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European Commission

MEMO

Brussels, 29 October 2012

Why was it necessary to change the budgetary and spending rules in the Financial Regulation?

A new Financial Regulation for the EU finances: What's new, why and how does it work

The Commission continuously assesses the way it manages EU funds, taking into account lessons learnt from the past, feedback from end users and other stakeholders, as well as new challenges posed by 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. This update is already the second following the adoption of the Financial Regulation in 2002.

Furthermore, the challenge to overcome the economic crisis leads to 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 for both the recipients of Union funds 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 the achievement of the objectives of Europe 2020. Broadly speaking, the changes focus on three areas:

1. Simplification: cutting red tape, speeding up procedures and shifting the focus from paperwork to performance;

2. Accountability: ensuring enhanced sound financial management and the protection of the EU's financial interests;

3. Innovation: introducing financial mechanisms which will enable the mobilisation of third-party funds as leverage on EU funds.

How to simplify procedures by cutting red tape and shifting the focus from paperwork to performance?

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 delivered results against 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 date when communicating the evaluation results to applicants. Normally this date must fall within six months of the closure of the call. It will also indicate the 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 (referred to in the Financial Regulation as the "authorising officer by delegation", typically the Director-General) has to provide justification in case the maximum indicative deadlines were not respected and, if necessary, propose remedies in his/her annual activity report to the College of Commissioners. These provisions will speed up the evaluation and contract conclusion phases of projects.

Multi-annual work programs

Work programs are plans published in advance of how and on what EU funds will be spent in the near future. From now on, they can be multi-annual as opposed to just annual. This will give potential applicants for EU funds more transparency and predictability in terms of EU spending in the short to medium term. At the same time, this provision should not make EU expenditure programs rigid and unable to react to emergencies and new developments.

Abolishing the obligation to generate interests on 'pre-financing' and to return the interest

There will no longer be an obligation to generate interest on pre-financing paid to grant beneficiaries to provide them with cash for the action. Even if interest is generated, it is not due to the EU, neither is it 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 the research and NGO communities.

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 the 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 per 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 the 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.

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 have to 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 (or sub-granting, i.e. grants awarded by a grant beneficiary) are capped by a maximum threshold for the total grant amount that can be sub-granted, thus limiting the scope for taking on board partners with specific expertise who had not been identified at the beginning. This cap will be abolished.

The current rule that VAT can be made eligible if it is not recoverable under VAT legislation is, in principle, kept. In addition, 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 clarified, taking into account discussions with stakeholders. Profit is defined as the surplus of receipts of an action over its eligible costs. The Commission will only recover the share of the profit that corresponds 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.

Good administration and redress

Good administration, as expressly provided now in the new Financial Regulation, implies that proposals or tenders where documents are missing or are unclear should not be rejected right away. The applicant is given the opportunity to supply the missing pieces or provide clarifications. However, this may not lead to a modification of the proposal or tender.

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 through annual management declarations. 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 have to 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.

When designing control measures, the Commission will take into account the costs of control, but also the potential to simplify the rules and hence to decrease error rates.

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.

Provisions on conflict of interests and whistle-blowing are adjusted.

EU claims will receive the same treatment as equivalent claims of Member States in bankruptcy proceedings.

In order to further deter the misuse of EU funds, decisions on penalties for such misuse can henceforth be published.

What are the 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. Whereas traditional prizes reward contributions to EU policies which have already been made, inducement prizes could be used to a greater extent to induce and stimulate activity in a given area, with the aim to obtain creative and innovative solutions to specific problems. Such prizes have the potential to leverage funding in areas where more private investments are urgently needed as for example in research and development. Besides, the strict output orientation of a prize scheme guarantees value for money and greatly simplifies administrative procedures (no input controls necessary, such as checks on cost statements).

Public-private partnerships (PPPs)

The experience in implementing Joint Technology Initiatives, PPPs in the research area in the form of Joint Undertakings, has identified weaknesses due to a certain lack of flexibility of the EU's budgetary and financial rules. This has led to a proposal to create new possibilities for the implementation of PPPs. On the one hand, special PPP bodies governed by financial rules based on the model financial regulation can be set up. On the other hand, 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 have a thematic, e.g. relating to the fight against a certain disease, or geographic orientation. They can also focus on providing relief in cases of urgency, such as a natural disaster.

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.

Which way did the Commission proposal have to go until the final adoption?

The legislative procedure was initiated by the Commission proposal COM(2010)815final of 22 December 2010 after a public consultation which preceded the Commission proposal and started on 19 October 2009, resulted in 235 contributions of all type of stakeholders implementing or receiving Union funds and was closed on 18 December 2009. The publication in the Official Journal of the EU took place on 26 October and the new Financial Regulation entered into force today. In parallel, the Commission will adopt by the end of this year 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.

Has the simplification process ended with the adoption of the new Financial Regulation?

No, in order to underline the importance of the simplification process in the framework of the whole MFF 2014-2020 and the Commission position on it, the Commission launched a special initiative for monitoring the legislative process concerning sector specific rules (e.g. for research or trans-European networks) in the Council and the European Parliament: This process is going to be implemented through the regular publication of a Scoreboard, tracking simplification measures proposed by the Commission.

For more information about simplification, see the First Simplification Scoreboard:

http://ec.europa.eu/budget/library/biblio/documents/fin_fwk1420/COM_2012_531_en.pdf

Could you show some concrete examples of how should the EU financial rules be changed in the next programming period?

Please, see the link to learn more about concrete examples:

http://ec.europa.eu/budget/explained/budg_system/fin_fwk1420/simplification/simplification_en.cfm

Link to IP/12/1133


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