THE European Court of Auditors has condemned payment of major EU grants to a number of Irish companies aimed at assisting extremely profitable projects.

The court's annual report, which is to be published next week but has been seen by The Irish Times, singles out for criticism payments to companies of grants from regional industrial funds for projects whose internal rate of return (IRR) - a measure of return on investment - in some cases reached 70 per cent. Such a rate of return shows an extremely high level of profitability.

The court, the EU's internal audit system, reports that between 1990 and 1993 grants of £3.5 million and £1 million were paid to two Irish companies for in vestments in solar optics with IRRs of 69 per cent and 70 per cent. A project in the pharmaceutical sector received £2.66 million on an IRR of 70 per cent.

Between 1989 and 1990 a project in the medical instruments sector received £2.03 million on an IRR of 55 per cent and another firm involved in ocular and pharmaceutical products received £2.42 million even though its application forecast a rate of return of 40 per cent on the investment.

In all the cases the EU funding represented between 20 per cent and 30 per cent of the investment.

The court found "no genuine link between the amount of Community aid granted and the final IRR of the projects in the industry category". It recommends that, in future, such grants should be reduced or paid in the form of loans.

The annual audit gives a broad overview of the spending of the £56 billion raised by the Union last year, and puts a spotlight each year on a number of different programmes.

The court is concerned with accounting discrepancies and the failure to observe proper procedures, so figures for irregular payments do not necessarily represent fraud on the European taxpayer. The latter is fought by a separate fraud unit based in the Commission.

Apart from a small number of cases, Ireland gets a clean bill of health from the court this year.

The report also criticises the Commission for failing to carry out an assessment of the value for money involved in spending some £13 million on two fisheries protection planes for Ireland, while two planes for Portugal cost half as much. And there is some criticism of subsidies to an unviable fish-processing plant.

On VAT accounting, the court complains there are major discrepancies in the member-states between the accounts provided by suppliers and purchasers of goods, in some cases up to 50 per cent, leading to an overall gap between deliveries and acquisitions of some £27 million in the accounts.

More seriously, it notes a standstill in VAT receipts after 1993, probably due in part to a new system of "transitional" VAT payments. The result could be up to £14 billion in lost revenues for all the member-states.

The report takes a close look at the Danish feta cheese market, pointing out that in the five years to 1994 exports worth £450 million were subsidised to the tune of £380 million in export refunds intended to compensate for lower world prices.

The failure to systematically test fat and water contents of the exports led, the report concludes, to serious potential excess payments. The Commission is urged to recover £13 million from the Danish authorities.

Previous reports complained of the failure of specific agricultural sectors to maintain adequate registers of land under cultivation and again point's to serious unremedied weaknesses in the olive oil, rice and cotton sectors.

The report criticises the lack of systematic spot-checking of research contracts by the Commission. Only 82 were carried out on 31,000 contracts last year, leading to the recovery of £4.3 million.

When the court itself carried out eight spot checks of its own it discovered that some 28 per cent of the £4.9 million it was investigating was dispensed irregularly.

On the humanitarian aid front, the report is particularly critical of the Commission's insistence on clear "earmarking" of EU cash in the accounts of recipients.

Although, in many cases, funding goes from the EU and other donors to the same major programme - say, the UNHCR's work with refugees in Rwanda - the EU insists on separate accounting for the spending of its cash, resulting in complex and often expensive extra financial controls.

The practice also means, the report argues, that evaluations of the programmes often focus on the EU component rather than the whole.

Recently, the Commissioner for Humanitarian Aid, Ms Emma Bonino, said she was willing to look again at the practice but expressed surprise at what she saw, as a request from the court to relax supervision of funding.