Why was it necessary to change the budgetary and spending rules in the Financial Regulation?
The Commission performs a continuous assessment of the way it manages EU funds, taking into account lessons learnt from the past, feedback from end users and stakeholders, as well as the need to modernise financial rules. There is also a formal requirement to review the Financial Regulation and its Implementing Rules at least once every three years.
Furthermore, the challenge of overcoming the economic crisis includes considerations on how EU funds can be used in a simpler, more accountable, effective and efficient way.
Finally, the modifications introduced come well in time to both the beneficiaries and the funding authorities before the launch of the expenditure programmes under the next Multiannual Financial Framework 2014-2020, which is currently under discussion.
What are the goals of this review?
The EU is modernising its financial procedures in order to better serve achieving the objectives of Europe 2020. Broadly speaking, the changes focus on three areas:
- Simplification: cutting red tape, speeding up procedures and shifting the focus from paperwork to performance;
- Accountability: ensuring enhanced sound financial management and the protection of EU financial interests;
- Innovation: introducing financial mechanisms which will enable the mobilisation of third-party funds as leverage on EU funds.
Some of the novelties…
Shifting the emphasis of the grant system from reimbursing cost claims to payments for the delivery of results: lump sums, flat rates, unit costs
In most cases, EU grants are reimbursements of a share of the actual costs incurred by the beneficiary, which implies time consuming paperwork both for the beneficiary, who must itemise all expenditure, and the Commission, which then has to check the project not only against the delivery of the results, but also against eligibility of all the costs claimed.
The simplification concerns mainly the alternatives to actual costs, i.e. lump sums (payments against delivery), flat rates (percentages to cover certain categories of costs) and unit costs (rates per unit, such as per person/day):
- the maximum threshold per lump sum payment (currently EUR 25,000) will be abolished; instead, the Commission will set the amounts depending on the nature of the programme;
- it will be possible to agree with beneficiaries that lump sums, flat rates and unit costs are calculated on the basis of the beneficiaries´ own historical data or usual accounting practices. This is in particular the approach to so-called average personnel costs in research funding;
- for entities such as owners of small and medium enterprises (SME) or self-employed people, who do not receive a regular salary, unit costs can be established (e.g. a rate per day) as a basis for payment.
The increased use of these simpler forms will shift the focus from justifying the costs to demonstrating the agreed results of the activity on which contributions from EU budget are used.
Shorter payment deadlines
Beneficiaries will be entitled to receiving money due to them within the deadlines of 30, 60 or 90 days depending on how demanding it is to test the deliverables against the contractual obligations. While at present the Commission voluntarily applies similar deadlines, the new provisions will mean that missing a deadline will create an entitlement to late-payment interest for the beneficiary.
Time-to-grant target and indicative deadline
Calls for proposals will indicate the planned date when the evaluation results will be communicated to applicants. Normally this date must fall within six months of the closure of the call. The call will also indicate the planned date for concluding the grant agreements (or notifying the grant decisions) to successful applicants. Normally this date must fall within three months following the communication of the evaluation results.
The Commission official in charge (described in the Financial Regulation as the “authorising officer by delegation”, typically the Director-General) has to justify why the maximum indicative deadlines were not respected and, if necessary, propose remedies in his/her annual activity report. This provision should speed up the evaluation and contract conclusion phases of projects.
Abolishing the obligation to generate interests on ‘pre-financing’ and to return the interest
Beneficiaries of EU funds will no longer be obliged to open separate interest bearing bank accounts. Furthermore, even if interest is generated, it will not have to return to the EU Commission, neither will it be counted as revenue of the project.
With this, an administrative burden will vanish that was frequently criticised by grant beneficiaries and stakeholders during the public consultation held in 2009 preceding the Commission’s proposal of 2010, in particular by research (e.g. EARTO, FFG) and NGO (e.g. Euclid Network, TSEN, VOICE) communities.
Lighter administrative requirements for a larger group of low-value grants
Beneficiaries applying for grants of up to EUR 25,000 are already exempt from submitting certain documents. This threshold will be raised to EUR 60,000.
No guarantees on pre-financing can be asked for such grants; legal status of the beneficiary as well as the financial and operational capacity will be demonstrated by a declaration of honour without the necessity to provide supporting documents, and no certification will be required that the beneficiary is not in an exclusion situation. Also, for such grants, the non-profit principle does not apply.
These amounts apply per beneficiary, which may be relevant for actions with multiple beneficiaries working by way of a consortium.
Further simplification and flexibility in the grant rules
At the moment the so-called cascading grants (sub-granting), when a grant beneficiary later chooses further beneficiaries in his own call for proposals, are capped by a maximum threshold for the total grant amount to be sub-granted, thus limiting the scope for bringing on board partners with specific expertise who had not been identified at the beginning. This cap will be abolished.
VAT and EU funds
The current rule that VAT can be made eligible if it is not recoverable under VAT legislation is, in principle, kept. In addition, though, public bodies will be allowed to include VAT as eligible in actions in which they do not engage as public authorities.
The definition of profit in a grant is better explained taking into account the discussions with the stakeholders. Profit is the surplus of receipts of an action over its eligible costs. The Commission will only recover a share of the profit corresponding to the EU’s share in funding the action.
The rules on in-kind contributions, which can be used to demonstrate co-financing, are rendered more usable, in particular for grants below EUR 60,000.
As regards operating grants, they will no longer have to be gradually decreased. Also, building up a reserve by a beneficiary of an operating grant will not be counted for the calculation of profit.
Procurement
The procurement rules are generally based on the EU Procurement Directives. Therefore, the scope for changes is rather limited:
- Guarantees will not be required across the board; instead, it will depend on a risk assessment;
- The procedures below the thresholds of the EU Procurement Directives are simplified;
- Joint procurement will not only be possible with Member States, but also with EFTA and candidate countries where foreseen in an international agreement.
IT tools
Communication with beneficiaries and other authorities should increasingly take place by electronic means. A number of concrete provisions have been added, for example in the context of grants and procurement, to promote faster and paperless communication.
Good administration and redress
In future, proposals or tenders where documents are missing or unclear will no longer be rejected outright. Applicants will have the chance to supply the missing information or provide clarifications as long as these do not alter the proposal or tender. Also, an act of the funding authority which adversely affects a citizen will have to contain information on the possibilities to seek redress for challenging such an act.
How to make the control system of EU funds more effective and efficient?
Member States to take more responsibility for their management of EU funds
Article 317 of the Treaty on the Functioning of the EU obliges Member States to cooperate with the Commission in implementing the EU budget. Up to 80% of the EU budget expenditure is managed by Member States under so-called shared management in areas such as agriculture, growth and employment aid to EU regions (structural funds).
In agriculture, national paying agencies give formal assurance for the EU money they spend. This has helped to reduce the scope for errors.
Under the new rules, national fund managers for structural and other EU funds under shared management will also issue annual management declarations that will be subject to independent audit.
Further measures to strengthen accountability, sound financial management and protection of EU financial interests
Provisions on indirect management where Member States’ national agencies, third countries, international organisations or other authorised bodies implement EU funds will be harmonised and streamlined.
Where it is expected that errors discovered through checks of certain actions performed by a beneficiary can be found in other similar actions by the same beneficiary, the findings on such errors can be applied to these similar actions as well. This can lead to further recoveries and provides a stronger incentive to comply with EU funding rules.
EU claims will receive the same treatment as equivalent Member States’ claims in bankruptcy proceedings.
In order to further deter the misuse of EU funds, decisions on penalties for such misuse can henceforth be published.
Innovative financial mechanisms allowing for the leverage of EU funds
Leveraging EU funds by financial instruments
Financial instruments, i.e. support measures in the form of loans, equity participations including risk capital or guarantees, exist and contribute significantly to the EU’s policy objectives.
The new Financial Regulation provides a solid harmonised framework for them. Their increased use will also give EU funds a multiplying effect with a view to making them more effective. The new rules will also facilitate partnerships with the European Investment Bank group.
Prizes
Prizes, until now treated as grants sui generis, will receive greater attention. They will be awarded by the Commission following the evaluation of entries in a contest. Prizes can reward contributions to EU policies which have already been made. Inducement prizes can actually stimulate, after their launch, creativity and innovative solutions to existing problems from a large group of aspiring prize winners.
Public-private partnerships (PPPs)
Two innovations on PPPs: special PPP bodies governed by financial rules based on the model financial regulation can be set up, and PPPs can be implemented by private-law bodies under indirect management.
EU Trust Funds
Trust funds in external action are funds pooled from a number of donors, in particular the EU, its Member States, third countries, international organisations or private donors such as citizens to provide support to agreed objectives. These can relate to the fight against a certain disease for instance, or they can focus on providing relief in cases such as natural disasters.
The new Financial Regulation will allow the EU to establish such trust funds. They will be managed by the Commission and implemented at accountability standards as high as those applicable to the EU budget. They will be governed by a constitutive act reflecting the agreement of the donors on the objectives and management of the EU Trust Fund. The new possibility of EU Trust Funds will increase European coordination of financial support in external action and will also enhance the visibility of EU and Member States external aid.
What are the next steps?
The Financial Regulation sets the principles of the EU budget and governs the way the EU budget is spent. After this political agreement, the Financial Regulation will be formally adopted after the summer break. In parallel, the Commission will adopt the Rules of Application, a delegated act under Article 290 of the Treaty on the Functioning of the EU, which provides the details and contributes further to the objectives of the review. The bulk of the rules in this package will apply as from 1 January 2013. The legislative procedure was initiated by Commission proposal COM(2010)815final of 22 December 2010.
Source of information: European Commission
