with. Such overarching legislation would at least have to consist of a definition and the description of general prerequisites for granting a concession and rules for selecting concessionaires, overseeing their performance and provisions about liability. For instance, if an overarching enactment imposed general provisions on liability, these provisions would not have to be enshrined in each special enactment. The special enactments providing for the conferral of certain powers on concessionaires in specified circumstances could then lay down necessary supplementary provisions or intentional derogations from the overarching enactment. Therefore, the Federal Ministry of the Interior should consider what guidance needs to be given to federal departments and agencies to ensure compliance and good performance when granting concessions.

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4 Designing a fee system based on a legal framework for raising contributions

Fundamental issues of the law on contributions have not been clarified by federal legislation. Many regulations are inconsistent and incomplete. This has resulted in unnecessary bureaucracy and makes it difficult to levy contributions accurately and properly. Therefore, the law on contributions should be fundamentally overhauled in line with the example set by the structural reform of the federal law on fees. A clearer distinction should be drawn between contributions and other types of public charges and these various types of receipts should be more clearly presented in the budget. Contributions are levied for the potential use of public service or public amenity from all those who derive a specific benefit from the availability of such service or amenity. For example, public authorities levy contributions in return for higher education tuition or under the Ordinance on Electronic Signatures. In the 2011 federal budget, revenues from contributions were estimated at €50 million. There was no single federal department vested with the overall lead responsibility for the law on contributions. Legal provisions on contributions are laid down in various enactments and are not entirely consistent. Some of the provisions are difficult to handle and provide little legal certainty. For instance, there were many cases in which the Federal Network Agency for Electricity, Gas, Telecommunications, Post and Railway had to refund or subsequently collect contributions. Furthermore, there were substantial losses of revenue. The federal budget does not draw a clear distinction between contributions and other revenues. The Interior Ministry informed us that it will assume the leadership for the law on contributions and that it is intended to administer contributions under a structure similar to that of the overhauled law on fees. In order to benefit from the lessons learnt from the overhaul of the law on fees, that project was to be completed first before amending the law on contributions. The Finance Ministry stated that the legal classification of public charges was up to the relevant line ministries. In our opinion, the Interior Ministry’s decision to assume the lead responsibility for the law on contributions is an important step forward. We consider the outlined approach to the overhaul of the law on contributions appropriate. In contrast to the opinion expressed by the Federal Ministry of Finance, we think that it is important to draw a more precise legal distinction between contributions received and other public revenues. We therefore uphold our demand that the Federal Ministry of Finance modify budget presentation so that revenues from contributions are distinguished more clearly from other non-tax public revenues.

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5 Parallel development and operation of human resources management systems is inefficient

The Federal Government has failed to develop an overall plan for human resources management systems (HR systems) in federal departments and agencies and to coordinate the relevant efforts. As a result, departments and agencies have since 1996 developed and operated four large and many small systems that are among each other incompatible and inadequately at a cost in the range of a 9-digit euro amount. This lack of standardisation makes the necessary restructuring in the federal administration more expensive and difficult. HR systems support human resources planning, recruitment, allocation, development, payroll accounting and management. These tasks are largely identical in all departments. Nevertheless, these did not agree common standards for their HR systems. Some used the same and some different technologies and products. There was duplication in the development of components. As a consequence of incompatible HR systems, transferring part of human resources management of the Armed Forces to the Interior Ministry and the Finance Ministry has become difficult and more expensive. The Federal Government needs to develop measurable goals for merging its HR systems and implement them in a consistent and efficient way. Moreover, it has to set up an appropriate interdepartmental steering system for federal IT.

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6 The Federal Government fails to consistently implement recommendations for the efficient operation of large mail rooms

In 2012, our audit revealed once more that many federal departments and agencies have not yet proven the efficiency of their large mail rooms. As early as in 2005, we had recommended that the organisation of mail rooms in the federal administration be reviewed and that steps be taken to ensure their efficient operation. In the years 2004 and 2011, we audited large mail rooms in federal departments and agencies. We found that the audited entities had modified the organisation of the mail rooms but in many cases had adopted an unstructured approach. The line units rather than the mail rooms prepared letters for dispatch. In a number of cases, mail room staff manually folded and inserted outgoing mail although an enveloping machine was available. Departments and agencies that produced bulk mail did not check whether outsourcing would have been efficient. Moreover, the auditees largely failed to identify the overall costs of handling outgoing mail. Both in 2005 and in 2012, we recommended a systematic review of work processes and the assessment of staffing needs. Based on these recommendations, the auditees were to identify and eliminate weaknesses. The Federal Ministry of the Interior has the lead responsibility for organisational issues in the federal administration. It generally endorsed the recommendations for all federal departments and agencies. At year-end 2012, we once more asked all government departments whether they had implemented our recommendations. In many cases, replies were negative. In response, we again demanded that the mail rooms be organised efficiently. We asked the Federal Ministry of the Interior to support this process. The Federal Ministry of the Interior pointed out that, since 2005, the government departments had made vast efforts to organise all service processes efficiently but that experience had shown that blanket contracts with external service providers for dispatching mail had rather increased the workload. We uphold our view that work processes in the large mail rooms of federal departments and agencies need to be improved. The Ministry should encourage organisational studies in the mail rooms and should provide pertinent advice to the government departments.

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7 Streamlining of federal legislation proves successful

The streamlining of federal legislation which we called for has significantly reduced outdated legal provisions. We recommended that the residual work necessary is to be brought together in an interdepartmental Regulatory Reform Bill. The efforts to streamline legislation should be steadily pursued and broadened to include substantive aspects. The approaches adopted by the Federal Ministry of the Interior and the Federal Ministry of Justice provide a suitable basis for doing so. To ensure that legislative objectives are effectively accomplished, a legal system must be clear, understandable and easily accessible. This requires the continuous repeal or updating of formally or substantively obsolete legal provisions. Legislative streamlining thus assures the quality of the legal system. Since 2003, the Federal Government has pursued a strategy for streamlining federal legislation. These efforts have been coordinated by the Federal Ministries of the Interior and of Justice, which have the lead responsibility. We encouraged this streamlining process, e.g. with respect to the legislation on the consequences of the War and the legislation connected with German reunification. In the period 2006-2012, the Federal Government submitted eleven departmental and three cross-cutting regulatory reform bills. It was thus possible to reduce the number of laws by up to 4.9 per cent and to significantly impede its further growth. We commended the results as a major step towards streamlining the legal system. The success of these efforts should be ensured and enhanced. In addition, we recommended that the future focus should be on substantive objectives. The Federal Ministries of the Interior and of Justice committed themselves to bringing together the remaining streamlining needs and to incorporate them into a cross-departmental Regulatory Reform Bill. To make sure that legislation is streamlined continuously, the task force of state secretaries on the reduction of bureaucracy decided to enhance the evaluation of legislation projects. The screening of legislation provided for in the Act on the Promotion of Electronic Administration and the Amendment of Further Legal Provisions is expected also to contribute to the substantive streamlining of legislation. We will keep a close look on further developments.

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8 Cross-departmental rules: Travel costs incurred for attending job interviews

At our suggestion, the Federal Ministry of the Interior developed a guideline for the reimbursement of travel costs incurred by applicants for public service positions when travelling to job interviews. The guideline will be adopted by all federal departments and agencies. All applicants will be accorded equal treatment. The simplification of the rules will significantly reduce administrative burden. When auditing the reimbursement of travel costs for job interviews, we found that eleven different guidelines for such reimbursements were in place in the federal administration. Most departments had not adopted a guideline promulgated by the Federal Ministry of Finance for its remit designed to reduce such travel costs. They were concerned about potential adverse effects on the number of applicants and therefore introduced different rules. The results of our audit did not substantiate that concern. Due to indeterminate legal concepts, large scope for discretionary decisions and comparative calculations, the rules promulgated by the Federal Ministry of the Interior and similar guidelines adopted by other departments turned out to be error-prone and cause administrative burden. Provisions that halved foreign applicants’ claims to reimbursement infringed the non-discrimination principle enshrined in EU law. We recommended that the two Federal Ministries jointly develop rules about the reimbursement of job applicants’ travel costs that are binding on all federal departments and agencies, taking our suggestions into account and exempting travel costs below a minimum threshold from reimbursement. We drew attention to the EU rule which requires that all EU citizens be accorded equal treatment. The Federal Ministry of the Interior implemented our suggestions by promulgating a guideline on reimbursing travel cost incurred by applicants in order to attend job interviews.

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Part III Development of departmental budgets and department-related audit findings

Federal President and Federal President‘s Office

9 Development of departmental budget 01 The Office of the Federal President assists the Federal President in the discharge of his functions as head of state of the Federal Republic of Germany. The head of this Office advises and informs the Federal President. He/she attends Cabinet meetings as State Secretary. The Office employs a staff of 169. The Federal President has one official seat and official residence each in Berlin and Bonn. The office of the Joint Science Conference also comes under departmental budget 01. In FY 2012, the office had a staff of 19.5 and its expenditure budget totalled €1.8 million. Departmental budget 01 – Federal President and Federal President‘s Office

2012 2013 2014 actual target 1st draft figures figures budget

in € million

Departmental 30.5 32.5 32.8 expenditure

(established) posts

Staff 188 200 199

In 2012, expenditure under departmental budget 01 totalled €30.5 million. The major portion of this expenditure was accounted for by staff pay of €12.1 million and retirement benefits of €4.7 million (55 per cent). Other significant expenditure items of the Office of the Federal President were those on facility management, charity, travel and official events.

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German Bundestag

10 Development of departmental budget 02 The Lower House of Parliament is one of the five federal constitutional bodies. It is the directly elected House of the German Parliament. Together with the Upper House of Parliament it forms the Legislature of Germany within the system of separation of powers. It also decides about the federal budget and oversees the activities of the executive branch of government. The 17th German Bundestag was elected on 27 September 2009. In 2012, it had 620 Members representing five parliamentary groups. To support the Bundestag’s work, a Bundestag Administration is in place, which has the rank of a supreme federal authority headed by the Bundestag’s President and has a staff of about 2,500. Departmental budget 02 also includes the expenditures on the Parliamentary Commissioner for the Armed Forces, the Federal Convention (the body that elects the Federal President) and the Members of the European Parliament. In FY 2012, expenditures under departmental budget 02 totalled €674.2 million. In the past decade, total expenditures increased by 31.7 per cent from €511.8 million in FY 2003 to €674.2 million in FY 2012. Departmental budget 02 – German Bundestag

2012 2013 2014 actual target 1st draft figures figures budget

in € million

Departmental 674.2 731.4 748.6 expenditure

Departmental revenue 2.3 1.8 1.8

Commitment 3.9 38.0 27.3 authorisations

(established) posts

Staff 2,280 2,527 2,523

In FY 2012, this departmental budget consisted of the following broad categories of expenditure: • remunerations, grants and benefits for current and retired MPs (€296.8 million); • personnel expenditure for the staff of the Bundestag administration (€129.7 million); • grants to parliamentary groups (€80.8 million); • management and maintenance of premises (€46.2 million); • information technology for the Bundestag administration and the MPs (€17.3 million); • visitor service and public relations (€15.5 million) and • office supplies (€9.5 million).

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Bundesrat

11 Development of departmental budget 03 The Upper House of Parliament, where the 16 federal states are represented, is a constitutional body and part of the Legislature of the Federal Republic of Germany. It is the channel through which Germany’s constituent states are involved in federal legislation and administration and European Union affairs. It consists of members of the state governments. Depending on its number of inhabitants, each state has between three and six votes and as many representatives (Members). To assist the Members with discharging their functions, a Secretariat has been set up. Departmental budget 03 – Bundesrat

2012 2013 2014 actual target 1st draft figures figures budget

in € million

Departmental 20.9 22.8 23.0 expenditure

Departmental revenue 0.44 0.08 0.07

(established) posts

Staff 179 188 189

In FY 2012, expenditures under departmental budget 03 totalled €20.9 million. Since it is a purely administrative budget, personnel expenditure and expenditure on goods and services are its major expenditure items.

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Federal Chancellor and Federal Chancellery

12 Development of departmental budget 04 Apart from the Federal Chancellery, departmental budget 04 to fund is the source of funding for several central staff units, subordinate agencies of the Federal Government and numerous grantees. The four key areas within the remit of the Federal Chancellor are the coordination of the work of the Federal Government, public relations, the gathering of information for the Federal Government and the promotion of cultural activities and historical reappraisal. In 2012, expenditures under departmental budget 04 totalled €1.9 billion. Departmental budget 04 – Federal Chancellor and Federal Chancellery

2012 2013 2014 actual target 1st draft figures figures budget

in € million

Departmental 1,918.4 2,053.5 2,000.1 expenditure

Departmental revenue 6.0 3.1 3.2

Commitment 100.0 162.1 147.5 authorisations

(established) posts

Staff 3,568 3,693 3,687

• The Federal Chancellery has a staff of about 500. It assists the Federal Chancellor with the discharge of their functions and prepares his/her decisions. Moreover, it coordinates the work of the federal ministries. In FY 2012, the expenditure for the Federal Chancellery totalled €44.5 million. About 71 per cent of this total was accounted for by personnel expenditure, about 22 per cent by expenditure on goods and services. • The Federal Government’s Press and Information Office has a total staff of about 460. It coordinates cross- departmental public relations and informs the public and the media about the Federal Government’s work and informs the Federal Government and the Federal President about current news. In FY 2012, its expenditure totalled €83.2 million, of which about 63 per cent were accounted for by the procurement of goods and services, while the proportion of personnel expenditure was about 34 per cent. • The Federal Government Commissioner for Cultural Affairs and the Media is responsible for the Federal Government’s activities in the fields of cultural and media policy. He/She has a staff of about 210 and annually awards grants totalling €1 billion towards numerous institutions and events in nearly all fields of cultural activity. • The federal broadcasting corporation Deutsche Welle with locations in Bonn and Berlin is a non-profit entity under public law. It is under the legal supervision of the Federal Government. In 2012, the Federal Government Commissioner for Cultural Affairs and the Media gave a grant of €272 million towards the operation and equipment of Deutsche Welle. In mid-2013, the Federal Government and the German states agreed on closer cooperation in the field of television between Deutsche Welle and the domestic public broadcasting corporations. • The Federal Commissioner for the Files of the State Security Service of the Former German Democratic Republic is the custodian of the files of that Service and makes them available to private individuals, institutions and the

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public in accordance with the relevant legal provisions. The Commissioner has a staff of more than 1,700. In FY 2012, total expenditure amounted to €100.2 million.

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Federal Foreign Office

13 Development of departmental budget 05 The Federal Foreign Office represents the interests of the Federal Republic of Germany abroad and maintains relations with foreign governments and international organisations. It consists of its headquarters in Berlin, a branch in Bonn and 230 foreign missions. In 2012 – like in 2011 – total expenditure amounted to €3.1 billion, equivalent to 1 per cent of total federal expenditure budget. The Federal Cabinet’s decision of 13 March 2013 about key budgetary figures initially called for an appropriation of nearly €3.4 billion for the Federal Foreign Office. During budget negotiations, the Federal Ministry of Finance approved additional funding of €120 million, especially for humanitarian aid. Departmental budget 05 – Federal Foreign Office

2012 2013 2014 actual target 1st draft figures figures budget

in € million

Departmental 3,097.3 3,485.8 3,486.4 expenditure

Departmenatl revenue 145.4 123.9 135.2

Commitment 459.3 1,099.4 1,589.7 authorisations

(established) posts

Staff 6,257 6,642 6,679

• The Federal Foreign Office spent nearly two thirds of its total expenditure on foreign policy functions, especially on contributions to international organisations, humanitarian aid and foreign cultural and education policies. • The Office spent more than €500 million on crisis prevention and on the provision of humanitarian aid in cases of natural disasters and armed conflicts. • In FY 2012, the Federal Foreign Office spent nearly €750 million on maintaining cultural relations with foreign nations. Of this total, €220 million were accounted for by promoting German partner schools abroad. We recommended that the Federal Foreign Office modify arrangements for such promotion. On 20 June 2013, Parliament passed the German Schools Abroad Act. Under this Act, German schools abroad will in future have a legal claim on personnel and financial assistance. • About one third of the Office’s total expenditure budget was spent on staff, premises and infrastructure of headquarters and missions abroad. The major expenditure item is personnel expenditure for the Office’s 12,000 staff worldwide. In 2012, the staff expenditure totalled €850 million. Most Federal Foreign Office staff are employed abroad. At its headquarters, the Office has about 2,100 (established) posts, compared to about 4,600 in Germany’s foreign missions. In addition, the foreign missions employ 5,200 local staff, while another 1,000 are secondees from other federal departments, e.g. Economics Ministry and Defence Ministry. • The Federal Foreign Office obtained revenues especially from fees for processing visa and passport applications in its foreign missions. In 2012, such revenues totalled €100 million. Due to higher visa fees, the Office expects an increase of revenues of €10 million in 2014.

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Federal Foreign Office

14 German Houses of Research and Innovation established by the Federal Foreign Office continue to run deficits

Over a period of five years, the Federal Foreign Office has not succeeded in running the German Houses of Research and Innovation so as to make them financially self-sufficient on the basis of own resources and third-party funding. Since 2009, the Federal Foreign Office established six such Houses abroad. Up to now, the Office has provided them with funds in the total amount of €10 million. In the German Houses of Research and Innovation, German enterprises, research organisations and universities are to work under the same roof. They are to promote Germany as a centre for science, technology and innovation and support the international research work of the German science community and German enterprises. The Federal Foreign Office intended to provide start-up funding for a period of two years. After that, the Houses were to be financially self-sufficient by means of contributions from project partners. As from the beginning of the operating phase, the Foreign Office intended to fund individual projects only. The Office failed to conclude a binding agreement with project partners about who was to bear the operating costs. Instead, it provided permanent funding in the amount of €2-3 million annually to cover the operating costs of the Houses. Since the start of the operating phase, this constitutes an inadmissible form of block grant, for which no funds were appropriated in the federal budget. Moreover, the Federal Foreign Office did not succeed in involving the business community in the activities and funding of the Houses. We demanded that the Federal Foreign Office immediately limit the grant-funding of the German Houses of Research and Innovation to individual projects at each location and comply with the provisions of budgetary law. At the same time, the Office must ensure that project partners fund the full operating costs of the Houses from their own resources. Moreover, the office should step up its efforts to win more German enterprises as project partners. If the Office is not able to meet these requirements in the future, it should discontinue financing the project from federal funds.

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Federal Foreign Office

15 Federal Foreign Office reorganises the procurement of furnishings and office equipment

The Federal Foreign Office identified and eliminated errors in the procurement of equipment, furniture etc. for the German embassies and consulates-general. It reorganised the procurement process and the allocation of responsibilities for procurement. Thus, budget funds will be saved and corruption will be prevented. The Foreign Office provides its foreign missions (office buildings and ambassadors’ residences) with office equipment, furniture, carpets, curtains, antiques, silverware and other furnishing items. To do so, it can draw on €5 million of funds annually. We found that the division in charge of procurement and contract awards frequently purchased items inefficiently and non-competitive by ordering them from particular manufacturers or suppliers with which it maintained long-standing business relationships. This was due to requirements provided by the Office’s unit in charge of equipment for missions abroad. The two units were closely linked. Some staff members were responsible for contract awards over a period of more than ten years. Budgetary and procurement law require that contracting authorities procure goods and services efficiently under a formal procurement procedure, taking special regard to open competition. The awarding of public contracts is particularly vulnerable to corruption. The Federal Government’s Guideline on Corruption Prevention calls for preventive measures. One of them is to separate the awarding process from procurement planning functions and the specifications of the goods and services to be procured. Moreover, the assignment of individual staff members to areas of activity involving contract awards should not last longer than five years. We demanded that the Federal Foreign Office reorganise the procurement of furnishings and office equipment for its foreign missions, comply henceforth with budgetary and procurement law and take steps to mitigate risks of corruption. Furthermore, we suggested that suitable standardised products be procured more frequently either by means of blanket agreements or by having the needed items purchased locally by the respective foreign mission in order to achieve better bargains and save transport costs. The Federal Foreign Office has taken up all our recommendations and suggestions.

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Federal Ministry of the Interior

16 Development of departmental budget 06 The Federal Ministry of the Interior is in charge of homeland security and civil defence. Other major areas of responsibility are immigration, integration and ethnic minorities, the promotion of top-level competitive sports, official statistics, matters relating to the eastern German states, political education and matters relating to churches and religious communities. In addition, the Ministry functions as ‘public service department’, dealing with the structural and organisational procedures of public administration – especially the reduction of administrative burdens and administrative realignment – as well as information technology and information security. In FY 2012, the departmental expenditure budget totalled €5.7 billion, equivalent to 1.9 per cent of the total federal expenditure budget.

Departmental budget 06 – Federal Ministry of the Interior

2012 2013 2014 actual target 1st draft figures figures budget

in € million

Departmental 5,728.0 5,850.5 5,766.6 expenditure

Departmental revenue 459.2 405.9 405.9

Commitment 551.9 636.0 656.0 authorisations

(established) posts

Staff 51,987 53,459 53,395

• The major expenditure item under departmental budget 06 is homeland security. In 2012, five agencies and 84.5 per cent of all posts and established posts had homeland security functions. Departmental expenditure on these functions totalled €3.8 billion, equivalent to two thirds of the total expenditure under departmental budget 06. • €380 million (equivalent to about 7 per cent of total expenditure) were used in 2012 to fund programmes to promote the integration of migrants and refugees. The major portion of this amount was spent on integration courses and other measures of this kind. • Furthermore, the Ministry promoted top-level competitive sports by supporting numerous central projects (e.g. federal training centres, Olympic training centres, sports institutes, facilities for top-level competitive sports). In 2012, the Ministry spent about €131 million on top-level competitive sports. • The Federal Office of Administration is a central service provider within the remit of the Interior Ministry. It employs about 2,400 staff and told us that it performed more than 120 functions on behalf of the federal ministries and their subordinate entities. In connection with the restructuring of the German Armed Forces, the functions of payroll accounting, administering health care and family benefits for staff on active duty have been transferred to the Office as from 1 July 2013. By year-end 2015, the Office is to become responsible for processing claims to the reimbursement of travel and relocation costs and to separation allowance. As a result of this transfer of functions,

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about 2,000 Armed Forces staff will be transferred to the Federal Administrative Office. This will increase the Office’s workforce by about 80 per cent. The number of field offices will double to 14. • A major source of revenue for the Ministry were aviation security charges for checking air travellers and their luggage. In FY 2012, they amounted to about €329 million, equivalent to about 72 per cent of the Ministry’s total revenues. These revenues were matched by expenditures of €320 million paid to service providers that performed passenger and luggage checks and to the procurement and maintenance of equipment for aviation security checks. In addition, expenditure incurred on both rents paid for premises in airports and on Federal Police staff.

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Federal Ministry of the Interior

17 Protection of the population on a national scale requires better planning and legal bases

The separate responsibilities of the Federal Government for civil protection and of the states for disaster preparedness impair effective arrangements for the protection of the population. In 2002, the Federal Government and the states decided to pool civil protection and disaster preparedness under the umbrella of protection of the population. Although more than ten years have passed since then, no conclusive strategy has been developed. Relevant legislation is needed for ensuring effective protection of the population. Civil protection in the state of defence or tension is incumbent on the Federal Government. The states fulfil this function by delegation from the Federal Government, which provides part of the equipment and supplies. In the years 2010-2012, the annual expenditure on this totalled more than €30 million. Preparedness for disasters such as floods is incumbent on the states. The Federal Government will provide assistance on request but does not have operative powers in this field. The states have to fund disaster preparedness programmes. In 2002, the Federal Government and the states agreed on the New Strategy for the Protection of the Population in Germany in order to ensure nationwide protection of the population. We found that the distinction required by the Constitution between civil protection and disaster preparedness is difficult in practice. In the field of civil protection, the Interior Ministry provides the states with supplementary equipment and supplies without having complete information about the states’ human and material resources in the field of disaster preparedness. Furthermore, the Federal Government maintains a situation centre with a large staff, in spite of the fact that it does not have operative powers even in case of disasters on a national scale. In the latter case, there is a particular risk that it will be impossible to effectively pool information and coordinate resources nationwide. On the other hand, the states are under no obligation to cooperate and to inform the Federal Government about disasters. Ultimately, there is a lack of risk analyses and of an overall federal-state strategy for the protection of the population. We pointed out the need to create the planning and legal bases for the effective protection of the population. The responsibility of the Federal Government and the states is no longer to be determined by the cause of a disaster. In particular, we suggest that the Federal Government and the states use overarching scenarios as basis for analysing the risks to the population, pooling their resources and develop an overall strategy for the protection of the population. We hold that a fundamentally improved cooperation between the Federal Government and the states in the field of nationwide protection of the population will be possible, once the constitutional distinction between civil protection and disaster preparedness is abolished.

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Federal Ministry of the Interior

18 Inefficient grant-funding of cultural programmes for large-scale events

The Federal Ministry of the Interior gave block grants totalling €29 million to promote cultural programmes for large-scale events. This type of grant-funding was not admissible in terms of budgetary law. It was also inefficient. Moreover, the Ministry thus incurred unnecessary financial risks. We call upon the Ministry to select funding modes in accordance with budgetary law when grant-funding projects in the future. In the years 2006-2011, the Ministry gave grants in the total amount of €29 million towards four cultural programmes in connection with large-scale events e.g. the World Championships in Athletics or the street parties to celebrate the anniversary of German Unification. The financial support was given as block grants, i.e. the donor pays a fixed amount towards eligible expenditure. This funding mode restricts the possibility to claim the partial or complete refund of the grant, if total expenditure is lower or revenue is higher than expected. Other funding modes are deficit funding or proportional funding. Although the Ministry knew, when awarding the grant, that the beneficiaries expected funding contributions of undetermined amounts from third parties, it provided financial support in this form. This did not comply with budgetary law and also was inefficient. The Ministry argued that, in the case of fixed-amount grants, refund claims were possible only if the eligible expenditure was lower than the fixed grant. Therefore, it had initially not thoroughly audited the proofs of expenditure because it argued that a cursory review had already shown that total expenditure would exceed the amount of the grant. We audited the supporting documents submitted by the beneficiaries ourselves. We found that the beneficiaries had not complied with specific conditions subject to which the grant had been awarded or had obtained additional revenue. As a result of one case of non-compliance with conditions for the grant, eligible expenditures were lower than the awarded grant. Therefore, the Ministry claimed the refund of €340,000. We objected to the Ministry’s practice of giving fixed-amount grants for the cultural programmes, although it was aware, at the time when it awarded the grant, that the beneficiaries expected unspecified amounts of financial contributions from third parties. Thus, the Ministry infringed provisions of budgetary law and the principle of subsidiarity. Furthermore, it considers the possibilities for demanding refunds of grants as limited and therefore does not thoroughly audit the proofs on the use of funds. Therefore, we called upon the Federal Ministry of the Interior to give fixed-amount grants only if this is admissible under budgetary law.

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Federal Ministry of the Interior

19 Federal Police renounces the unnecessary construction of office and laboratory premises

In response to our recommendation, the Federal Police renounced a construction project for new office and laboratory premises for its research and test centre in Lübeck. Instead, it accommodated the staff concerned in an existing federal property. This will save €700,000 in federal expenditures.

The Federal Police built up a central research and test laboratory for command, control and operational equipment. This included devices for detecting objects and dangerous substances such as explosives. Such equipment is used e.g. for security checks at airports. The research and test laboratory evaluates and accepts these items. The Federal Police intended to build new office and laboratory premises for the staff at a planned expenditure of €700,000.

We found that the Federal Police had not conducted an investment appraisal for this construction project. In particular, it had failed to consider other options for accommodation, although federal premises on the same property were unoccupied.

We recommended that the Federal Police use the existing premises to accommodate staff. The Federal Ministry of the Interior and the Federal Police followed our recommendation, permanently accommodating the staff concerned in another building available.

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Federal Ministry of the Interior

20 Federal Interior Ministry merges automated border checks to a single system

Following our recommendation, the Federal Interior Ministry will develop a single system of automated border checks by 2014. Under this system, the Federal Police identifies travellers by means of the digital photograph in the electronic passport and thus can renounce the expensive procedure of identifying individuals by means of an iris scan. This will lead to one-time savings in capital expenditure of €2 million and subsequent annual operating costs of €200,000.

The Federal Interior Ministry currently operates two systems for automated border checks on a trial basis at Frankfurt Airport. These systems are designed to reduce staffing needs and accelerate border checks. They rely on biometric data. The fully automated ABG (Automated Biometrics-Supported Border Control) system identifies travellers by iris scan, whereas the partly automated EasyPASS system is based on the digital photo in the electronic passport. The Ministry intended to expand both systems. Non-recurring capital expenditure of €2 million and annual operating expenses of €200,000 had been earmarked for the ABG system. We found that the Federal Police had neither carried out capital expenditure appraisals before nor during the two projects. In particular, it had failed to evaluate target achievement perspectives prior to deciding on the system expansion. Moreover, our audit evidence shows that ABG user numbers have declined. We recommended evaluating the effectiveness of both systems. The Federal Interior Ministry and the Federal Police followed our recommendation and had real-time project evaluations carried out. They found that only EasyPASS was cost-effective and therefore pledged to exclusively focus on this system. Data of travellers participating in the ABG system are to be migrated to the EasyPASS system by year-end 2014.

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Federal Ministry of the Interior

21 Federal Office for Migration and Refugees intends to enhance effectiveness of integration courses for migrant women

The Federal Office for Migration and Refugees intends to optimise funding of integration courses for migrant women. The Office promised to examine course providers and their central offices more frequently and to check their statements of account more thoroughly. This approach is in line with our recommendations. The Federal Office for Migration and Refugees provides average annual grants of €1.6 million to integration courses for migrant women. These courses aim at teaching participants basic German language skills and laying the ground for further integration measures. The German SAI identified the following shortcomings: • The Federal Office redesigned the funding programme in 2005. Since then, no evaluations in terms of target achievement have been done. • The courses on offer did not take into account the regional distribution of the target group. In some of Germany's constituent states, it was therefore much more difficult to find a training place than in others. • The Office failed to thoroughly supervise relevant course providers. • The statements of account for the public funding received were not checked with due care. It thus escaped the Office's attention that one central office unduly cut the lump-sum amounts earmarked for the courses and partly pocketed the funds. The Office promised to remedy these deficiencies. For example, it intends to determine a quota for the allocation of courses to the individual constituent states to reflect the regional distribution of migrant women. The Office is committed to carry out on-site controls of 20 per cent of the course providers as from 2014 and to evaluate the programme results achieved.

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Federal Ministry of Justice

22 Development of departmental budget 07 The Ministry’s main task is to prepare legislation. It has the lead responsibility for drafting Bills and statutory instruments in the fields of civil law, mercantile and commercial law, criminal law and the codes of criminal and civil procedure. Furthermore, the Ministry participates in developing Bills and statutory instruments for which other federal government departments have the main responsibility. Tasks cover the Federal Court of Justice, the Federal Administrative Court, the Federal Finance Court, the Public Prosecutor General of the Federal Court of Justice, the Federal Patent Court, the German Patent Office and the Federal Office of Justice. In FY 2012, the Ministry spent €542.6 million, equivalent to 0.2 per cent of total federal budget expenditure. This was matched by revenues of €495.6 million, 87 per cent of which were attributable to the German Patent Office and the Federal Office of Justice. Departmental budget 07 – Federal Ministry of Justice

2014 2012 2013 1st actual target draft figures figures budget

in € million

Departmental 542.6 606.8 613.0 expenditure

Departmental revenue 495.6 484.3 484.2

Commitment 7.9 122.8 1.1 authorisations

(established) posts

Staff 4,313 4,723 4,715

• A major portion of the expenditures of the Federal Justice Ministry, the supreme federal courts and the Public Prosecutor General of the Federal Court of Justice is accounted for by personnel costs and pension costs. This is attributable to special features in their age and pay structure. In 2012, personnel expenditure (incl. retirement benefits and remittances to the retirement benefit fund) accounted for 77 per cent of total expenditures under departmental budget 07. • With a staff of 2,189, the German Patent Office is the biggest agency within the remit of the Federal Justice Ministry. The Office manages industrial property rights and informs the public of such rights. In 2012, the Office generated almost two thirds of the total revenues under departmental budget 07. • The Federal Office of Justice was set up in 2007 as a central service agency for the federal justice administration. In 2012, it employed a staff of 568. The Legislature repeatedly extended the remit of the Office. On 1 November 2013, it assumed the functions of an arbitration body for aviation. Air passengers may approach to this arbitration body to make compensation claims for denied boarding, cancellation or delays of flights. The Office has begun to build up a competence centre for implementing and operating a legal information system. As from mid-2014, electronical applications for certificates of good conduct and for information from the central trade and industry register will likely be possible by means of the new identity card.

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Federal Ministry of Finance

23 Development of departmental budget 08 The Federal Finance Ministry drafts the medium financial plan and the federal budget and renders account for federal revenues and expenditures, assets and liabilities. It is responsible for the federal tax authorities. Another focus of its tasks are the Federation's financial relations with the German states and the European Union. Moreover, it is responsible for fundamental issues of monetary, economic and credit policy, prepares tax legislation and oversees the consistent application of the law. In addition, the Ministry deals with restitution payments in favour of victims of National Socialist persecution, is the supervisory authority for the Institute for Federal Real Estate. It is also responsible for policy issues of privatisation and federal government shareholdings. In FY 2012, expenditures under departmental budget 08 totalled €4.7 billion. This is equivalent to 1.5 per cent of the total federal expenditure budget. The major portion of expenditures was accounted for by the Customs Administration with €1.9 billion. Revenues totalled €359 million. About 40 per cent of the revenues originate from the Federal Government’s stakes in successor bodies to the Trust Agency and about 30 per cent from revenues generated by the Customs Administration (fees and fines). Departmental budget 08 – Federal Ministry of Finance

2014 2012 2013 1st actual target draft figures figures budget

in € million

Departmental 4,706.0 5,018.4 5,014.4 expenditure

Departmental revenue 359.0 246.2 251.7

Commitment 810.4 309.0 334.4 authorisations

(established) posts

Staff 40,102 42,413 42,428

• Total expenditures in 2012 exceeded the budgeted figure by €100 million. The major expenditure items under departmental budget 08 are personnel expenditures. In 2012, they accounted for 58 per cent of total expenditures under this departmental budget (€2.7 billion out of €4.7 billion). Of these, nearly €880 million were costs of retirement benefits. • Expenditures for the Customs Administration in 2012 totalled nearly €1.9 billion, €1.4 billion of which were personnel costs. • Another major expenditure item in departmental budget 08 were German reparations in connection with the consequences of war and compensations for victims of national socialist persecution (€641 million). • In 2012, the Federal Central Tax Office reimbursed the Federal Employment Agency and the German Federal Pension Insurance administrative costs of €296 million on the basis of an administrative agreement.

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• In 2012, the expenditures on central services provided by the Federal Office for Central Services and Unresolved Property Issues and the Centre for Data Processing and Information Technology totalled about €270 million. • Expenditure totalling €248 million was incurred in 2012 for the successor bodies of the privatisation agency for eastern Germany. This was nearly €50 million more than had been estimated in the 2012 federal budget. • Expenditure under the new budget chapter “centrally budgeted administrative revenues and expenditures” totalled about €1 billion in 2012. Nearly 90 per cent of this expenditure were accounted for by the payment of retirement benefits. • The Federal Finance Ministry expects revenues to increase by €36 million annually as from FY 2015. A new legal provision introduced at our recommendation is to authorise the Customs Administration to charge lump-sum fees from federal public-law entities to recover administrative costs of debt collection services provided on behalf of such entities.

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Federal Ministry of Finance

24 Enhancing organisational structure for dealing with government shareholdings in stabilised banks

The Federal Ministry of Finance lacks adequate organisational structures needed to properly manage government shareholdings in banks acquired in connection with financial market stabilisation programmes. Subject matter questions related to stabilisation were assigned to one directorate-general, while another directorate-general was in charge of mentoring and guidance for new members of the relevant banks' supervisory boards. The Federal Government granted assistance to banking institutions in order to stabilise the financial markets. The shareholdings which it acquired in two of the banks were managed by the Federal Ministry of Finance. One directorate-general provided preparatory training to the Ministry officials who, at the instigation of the Federal Government, had been appointed new members of the supervisory boards. The stabilisation measures and the relevant banks, however, fell within the remit of another directorate-general. We found that information available on the banks in question varied greatly between the two directorates-general. The Ministry admitted that it was necessary to improve liaison between the organisational units involved. This would help to thoroughly monitor banks that had undergone stabilisation programmes and effective training of supervisory board members appointed from within its staff. The Ministry declared that it had arranged for the necessary steps to be taken and that information exchange had been improved. According to the Ministry, the new arrangements ensured full preparatory training of supervisory board members. The Ministry rejected any further pooling of responsibilities. We acknowledge that the Ministry has successfully improved communication between the units involved as well as guidance provided to its representatives on the supervisory boards. Nevertheless, the action taken is as yet insufficient to ensure an effective performance of financial market stabilisation by the board. Responsibilities for subject matter questions related to financial market stabilisation and the preparatory training of supervisory board members have still not been pooled in one organisational unit. We uphold our recommendation to merge the tasks that are currently separated within the directorate-general in charge of stabilisation measures.

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Federal Ministry of Finance

25 Federal fiscal administration reduces risks related to electronic salary systems operated by service providers

The Federal Ministry of Finance specifies the rules of procedure for salary processing. This helps to reduce risks related to transmission errors and manipulations in connection with electronic salary systems operated by service providers. For instance, such payments may not be authorised by one staff member alone. We found deficiencies in the authorisation and recording of salary payments, which are due to risks involved in computer-assisted salary payment systems operated by service providers. Where these risks materialise, salary payments could be unlawfully authorised over a period of several years. If the documents substantiating the payments in question, such as performance appraisals, work time records or drivers' logbooks, are not fully submitted to the service provider, the personnel management service is required to duly ensure and document the accuracy of the facts and of the accounts. Furthermore, personnel management staff in charge needs to have access to salary data of all staff. Our audit findings and recommendations have prompted the Ministry to refine the rules of procedure for salary processing. In particular, it has established clear rules for compliance with the cross-check principle, according to which two staff members need to certify the accuracy of the facts and authorise payments. In addition, the Ministry intends to implement a new IT application to grant the personnel management services access rights to pay slips. This will help to reduce risks related to transmission errors and potential manipulations that might lead to excess staff expenditure for an indefinite period of time.

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Federal Ministry of Economics and Technology

26 Development of departmental budget 09 The Federal Economics Ministry has the lead responsibility for designing the entire economic policy of the Federal Government. This covers industry, commerce and trade, export promotion, technology and innovation policy, mining, market regulation and energy policy. The Ministry’s remit covers six agencies in the field of science and technology and in the fields of market regulation, trade promotion, external economic affairs and energy policy. In 2012, the Ministry spent €6.8 billion, equivalent to 2 per cent of the total federal expenditure budget. Departmental budget 09 – Federal Ministry of Economics and Technology

2014 2012 2013 1st actual target draft figures figures budget

in € million

Departmental 6,136.0 6,119.2 6,109.2 expenditure

Departmental revenue 653.4 426.3 371.8

Commitment 2,271.8 2,540.4 2,622.4 authorisations

(established) posts

Staff 7,612 7,773 7,737

• In 2012, the Federal Economics Ministry spent €5 billion on grants to foster activity in various branches of the economy. This amount was equivalent to 83 per cent of total expenditures under the departmental budget. For 2012, the grants database discloses grants towards 21,000 projects paid to 13,000 beneficiaries. It has commissioned 23 project executing agencies to manage the grant programmes. • Revenues of €375 million had been budgeted; actual revenues totalled €653 million. The difference of €278 million mainly results from grants awarded from the European Regional Development Fund, which the Federal Economics Ministry passed on to the German states. • In the 2013-2017 period, expenditures under departmental budget 09 are to decline by €222 million, equivalent to a reduction of 3.6 per cent. Savings during this period will be generated above all by cutting grants towards hard- coal mining, the expiry of disarmament projects in the Russian Federation and grants towards the construction of a light rail rapid transit system in Vietnam. Additional funds have, in particular, been earmarked for the German Aerospace Centre.

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Federal Ministry of Economics and Technology

27 Federal Economics Ministry needs to remedy loss of charges incurred by the Federal Network Agency in connection with signature procedures

For many years, the Federal Economics Ministry has failed to revise the ordinance on the technical realisation of the German Signature Act. Since 2001, fees and annual contributions have been collected on the basis of inappropriate and obsolete data. This has led to losses of federal government revenue in the range of millions of euros. Our audit work conducted in the year 2007 revealed shortcomings in the collection of charges by the Federal Network Agency for Electricity, Gas, Telecommunications, Post and Railways (Federal Network Agency). The Agency performs administrative and monitoring tasks in relation with the Act on Framework Conditions for Electronic Signatures (Signature Act). To this end, it collects fees as well as an annual charge on the basis of the Signature Ordinance of 2001. In the years 2002 to 2006, revenue from fees and annual contributions only covered roughly 10 per cent of the total costs amounting to some €4 million. Annual contributions accounted for less than 1 per cent of total cost coverage. In violation of the Signature Act, contribution rates were charged on the basis of significantly overestimated numbers of certificates. According to the Act, the Agency is required to levy fees and annual charges to cover its administrative expenses, taking into account the share in costs attributable to public interest. In 2012, we looked once more at the Agency's charging procedures in the field of electronic signatures. We found that the Ministry had failed to honour its promise to review the Signature Ordinance. In the 2007-2012 period, revenue collected only covered 9 per cent of the total costs amounting to €7 million. The Ministry needs to amend the Ordinance without delay in order to avoid further losses of revenue. In doing so, it should ensure that costs incurred by the Agency are refinanced in accordance with applicable legal provisions. More than ten years after the determination of contribution rates, the numbers of certificates reported by certification service providers (CSP) represent only a fraction of the numbers originally forecast. The Ministry should therefore base its recalculation of contribution rates on reliable certificate numbers which are in line with the CSP's annual reports. Both the Ministry and the Agency are to carry out annual reviews of the calculation bases for the collection of charges. Otherwise, the federal budget risks to be further burdened contrary to the statutory requirements in place.

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Federal Ministry of Food, Agriculture and Consumer Protection

28 Development of departmental budget 10 The Federal Ministry of Food, Agriculture and Consumer Protection exercises the functions of the federal government in the fields of food, agriculture and forestry, agricultural social policy and consumer policy. In FY 2012, it spent €5.2 billion on these purposes. This amount accounted for 1.7 per cent of the total federal expenditure budget. Compared to the 2012 figure, expenditures in FYs 2013 and 2014 are to remain nearly the same, while the volume of the proposed total federal expenditure budget is to be reduced by 3.7 per cent. Departmental budget 10 – Federal Ministry of Food, Agriculture and Consumer Protection

2014 2012 2013 1st actual target draft figures figures budget

in € million

Departmental 5,243.0 5,269.2 5,262.3 expenditure

Departmental revenue 86.7 63.2 83.5

Commitment 699.4 1,534.4 1,694.7 authorisations

(established) posts

Staff 3,977 4,049 4,049

• The major portion of the expenditures of departmental budget 10 went into social security policy for the agricultural sector. In FY 2012, federal spending on the old age pensions, health insurance and accident insurance schemes for farmers totalled €3.7 billion. • Due to structural change and the demographic trend, the number of farms and of contributors to the agricultural social security scheme will decline in the future. The bodies administering the scheme have not yet succeeded in reducing administrative expenditure in line with the smaller number of insured people. Therefore, the Legislature obliged the administering bodies to reduce, by 2016, administrative expenditure by 20 per cent as compared to 2004. As from 1 January 2013, the Legislature reorganised the agricultural social security scheme and established a single social security body for agriculture, forestry and gardening. We monitored the restructuring process right from the start and found that the new federal body does not yet have a sustainable organisation and human resources strategy. We will keep an eye on further developments. • Other major expenditure items in departmental budget 10 include €584 million spent on the Joint Task for the Improvement of Agricultural Structures and Coastal Protection and €484 million spent on the promotion of “Sustainability, Research and Innovation”. For this purpose, the Federal Ministry of Food, Agriculture and Consumer Protection has increased expenditures by 33 per cent in 2009. • Consumer policy has been the stated focus of the activities of the Federal Ministry of Food, Agriculture and Consumer Protection. In 2012, expenditures on consumer policy and on the Federal Office of Consumer Protection and Food Safety amounted to €148.5 million, equivalent, however, to only 2.8 per cent of total expenditures under departmental budget 10. • In 2011, the German SAI’s President, in his capacity as Federal Performance Commissioner, conducted a study of the organisation of consumer health protection to identify weaknesses. He recommended redirecting official

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controls and, moreover, legislative amendments and a reorganisation of national crisis management. Together with the state governments, the Federal Ministry of Food, Agriculture and Consumer Protection is developing potential solutions.

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Federal Ministry of Labour and Social Affairs

29 Development of departmental budget 11 The remit of the Federal Ministry of Labour and Social Affairs comprises key Federal Government functions of social security and employment. The tasks relating to statutory pension insurance, statutory accident insurance and to the promotion of employment are largely performed by bodies incorporated under federal or state law, especially by the German Federal Pension Insurance and the Federal Employment Agency. As a matter of principle, they are financed from contributions. However, the Federal Government takes up a considerable portion of the related expenditure, which is strongly dependent on external factors: the impact of the economic cycle on the labour market, the demographic trend in Germany and the duration of working life. In terms of its volume, departmental budget 11 is the by far biggest departmental budget within the overall federal budget. Its expenditures in FY 2012 totalled €125 billion, which is equivalent to 40.7 per cent of the total federal expenditure budget. Departmental budget 11 – Federal Ministry of Labour and Social Affairs

2012 2013 2014 actual target 1st draft figures figures budget

in € million

Departmental 124,952.5 119,229.1 120,697.2 expenditure

Departmental 6,091.9 1,582.3 1.894.5 revenue

Commitment 1,573.9 2,350.0 2,347.9 authorisations

(established) posts

Staff 2,212 2,430 2,429

• In 2012, the Federal Government paid a total amount of €81.4 billion towards statutory pension insurance. Thus, the Federal Government funded nearly one third of the expenditure on statutory pension insurance. Two federal bodies and 14 regional bodies perform the tasks of statutory pension insurance under their own responsibility. A reorganisation launched in 2005 was to streamline pension insurance and make it more effective. We repeatedly recommended that the pension insurance bodies improve their coordination in matters of corporate policy and cross-cutting issues. • In the years 2011 and 2012, we checked whether the pension insurance bodies duly claimed the refund of excess pension payments. We found that not all pension insurance bodies did so consistently and without delay. At present, we are discussing ways in which the Federal Ministry of Labour and Social Affairs and the pension insurance bodies can transparently record their outstanding claims and act consistently in demanding refunds. • In 2012, expenditures on the promotion of employment totalled €7.2 billion. The Federal Ministry of Labour and Social Affairs used this amount to support the Federal Employment Agency. In 2013, the Federal Government discontinued the payment of federal grants towards the costs of employment promotion. At the same time, the integration contribution payable by the Agency to the federal budget was abolished. The Agency had used that contribution to cover one half of the costs spent by the Federal Government on providing basic assistance to long- term unemployed. The Federal Government expects the financial situation of the Agency to remain stable in the

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coming years. In the field of employment promotion, our audit focuses on the Agency’s specific functions. In response to our recommendation, the Agency intends to send more clients to training events designed to help young people with starting careers. • For years, the Federal Government has incurred large expenditures on the basic security scheme for job seekers. In 2012, such expenditures totalled about €32 billion. As external auditors of the Federal Government, we are the only public institution that has a full mandate to do fieldwork at all job centres. In addition to reviewing the organisation of the units responsible for administering the basic security scheme for job seekers and the reimbursement of costs by the Federal Government, our audit focused on the integration of job seekers in the labour market and the use of employment promotion tools such as subsidised community work (where the workers draw an hourly wage of €1 on top of unemployment assistance). Key recommendations on how to enhance programme management were incorporated into legislation and regulations.

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Federal Ministry of Labour and Social Affairs

30 Federal Government fails to implement recommendations for regulatory and administrative simplification of statutory health and long-term care insurance

Although the Federal Government acknowledged the merit of our recommendations on the regulatory and administrative simplification of statutory health and long-term care insurance for jobseekers receiving basic security benefits, it has, so far, failed to implement them. Government thereby tolerates error-prone administrative practices and avoidable administrative costs although it is well aware of the need for reforms. Beneficiaries of basic security for jobseekers who are not insured through another wage earner as dependents, are, as a rule, subject to compulsory statutory health and long-term care insurance. Social security contributions for this group of beneficiaries are borne by the Federal Government and transferred to the insurance bodies via the job centres. Job centres therefore need to verify for each beneficiary whether he or she is subject to compulsory insurance due to the benefits received. The contributions to be paid are reduced by any supplementary income earned by compulsorily insured beneficiaries. We found that in almost 50 per cent of the cases under scrutiny, job centres had determined the insurance contributions inaccurately. In every fifth case, the job centres made mistakes when deciding on the eligibility for compulsory insurance. Processing of statutory health and long-term care insurance matters was cumbersome and time-consuming. We recommended abolishing the principle according to which statutory health and long-term care insurance for dependents takes precedence over the compulsory insurance for beneficiaries of basic security. Instead, we suggested introducing a lump-sum contribution for each month in which basic security benefits for jobseekers are received. The aggregate amount of these lump-sums should not exceed current expenditure. The Federal Ministry of Labour and Social Affairs and the Federal Ministry of Health acknowledged the merit of our findings in August 2012. Both concur with the key points we made about the complexity of the legal situation as well as with our conclusions derived from the evidence gathered. They aim at taking policy decisions by year-end 2013/the beginning of 2014 on the basis of current discussions on the amendment of applicable laws. However, no initiative for amending the provisions in force has been announced up to now. We demand that the Ministries revise applicable legislation without any further delay. This is to ensure legally reliable and efficient administrative procedures in the field of statutory health and long-term care insurance for recipients of basic security benefits. When determining the lump-sums, the Ministries should make sure that their aggregate amount does not exceed current expenditure.

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Federal Ministry of Labour and Social Affairs

31 Supreme Courts have appropriately identified staffing needs for administrative services

After restructuring their organisational set-up, the Federal Labour Court and the Federal Social Court identified staffing needs for their administrative services. By reallocating tasks, they ensured a more balanced distribution of work among their employees in the areas under scrutiny. We pointed out that the Federal Courts had failed to appropriately identify their staffing needs and qualifications. Moreover, they had destroyed all corresponding records and were, therefore, neither able to base future assessments on these nor to update the needs identified. We recommended that the Courts apply adequate methods to reassess their support staff requirements. This assessment should be preceded by a comprehensive task review. The Courts announced their intention to implement our recommendations. In 2012, we carried out a follow-up audit to verify whether the Courts had honoured their promises. We found that they had balanced out their staff's workload where it had previously been excessive or too low and provided sound justifications for staffing needs identified in part of the areas under scrutiny. Furthermore, we acknowledged that the Courts had developed a model that can be continuously updated. We are going to monitor if the Courts will use equally appropriate methods for identifying their staffing needs in the remaining areas.

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Federal Ministry of Labour and Social Affairs

32 Following our audit, Federal Insurance Office obtained reimbursement of IT expenditure totalling almost €500,000

After our audit work, the Federal Insurance Office was refunded an additional amount of nearly €500,000 from the Health Fund for the years 2009-2011. Since 1 January 2009, contributions paid by individuals insured under the statutory health insurance programme as well as the corresponding federal grant flow into the Umbrella Health Fund, which allocates lump-sums to health insurance institutions to help them cover their expenses. The Health Fund is managed by the Federal Insurance Office. Expenditure incurred by the Office due to its management function is to be reimbursed from the Health Fund. Before our audit, the Office stated its refundable IT expenditure inconsistently and inadequately or not at all. Acting on our recommendation, the Office developed a strategy for IT expenditure accounting in connection with the Health Fund. It checked all statements of accounts and identified the outstanding amount for the years 2009-2011. We expect the Office to consistently apply and, where necessary, update its new strategy for IT expenditure accounting.

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Federal Ministry of Labour and Social Affairs

33 German Occupational Safety and Health Exhibition intends to increase its outreach efforts by providing online services

The Federal Institute for Occupational Safety and Health operates the German Occupational Safety and Health Exhibition located in Dortmund. By offering supplementary online services, the Institute intends to enhance the exhibition's outreach to stakeholders all over Germany. The German Occupational Safety and Health Exhibition is, in particular, designed to inform the public about the importance of organising work in accordance with employees' needs. In 2013, expenditure of more than €8.5 million has been appropriated for the exhibition. Each year, the exhibition was visited by 150,000 to 190,000 visitors. Although the exhibition was targeted at people from all over Germany, a huge majority of its visitors came from the immediate vicinity or closer surroundings. Until 2012, the exhibition's website contained visitor information and a calendar of upcoming events. Educational films, e-learning courses or other online services of this kind were, however, not provided. We recommended that the Institute make available adequate educational services on the Internet to share part of its relevant knowledge and expertise, thus creating a significantly larger, nationwide impact. At year-end 2012, the Institute redesigned its website and ensured that information provided was more in line with the interests of individual target groups. Apart from the contents that have already been available before, it is now also possible to download files for preparing teaching units in schools. The Institute intends to expand its Internet service by adding more photos, video clips and more advanced subject matter papers. We hold that the supplementary online presentation of learning contents is suitable for improving the outreach to stakeholders across Germany. The Institute should evaluate if and to what extent this approach helps to achieve this goal.

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Federal Employment Agency

34 Federal Employment Agency spends up to €2.6 million annually for unnecessary document scanning capacity

The Federal Employment Agency had unemployment insurance documents digitised. When contracting out the corresponding services, it failed to accurately specify the quantities of documents to be captured. As a consequence, the capacity made available exceeded the Agency's actual needs. Annual lump-sum costs incurred for the allocated capacity totalled up to €2.6 million. We demanded that the Agency only pay for services actually needed. In a possible renewal contract, the Agency needs to provide for the relevant amendment. The Federal Employment Agency wished to introduce electronic files for unemployment insurance issues and child benefit offices. It therefore awarded a contract to a contractor for digitising services. The service provider charges an annual lump-sum for the allocation of digitising capacity. We found that the amount of documents which the Agency had in fact digitised was significantly lower than originally planned. Nevertheless, the lump-sum paid for the capacity allocated remained unchanged as the contract did not provide for subsequent amendment. For this reason, the Agency is obliged to pay an annual amount of up to €2.6 million for the provision of digitising capacity not needed. We demanded that the Agency only use its budget funds for procuring the digitising capacity that is actually needed. To this effect, it needs to clearly and consistently specify the type and amount of documents to be processed. We expect the Agency to amend the inefficient contract accordingly prior to its possible renewal.

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Federal Employment Agency

35 Federal Employment Agency intensifies efforts to detect, trace and prevent economic loss

Following our recommendation, the Federal Employment Agency has announced its intention to enhance its procedures for detecting, tracing and preventing economic loss. Thereby, the Agency seeks to improve the quality of reporting and gain a more in-depth insight into the causes of loss. Moreover, it intends to strengthen precautions and monitoring in order to take more effective action against economic loss. The Federal Employment Agency may incur losses of financial and tangible assets if its employees neglect their duties. This may, for example, be the case where employees authorise unemployment benefits or basic security benefits for jobseekers without adequate justification or where they cause damage to or lose property of the Agency. In 2011, some 24,000 cases of loss were recorded, equivalent to an amount of €26 million. In 160 cases, totalling €1 million, the Agency perceived its staff to be liable for the loss caused. We found that, in part, the Agency incompletely recorded the economic loss incurred and deviated from its own rules of procedure. Therefore, it had insufficient information on the causes and extent of loss. The Agency failed to conduct targeted evaluations to assess the effectiveness of measures implemented to remedy the causes of loss. Options to fully disclose and effectively prevent economic loss were hardly ever seized. The Agency has, to a large extent, followed our recommendations. It has taken first steps to ensure a more effective prevention of future losses. For instance, it has repeatedly outlined to its staff the need to record all data on economic loss fully and accurately. The Agency intends to evaluate more systematically whether measures introduced to remedy causes of loss have the desired impact. Furthermore, it is committed to strengthening precautions and monitoring in order to reduce economic loss.

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Federal Employment Agency

36 Enhanced utilisation of training capacities generates savings amounting to millions of euros

Following our recommendation, the Federal Employment Agency intends to make better use of pre-vocational training programmes. In the future, above a specified participation rate, the Agency will only have to pay for training places that are actually filled. The Federal Employment Agency (Agency) can help school leavers to gain easier access to the labour market by offering them pre-vocational training programmes. The programmes are implemented by providers with whom the Agency has concluded relevant framework contracts. Under these contracts, the Agency's field offices (offices) can call off training places. They are, however, obliged to call off a specified minimum number of places irrespective of whether these are actually filled or not. Where the offices had called off a number of places exceeding the specified minimum, they also had to pay for places not used. We found that the offices had called off a significant number of places above the minimum threshold although they were, in fact, unable to assign participants. Thus, in our sample alone, places worth €4 million remained unfilled. We recommended that the Agency only call off training places above the minimum threshold if and as long as these can actually be filled. To this effect, it should continuously monitor the current utilisation of training capacities and make use of contractual options available. The Agency has instructed its field offices to adjust their planning so as to fill all places that have been called off. It uses an IT application to monitor capacity utilisation. Furthermore, it has amended the framework contract. The offices are now only required to pay for places exceeding the minimum number if these are actually filled.

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Pension Insurance

37 Pension insurance bodies throughout Germany intend to harmonise their guidance to ensure consistent application of the law

Acting on our recommendation, statutory pension insurance bodies intend to provide their staff with nationwide, uniform guidance on how to apply relevant legislation. Joint guidelines can help the bodies to implement federal law consistently and to enhance the Federal Pension Insurance's public reputation. Two federal bodies and 14 regional bodies perform the tasks of statutory pension insurance. Their staff decides on pension matters according to the German Social Law Code, such as old-age pensions and pensions on account of reduced earning capacity. As early as in 2001, we found that statutory pension insurance bodies provided their employees with inconsistent guidance on how to deal with pension matters. We recommended that the bodies consolidate their guidance to ensure uniform application of the law. They promised to act on our recommendation. During a follow-up audit carried out in 2012, we found, however, that inconsistent guidelines on the application of the law persisted. In our view, this situation involves significant legal risks for the bodies and could be detrimental to the public reputation of the statutory pension insurance. We demanded that relevant guidance be harmonised. According to information provided by the bodies, they have responded to our demands and agreed on harmonising their technical guidelines. They informed us that they were currently discussing when and in what steps to implement the harmonisation. We hold that joint guidance will contribute to a consistent application of federal legislation.

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Federal Ministry of Transport, Building and Urban Development

38 Development of departmental budget 12 It is the task of the Federal Ministry of Transport, Building and Urban Development to ensure, plan and promote the development of transport infrastructure and operations in Germany. The Ministry is responsible for the construction, upgrading and maintenance of roads, railways and waterways, inland and sea shipping and civil aviation. The Ministry also exercises the federal competences in matters of regional planning, urban development, housing and building. In FY 2012, expenditures under departmental budget 12 totalled more than €25 billion, equivalent to 8.4 per cent of the total federal expenditure budget. More than one half of the expenditures under this departmental budget were capital expenditures, which went primarily into the construction of roads and railway lines. The Ministry obtained most of its revenue (€4.4 out of €6.2 billion) from the toll system for heavy vehicles. Departmental budget 12 Federal Ministry of Transport, Building and Urban Development

2014 2012 2013 1st actual target draft figures figures budget

in € million

Departmental 25,733.8 26,411.0 25,444.1 expenditure

Departmental revenue 6,232.5 5,732.6 5,733.9

Commitment 7,478.3 24,035.9 12,119.3 authorisations

(established) posts

Staff 22,321 23,367 23,298

• In 2012, the Federal Government spent €9.7 billion on the railways. A distinction needs to be made between the federal expenditures of €5.5 billion on the Federal Railways Fund and the expenditures of €4.2 billion on Track construction, upgrading and maintenance. As to upgrading, the Federal Government gives its railway infrastructure companies project-linked grants towards construction costs. The companies have to give detailed proof that they used these funds efficiently and in line with the specified purposes. Since 2009, the Federal Government has paid annual lump-sums of €2.5 billion for maintenance of the Track. The work to be done by the companies in consideration of this grant has not been adequately specified, especially for the year 2015, and can therefore hardly be verified. • The Federal Government funded the construction, maintenance and operation of federal long-distance roads with €6.5 billion. The Ministry estimates annual funding needs for maintenance alone to exceed €3 billion. The relevant budget estimates increased to €2.5 billion in 2013. However, the budget accounts show that, in past years, more than 10 per cent of the expenditure appropriations were not used for maintenance but rather for such work as the construction and upgrading of roads. • The Federal Government is also responsible for the construction, upgrading and maintenance of federal waterways. In 2012, it spent €1.9 billion for this purpose. Administrative tasks in connection with the federal waterways are performed by a network of federal administrative offices, the Waterways and Shipping Administration. Since 2011, the Ministry has reviewed this Administration to restructure it. As of 1 May 2013, it merged the previous seven waterways and shipping directorates into the Waterways and Shipping Directorate-General with seven branch offices. We will continue to monitor further developments.

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• In 2012, expenditure on housing and urban development totalled €3.4 billion. The biggest items were housing allowance, housing construction allowance and various grant-funding programmes, e.g. for the rehabilitation of buildings and for urban development. A major portion of capital expenditures appropriated under this departmental budget goes to transport infrastructure projects. Depending on the type of transport (rail, road, waterway), these expenditures are reflected differently in the federal budget. In our opinion, the Ministry should disclose these projects in a consistent and more transparent way in order to improve parliamentary steering of these important projects.

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Federal Ministry of Transport, Building and Urban Development

39 Proposed noise protection wall virtually ineffective

A road works authority plans to build a noise protection wall worth €900,000 which would be nearly ineffective. We demanded that the Federal Ministry of Transport, Building and Urban Development ensure that federal budget funds earmarked for noise protection are used effectively and efficiently. In the Bavarian municipality of Diedorf, the road works authority intends to build a noise protection wall for residents living near a new federal trunk road to be constructed. While the wall would protect residents from road noise, it would not block out the much louder train noise coming from an adjacent railway line. The road works authority tried in vain to develop a noise abatement plan in cooperation with the federally owned Deutsche Bahn AG to adequately protect residents from train noise. Deutsche Bahn gave noise protection investment at other locations higher priority. We advised the Ministry that the proposed noise protection wall was inefficient as its enormous costs were not matched by any appropriate benefit. We expect the wall to be constructed at a site where it will yield maximum benefit for residents and protect them from both road and railway noise. The Ministry should take leadership to help ensure that the Deutsche Bahn AG build the wall between the railway line and the residential buildings.

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Federal Ministry of Transport, Building and Urban Development

40 Insufficient assessment of the need for emergency lanes

The Federal Ministry of Transport, Building and Urban Development and the road works administration of the Land Schleswig-Holstein plan to widen federal trunk road no. B 207 to four lanes and provide emergency lanes. We hold that traffic forecasts do not indicate any need for this type of motorway-like upgrade. By reducing the project scope, the Federal Government could save €22 million. In our opinion, the Ministry and the road works administration should reassess the actual need for emergency lanes. On behalf of the Federal Ministry of Transport, Building and Urban Development, the road works administration of Schleswig-Holstein plans to widen federal trunk road no. B 207 to four lanes and provide emergency lanes. The section on the Fehmarn Sound Bridge connecting the island of Fehmarn with the mainland will remain a two-lane road. Costs for the upgrade are estimated at €90 million, of which €22 million will go into the construction of emergency lanes. The road works administration considers emergency lanes to be necessary due to the crucial importance of the B 207. Once upgraded to four lanes, the B 207 is supposed to close the gap between the federal motorway A 1 and the planned tunnel link to Denmark across the Fehmarn Belt. Moreover, the administration argued that emergency lanes were necessary for reasons of road safety. Some sections of the four-lane motorway A 1 do not have emergency lanes. While the tunnel will be constructed with four lanes plus emergency lanes, there are no emergency lanes on the connecting roads to the Danish hinterland. As forecasts predict light traffic for the B 207, we see no need for this type of motorway-like upgrade. Emergency lay-bys are sufficient to meet road safety requirements. The administration's plans do not give due consideration to the fact that, for the time being, the B 207 will only have two lanes on the Fehmarn Sound Bridge. Furthermore, the planning insufficiently assesses economic and environmental impacts arising from the construction of emergency lanes. We recommended that the administration abandon emergency lanes project and build lay-bys instead. This would generate federal savings of €22 million. In our opinion, the Ministry and the road works administration should reassess the actual need for emergency lanes.

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Federal Ministry of Transport, Building and Urban Development

41 Misuse of federal budget funds for state road upgrade: Brandenburg reimburses more than €3 million to Federal Government

In response to our advice, the Brandenburg road works administration has reimbursed an amount of more than €3 million to the Federal Government. Brandenburg commissioned a widening programme for a road that it had downgraded from federal to state level before. In the year 2000, the Federal Highway Research Institute (Institute) included a section of the federal trunk road no. B 115 into a research project in the field of road safety. The planning for the necessary construction of fast lanes and the road surface dressing was done by the Land of Brandenburg. It was not finalised before 2003. In the same year, the Federal Ministry of Transport agreed with the road works administration on downgrading the respective section of the B 115 to state level as it was no longer used by long-distance traffic. As from 2004, the responsibility for road construction and maintenance and all related tasks were delegated to the Land. In 2004 and 2005, the road works administration had the road widening programme carried out as planned and charged the related expenditure totalling €3.26 million to the Federal Government. The administration assumed that construction costs for the research project were still borne by the Federal Government even if it did no longer fund construction and maintenance. We criticised that the administration had used federal budget funds to widen a road that had been downgraded to state level. The widening programme was not necessary for federal mission performance. In response to our advice on this topic, the road works administration reimbursed the construction costs amounting to €3.26 million to the Federal Government in 2012.

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Federal Ministry of Transport, Building and Urban Development

42 No construction of an unnecessary traffic control system at a cost of €4 million

In response to our recommendation, the road construction administration of the State of Schleswig-Holstein waived the construction of an unnecessary adaptive traffic control system on federal motorway A 1 near Lübeck, which was to cost €4 million. In the Lübeck area, federal motorway A 1 has six lanes. The Schleswig-Holstein road construction administration planned the construction of an adaptive traffic control system with a length of 11.2 km on this motorway section. It estimated the construction tests at €2.3 million. Adaptive traffic control systems are to safely control the flow of traffic in line with the current traffic load. Our Stuttgart field office supported us when we examined the planning of the adaptive traffic control system in 2012. We found that the Schleswig-Holstein road construction administration had not taken into account construction costs of €1.7 million. In addition, the road construction administration had based its investment appraisal on obsolete data about accidents and congestions on the motorway section concerned. Following our advice, the road construction administration re-examined its estimates and came to the conclusion that an adaptive traffic control system on A 1 in the Lübeck area is unnecessary because it did not improve the traffic flow.

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Federal Ministry of Transport, Building and Urban Development

43 Follow-up audit of the structural conversion of a crossing leads to reimbursement

Our follow-up audit led to the refund to the Federal Government of €420,000 by the road construction administration of the State of North Rhine-Westphalia. The said administration had failed to timely and completely claim financial contributions from the State and the municipality concerned towards the costs of the structural conversion of a crossing. The road construction administration of the State of North Rhine-Westphalia had a crossing of federal road B 239 in the town of Detmold converted at a cost of €800,000. The crossing links a state road and a municipal road with the federal road. The apportionment of the conversion costs is governed by the Federal Trunk Roads Act. Already in 2008, we alerted the road construction administration to deficiencies in the apportionment of the costs. We had found that, contrary to the Federal Trunk Roads Act, the road construction administration had not charged parts of the costs to the municipality and the State. At that time, the road construction administration had promised to do so retroactively. With the support of our Stuttgart field office, we conducted a follow-up audit in 2011 to ascertain whether the road construction administration had done as promised. We found that the road construction administration had neither apportioned costs for a traffic light system nor value-added tax. Moreover, it delayed claiming the financial contribution from the municipality by more than one year. We urged the road construction administration to correct the erroneous apportionment and to refund the amounts unduly charged to the Federal Government. The road construction administration complied with our demand and refunded €420,000 to the Federal Government.

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Federal Ministry of Transport, Building and Urban Development

44 Optimised construction of the Kramer Tunnel: millions saved and safety risks reduced

In response to our recommendation, the Federal Transport Ministry and the road construction administration of the Free State of Bavaria had initially built only the rescue tunnel for the Kramer Tunnel near Garmisch-Partenkirchen. The knowledge thereby generated about the difficult geological and hydrological conditions of the Kramer Massif is now used to determine the method of construction of the main tunnel. Thus, costs of several millions of euros will be saved and safety risks will be reduced. On behalf of the Transport Ministry, the road construction administration of the Free State of Bavaria is planning the Garmisch-Partenkirchen bypass, which will be routed west of the town through a tunnel underneath the Kramer Massif at a length of 3.6 km. The Kramer Tunnel is to consist of a single-tube main tunnel and a rescue tunnel passable for vehicles. The road construction administration planned to invite tenders jointly for both tunnels. It intended to start with the construction of the rescue tunnel. Work on the main tunnel was to start as early as four months after that. We audited the construction project with the assistance of our Stuttgart field office. We found that, owing to inaccessibility of the Massif, the road construction administration did not know the geological and hydrological conditions for the whole length of the tunnel. We considered it likely that geological fault zones, loose stone layers or ground water would impair the works and endanger the workers. The road construction administration would have neither been able to take regard to such factors when inviting tenders for the main tunnel nor when deciding about the construction method. We urged the Transport Ministry first to invite tenders only for the construction of the rescue tunnel. The road construction administration was to use the knowledge gained about geological and hydrological conditions to determine the method of construction of the main tunnel and to make a detailed estimate of the building costs. The Transport Ministry and the road construction administration complied with our demand. This resulted in cost savings in the range of millions of euros and a reduction of the safety risk.

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Federal Ministry of Transport, Building and Urban Development

45 Overloaded road transport of building materials

In respect to our recommendation, the Federal Transport Ministry induced the road construction administrations of the states to step up its monitoring of compliance with weight limits for transport vehicles on building sites of federal long-distance roads. This will avoid unnecessary costs of repairing to federal long-distance roads damaged as a result of overloading of vehicles. We had repeatedly pointed out the adverse effects of overloaded vehicles transporting building materials. The building materials needed on road construction sites are usually transported by simple lorries/trucks or tractor- trailers. The maximum permissible gross laden weight of such vehicles may not exceed 40 (metric) tons. During our audits, we found that the gross weight of transport vehicles on building sites of the road construction administrations often exceeded the permissible maximum. Individual delivery and weight notes indicated gross weights of up to 58 tons. We pointed out that overloaded transports cause considerable damage to roads and bridges. We recommended that the road construction administrations take stricter action against overloaded transports of building material. The Federal Transport Ministry followed our recommendations and issued guidance to the states’ road construction administrations, urging them to clarify by appropriate provisions in the building contracts that transport vehicles may not exceed the permissible maximum weigh and that overloading will be reported as an administrative offence which carries a penalty.

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Federal Ministry of Transport, Building and Urban Development

46 Administrative costs overcharged: Federal Government claims refund

Following our recommendation, the Federal Building Ministry has claimed the refund of overcharged administrative costs in the amount of €0.6 million from the Free State of Saxony. Moreover, the Ministry intends to take up our suggestion that, for the sake of legal clarity, the Federal Government should agree with the states that, in connection with building work carried out by the states on behalf of the Federal Government, neither party shall invoke a statute of limitation in connection with compensation for administrative expenses. The Federal Government paid €0.6 million too much in compensation for the performance of federal building tasks by that state. When we discovered the excess payment in the course of our audit, the Federal Government set off its claim to a refund from the state against compensation claims of the state. The state objected to the setting off because it was of the opinion that the federal claim was forfeited due to a statute of limitation. The Federal Building Ministry rejected the argument that the claim was statute-barred. The Ministry was of the opinion that the statute of limitation laid down in the Civil Code was not applicable arguing that the relation between the two parties of the agreement was not that of separate legal entities. The Federal Building Ministry insists on setting off the refund claim. It also has taken up our suggestion to negotiate with the states, for the sake of legal clarity, about a mutual raver of the statute of limitation.

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Federal Ministry of Transport, Building and Urban Development

47 Waterways and shipping directorates improve contract management

Following our advice, the North and North-West Shipping Directorates will improve the design and implementation of their procurement contracts. For this purpose, they step up the training of specialists and intensify their technical oversight. This will avoid unnecessary expenditure. The waterways and shipping offices (which are subordinate to the directorates) award numerous public contracts in order to perform their tasks. Such contracts relayed e.g. to the repair of ships or the supply of stones for hydraulic engineering. Many of the contracts made by the waterways and shipping offices audited were incomplete. For instance, contractual provisions defining the content and acceptance of supplies or services were incomplete or lacking. The waterways or shipping offices rarely monitored the deadlines for warranty claims. In almost half of the contracts audited, they subsequently extended the contract volume, which led to high additional expenditure. We attributed the deficiencies to the fact that the waterways and shipping offices failed to design and implement the contracts with due care. Moreover, we considered the technical oversight of the waterways and shipping directorate over the offices as inadequate. We called upon the directorates to significantly improve contract management. The directorates committed themselves to significantly step up their training programmes on procurement and contract management. In addition, they are considering organisational improvement, e.g. the obligatory use of central monitoring lists for acceptances and warranty deadlines.

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Federal Ministry of Transport, Building and Urban Development

48 Waterways and shipping directorate: Purchase of protective equipment

Following our advice, the Waterways and Shipping Directorate East has taken steps to ensure that its subordinate offices do no longer procure personal protection gear for their staff by means of numerous individual contracts. Instead, the needed equipment will be procured efficiently via centralised blanket agreements. When on duty, the staff of the waterways and shipping administration need equipment for their protection against dangers to their health and safety. This includes e.g. working cloths and protective cloths, life wests and protective footwear. According to a strategy developed by the Federal Transport Ministry, the waterways and shipping administration is generally to cover its equipment needs via central federal procurement offices because this is usually cost-effective. In the years 2008-2011, the offices procured identical protective equipment by means of 2,600 individual contracts, usually non-competitively. They neither requisitioned the needed equipment from the central procurement offices nor did they use the blanket agreements made by the latter. We noted both the inefficient decentralised purchasing and the lack of competition for most individual contracts. We demanded that procurement become efficient and that the federal Transport Ministry’s strategy be complied with. The Waterways and Shipping Directorate East took up our demand. Especially, the Directorate instructed its subordinate entities to generally cover their needs for protective equipment by means of the blanket agreements and it created the technical prerequisites for centralised electronic purchases.

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Federal Ministry of Transport, Building and Urban Development

49 Federal railway authority claims the return of €2.7 million of federal funds

Based on findings developed by our audit, the Federal Railway Authority demanded a refund of a total amount of €2.7 million by the railway infrastructure companies. These used federal funds inefficiently and in violation of the relevant agreements. The Federal Government finances the construction, upgrading of and replacement investments in its railway lines. Payments are based on project-related funding agreements with federal railway infrastructure companies. These commit themselves to using the federal funds received cost-effectively and for the purposes specified in the agreements. If the companies divert the funds to other purposes, they have to repay them. We audited how the companies have used the federal funds. In our audit, we found that the companies had charged supplies or services twice against the funds, had funded their own planning and construction errors and procured unnecessary equipment. We alerted the federal railway authority to these shortcomings and urged it to claim the return of the federal funds used in violation of agreements. The Authority followed our findings. It demanded that the companies repay €2.7 million. The companies have already paid back €1.5 million.

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Federal Ministry of Defence

50 Development of departmental budget 14 The Armed Forces consist of military units and of the Federal Defence Administration. Their tasks are derived from the objectives of German security and defence policies. The required budget funds are appropriated under departmental budget 14, i.e. the defence budget. The budget totalled €33.5 billion in FY 2012, equivalent to 10.9 per cent of the total federal expenditure budget. Defence expenditures of €32.8 billion, equivalent to 11.1 per cent of the total federal expenditure budget, have been appropriated for FY 2014. Departmental budget 14 – Federal Ministry of Defence

2012 2013 2014 actual target 1st draft figures figures budget

in € million

Departmental 33,505.8 33,258.1 32,835.7 expenditure

Departmental revenue 642.4 323.3 292.1

Commitment 4,993.0 8,050.4 4,329.4 authorisations

(established) posts

Staff 268,629 281,479 275,540

The presentation of development under departmental budget 14 focuses on the following issues: • In FY 2012, commitment authorisations appropriated under departmental budget 14 totalled €8.9 billion. In fact, the Federal Ministry of Defence only used €5 billion of these authorisations. Thus, the utilisation ratio was 55.8 per cent. In the previous year, however, the utilisation ratio was 18.2 per cent only. We criticised this comparably low percentage in departmental budget 14. We pointed out that such a low degree of utilisation could be attributable to the budgeting of expenditure items that did not comply with the formal budgeting requirements. We consider the increased utilisation a step in the right direction. • Departmental budget 14 provides for personnel expenditure of €10.5 billion in 2014. As part of the overall military downsizing exercise, the Armed Forces intend to reduce their military and civilian personnel by about 23,300, adjusting them to the new structure by means of various mechanisms. For instance, they temporarily recruit less new personnel in some areas than would be needed to completely replace outgoing personnel. The Armed Forces thereby intend to reduce their personnel quickly and in a socially acceptable way and to enhance the attractiveness of serving in the Armed Forces. • Since 1991, the Armed Forces have reduced the numbers of their aircraft, ground vehicles and naval vessels by more than 60 per cent. Nevertheless, this did not reduce expenditure on materiel maintenance. In 2012, for instance, the Armed Forces spent a total amount of €2.7 billion on materiel maintenance, which exceeded the 2007 annual amount by €432.9 million. Up to 2017, such expenditure is to increase by another €317.5 million to €3.1 billion. We hold that it is necessary to take a closer look into the reasons why materiel maintenance expenditure increased while the numbers of vehicles, aircraft and vessels declined. Since the Armed Forces intend to further reduce these numbers in the course of their downsizing exercise, the Federal Ministry of Defence should set savings targets for material maintenance.

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• The Armed Forces cooperate with private contractors under operator models. The purpose of such arrangements is to perform tasks of the Armed Forces more cost-effectively. For 2014, expenditures of €1.6 billion have been budgeted for operator models. The Federal Defence Ministry may terminate some operator models in the years 2013-2016. At present, the Ministry is considering options for the future procurement of the services so far delivered by the private sector.

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Federal Ministry of Defence

51 Armed Forces purchase unsuitable green electricity certificates for €3.5 million

The Armed Forces purchased green electricity certificates worth more than €3.5 million, which were not suitable for increasing the share of green electricity in the power consumption of their installations. The certificates merely served to declare the conventional electricity consumed as green electricity. The purchase of the certificate did not contribute to meeting the climate protection goals of the Federal Government. By means of green electricity certificates, producers of energy can market the value added of their green electricity separate from the physical electricity. If, e.g. a customer purchases green electricity certificates, he is permitted to re- label electricity generated from nuclear fuel or coal as green electricity. In the years 2010-2012 the Armed Forces purchased green electricity certificates at a total cost of €3.5 million. Their intention was to increase the share of green electricity in the power consumed on their real estate and to support the Federal Government in meeting the climate protection goals. The Federal Environment Ministry and the Federal Environmental Agency considered green electricity certificates as unsuitable for proving compliance with environmental requirements. Therefore, they discouraged contracting authorities from purchasing green electricity certificates. Nevertheless, three Armed Forces entities purchased green electricity certificates. One entity actually purchased so many green electricity certificates that it nominally used green electricity in excess of its actual power consumption. The green electricity certificates purchased by the Armed Forces almost exclusively related to green electricity from existing hydro-electric power stations in Norway. No electricity from there flows into the German green power grid. Thus, the real share of green electricity in the power consume on Armed Forces real estate has not increased. Thus, the purchase of the certificates was ineffective. Moreover, the purchase of green electricity certificates for 100 per cent of the power actually consumed could not be justified in terms of cost-effectiveness, since 30 per cent of the power actually consumed were green electricity. The Federal Defence Ministry admitted the weaknesses of the green electricity certificates. Nevertheless, it announced that it would continue to purchase them. It pointed out that it did not concur with the opinion of the Federal Environment Ministry and the Federal Environmental Agency concerning the promotion of green electricity. The arguments of the Federal Defence Ministry have not convinced us. We cannot see why the advice of the Environment Ministry and its subordinate Agency should not be valid for the Armed Forces. To us, it is a matter of particular concern that, while admitting the weaknesses of the green electricity certificates, it wishes to continue purchasing them. The Federal Defence Ministry has spent budget funds in the range of millions of euros on an ineffective measure. We expect the Federal Defence Ministry to renounce future purchases of green electricity certificates or similar instruments and to take regard to the advice of the Federal Environment Ministry about the cost-effective purchase of green electricity.

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Federal Ministry of Defence

52 Armed Forces cannot completely verify the whereabouts of lent materiel

Over the last 20 years, we repeatedly criticised that the Armed Forces do not have an overview of defence materiel lent to others. In 2012, they were once more unable to trace the whereabouts of defence materiel worth €92 million. Even with the assistance of additional specialist staff, the Armed Forces were unable to fully clarify accounting differences. After years of investigation and futile clarification efforts, they have no choice but writing off these assets worth millions. The Armed Forces temporarily hand over defence materiel both to scientific institutions and manufacturers of defence materiel for testing, development and research purposes. In 1993 and 2006, we had already criticised that the Armed Forces were unable to trace defence materiel it had lent to such institutions and companies. In 2012, with the support of our Munich field office, we looked once more into the way in which the Armed Forces organised the tracing of lent materiel. We found that the Armed Forces had meanwhile set up a central unit for the tracing of materiel but that this unit worked with unsuitable procedures and too few staff. Moreover, we advised the Armed Forces that there was more untraceable materiel than they had known. Only as a result of our audit work did the Armed Forces step up their efforts to trace lent materiel. In spite of extensive investigations, the special unit was unable to trace defence materiel worth €92 million. The Federal Defence Ministry now intends to introduce a formal procedure similar to that used to deal with damaged materiel. It thereby intends to write off a lump sum of €92 million in the relevant accounts without being able to ascertain whether and by whom damage has been caused in individual cases. In spite of their repeatedly announced intention to clarify this matter, they have not been able to fully trace the whereabouts of lent defence materiel during the last 20 years. We consider it necessary that, in future, the Armed Forces continuously trace lent materiel right from the start. Doing so will require a robust procedure and a suitable IT system along the lines of the intentions declared by the Armed Forces for years. Failing that, the Armed Forces cannot exclude the loss of assets.

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Federal Ministry of Defence

53 Armed Forces still have no modern system for tracing materiel in place

In the 1990’s, the Armed Forces repeatedly attempted to implement an effective system for tracing materiel. These efforts have not been successful so far. In the latest instance, they invested €5 million into a separate IT system for their Afghanistan mission. However, this system turned out to be impracticable. Now they intend to spend more than €8 million on commissioning a civilian contractor to monitor the backflow of materiel from Afghanistan. Nevertheless, the efficiency of the Armed Forces’ materiel management remains limited. To perform their mission, the Armed Forces have to move and trace materiel worldwide. An IT system for tracing materiel from commissioning up to consumption or decommissioning is to be implemented. We repeatedly found that, especially in connection with missions abroad, the Armed Forces were not able to ensure the necessary transparency of the movement of materiel. With the support of our Munich field office, we looked into the Armed Forces’ system for tracing materiel in 2012. In the year 2000, the Armed Forces had decided to implement their standard management software (SASPF) also for their materiel management. Since then, they have equipped selected logistic units in Germany with the appropriate systems. However, so far, these systems only support depot management and do not have the capability of tracing shipments or airlift routes. In 2004, the Armed Forces procured a system costing €5 million for tracing materiel in connection with supplying German troops in Afghanistan. They did not participate in the system used by other NATO Member States. The Armed Forces intended to later integrate their own tracing system into SASPF. They spent the funds of more than €12 million appropriated for this purpose on other partial projects. Since further investment would have been required, the Armed Forces decided to discontinue the use of the system effective from 2011. They now intend to use the support of a commercial contractor for bringing back materiel from Afghanistan. This contractor is to ensure, by means of his own technology and at a total cost of €8 million, the tracing of the return to Germany of about 4,800 containers and 1,200 vehicles. In our assessment, the steps so far taken by the Armed Forces to improve the tracing of their materiel have been incoherent and inadequate. We perceive an urgent need for the Armed Forces to integrate a system for tracing materiel into SASPF. In our opinion, separate solutions not integrated into the Armed Forces’ logistic system are inefficient. Only by integrated materiel management will the investments add value in the long term.

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Federal Ministry of Defence

54 Projects of the privatised clothing supplier of the Armed Forces funded

The Federal Defence Ministry has funded several technical projects of the privatised clothing supplier of the Armed Forces with an amount of €5 million. There was no legal basis for doing so. In addition, the Ministry cannot exclude the possibility that its grant towards one of the projects actually exceeded its costs. The Ministry has not acceded to our demand to clarify the circumstances of such funding. On behalf of the Federal Government, the Federal Defence Ministry holds 25.1 per cent of the share capital of LH Bekleidungsgesellschaft mbH, a limited liability company established jointly with two private sector companies. Being the sole customer of Bekleidungsgesellschaft, the Armed Forces do not only bear the cost of procuring clothing but also the company’s other expenditure. For this purpose, the Armed Forces and the company annually agree on a fixed price. In December 2011, the Armed Forces paid €4.13 million to the company for a new IT system. The Ministry’s directorate arranged for payment within a few days on the basis of an inadequate project application and without sufficient back-up documentation. The company intended to commission the IT system as late as in 2013. We hold that this prepayment was inadmissible. Moreover, there was no legal basis for this funding. The decision has been poorly documented and the Ministry cannot exclude that the company took costs of the IT system into account when calculating the fixed price. If this is the case, the Armed Forces would have overpaid the IT system. For the year 2009, the company offered the Armed Forces to credit them an amount of €913,000. The Ministry’s directorate arranged for most of the credited amount to be spent by the company for technical changes of two high- bay warehouses, “passing by the federal budget”. In our opinion, this infringement of budgetary law is particularly grave since, during decision-making in the Ministry, the directorate had previously not been authorised to fund this measure from the federal budget. The Ministry has not acceded to our demand to review and comprehensively assess the legal aspects of all decisions concerning the funding of the projects.

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Federal Ministry of Defence

55 Expenditures on foreign assignment allowance cannot be sufficiently verified

During their assignment abroad, e.g. in Afghanistan, Armed Forces personnel received foreign assignment allowances in addition to the pay they draw when serving in Germany. Owing to inadequate keeping of files, the quality of processing and the amounts paid out cannot be verified. Excess or underpayments thus go permanently unnoticed. Armed Forces personnel assigned to a humanitarian or support mission abroad are paid foreign assignment allowances under the relevant legislation. Depending on the strain implied in local conditions, tax-free allowances in six brackets ranging between €30 and €110 per diem are granted. We intended to audit the payment of foreign assignment allowances to 20,000 staff in the annual amount of €180 million on the basis of a sample of payroll cases. The Armed Forces did not keep the corresponding files in good order. Only with a considerable input of work were they able to furnish records on payments of such allowances. As a result, we had to limit the scope of our audit which impeded accurately assessing the processing quality of the allowance cases by the Armed Forces. We also audited the calculation of the allowances in Germany. In one Armed Forces entity, 30 per cent of the cases had been processed inaccurately. Soldiers were frequently either overpaid or underpaid. We expect the Federal Defence Ministry to ensure checks of the allowance payments and the accurate keeping of files as soon as possible. This will be the only way for the Ministry and its subordinate authorities to exercise their power of technical oversight and to ensure accurate payment of the foreign assignment allowances.

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Federal Ministry of Defence

56 Armed Forces pay salaries to newly recruited soldiers inaccurately

The Armed Forces inadequately checked the salary payments to their newly recruited military personnel. 2,000 soldiers received inaccurate amounts of pay. The new IT payroll system does not meet the technical requirements for ensuring that salaries are paid in correct amounts. Therefore, the Federal Defence Ministry should complement the IT system by controls and introduce electronic payroll records. Based on our audit findings, we had recommended that the Federal Defence Ministry verify the salary payments. When doing so, the Ministry found that nearly 2,000 soldiers had received incorrect, usually too low amounts of pay. The new IT payroll accounting system (SASPF) does not permit a centralised verification of the salaries paid to the soldiers. The Armed Forces keep hardcopy payroll records for their soldiers at several locations. Therefore, a manual ex-post check of the payments involves a large administrative burden. Additional checking functions and soft copy pay records could remedy this deficiency. Due to financial considerations, the Armed Forces have not yet introduced electronic pay records. The Federal Defence Ministry is obliged to ensure the accurate payment of military salaries. It should make arrangements that personnel expenditure can be verified with a reasonable administrative burden. To do so, it should complement SASPF by verification functions and introduce electronic payroll records.

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Federal Ministry of Health

57 Development of departmental budget 15 The Federal Health Ministry is responsible for the legal framework of statutory health and long-term care insurance and gives grants to the health insurance bodies. In addition, it has regulatory powers in the fields of health, health protection measures and the fighting of diseases. It is supported in the discharge of its functions by five subordinate agencies. The FY 2012 departmental expenditure budget 15 totalled €14.5 billion, equivalent to 4.7 per cent of the total federal expenditure budget. Departmental budget 15 – Federal Ministry of Health

2012 2013 2014 actual target 1st draft figures figures budget

in € million

Departmental 14,502.5 11,986.9 11,090.7 expenditure

Departmental revenue 135.2 93.5 99.6

Commitment 95.9 42.6 49.4 authorisations

(established) posts

Staff 2,537 2,035 2,020

• Grants by which the Federal Government compensates health insurers for expenditures on non-contributory benefits totalled €14 billion in 2012 and thus accounted for 97 per cent of total expenditures from this departmental budget. Together with the contributions of the insured persons (and their employers) grants flow into the Umbrella Health Fund managed by the Federal Insurance Office. The individual health insurance bodies receive allocations from the Fund to cover their expenditures on benefits and administrative costs. For 2013, the federal grant was reduced by €2.5 billion to €11.5 billion. In 2014, it will be once more to be reduced to €10.5 billion. For the subsequent years, annual federal grants have again been estimated at €14 billion. • We audited the health insurance bodies’ expenditures on benefits and administration. In response to our annual report, the resolution of the Public Accounts Committee of the German Parliament’s Budget Committee and proposals made by the Federal Ministry of Health, Parliament amended the submission and approval of the contracts with executive directors of the health insureance bodies, the approval of lease agreeements and the improvement of invoicing by hospitals. Moreover, we noted insufficient oversight and excessive administrative expenses of the former umbrella organisation of guild health insurance funds. • In accordance with new legislation, the Federal Ministry of Health will in 2014 give grants, retroactively from 2013, towards the premiums payable by members of statutory long-term care insurance for supplementary private long-term care insurance. For this purpose, €100 million have been estimated in the 2014 federal budget. At this time, it is impossible to assess the volume of claims to grants and the administrative costs. • Grants of €44 million were awarded to public-sector and private-sector institutions, associations and individual projects in the field of health care and to research institutions of the Leibniz Association which is funded jointly by

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the Federal Government and the German states. €31 million were used to fund health education and disease prevention programmes, while €22 million were spent on research funding. • Departmental budget 15 disclosed sponsoring revenues of €15 million, of which €13 million came from the Association of Private Health Insurance Companies for the funding of campaigns to prevent juvenile AIDS and alcohol abuse. Based on our audit results, the Public Accounts Committee required the Federal Health Ministry to ensure that the sponsoring agreements be drafted in a way excluding undue influence by the Association.

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Federal Ministry of Health

58 Health Fund without meaningful and audited financial statements

Since 2009, the Federal Insurance Office has administered the Health Fund from which expenditures of up to €185 billion were paid in 2012. So far, the Fund has belatedly submitted the financial statements for the years 2009 and 2010. These provide little meaningful information since they do not include notes on the Fund’s financial and liquidity position. The audit of annual financial statements by the internal audit service of the Federal Insurance Office should be replaced by an independent audit, for which the legal basis must be created. The Health Fund is obliged to produce an annual financial statement up to 15 May of the subsequent year. In contrast to the financial reporting duties of the individual health insurance bodies, the Fund’s financial statements are not required to include an annex with notes on the financial and liquidity position. The Fund’s financial statements are audited by the internal audit office of the Federal Insurance Office. The Federal Insurance Office adopted the annual financial statement for 2009 in December 2011 and the annual financial statement for 2010 in June 2013. No financial statements have as yet come forth for the years 2011 and 2012. We demanded the production of these statements as soon as possible and the timely submission of the statements in the future. We pointed out that the annual financial statements submitted so far provide little meaningful information. For instance, there is a lack of notes about the Fund’s liquidity trend, risks and perspectives. Furthermore, the audit by the internal audit service is no valid substitute for an independent audit. The Federal Health Ministry told us that it was planning new regulations for speeding up the production of the annual financial statements. The Ministry admitted that explanatory notes to the statements could facilitate their evaluation. We recommended that future financial statements of the Health Fund be complemented by important information about the Fund’s position, risks and perspectives. The requirements to be met by the financial statements of the individual health insurance bodies should also be applied to the financial statements of the Health Fund. We also consider an independent audit of the Fund’s financial statements necessary in order to avoid conflicts of interest. Furthermore, a procedure for granting discharge to the Federal Insurance Office should be developed. We urge the Federal Health Ministry to develop regulations to this effect.

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Federal Ministry of Health

59 Prevention of corruption and control of the use of grant funds improved

In response to our recommendation, the Federal Health Ministry and the State of Hesse will impose effective rules designed to prevent corruption on a jointly funded research institute. Moreover, the Federal Health Ministry and the State of Hesse agreed that the latter will audit the expedient and cost-effective use of funds in line with prescribed standards. Together with the State of Hesse, the Federal Health Ministry gives grants to a scientific research institute which tests new methods for the treatment of cancer and AIDS. Both the Federal Government and the State give institutional grants. Under the funding agreement between the Federal Government and the State of Hesse, the research institute is obliged to apply Hesse’s regulations for corruption prevention and the State has to audit the documents proving the use of the grant funds. We found that the Hessian rules for corruption prevention are limited to an administrative regulation about accepting rewards and gifts. No obligation was imposed on the research institute to implement other important measures of corruption prevention, e.g. the transparency of contract award procedures and the rotation of staff in areas that are particularly vulnerable to corruption. The Federal Health Ministry tolerated this and did not impose regulations of its own concerning corruption prevention. Furthermore, the Federal Health Ministry had accepted that the State of Hessen had the documents proving the use of the grant funds audited by a private-sector auditor commissioned by the research institute. The Federal Health Ministry concurred with us in that corruption prevention and the audit of the documents proving the use of funds need to be improved. Both the Federal Government and the State of Hessen will oblige the research institute to comply with the Federal Government Directive concerning the Prevention of Corruption in the Federal Administration. This Directive specifies measures of corruption prevention for all important fields of activity. Moreover, the Federal Health Ministry and the State have agreed on the provisions that apply to the member institutions of the Leibniz Association with respect to the back-up documentation of the use of grant funds. These institutions have to comply with an extensive set of standards for proving and auditing the use of funds.

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Federal Ministry for the Environment, Nature Conservation and Nuclear Safety

60 Development of departmental budget 16 The Federal Ministry for the Environment, Nature Conservation and Nuclear Safety has lead responsibility for the Federal Government’s environmental policy. It spent €1.5 billion in FY 2012. Expenditure of €1.6 billion has been budgeted for 2013 and of €1.8 billion for 2014. Departmental budget 16 – Federal Ministry for the Environment, Nature Conservation and Nuclear Safety

2012 2013 2014 actual target 1st draft figures figures budget

in € million

Departmental 1,490.4 1,644.1 1,818.2 expenditure

Departmental revenue 312.6 326.5 326.3

Commitment 817.2 1,099.4 1,202.1 authorisations

(established) posts

Staff 2,709 2,956 3,015

• With €503 million (equivalent to 34 per cent of the total departmental expenditure budget), expenditures on the promotion of renewable energies once more was the biggest item in FY 2012. The expenditures on the final disposal of radioactive waste totalled €351 million (24 per cent of total expenditure). €108 million (equivalent to 7 per cent of total expenditure) was allocated to international climate protection. • Administrative expenditures plus retirement benefits totalled €296 million, i.e. 20 per cent of total expenditures. These are not only attributable to the Ministry but also to the Federal Environment Agency, the Federal Agency for Nature Conservation and the Federal Office for Radiation Protection as subordinate authorities. • Of the 2012 total revenues of €313 million of this departmental budget, 74 per cent have been accounted for by advance payments of future users of final repositories. These advance payments are to rise in 2013 and 2014 by about €60 million each, thus contributing to an increase in this departmental budget’s total revenues. • The medium-term financial plan for the years 2015-2017 calls for reducing the annual expenditure level of €1.8 billion by €70 million on average each year. However, departmental budget planning for future years is subject to numerous financial risks that are currently not reflected in the federal budget. The biggest risk is implied in the need to reliably estimate the expenditures on the final disposal of radioactive wastes. Annual expenditures of €460 million estimated for this item in the financial plan are based merely on a rough estimate, inter alia due to the fact that the Ministry cannot rely on any sound figures about the total costs of the final repository projects. • Effective from 1 January 2011, the Federal Government created an off-budget entity known as the Special Energy and Climate Fund. This Special Fund permits additional programme expenditure to promote an environmentally friendly, reliable and affordable energy supply as well as climate protection. In its 2014 draft budget, the Federal Government proposes shifting the resources of the separate property fund for international climate change mitigation and environmental protection to the departmental budgets 16 and 23. The 2014 budget of the Fund calls for expenditures of €1.6 billion and commitment authorisations of €2.8 billion. Of these, the Federal Ministry for the Environment, Nature

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Conservation and Nuclear Safety is to manage expenditures of €344 million (22 per cent) and commitment authorisations of €487 million (18 per cent).

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Federal Ministry for Family Affairs, Senior Citizens, Women and Youth

61 Development of departmental budget 17 Within the Federal Government, the Ministry is responsible for the policies on families, senior citizens, gender mainstreaming and youth. In particular, it funds statutory benefits for families and gives grants to institutions and towards projects. The Federal Department for Media Harmful to Young Persons and the Federal Office of Family Affairs and Civil Society Functions are superior federal authorities subordinate to the Ministry. The Federal Anti-Discrimination Agency is integrated in the Ministry. In 2012, expenditures under this departmental budget totalled €7.3 billion, equivalent to 2.4 per cent of the total federal expenditure budget. Departmental budget 17 – Federal Ministry for Family Affairs, Senior Citizens, Women and Youth

2012 2013 2014 actual target 1st draft figures figures budget

in € million

Departmental 7,289.0 6,881.7 7,626.2 expenditure

Departmental revenue 72.1 67.7 66.4

Commitment 444.4 553.6 542.8 authorisations

(established) posts

Staff 1,260 1,268 1,247

The major portion of expenditures within this departmental budget is accounted for by statutory benefits for families, e.g. parental allowance. As from 1 August 2013, a childcare supplement was introduced as additional benefit. In 2012, the statutory benefits for families totalled €5.8 billion, equivalent to 80 per cent of total departmental expenditures. These expenditures are estimated to rise to reach €6.0 billion in 2013 and to €6.7 billion in 2014. Since the suspension of compulsory non-military national service as from 1 July 2011, the Federal Office of Family Affairs and Civil Society Functions has had a large number of new responsibilities, e.g. for the voluntary national service and the promotion of mentoring of the volunteers pursuant to the Youth Voluntary Services Act. In addition, it has taken over functions from the remit of the Federal Ministry for Family Affairs, Senior Citizens, Women and Youth. We are monitoring this process. Moreover, the Ministry supports institutions and programmes e.g. for language training in kindergartens or measures to strengthen civil society. A large portion of the resources appropriated for institutions and projects in the field of children and youth policy is channelled directly to local regional executing organisations or to the German states in order to fund local or regional programmes. As early as in 2007, the German SAI’s President, acting in his capacity as Federal Performance Commissioner, had pointed out that the Federal Government provided funding for such tasks and had advocated a strengthening of the operational and financial responsibilities of the states.

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Federal Ministry for Family Affairs, Senior Citizens, Women and Youth

62 Reduction of administrative burdens: Amendment of advances on child maintenance

A major contribution to the reduction of administrative burdens may be achieved, if the statutory advances were no longer set off against claims to benefits under the basic security scheme for jobseekers, since such setting-off is cumbersome to administer. This would not affect the total benefit claims of single parents and their children. In our opinion, the Federal Family Affairs Ministry needs to step up its efforts to have the legal amendment enacted. The resulting shift of financial burdens between the Federal Government, the states and municipalities needs to be compensated. The claim to basic security benefits for jobseekers, e. g. for subsistence and accommodation are subordinate to the statutory claim to advance payments for child maintenance. The latter claim is set off against the claim to basic security benefits. We have found that this involves unnecessary administrative burdens. We have estimated the related personnel and material costs incurred by states and municipalities at €160 million annually. We believe that a major contribution to the reduction of administrative burdens may be achieved by abolishing the setting-off of the statutory claims to advance payments for child maintenance against the claims to basic security for jobseekers. Only children that do not have a claim to basic security for jobseekers (and their dependents) should be entitled to advance payments for child maintenance. This arrangement would not affect the aggregate benefit claims of single parents and their children. The Federal Family Affairs Ministry has acknowledged the large administrative burden the present arrangement places on states and municipalities. It has stated its intention to arrange for a legislative amendment concerning the statutory claim to advance payments on child maintenance in the long to medium term. We hold that the Ministry needs to pursue such legislative amendments with greater urgency. The resulting shift of burdens between the Federal Government, the states and municipalities must be compensated.

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Federal Ministry for Family Affairs, Senior Citizens, Women and Youth

63 Verification of income for determining the claim to parental allowance simplified

In response to our recommendation, the Federal Legislature simplified the calculation of the claim to parental allowance. The new regulations make it easier for the states’ units responsible for administering parental allowance to verify the incomes of the claimants and to accurately calculate the claims to the federally-funded parental allowance. This may also reduce the states’ administrative burden. With the support of our field offices, we found that the units administering parental allowance had inaccurately assessed claimants’ net incomes in one third of all parental allowance cases audited. We attributed this to the complex provisions on calculating incomes. The staff of the units administering parental allowance often did not have the required knowledge of accounting and tax law for calculating net incomes accurately. We repeatedly recommended that the Federal Family Affairs Ministry simplify, in conjunction with the states, the calculation of parental allowance. In 2012, the Legislature decided to facilitate the calculation of incomes. In the case of claimants who are employees, the parental allowance units calculate claimants’ net incomes by deducting lump sums for social security contributions and taxes. Self-employed claimants present the latest income tax assessment notice issued before the birth of the child to prove the amounts of their incomes. In our opinion, this legislative amendment considerably simplifies the work of the parental allowance units. The amended provisions contribute to the accurate administration of the Parental Allowance Act and the proper use of federal funds. Moreover, they may reduce the administrative burdens on the states.

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Federal Constitutional Court

64 Development of departmental budget 19 The Federal Constitutional Court located in Karlsruhe is an independent court of law separate from all other constitutional bodies. It monitors compliance with the German Constitution. The Federal Constitutional Court’s rulings are binding on the constitutional bodies that exist at federal and state level and on all courts and authorities. In FY 2012, the Federal Constitutional Court spent €29.5 million. This accounts for 0.01 per cent of the total federal expenditure budget. Departmental budget 19 – Federal Constitutional Court

2012 2013 2014 actual target 1st draft figures figures budget

in € million

Departmental 29.5 45.1 39.3 expenditure

Departmental revenue 0.5 0.04 0.04

Commitment 4.9 18.6 10.1 authorisations

(established) posts

Staff 161 170 172

• This departmental budget has an above-average share of expenditures on personnel and retirement benefits. In 2012, these expenditures amounted to more than 72 per cent of the Court’s total expenditures. • The Court’s building will be completely renovated by 2014 at an estimated total cost of €46.7 million. Therefore, the Court’s total expenditure budget will increase significantly in the years 2012-2014 in comparison to 2011 total expenditures. • The Court intends to expand its public relations work effective from 2014. Also, it has planned to spend significantly more money on international contacts as well as on publications and documentations. • The number of constitutional complaints filed with the Court is increasing continuously. The Court advocates introducing a provision that a fee should be charged for considering obviously unsubstantiated constitutional complaints.

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Federal Ministry for Economic Cooperation and Development

65 Development of departmental budget 23 In 2012, the Federal Ministry for Economic Cooperation and Development spent €6.3 billion: Departmental budget 23 – Federal Ministry for Economic Cooperation and Development

2012 2013 2014 actual target 1st draft figures figures budget

in € million

Departmental 6,346.0 6,296.4 6,282.8 expenditure

Departmental revenue 605.1 559.6 587.1

Commitment 4,341.3 4,852.8 6,900.3 authorisations

(established) posts

Staff 591 734 723

• Expenditures on bilateral inter-governmental development cooperation (sub-divided into Financial Assistance and Technical Assistance) totalled €3.3 billion, equivalent, as in the previous year, to 53 per cent of the total. • Support of civil-society and economic organisations under non-governmental development cooperation accounted for €724 million (11 per cent of total expenditure). • Under multilateral and European development cooperation, the contributions to international organisations totalled €2.2 billion, equivalent to 34 per cent of total expenditures. • Administrative expenditures in 2012 totalled €92 million, equivalent to 1 per cent of the Ministry’s total expenditure budget. The revenues of the departmental budget, which totalled €605 million in 2012 largely originated from repayments and interest payments for loans granted by way of Financial Cooperation. Since the establishment of the off-budget federal entity Energy and Climate Fund, the Ministry has had additional resources at its disposal for purposes of international climate and environmental protection. In 2012, the Ministry spent €14 million of the total amount of €23 million allocated to it. Since the Fund obtained fewer revenues than expected, the Federal Ministry for Economic Cooperation and Development was able to use commitment authorisations of €237 million rather than the budget amount of €523 million. Under the 2014 draft federal budget, the Federal Government intends to reallocate the resources needed to finance projects for international climate and environment protection from the off-budget Fund to federal budget. The Federal Government has repeatedly committed itself to raising the share of public expenditures on development cooperation in Germany’s gross national income to 0.7 per cent by 2015. This share totalled 0.39 per cent in 2011 and 0.38 per cent in 2012 (provisional figure).

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Federal Ministry for Economic Cooperation and Development

66 Shareholding revenues not surrendered to the federal budget

The Federal Ministry for Economic Cooperation and Development promised that it will in future duly remit revenues from shareholdings in and loans to enterprises in developing countries. Furthermore, it intends to state shareholdings and outstanding loans granted coorectly in the federal capital account. The Ministry commissioned a company to aquire shareholdings in enterprises in developing countries or grant loans to these enterprises from federal budget funds. The Ministry received revenues and debt repayments of €20 million from the shareholdings and loans. However it did not surrender these funds to the federal budget but used them for other development purposes. There was no authority under budget law to do so. Parliament was not aware of these off-budget resources which were available for development policy purposes. Therefore, it was unable to decide about the use of these funds. Not being aware of these off-budget funds, it appropriated budget funds for the same purpose. Furthermore, the Ministry stated the shareholdings and outstanding loans inaccurately in the federal capital account. At year-end 2012, the capital account stated shareholdings and loans in the total amount of €86 million, although they had already been sold or repaid.

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Federal Ministry of Education and Research

67 Development of departmental budget 30 For FY 2014, funds of €14 billion have been budgeted for the Federal Ministry of Education and Research. While the overall budget is to be reduced by 2.2 per cent compared to 2013, expenditure under departmental budget 30 will increase by 1.6 per cent. Compared to 2011, the overall increase of the departmental budget will be 20.3 per cent. Departmental budget 30 – Federal Ministry of Education and Research

2014 2012 2013 1st actual target draft figures figures budget

in € million

Departmental 12,968.8 13,740.4 13,964.7 expenditure

Departmental revenue 127.0 111.7 89.4

Commitment 4,524.7 5,547.2 4,563.5 authorisations

(established) posts

Staff 873 916 920

• The draft budget is based on the assumption of a sharp increase in underspending to €410 million and, therefore, on the expectation that the Ministry will be able to realise savings in budget execution that are considerably higher than previously. • In the previous year, we pointed out that the reduction of expenditure in 2014 projected in the medium-term financial plan was little reasonable. Our assessment has been confirmed by the fact that total expenditure under departmental budget 30 is to be higher by €450 million in comparision to the earlier medium- term projection. Under the current medium-term financial plan, expenditure on research and development is also to decline in the next few years. We expect that this projection will not be realistic either. • The Ministry provides funding in excess to €4 billion to research institutions. These were strongly expanded in recent years and staff already totalled 90,000 in 2012. This large number of staff entails considerable future obligations for the Federal Government. • The 2014 budget calls for more than €6 billion of expenditures on research projects. For years, we have found deficiencies in the control of these grant funds. The Ministry needs to do more efforts to remedy these deficiencies. In our opinion, the steep increase in grant-funding under departmental budget 30 can only be justified, if the Ministry can ensure a sound management of these resources. • The Federal Government has committed itself to pay €715 million annually to the states up to 2019 as compensation for abolishing the joint tasks education planning and university construction. As from 2014, the Federal Government has not obliged the states to use the funds in the education sector. Nevertheless, the Federal Government would welcome it, if the states used the funds in the education sector. We endorse this request. Federal education and research budget may not be used to fund general expenditure of the states. • Since 2010, the Ministry has funded the Germany Scholarship programme. Due to the small number of beneficiaries of the programme, only slightly less than 60 per cent of the federal funds allocated in 2010-2012 went

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into payments to beneficiaries, while nearly 40 per cent where accounted for by programme delivery costs. In spite of the slow start, the medium-term financial plan projects programme expenditure in the total amount of €275 million in the years 2013-2017.

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Federal Ministry of Education and Research

68 Overhead funding for universities – limits of federal funding responsibility

The German Research Foundation grants overhead funding towards universities’ research programmes to co-finance there infrastructure. These overhead allowances are borne by the Federal Government alone, although the Foundation is jointly funded by the Federal Government and the state on a pro-rata basis. We have called upon the Federal Research Ministry to extend its overhead funding beyond 2015 only, if the states make an appropriate contribution. The Ministry should also substantiate the appropriateness of the overhead allowances. The German Research Foundation gives grants towards universities by financing their personnel and material expenditure. Since 2007, they have additionally received overhead allowances of 20 per cent. Their purpose is to set off the burden on the infrastructure of universities. We found that, in contrast to other grant-funding, overhead allowances are financed exclusively by the Federal Government. Neither during the negotiations for the Higher Education Pact up to 2010 nor in connection with its extension to its 2015 did the Federal Research Ministry succeed in securing a contribution from the states. Also, the Federal Ministry set the overhead allowance at 20 per cent without knowing whether the universities actually suffer this advantages which the Federal Government may compensate for at that level. For the period beginning in 2016, the Federal Research Ministry intends to make an attempt to secure a contribution from the states. The Ministry claimed that it had obtained a declaration of intent according to which the states would accept their obligation to contribute and that there would be a study about the level of the overhead allowances which would look into their impact on the universities’ infrastructure. In our opinion, the states’ declaration of intent is no clear funding commitment. We called upon the Federal Research Ministry to make any extension of the overhead allowances conditional upon a reasonable contribution by the states. We believe that, in the long term, it will not be in the best interest of the universities, if the states partially renege on their responsibility for the universities so that the latter become increasingly dependent on time-limited federal grants. To determine the appropriate level of the overhead allowances, we consider representative economic data necessary in order to identify the additional burden on infrastructure. We therefore demand that the study be aligned so as to generate appropriate results.

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Federal Ministry of Education and Research

69 Federal Research Ministry closes gap in the control of grant funds handed out by the German Research Foundation

In response to our recommendation, the Federal Research Ministry obliged the German Research Foundation to better control federal grant funds. In future, the Foundation will conduct substantive tests on 5 per cent of all grants in which universities are given grants under the Initiative for Excellence. Moreover, the Foundation also intends to improve control in other funding areas and to close gaps in control. The German Research Foundation delivers the Initiative for Excellence to Promote Institutions of Higher Education, which is sponsored by both the Federal Government and the States. In this context, it channels federal budget funds of nearly €400 million annually to universities. We found that the Foundation did not control the funds in line with the requirements of budgetary law. Specifically, it would have been the Foundation’s duty to carry out substantive tests on the basis of samples. Thus, the channeling of federal budget funds via the Foundation resulted in a gap in the control of the use of public funds. The Federal Research Ministry obliged the Foundation to improve the control of grant funds. Therefore, the Foundation will carry out substantive tests on 5 per cent of the grants awarded under the Initiative for Excellence. This will include audit work on universities’ premises. In response to our audit findings, the Foundation will moreover develop a framework for improving the control of funds in all of its funding areas and for closing gaps in control. The Federal Research Ministry has taken up our recommendations. The steps now taken are appropriate means for guaranteeing adequate control of federal budget funds channelled by the Foundation to grantees. We shall monitor the progress made in practice in implementing the Foundation’s improvement framework.

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Federal Debt

70 Development of departmental budget 32 In 2012, expenditures from the departmental budget totalled €31.3 billion while total revenues amounted to €23.7 billion. Departmental budget 32 – Federal Debt

2012 2013 2014 actual target 1st draft figures figures budget

in € million

Departmental 31,316 32,983 30,374 expenditure

Departmental revenue 23,749 26,351 7,306

• Total expenditures from the federal budget have for years exceeded total revenues. In its annual budgets, the Federal Government regularly closes this gap by borrowing (net new borrowing). Proceeds from such borrowing are disclosed as revenues in departmental budget 32. • When federal debt incurred in previous years falls due, new borrowing (replacement borrowing) is used to substitute the previous borrowing. By doing so, the Federal Government rolls over debts and interest expenditures into the future without reducing accumulated debt. Net new borrowing plus replacement borrowing add up to federal gross borrowing as disclosed in the budget, which totalled more than €245 billion in 2012, while Federal Government’s accumulated debt totalled €1,054 billion. • Debt servicing that the Federal Government has to pay on its aggregate debt is the principal expenditure item. In its medium-term financial plan, the Federal Government has estimated an increase of interest expenditure from €31.6 billion in 2013 to €34.2 billion in 2017. The extent to which this estimate will prove accurate depends on the further development of interest-rate levels. • Other expenditures provided for under departmental budget 32 include revenues and expenditures on sureties, guarantees and other warranties. The Federal Government assumes guarantees for projects, both in Germany and abroad that merit support or are in the public interest. The Federal Government uses this tool mainly to promote economic activity. • The 2012 annual Budget Act authorised the Federal Government to grant warranties up to a total amount of €436.9 billion. This authority was used to the degree of 76.8 per cent. The loss so far accumulated in connection with previous warranties totals €11.7 billion, of which the major proportion is accounted for by defaults on warranties for the domestic economy. • Apart from the warranties authorised under the Budget Act, the Federal Government provides financial support and assumes other warranties in favour of German financial institutions in connection with the stabilisation of the financial market. It set up two off-budget federal funds, i.e. the Financial Market Stablisation Fund and the Restructuring Fund. At year-end 2012, the Federal Government guaranteed bonds issued by the financial institutions in the aggregate amount of €3.7 billion and provided financial assistance totalling €18.8 billion. As from 2011, banking institutions have to pay annual and special contributions known as bank levies. In the long term, a capital stock of €70 billion is to be accumulated. If these resources are not sufficient to restructure instable banks, the Restructuring Fund, also an off-budget federal entity, can provide resources of up to €20 billion for capital injections and guarantees of up to €100 billion.

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• To safeguard financial stability in the European Monetary Union, the Federal Government assumes warranties of €22.4 billion for lending support to Greece and up to €211 billion for the European Financial Stabilisation Facility. These warranties are not included in the budget. In 2012, the Member States of the European Monetary Union established the permanent European Stability Mechanism (ESM). This replaces the temporary EFSF and continues the stabilisation measures. The ESM is to support Member States, if they cannot borrow in the capital markets or if they can do so only under unfavourable conditions. The objective is to safeguard the financial stability of the euro area. The ESM has a capital stock of €700 billion, of which the Member States must directly pay in €80 billion. Germany’s share in this direct payment is €21.7 billion and is payable up to 2014. The related expenditure has been budgeted in departmental budget 60. Germany’s liability in respect of the ESM’s capital stock is limited to €190 billion.

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General Fiscal Administration

71 Development of departmental budget 60 The departmental budget of general fiscal administration differs substantially from the expenditure oriented departmental budgets that reflect the structure and functions of federal departments. Above all, this departmental budget discloses federal expenditures and revenues which • have no substantive relationship with the remit of any department or • relate to various departmental remits without one department having lead responsibility. Revenues are the major items in this departmental budget, especially tax revenues (€256.1 billion in 2012). According to the 2014 draft budget, tax revenues (budgeted at €268.7) accounting for 91 per cent of total revenues (including net borrowing) are the major source of funding federal expenditures. Given their fiscal importance, we place focus on these. Compared to revenues, expenditures from departmental budget 60 play a minor role (€20.5 billion in 2012). However, they have significantly increased to €28.2 billion compared to the previous year. The main reason for this is the non- recurring grant of €8.0 billion to the Reconstruction Aid Fund for Flood Damage. That Fund had been established to pay for the damage caused by floods in summer 2013 and to fund the reconstruction of infrastructure. Apart from the payments into the European Stability Mechanism (in the years 2012-2014), major expenditure items include grants to the retirement fund for postal civil servants, the allocations to the Energy and Climate Fund (in the years 2012-2014), the funds accrued to meet public service pay rises and miscellaneous expenditure on retirement benefits. Departmental budget 60 – General Fiscal Administration

2012 2013 2014 actual target 1st draft figures figures budget

in € million

Departmental revenue 266,619.8 273,096.4 277,265.0

Departmental 20,467.9 28,200.8 16,034.0 expenditure

Commitment 4,408.0 57.0 67.0 authorisations

While the amount of revenues from privatisations has declined by €4 billion, tax revenues are to rise by €8 billion. These revenues are forecast to increase annually during the financial planning period up to €300.5 billion (in 2017). This trend will strengthen the weight of tax revenues as source of funding expenditures. The 2014 draft budget calls for a significant decline in expenditures since only one further instalment payable to the European Stability Mechanism has been budgeted and there will no longer be a grant to the Reconstruction Aid Fund for Flood Damage.

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General Fiscal Administration

72 Urgent need for legislative provision on the tax exemption of recapitalisation gains

Applicable legal provisions on the tax exemption of recapitalisation gains might impair the financial rehabilitation of companies in distress. Municipalities and tax offices decide, independently of each other, about the exemption of recapitalisation gains from taxes on earnings. Therefore, companies do not have the planning reliability they need for financial rehabilitation. Companies in distress undergo financial rehabilitation in order to avoid their complete breakdown. One of the most frequent rehabilitation measures is the waiver by creditors of their claims. This generates recapitalisation gains. By virtue of administrative guidance issued by the Federal Finance Ministry, these gains are to be exempted from income and corporation tax. The decision about the exemption is incumbent on the local tax offices. Municipalities decide about the exemption from trade tax and are neither bound by administrative guidance nor by the decision of the local tax offices. Companies need to file their applications for tax exemption both with the responsible tax office and with each municipality involved. Deviating decisions are likely and actually occur. This makes it difficult for companies to plan and implement financial rehabilitations and causes avoidable administrative burden. We recommended legislation which automatically exempts recapitalisation gains from tax liability. This would considerably reduce the administrative burden and provide the necessary planning reliability.

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General Fiscal Administration

73 Lump-sum deduction of operational expenditures in forestry businesses amended

The Legislature has taken up our recommendations. It reduced the lump-sum deduction of operational expenditures from forestry earnings and limited it to smaller forestry businesses. An accurate tax assessment of forestry businesses is now possible. Proprietors of forestry establishment that do not keep accounts may on application deduct their operational expenditures from the earnings generated by the sale of wood. They may choose each year between the lump-sum deduction and the deduction of actual operational expenditure. If lump-sum deduction is chosen, no further claims to deductions of forestry operational expenditures from earnings generated by the sale of wood in the financial year can be made. Previously, this also applied to reforestation costs irrespective of the year in which they were actually incurred, e.g. to compensate for storm damage. We compared the calculation of profits of forestry businesses and found that the lump sums for the deduction of operational expenditure were excessive. This meant that earnings of medium-sized and larger forestry businesses were assessed inadequately. Moreover, the annual choice between lump-sum deduction and deduction of actual expenditure permitted forestry businesses to claim the deduction of reforestation costs several times. We recommended that the Federal Finance Ministry restrict lump-sum deduction to small forestry businesses. We further recommended that lump sums be reduced significantly and reforestation costs be excluded from lump-sum deduction. The Tax Simplification Act 2011 amended the rules for the lump-sum deduction of operational expenditure from earnings generated by forestry accordingly.

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General Fiscal Administration

74 Legislation against ‘goldfinger scheme’ to prevent tax revenue losses

The Legislature has changed provisions on tax exemption with progression. Taxable persons can no longer use provisions to avoid taxes by means of the ‘goldfinger scheme’. Our recommendations helped to bring about this change. Profits and losses of certain foreign partnerships domiciled in the European economic area are tax exempt in Germany by virtue of double taxation agreements. However, tax law calls for an exemption with progression. For years, taxable persons exploited the German rules on tax exemption with progression by means of an arrangement known as the ‘goldfinger scheme’: They established partnerships, e.g. in the United Kingdom. These partnerships acquired precious metals destined for sale, preferably gold. The metals bought thus became current assets. Since the partnerships had no or only little profits in the year of establishment, the costs of acquiring the current assets generated losses. In a number of cases, these losses were very high which resulted in a zero tax rate on total profits. If the partnership sold the gold in the subsequent year, tax offices took these profits into account under the taxation with progression rule. However, this scarcely had an effect on the progression to be applied because the taxable persons were already subject to the top tax rate due to their large incomes so that the sale of the gold did not increase progression. We found that the ‘goldfinger model’ caused annual losses of tax revenue in an 8-digits euro amount. We therefore urged the Federal Finance Ministry to prevent the use of the ‘goldfinger model’ by changing legislation. The Legislature changed the rules for exemption with progression by means of the Mutual Assistance Directive Implementation Act which also modified certain taxation rules. According to the new provisions, foreign partnerships may claim expenditure deductions for current assets such as gold only at the time when they make a profit or transfer the gold to their private assets.

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General Fiscal Administration

75 Regulation on bonded VAT warehouses needs to be reconsidered

The tax administration is neither fully aware of the total number of bonded VAT warehouses actually approved by the local tax offices nor of the volume of turnovers of the traders. Losses of tax revenue and cases of fraud cannot be excluded. The Federal Finance Ministry has not assessed the financial importance of the bonded VAT warehouses and not scrutinised whether the regulation is appropriate. Traders may store certain goods, e.g. grain in bonded VAT warehouses and sell them without creating a VAT liability. The goods remain on the traders premises in the bonded warehouse. VAT becomes due only when the goods are processed or leave the bonding warehouse. We found that the tax offices did not know the number of bonded warehouses in place, since they did not record the approvals. In addition, the tax offices failed to check the bonded warehouses. The Ministry did not know whether the arrangement for bonded VAT warehouses actually improved the competitiveness of domestic traders, which had been the objective of the relevant legislation. The tax offices have to record the approved bonded VAT warehouses and to check them as well as the connected turnovers. The Federal Finance Ministry, in conjunction with Germany’s constituent states, will have to develop rules for this. We expect the Finance Ministry to verify whether the legislative provision on bonded VAT warehouse has proved successful.

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General Fiscal Administration

76 Taxable turnovers of physicians not completely taxed

In many cases, taxable services provided by physicians are not taxed. The reason is that the tax administration does not have information about these taxable turnovers. Initiatives taken by the Federal Finance Ministry are ambiguous and insufficient to ensure equitable and complete taxations of these turnovers. Medical treatment by physicians is exempt from VAT, if it is medically indicated. Apart from that, physicians increasingly provide taxable services such as liposuction, cosmetic breast surgery, the removal of tattoos and the bleaching of teeth. In recent years, the volume of such taxable services has strongly increased. Frequently the tax offices did not identify these taxable services because they lacked the necessary information. The respective turnovers therefore remained untaxed. In cases where tax auditors in the field addressed the problem of distinguishing between taxable and tax-free services, it often turned out that the portion of taxable turnovers was higher than expected. As a result, VAT revenues increased. The tax administration needs additional information in order to ensure equal and complete taxation. We recommended that the Federal Finance Ministry develop a specific questionnaire for physicians. This would enable tax inspectors to ask for information needed for accurate tax assessment. In addition, they should be made aware of the need to identify cases in which physicians’ tax returns need to be scrutinised more thoroughly. Only thus will the tax administration be able to equally and completely tax the taxable services of physicians.

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General Fiscal Administration

77 No adequate combat of VAT fraud after changes in ownership of businesses

Offenders use a gap in the VAT legislation for fraudulent purposes. This is so because tax offices may not demand monthly preliminary VAT returns in cases where traders acquire more or less active businesses as so-called shell companies and generate turnovers under their names. We hold that these traders need to be obliged to file monthly VAT returns. This is the only way for tax offices to collect timely information about turnovers and cases of fraud, thus preventing losses of tax revenue. Founders of new businesses have to file monthly preliminary VAT returns in the year of establishment and in the subsequent year. This enables tax offices to prevent VAT fraud. For existing businesses, the traders generally have to file quarterly preliminary returns. Fraudulent traders use the non-obligation to file returns monthly: They acquire businesses with little or no activity as shell companies. They achieve large turnovers under the name of the shell company but do not pay the related VAT they owe to the tax office. The shell companies have often been already dissolved before the tax offices become aware of the turnovers via the quarterly returns. This results in losses of tax revenue. We recommended amending the legal provisions to the effect that traders who acquire shell companies need to file monthly preliminary returns with the tax office. This serves to identify and combat cases of fraud at an earlier stage.

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General Fiscal Administration

78 Better VAT inspection of taxable construction work performed by foreign contractors

The Federal Finance Ministry has taken up our recommendations for taxing turnovers generated by foreign contractors in Germany. The tax offices will step up their VAT inspections concerning construction work performed by foreign contractors, increase the number of tax audits in the field and thereby prevent losses of VAT revenue. As a rule, the trader who delivers goods or services owes the payment of VAT on taxable supplies or services. In deviation from this rule, the recipient of such supplies or services has to pay the VAT on supplies or services delivered by foreign contractors. In recent years, we audited the impact of this legal provision. We found that the tax offices were not able to rule out losses of tax revenues. This was essentially attributable to the following causes: • The tax offices omitted comparisons between the VAT returns of the contractors and the recipients of goods or services. • The tax offices did not identify cases where recipients of construction services declared these services either not at all or incompletely. • Tax auditors in the field addressed the taxation of construction services only in a few cases. The Finance Ministry has acknowledged that VAT inspection in relation to construction services provided by foreign contractors needs to be stepped up. The tax authorities of Germany’s constituent states should take appropriate steps to ensure that the tax offices intensify their inspections concerning the VAT liability generated by the provision of construction services by foreign contractors.

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General Fiscal Administration

79 Successful efforts to combat VAT fraud due to sustained international cooperation

The Supreme Audit Institutions of Belgium, the Netherlands and Germany jointly audited the implementation by the EU Member states of their recommendations for combating intra-Community VAT fraud. The auditors found cases of initial success: Fraudulent traders can be identified earlier. To make the fighting of VAT fraud even more effective, the tax administrations should be authorised to delete traders from the VAT register. The audit institutions found, in particular, that information exchange throughout the European Union has improved. Generally, data on intra-Community sales are shared earlier. As a result, potentially fraudulent traders can be detected earlier. In addition, the EU Member States have set up the Eurofisc network to facilitate cooperation among the fraud- fighting units. The audit institutions have identified need for action in the following fields, among others: The registration and deletion of businesses for VAT. For instance, the tax administrations need to be authorised to delete valid VAT identification numbers of businesses in order to prevent fraudulent traders from misusing such numbers which they have acquired through the purchase of the business in question. The three Supreme Audit Institutions have published a joint report, available at www.bundesrechnungshof.de.

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General Fiscal Administration

80 Taxation of interest income from private loans has been improved

The Federal Finance Ministry and Germany’s constituent states have created the prerequisites for improving the accuracy of the taxation of interest income from private loans. In response to our recommendation they simplified the income tax return form and intend to adjust the IT programmes for tax assessment accordingly. Moreover, the states provided intensive training for their tax inspectors. Yields on private capital are subject to the final withholding tax of 25 per cent. To preclude the possibility that high- income taxpayers obtain an undue advantage in respect of this tax by granting private loans, the Legislature has provided for exceptions. Thus, interest income has to be taxed with the individual tax rate of up to 45 per cent where • the lender and the borrower are closely associated with each other and the interest expenditure generates operational expenditure or work related expenses of the borrower; • a loan is granted by a partner or shareholder to the partnership or company and where the lender holds at least a 10 per cent interest in the borrowing partnership or company. We found that the tax offices frequently applied the final withholding tax rate of 25 per cent to interest income to which the higher individual tax rate should have been applied. We therefore recommended that: • Tax inspectors be once more instructed about the circumstances in which the individual tax rate and not the final withholding tax rate must be applied. • The schedule “capital assets” should be simplified. • To adjust the IT programmes to facilitate the identification of the exceptional cases by the tax inspectors. The Finance Ministry and the states have taken up our proposals.

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General Fiscal Administration

81 Federal Finance Ministry failed to inform the Legislature about changes in tax subsidies

The Federal Finance Ministry failed to inform Parliament about the results of effectiveness evaluations in the field of tax subsidies. If Parliament is not informed, there is the risk that effectiveness evaluations become futile. Effectiveness evaluations in the field of tax law are particularly important because tax legislation regularly has large financial effects. Especially the legal provisions on tax subsidies should therefore be reviewed at regular intervals. We conducted an extensive study on tax subsidies. On behalf of the Federal Finance Ministry, expert advisors carried out structured effectiveness evaluations of the 20 biggest tax subsidies. They proposed the abolition of five tax subsidies (€4.8 billion) and to revise ten tax subsidies (€10.5 billion). The Ministry considered most of the proposals as helpful. Nevertheless, it did not inform Parliament about the results of the expert evaluations and the need for change. If, after performing effectiveness evaluations, the Finance Ministry is convinced that provisions of tax law do not accomplish the intended objectives or have undesired side-effects, we believe that it has the duty to inform Parliament accordingly and to point out options for legislative action. Only thus can Parliament decide whether and what legislative action is to be taken in response to the results of effectiveness evaluations. If the Federal Finance Ministry omits such information or furnishes incomplete information, there is the risk that effectiveness evaluations become pointless.

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Activities and budget of the German SAI

1 The German SAI and its field offices The German SAI is a supreme federal authority and as an independent institution of government audit is subject only to the law (Art. 1 Sentence 1 Bundesrechnungshof Act). The Members enjoy judicial independence (Art. 114.2 German Constitution). In addition to the German SAI’s President and Vice-President, the heads of the audit divisions and of the audit units are Members of the German SAI. The two Houses of the German Parliament elect the SAI’s President and Vice-President upon the recommendation of the Federal Government. The President of the Federal Republic appoints those elected. Their term of office is twelve years. Re-election is not permitted. The German SAI’s headquarters are located in Bonn and it has a branch office in Potsdam. It consists of nine audit divisions with 48 audit units. Administrative functions are incumbent on the Presidential Division. Decisions about audit-related issues are taken by boards and panels of Members. Most decisions are made by the cognisant panel of two Members (Head of Audit Division and Head of Audit Section). In certain cases, either the President or the Vice-President joins the panel, making it a panel of three Members. Decisions of the panels of two or three Members require unanimity. Our supreme decision-making body is the (governing) board which has the exclusive power to decide on cross-divisional or particularly important issues, e.g. the annual report. Our work is supplemented and supported by seven field offices located in Berlin, Frankfurt am Main, Hamburg, Hanover, Coblence, Munich and Stuttgart. As part of a restructuring exercise, the two field offices in Cologne and Magdeburg were closed down at year-end 2012. The field offices are subject to administrative and technical supervision by the German SAI. They perform their audit work in accordance with the provisions that apply to the German SAI. In relation to the audited entities, their rights to perform audits and to collect audit evidence are the same as those of the German SAI, which bears the constitutional responsibility for the audit results developed by the field offices. The SAI and the field offices cooperate closely in the planning and implementation of audits. This ensures that the same audit criteria are applied throughout Germany. The 2013 annual report also includes audit findings developed by the field offices.

2 Audit work

2.1 Audit mandate The German SAI audits the entire financial management of the Federal Government (especially of the ministries and subordinate federal agencies) including federal off-budget funds and industrial or trading funds. We are also authorised to audit non-departmental public bodies incorporated under federal law and the public bodies responsible for statutory health insurance, social long-term care insurance, statutory accident insurance and statutory pension insurance, provided that these bodies receive grants in aid from the Federal Government or that the Federal Government is obliged by statute law to grant guarantees to these bodies and schemes. It also audits the Federal Employment Agency. Federal financial management is divided into budgetary management, which consists of executing the (annual) Budget Act and budget as well as accounting and drawing up the financial statements, and extra-budgetary financial management, which covers all other financial activities of the Federal Government. Where bodies or other third parties outside the federal administration are concerned, the SAI is authorised to audit them, especially if they • implement parts of the federal budget (e.g. where Germany’s constituent states perform public management tasks on behalf of the Federal Government) or have expenses reimbursed by the Federal Government (e.g. for the performance by local authorities of certain functions under the scheme for providing basic support for job-seekers), • manage federal funds or assets, • receive federal grants, or

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• are bodies incorporated under private law, directly or indirectly majority-owned by the Federal Government and/or any of its separate property funds, are not exposed to competition, and if – pursuant to their specified objective – are engaged, entirely or for the most part, in the provision of public services or have been set up for that purpose, and receive for that purpose appropriated federal funds or guarantees from the Federal Government. In performing such audits, we verify that the recipient bodies use the resources allocated to them in accordance with the specified purposes and the principles of efficiency and effectiveness. To do so, we also conduct field work in state and local government bodies. In the case of grants, we may extend our audit to the financial management of the recipient’s other resources, if we consider this necessary. When auditing the Federal Government’s management of its shareholdings in businesses incorporated under private law, we take regard to commercial principles.

2.2 Audit criteria: performance, regularity and compliance In our audit work, we apply the criteria of performance, regularity and compliance as set forth in Art 114.2 German Constitution. Our performance audits look into the ratio between costs and benefits. The focus is on the question whether the audited bodies make efficient and effective use of their staff and other resources. Furthermore, we check whether the audited bodies have analysed the results of their measures and whether these measures actually accomplished the intended objectives. When auditing regularity and compliance, we check as to whether the audited bodies adhere to the standards and principles of good financial management and to the budget.

2.3 Audit focus and audit procedure The German SAI is independent in the choice of its audit themes and the design of its audit exercises. We focus on specific issues and may limit the audits to samples. Our primary objective is to obtain a sound overview of federal financial management and to avoid gaps in audit coverage as best as possible. Our choice of audit work also takes regard to whether the matters to be audited are of financial importance or risk-prone. Whenever possible, we accede to audit requests of the Parliament and its committees. By means of follow-up audits, we monitor any remedial action taken or improvements made by the audited bodies in response to our audit findings. We also verify compliance by the audited bodies with the requirements imposed by Parliament. Thus, we provide leadership in convincing audited bodies to implement our audit recommendations and the Parliament’s resolutions. We ourselves determine the nature and timing of our audits. We may conduct fieldwork to collect audit evidence. We have the right to be provided with the information we request and the right of access to files, records and data. In 2012, the German SAI and its field offices conducted some 1,400 audits.

3 Advisory work

3.1 Advisory role of the German SAI On the basis of audit findings, we provide advice especially to Parliament and the Federal Government. We also make available to the Government and to Parliament our expertise in preparing the budget estimates and advise them on financial developments and high risks in the overall budget and the budget estimates. Case examples are included in the reporting items on departmental budgets. Furthermore, we provide advice to the two Houses of Parliament, the Federal Government and the line ministries on fundamental issues, on major government programmes or on matters where we are asked for information. Advisory reports to the Parliament are of key importance to us. In 2012, we submitted 56 confidential opinions and advisory reports pursuant to Art. 88.2 Federal Budget Code to the parliamentary Appropriations Committee and the Public Accounts Committee. We may at any time inform the two Houses of Parliament and the Federal Government of matters of particular importance (Art. 99 sentence 1 German Federal Budget Code). In 2012, we submitted to the Lower House of Parliament five special purpose reports in accordance with Article 99, Federal Budget Code. For instance, in one report, we pointed out potential savings of €160 million annually, if the deduction of advances on child support from

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beneficiaries’ claims to basic income support for jobseekers, which involves a high administrative burden, were discontinued (cf. item 62 hereof). The reports have been published on our website (www.bundesrechnungshof.de).

3.2 Advice provided by the SAI’s President as Federal Performance Commissioner By tradition, the President of the German SAI holds the ex officio position of Federal Performance Commissioner. His job is to encourage good federal government performance and an adequate organisational and procedural set-up of federal departments and agencies. In performing his functions, the Commissioner mainly relies on the audit findings and experience. One of the Commissioner’s principal functions is to provide advice to Government and Parliament on the impact legal provisions may have on government performance. For this purpose, federal government departments have to involve the Commissioner at an early stage in drafting Bills, delegated legislation and administrative regulations. If the Commissioner does not concur with the contents of such legislation or regulations, this needs to be pointed out e.g. in the cover letter which accompanies the submission to the Cabinet. Especially when dealing with money Bills, the Lower House of Parliament can rely on the findings available from the Commissioner (Art. 96.6 Standing Orders of the Lower House of Parliament). In 2012, the executive branch involved the Commissioner in almost 400 legislative and regulatory projects. The Commissioner issued 54 opinions, some of them quite extensive, on these projects. His proposals have been used as input for the legislative or regulatory process to a varying extent. Furthermore, the Commissioner started, in 2012, to develop good practice guides derived from findings generated by the German SAI’s audit work. The purpose of these good practice guides is to make fundamental findings that are significant beyond the isolated cases audited available to public managers. The objective is to provide a condensed overview of ‘typical mistakes’, guidance for avoiding them and, where appropriate, further information such as opinions of the Commissioner and other available guidance. The collection of good practice guides covers various subject areas, e.g. human resources management, grants and procurement. It is to be expanded continuously and can be retrieved from our website (www.bundesrechnungshof.de).

4 Cooperation with the regional audit institutions (RAIs) The financial systems of the Federal Government and the German states are closely linked. Therefore, the audit remits of the German SAI and the RAIs frequently overlap. To make audit work efficient, to prevent duplication and gaps in audit coverage as much as possible, the audit institutions are to cooperate. They do so while maintaining their independence and to respect each others’ remits. The presidents of the German audit institutions meet at regular intervals (every six months) to discuss issues of common interest in a Conference of Presidents. The objectives of such cooperation are to develop common opinions on overarching issues of government auditing, to coordinate our stances in individual cases, to conclude audit agreements and to share specific lessons learnt. During the respective meetings, the audit institutions regularly discuss trends in public finance. The Conference of Presidents has repeatedly called for a sustainable consolidation of public budgets and a restriction of the public debt. In particular, it supports and monitors the implementation of the constitutional debt rule by the Federal Government and the states. The Conference of Presidents has set up working groups of the audit institutions for subjects such as budgetary law, taxes, government shareholdings, public works, social affairs, human resources management, organisation and information technology. They prepare the decisions of the Conference of Presidents. Groups of experts share lessons learnt and Presidents rely on bilateral liaison. To strengthen the professional capacities of their staff, the German audit institutions hold joint training events. The audit of EU budget funds in Germany as a Member State is also a key issue in our cooperation with the RAIs. The German audit institutions share information about their EU related audit activities and coordinate their audit work. In July 2010, they set up an EU audit database. It holds data on about 450 audit exercises (300 of which were performed by the German audit institutions) and thus provides an overview of audit work related to the EU – including the work of the European Court of Auditors (ECA) – in Germany. Moreover, the German audit institutions have set up a working group on Europe in which they discuss European developments that are also significant for external government auditing in Germany. In 2012, they produced the second “EU Report of German audit institutions”. Divided into ten key areas, e.g. the reforms of the EU’s fiscal and economic policy, the sovereign debt crisis and the measures adopted to solve it, the Report informs Federal Parliament, the Parliaments of the German states, institutions of the European Union and the general public about Germany’s financial relations with the

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European Union. More than 50 audit results developed by German audit institutions highlight shortcomings in the national administration and control of European Union funds. The report was published on 15 January 2013 and is available in German and English at www.bundesrechnungshof.de.

5 International issues

5.1 Overview Our international activities take three forms (see figure 1): • We take over international audit mandates. • We share professional and technical knowledge with the SAIs of other countries, participate in the work of multinational bodies and in the development of international audit standards. • We pass on our knowledge and experience to SAIs that are in need of support.

5.2 Audits with an international focus

5.2.1 Audits jointly carried out with the ECA The ECA examines the accounts of all receipts and expenditures of the European Union in the EU Member States in liaison with the national audit bodies. Where the ECA and the national audit bodies cooperate, each of them maintains its independence. In 2012, such cooperative audits covered a total budget volume of €147.2 billion (final adoption of the European Union’s general budget for FY 2012 - 2012/70/EU, EURATOM). 86.5 per cent of the EU budget funds flow back as grants to the Member States (especially in the form of Structural Funds resources and assistance to agriculture). Cooperation between the ECA and the German SAI takes a wide variety of forms. We coordinate work planning and the sharing of information and lessons learnt between the ECA and the German audit institutions. Moreover, we participate in audits carried out by the ECA in Germany, evaluate the ECA’s audit reports where they come under our remit and forward them to the German regional audit institutions. The latter may also attend ECA audits where the EU funds are managed by the administration of the German state concerned. Furthermore, we inform the ECA about the results of EU-related examinations carried out by the German audit institutions.

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Figure 1

International activities of the German SAI

International activities

Audits with an Knowledge-sharing and Targeted support and international focus participation in the development training of SAIs of international standards

with the European EU Contact International Support to building Court of Auditors Committee Organisation of up SAIs Supreme Audit Institutions (INTOSAI)

with other European Development European SAIs Organisation of cooperation Supreme Audit Institutions (EUROSAI)

Audit of international organisations

5.2.2 Joint audits with other European SAIs Together with the SAIs of other EU Member States, we carry out coordinated audit work: Based on a common audit framework and coordinated as to timing and contents, the SAIs carry out audits in the Member States. For instance, the SAIs of the Netherlands, Belgium and Germany have conducted a joint audit of the efforts to fight VAT fraud in connection with intra-Community transactions. In our joint report, we made concrete proposals for improvement (cf. item 79 hereof). In addition, the German SAI and the SAI of the Czech Republic have conducted parallel audits on the awarding of building contracts.

5.2.3 Audit of international organisations The Federal Republic of Germany is a member of a large number of international and supranational organisations and pays contributions to them from the federal budget. The management of members’ contributions is examined by the audit bodies of these organisations. The German SAI is the External Auditor of the Organization for the Prohibition of Chemical Weapons (OPCW) at The Hague and the Organisation for Security and Cooperation in Europe (OSCE) in Vienna. Furthermore, we provide auditors for smaller international organisations. In addition, we have observer status on the Panel of External Auditors of the United Nations. Our audit mandate also covers the exercise of membership rights in such organisations by the cognisant federal government departments in the governing bodies of these organisations.

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5.3 Knowledge-sharing, coordination and participation in the development of international standards

5.3.1 Contact Committee At the European level, we also cooperate with the SAIs of the other Member States and the ECA in a forum known as Contact Committee, i.e. the annual conference of the Heads of the Supreme Audit Institutions of all EU Member States and of the ECA. The activities of the Contact Committee include e.g. the exchange of professional knowledge, lessons learnt from the audit of EU funds and information on current developments in EU financial management.

5.3.2 INTOSAI The International Organisation of Supreme Audit Institutions (INTOSAI)2 encompasses Supreme Audit Institutions of 190 countries – including the German SAI. INTOSAI has set up various working groups who elaborate and publish e.g. technical standards and guidelines on various subjects of external auditing. The International Standards for Supreme Audit Institutions (ISSAI) are recognised as examples of good practice by SAIs all over the world and thus also by the German SAI.3 Our contribution to the work of INTOSAI focuses on the promotion of peer reviews but also on developing a framework for measuring the performance of SAIs and on audits addressing the prevention of corruption. International peer reviews are a method for assessing mission performance of an SAI in accordance with international standards on a voluntary basis. The peers are colleagues from partner SAIs. In 2013, we conducted a peer review of the Austrian SAI together with the SAIs of Denmark and Switzerland.

5.3.3 EUROSAI One of INTOSAI’s seven regional working groups is the European Organization of Supreme Audit Institutions (EUROSAI)4. The regional working groups implement INTOSAI’s goals, taking regard to regional peculiarities. Within EUROSAI, the sharing of lessons learnt focuses on a wider European context, i.e. beyond the EU. The Strategic Plan adopted in 2011 serves to implement the INTOSAI goals in Europe paying due regard to regional particularities. The German SAI is chair of the working group which is to promote the application in Europe of the international audit standards developed by INTOSAI. Activities include the EUROSAI working groups on IT audit and on environmental audit.

5.4 Targeted support and training of SAIs

5.4.1 Support to SAIs still in their development stage We maintain bilateral contacts with a large number of foreign SAIs. We assist SAIs that are still in their development stage with capacity building. Our experts provide advice and training or organised study visits and seminars. Moreover, we support a project of the EU Commission on the institutional realignment of the Greek SAI. This project is to be concluded by the end of 2014.

5.4.2 Development cooperation We support the Federal Government’s development cooperation activities in the field of external government auditing. We participate in two comprehensive projects with INTOSAI’s regional organisations in Africa (AFROSAI) and Latin America (OLACEFS) and assist with current projects at the SAIs of Cambodia, Georgia, Kenya and Tanzania together with GIZ, a company which delivers development projects on behalf of the Federal Government.

6 Budget and staffing (Departmental budget 20)

6.1 Overview In 2012, the German SAI’s expenditures totalled €125.6 million. As in the preceding years, the expenditure under departmental budget 20 as a proportion of total federal budget expenditure amounted to 0.04 per cent.

2 Further information is available in the Internet under www.intosai.org. 3 Further information on the ISSAIs is available on the website http://www.issai.org. 4 Information on EUROSAI is published on the website http://www.eurosai.org. Other regional associations of SAIs comprise SAIs of African, Arab, Asian, Caribbean, Latin American and South Pacific countries.

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6.2 Budget structure and development Given that our audit and advisory work requires a vast input of human resources, personnel expenditure accounts for an extra-ordinarily large share of total expenditures. In 2012, personnel expenditure accounted for 86 per cent (€107.5 million) of total expenditures. Of these, nearly one third was accounted for by retirement benefits. The rest of our budget funds were used largely for renting and operating office premises (4.1 per cent), information technology (3.3 per cent), capital expenditure on building improvements (3.0 per cent) and official travel (2.1 per cent). Actual expenditure exceeded the amount budgeted for 2012 by 2.8 million. This was due mainly to expenditure on the completion of building rehabilitation work in Bonn and the Potsdam branch office. The necessary funds had been estimated in the 2011 budget, but owing to delays in the building work, it was impossible to completely spend the appropriated funds in that year. The unexpended balances of budget funds eligible for flexible financial management were carried forward to the subsequent year. Thus, it was possible to incur the capital expenditure of €3.8 million on the improvement of buildings, although they had not been budgeted for 2012.

Table 1 Overview of departmental budget 20a German SAI Deviation 2012 2012 target 2013 2014 Change target actual figures / target 1st draft b 2013/2014 figures figures actual figures budget figures

in € million in %

Departmental expenditure 122.7 125.6 2.8 132.9 136.0 2.4

including:

73.6 74.2 0.6 79.2 80.1 1.1 • Personnel expenditure without retirement benefits 32.0 33.3 1.3 34.8 36.9 6.1 • Retirement benefits 9.5 5.2 -4.3 9.4 9.2 -2.5 • Rents and operating costs for premises 2.7 4.1 1.4 4.4 4.5 0.6 • Information technology 0.0 3.8 3.8 0.0 0.0 0.0 • Capital expenditure on building 2.8 2.6 -0.2 2.8 2.7 -1.5 • Official travel Departmental revenue 0.4 1.6 1.3 0.4 0.3 -4.0

Commitment authorisations 12,0 c 3.6 -8.4 1.9 0.0 -100.0

(established) posts in %

Staff 1,332 1,226d -106 1,338 1,315 -1.8 Note: a Differencies through rounding are possible. b Pursuant to Art. 125 of the Standing Orders of the Lower House of Parliament, the first budget draft was not pursued further after expiry of the life of the previous Parliament (see also item 4 of the preliminary remarks). c Excess and extra-ordinary commitment authorisations included. d Actual staff numbers as of 1 June.

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Source: Departmental budget 20 for FY 2012: Budget account; for FY 2013: budget; for FY 2014: 1st draft of budget. The IT expenditure exceed the budgeted amount by more than 50 per cent. Again, it was possible to incur this additional capital expenditure largely by drawing on unexpended balances from the previous year. These funds were used above all for the conversion of all terminal equipment to a new operating system and new office communication software and for the provision of a secure and approved hardware solution for mobile use (official travel, teleworking). Expenditure on rent payments was €4.3 million lower than budgeted. This is attributable to delays in the conclusion of lease agreements for our office premises in Berlin and Potsdam with the Institute for Federal Real Estate in Bonn and Potsdam. As a consequence, the commitment authorisations under our FY 2012 budget needed to be drawn upon to a minor extent only, i.e. 30 per cent. While the departmental budget estimate for 2012 totalled €125.6 million, total expenditure of €132.9 million was estimated for 2013 under departmental budget 20. The increase by €7.3 million was caused mainly by additional personnel expenditure for staff on active duty (€5.1 million) and for retirement benefits (€1.5 million). This was due mainly to pay increases in 2013, higher remittances to the Civil Service Pension Fund and the hiring of new staff planned for 2013. Revenues in our budget are of minor importance only. They amounted to €1.6 million in 2012. With 0.9 million, the lump-sum compensations received for the transfer of civil servants of the German states and their future pension claims to the federal public service account for the major share of our revenues. Other items include compensations paid by international institutions on whose behalf we discharge audit mandates.

6.3 Substantial expenditure items

6.3.1 Staffing and pensions Of the 1,332 budgeted posts in the German SAI and its field offices, 1,226 were filled as of 1 June 2012, of which 700 were in the German SAI and 526 in the field offices (cf. table 2). The average proportion of severely disabled employees in the total workforce was 9.8 per cent in 2012. The share of civil servants in the total workforce is about 88 per cent. Most of them are audit staff. They work in all fields in which the Federal Government obtains revenues, incurs expenditures or assumes financial risks. Therefore, the auditors have to meet a wide variety of professional and personal requirements. This is why our staff have a wide range of professional and academic qualifications (e.g. degrees in law, economics and business administration, engineering and computer science). 39 per cent of all staff are women. 36 per cent of the audit staff are women, 50 per cent of the administrative staff are women. On 31 December 2012, we successfully completed a restructuring that led to the abolition of a total of 210 posts in our field offices. The goal of the reorganisation, which started in 2007, was to enhance the efficiency of our audit and advisory work. This required various measures in the fields of organisation and human resources management. Each of the issue areas in the field offices was subordinated to a specific audit unit of the German SAI, smaller issue areas were disbanded and hierarchies were flattened. As a consequence, our two field offices in Cologne and Magdeburg were closed at year-end 2012. The budgeted numbers of (established) posts in the field offices will be reduced by another 5 per cent (30 posts) by year-end 2014 (cf. table 2). This is mainly due to the after-effects of the organisational reform in the field offices. This accounts for 20 of the abolished posts. Since the posts were still filled on 31 December 2012, they can be devolved only under the 2013 or 2014 budgets.

6.3.2 Management of premises Expenditure on renting and operating premises increased from €5.2 million (actual figure) in 2012 to €9.4 million (target) in 2013. As from 2013, we must also pay rent at the local market level for our office premises in Bonn and Potsdam to the Federal Real Estate Agency (€3.8 million). Further rent is payable for the Hanover and Munich field offices, for whose use no rent was payable before (€0.6 million). However, it was possible to terminate the leases of premises for the Cologne and Magdeburg field offices after their closure on 31 December 2012 (€0.2 million). As a result, the respective budget estimates for 2013 had to be increased by €4.2 million in comparison to the 2012 actual figure.

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As a result of deleting 210 (established) posts, rented office space in the seven remaining field offices was reduced. This generated savings of rent and operational expenditure in the total amount of about €1 million up to year-end 2012.

Table 2 (Established) posts of the German SAI and its field offices

Deviation 2012 2012 target 2013 2014 Change target actual figures / target 1st draft 2013/2014 figures figures actual figures budgeta figures

(Established) posts Number in %

Total 1,332,0b 1,226,5c -105.5 1,338,5b 1,315,0b -1.8

including:

736.5 700.5 -36.0 750.5 749.5 -0.1 • German SAI 595.5 526.0 -69.5 588.0 565.5 -3.8 • Field offices

a Note: With the expiry of the parliamentary electoral term, the first budget draft will not be followed through (Art. 125 of the Lower House of Parliament’s Standing Orders) b Including substitute established posts (2012: 4, 2013: 4, 2014: 3) c Actual staffing on 1 June Source: For the year 2012: departmental budget; for the year 2013: departmental budget; for the year 2014: 1st budget draft

6.4 Audit of the German SAI’s account pursuant to Art. 101 Federal Budget Code As in previous years, the 2012 accounts were audited by a commission of the Public Accounts Committee in accordance with Art. 101 Federal Budget Code. The audit focused on the annual account, on budget execution and the organisational reform of the external audit function. The two Houses of Parliament granted discharge to the German SAI.

6.5 Outlook The development of departmental budget 20 during the 2013-2016 financial planning period is shown in table 3.

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Table 3 Expenditure trends on the departmental budget 20 during the financial planning period

2013 2014 2015 2016 2017

in € million

132.9 136.0 137.7 139.4 141.8

Source: For the year 2013: departmental budget 20; for 2014: 1st draft departmental budget 20; for the years 2015-2017: medium-term financial plan of the Federal Government for the years 2013-2017

During the financial planning period, total expenditures under departmental budget 20 will increase to €141.8 million up to 2017. This is due especially to higher expenditure on retirement benefits (€5.4 million), further recruitment (€2.7 million) to fill vacancies and for renting and operating other premises (€0.8 million).