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Brussels, 28 May 2010

Review of the EU’s financial rules: Q&As

Why is the Commission proposing changes to the EU's financial procedures?

The Commission is continuously assessing the way it is managing EU funds, taking into account lessons learnt from past experience, feedback from end users and stakeholders, as well as new challenges. There is also a formal requirement to review the financial rules (i.e. the Financial Regulation and its implementing rules) at least every three years. This is already the second such exercise.

What are the goals of this review?

The Commission aims to modernise its financial procedures so that they can facilitate the use of EU funds in stimulating growth and innovation. Broadly speaking, the changes focus on three areas:

1. cutting red tape and shifting the focus from paperwork to performance

2. improving the effectiveness and efficiency of control

3. introducing innovative financial mechanisms

1. How to cut red tape and help shift the focus from paperwork to performance?

More beneficiaries to benefit from lighter administrative requirements

Beneficiaries applying for grants up to €25,000 are already exempt from submitting certain documents. The current maximum threshold will be raised twofold to €50,000. Parallel simplification measures are proposed for businesses that bid for Commission contracts.

Abolishing the obligation to open separate bank accounts and return to the Commission interest on 'pre-financing'

Under the current rules, beneficiaries of grants need to open a dedicated bank account to receive an upfront payment at the outset of the project, and need to return to the Commission any interest earned while the money is kept on this account. They will no longer be obliged to do so. This will reduce the amount of paperwork and time in the crucial initial phase of the project.

More scope for beneficiaries to use the grant to involve other project partners with specialised expertise instead of doing everything in-house

At the moment the so-called cascading grants are capped by a maximum threshold for the total grant amount, thus limiting the scope for bringing on board partners with a specific expertise. This cap will be abolished.

Shifting the emphasis of the grant system from reimbursing cost claims to paying for the delivery of results

In most cases, EU grants are reimbursements 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 must then check the project not only against the delivery of the results, but also against eligibility of all the costs and invoices the beneficiary has sent.

The changes proposed build on the simplification measures already in place such as the use of lump sum payments and flat rates:

- the maximum threshold per lump sum payment (currently €25,000) will be abolished; instead, the Commission will set the amounts depending on the nature of the programme. Beneficiaries will be paid lump sums to undertake specific tasks and will then need to demonstrate that they have done so effectively and efficiently, rather than report individual cost items.

- for some costs, e.g. salaries, it will be possible to pay against the usual average costs as applied by the beneficiary, rather then against the actual costs from the payrolls of each member of the research team.

2. 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

Some 80% of the EU budget is spent by Member States in areas such as agriculture, and aid to EU regions and to boost employment (structural funds). In agriculture, national paying agencies give formal assurance for the EU money they spend. This has helped reduce the scope for errors. There are no formal statements of assurance from the agencies responsible for structural funds.

Under Commission proposal, national paying agencies for structural funds would issue a statement of assurance that will then be subject to independent audit.

Balancing costs and benefits of controls

Should the 2% threshold used in the audit of EU funds be the same for all EU activities, even though the risk may differ significantly, as it does e.g. between administrative expenditure and complex rural development aid?

Following recommendations from its external auditors (i.e. the European Court of Auditors), and from the budgetary authority, the Commission's proposal formally introduces the concept of tolerable risk of error.

In practice, for each policy area, the Commission would carry out an analysis of the risk and controls applied. Then, it would propose a corresponding tolerable risk of error, to be decided by the political authorities (the European Parliament and the Council).

3. What are these innovative financial mechanisms?

Pooling additional resources from member states in EU trust funds to improve delivery and visibility of EU aid in crisis and post-crisis situations

When faced with a crisis situation (natural disasters…), the EU must act quickly and efficiently. At the moment, there is no mechanism that would allow member states to pool their resources to provide quick EU financial assistance. Such an approach could also be used to tackle long term and complex development issues requiring financial support from various sources.

Under the proposed amendments, the Commission will be empowered to set up dedicated trust funds. Member states will then be able to transfer their contribution to a common fund for an action coordinated by the Commission. This will increase the leverage effect of the EU aid and facilitate the management of these funds.

Furthermore, trust funds would bring together EU institutions, Member States and citizens towards one common goal (emergency aid, thematic initiative…), thus strengthening the sense of European identity.

Using public-private partnerships more widely thanks to simplified financial requirements

Europe 2020 strategy calls for mobilising innovative instruments to finance investments into economy, including public-private partnerships (PPPs). These partnerships already exist at EU level and manage significant resources. However they have to adhere to all EU's budgetary and financial rules though these are not meant for private businesses.

Rather than formally adopting all EU procedures, the PPPs will be given an option to operate under national legislation of the country where the private partners are based, provided they adhere to basic EU financial requirements regarding accounting, audit and transparency.

Leveraging EU funds by developing a privileged relationship with the European Investment Bank group (EIB)

EIB is an important source of funding and risk management for SMEs across the EU. Yet, under current rules, the Commission must treat EIB as an external partner and go through time-consuming procedures before it can commit funds to common projects.

Under the changes proposed, the EIB will be treated as an EU institution, which will facilitate common projects, as well as loan and grant blending.

What are the next steps?

Changes proposed by the Commission need to be adopted by the European Parliament and the Council. The Commission expects the legislative process to be completed by the end of 2011.

Link to IP/10/629: Less paperwork and more focus on results: Commission reviews rules for access to EU funds

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