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INTERACT POINT VIBORG Eligibility and control requirements in European Territorial Cooperation Copenhagen 6-7 November 2008

Difference between audit and control First level control: • Is not just a check of the correct calculation and documentation of expenditure (though this is an important element) • Is also a check of whether expenditure is eligible (in line with Community and national rules, the approved application etc) • Requires that control is more than regular audit • Checklists provide useful clarification of detailed points to be checked

Background for cooperation specific rules First level control background • Regulation (EC) 1083/2006 • Regulation (EC) 1080/2006 • Regulation (EC) 1828/2006 • National rules • Programme rules (including fact sheets and manuals) • Interpretations of identified national contacts • See http://www.interact-eu.net/eligibility/102for e-tool on interpreting common eligibility questions

First level control walk through • What are the different checks to be carried out? • What are the relevant rules and regulations? • What are the common problems? • How would you approach such checks?

Partner capacity 1. Continuing partner capacity • Guidance document recommends criteria for capacity checking – often not available • Worth checking staff changes and partnership changes • Any changes to accounting or filing procedure? • Any changes in where audit trail documents are kept? • Any other significant changes for the organisation?

Correctness and completeness 2. Correctness and completeness • Territorial Cooperation projects based on the principle of reimbursement: Only incurred and paid eligible expenditure may be included • Interim and final payment claims must correspond with payments made by beneficiaries • They must be supported by invoices or accounting documents of equivalent probative value and evidence of payment • A basic accounting check

Deduction of income 2. Deduction of revenues • Revenue = All funds paid to the project except ERDF and co-financing • Should have been integrated in original project budget • Check also that no discounts have been given on invoiced prices • Relatively simple within the project lifetime

Revenue generating projects Project revenue in the regulations • Revenue is ‘any provision of services against payment’ (1083/2006 §55.1). It is often misunderstood as profit. • Projects subject to State aid rules are not subject to rules on revenue generation (§55.6) • Expected revenue should be covered in the application form and deducted from total eligible costs • If revenue cannot be accurately estimated in advance, all revenue up to 5 years after project closure must be repaid to the CA before programme closure (probably impossible) • Other revenues up to 3 years after programme closure must be refunded to the general budget of the EU • Note that 1083/2006 §55 on revenue generating projects is likely to be changed soon

Double-funding check Double-funding check • Verifications ‘…shall include procedures to avoid double financing of expenditure with other Community or national schemes and with other programming periods.’ (1828/2006 §13.2) • Check of accounting systems should verify that same item cannot be included twice • Will not detect fraud with invoices where recommended reliable procedure is to stamp all invoices included in every claim • Ideas?

Common problems checks 1+2 Related errors 2000-2006 • Unpaid amounts charged to project • Same cost included twice • No evidence/control for co-financing part of budget • Revenues not deducted • Expenditure reported for organisations not in the partnership

Eligibility period 3. Eligibility period • Services must be contracted, delivered and paid within the eligible period for the project • Check the contract for the start date for eligibility and programme rules for the end date • How to treat advance payments on services? • Programme rules for costs incurred and paid after the close of the project (mainly final control)

Relation to approved operation 4. Relation to the approved operation • Is expenditure in line with the approved application and the activities included in the interim report? • Can the Lead Beneficiary also confirm this from its own checks? • Are there activities outside the eligible area? Have they been approved in advance and do they comply with programme limits?

Common errors checks 3+4 Related errors 2000-2006 • Project includes costs for services contracted before the start • Projects includes costs for non-agreed / non-relevant activities • Projects include costs that have not yet been paid • Projects include unnecessary advances • Projects include non-approved travel outside the area • Especially at project end, unused funds are used on new equipment unrelated to the project • Lead Beneficiaries unwilling to ‘police’ partners

Eligibility rules 5. Compliance with national and Community eligibility rules • First a few general points on eligibility…

Difference between audit and control Commission approach to eligiblity 2007-2013: • Description of management and control systems submitted by MS to the Commission requires: “…eligibility rules laid down by MS and applicable to the Operational Programme” 1828/2006 §22 (g) • Commission therefore adopts a hands-off approach to most eligibility questions • General principle that if expenditure is not covered in European rules but national rules say it is OK, Commission will accept it • Clear need for adequate and updated national rules

Challenges about eligibility in INTERREG Territorial Cooperation challenges • No exhaustive list of eligible or ineligible expenditure (ever) • Projects involve partners from various MS with different rules, languages, practices and understanding of eligibility • Eligibility can often only be assessed case-by-case depending on the project objectives, financial plan and approved application • Other countries, programmes and funds (for example ESF) have different rules which may cause confusion

Challenges about eligibility in Territorial Cooperation programmes Territorial Cooperation advantages • National rules give more freedom to update rules • National authorities provide a quicker source of reliable advice • Majority of project actions quite similar • Programme rules cover all basic issues

Controlling eligibility – Key questions for controllers When in doubt – Essential eligiblity questions • Is the cost claimed real? • Is there evidence it has been paid out? • Is the price reasonable? • Does it add value to the project? Will it provide benefit to the programme area?

What is new about eligibility in 2007 – 2013?

The most extensive eligibility rules shall apply… Generally ignore 1080/2006 §13.3: “Where article 7 provides for different rules of eligibility in MS … the most extensive eligibility rules shall apply throughout the programme area” • Article 7 only allows for different rules in the case of housing. This is not generally understood and has caused much confusion! • Harmonisation of rules still perhaps a good goal to aim for?

European eligibility rules 2007-2013 1080/2006 §7: The following is not eligible • Interest on debt • Purchase of land for an amount exceeding 10% of the total expenditure for the operation (except for some environment projects) • Recoverable VAT

European eligibility rules 2007-2013 1828/2006 §49 Following financial charges and guarantee costs are eligible • Charges for transnational transactions (note that national charges no longer explicitly ineligible – national rules!) • Bank charges for opening and administering accounts where the implementation of an operation requires a separate account to be opened • Legal consultancy fees, notarial fees, costs of technical and financial experts, accounting and auditing costs (FLC, SLC) • The cost of guarantees provided by a bank or other financial institutions (where these are a legislative requirement)

European eligibility rules 2007-2013 Expenditure by public authorities relating to the implementation of operations (1828/2006 §50) • Professional service provided by a public body in the preparation or implementation of an operation • It must be invoiced to the beneficiary or • Certified on the basis of documents of equivalent probative value • If these are staff costs (provision of services or contribution in-kind ) – must be additional

European eligibility rules 2007-2013 1828/2006 § 53: Depreciation • No change in content • Depreciation costs of depreciable assets directly used for an operation and incurred during the period of its co-financing shall be eligible, provided that the acquisition of the assets is not declared as eligible expenditure

European eligibility rules 2007-2013 Other ineligible costs • Decommissioning nuclear power stations • Fines, financial penalties and expenditure on legal disputes • Purchase costs for depreciated assets used for an operation

Eligibility errors Related errors 2000-2006 • Ineligible expenditure! Cases too varied to list • Generally, rules tend to limit most obvious cases • Capacity checking should ensure that beneficiaries really are aware of programme, EC and national requirements • National interpretations best provided in writing • As a rule programmes will not be able to accept general findings (‘I am not certain that…’) • Findings have to be finalised, quantified and deducted

Overheads errors Office costs errors 2000-2006 • Notorious areas for problems because interpretations can vary so widely • Common problems due to insufficiency / lack of calculation method (e.g. use of flat rates). Agree the calculation method from the start • Confusion in projects because some programmes (e.g. Framework) allow flat rates • Disagreement about what can be included (standardisation/approval of methods in projects could be a way forward) • New flat rate rules will require particular attention

In-kind contributions

In-kind contributions Eligible in-kind costs • A contribution for which no charge is made (e.g. a free provision of land or real estate, materials, equipment, unpaid voluntary work) • ERDF reimbursement is limited by a maximum rate: Total eligible expenditure minus contributions in-kind • Documentation of such costs notoriously unreliable – some countries do not accept these costs • Unpaid voluntary work most common – requires reliable time sheets and fair hourly rate • Value of other contributions needs to be objectively assessed

In-kind contribution: How to calculate max ERDF contribution? Capping of payments in a programme with ERDF co-financing rate 85% Example: • Financing = €100.000 in cash + €100.000 in-kind • Total project expenditure = €200.000 • 85% total project expenditure = €170.000 • But maximum ERDF contribution = Total eligible costs – in kind = € 100.000 • Payment to this project is capped at €100.000 ERDF • In-kind contributions are rarely large enough to cause capping

Controlling in-kind contribution: Checklist In-kind questions • Does the contribution belong to one of the accepted categories: Land, real estate, equipment, professional work, unpaid voluntary work? • Has the value of in-kind contribution been certified by an independent qualified valuer or duly authorized body? • Is the amount of the in-kind contribution supported by accounting documents with adequate probative value? • Is the value of unpaid voluntary work determined by comparing it with an equivalent work? • Was the total eligible amount corrected by deducting in-kind contribution? Is the claimed ERDF co-financing correct?

Accounting checks 6. Accounting • An audit check – few comments from our side • Timesheets particularly problematic in past • Are there any? • Do they provide enough information? • Who signs them? • Do fulltime project staff also have to keep them? • Does payment information provide adequate evidence of source of funding for full salary? (pay slips) • Agree standards at project start

Audit trail checks 7. Audit trail – essential principle • Audit trail basic = Accounting documents and evidence • Audit trail European Territorial Cooperation = All accounting documents + evidence of eligibility (justification of expenditure) • Failure to understand this has led to recoveries of up to 85% of programme budgets • The most common problem detected in Commission audits

Audit trail checks 7. Audit trail • Includes proof of delivery of product or service • For detailed suggestions see separate sheet available from INTERACT • Note that national rules should include something on requirements for the audit trail

Audit trail checks Related errors 2000-2006 • No documents or invoices only • No audit trail for national co-financing amount • Inclusion of small ineligible items (check especially credit card payments, petty cash) • No adequate calculation for part-time staff costs and/or overhead costs • Ineligible costs included in overheads • No attempt to reclaim VAT • Inconsistent use of exchange rates • Costs not related to the project

Public procurement Procurement: Legal basis • Directive 2004/18/EC – On the coordination of procedures for the award of public works contracts, public supply contracts and public service contracts • Directive 2004/17/EC – Coordinating the procurement procedures of entities operating in the water, energy, transport and postal services sectors • Commission Interpretative Communication 2006/C 179/02 - On the Community law applicable to contracts not or not fully subject to the provisions of the public procurement directives • Commission Interpretative Communication 2007/C 6661 - On the application of Community law on public procurement and concessions to institutionalised public-private partnerships • http://ec.europa.eu/internal_market/publicprocurement/index_en.htm

Public procurement Procurement basics • Relates to all contract awards for products and services for implementation of the project • Two types – full tender and limited tender • Decided by contract value. Very basically, full tender for: • Service contracts over EUR 162.000 • Public works contracts over EUR 6.242.000 • Member States may also set lower values • Limited tender in almost all other cases • Check directives for various ’ifs’, ’buts’ and ’maybes’ • Include procurement knowledge in capacity checking

Public procurement Procurement basics • Fundamental principles to be observed: Free movement of goods, right of establishment, freedom to provide services, non-discrimination and equal treatment, transparency, proportionality and mutual recognition • Also apply for purchases below the threshold values • Many Member States / organisations also set limited tender thresholds so very small amounts not covered – big differences in amounts • Do you and your projects know the relevant amounts?

Public procurement Derogations from procurement: Internal Market • No relevance for the internal market (very modest economic interest at stake) • Decided case-by-case based on subject of contract, estimated value, market concerned, geographic location of place of performance • Decision not to tender needs to be documented • Careful – Commission likely to be stricter in interpretation than many projects

Public procurement Derogations from procurement: Urgency and only one operator available • Extreme urgency due to unforeseeable events • Applies to e.g. natural disasters rather than tight schedules • For technical or artistic reasons or reasons connected with the protection of exclusive rights contract can only be executed by one particular economic operator • Very limited. There is normally more than one potential supplier • i.e. normally no acceptable derogations from requirements

Public procurement Advertising requirements • Sufficient ’to enable the services market to be opened up to competition’ • Undertakings in other MSs must have access to appropriate information and be in a position to express their interest • Contacting potential suppliers not sufficient – Publication (e.g. on web) a minimum • Must contain details of contract and the award method

Public procurement – what needs to be checked? Controlling procurement • Verifications should be carried out as soon as possible after the public procurement process has occured • Commission recommends list of new contracts with all claims • MS should develop guidance on public procurement for beneficiaries as part of the supporting documents for the programme • See management verification guidance for more details

Procurement errors Related errors 2000-2006 • No (evidence of) tendering – especially small contracts awarded automatically to local suppliers • Contract value deliberately set just below full tender threshold • Contracts split up into smaller assignments • Additional services provided in addition to main contract taking total amount over thresholds • Inadequate publicity of invitation to tender • Lack of transparency / objectivity in tender award procedure • Use of restrictive criteria limiting parties able to tender • Not enough time to submit tenders

Flat rate cuts Flat rate cuts for non-compliance with tendering rules and procedures: • Now covered in a Commission paper • Sliding scale of cuts based on the seriousness of the irregularity. From 100% to 2% • The longer problems go undetected, the more likely that most of the contract value will be rejected

Horizontal priorities 8. Compliance with EU ‘horizontal objectives’ “…the Community shall contribute to the harmonious, balanced and sustainable development of economic activities, the development of employment and human resources, the protection and improvement of the environment, and the elimination of inequalities, and the promotion of equality between men and women”.

State Aid, environmental and equal opportunities rules 8. State Aid • Does the programme allow State Aid? • Under de minimis rules, a block exemption or another scheme? • If no, are there are any special rules governing grants to avoid State Aid problems (e.g. free access to all results / no ownership rights) • See Vademecum Community rules on State Aid (15.02.2007) • Guidelines on national regional aid for 2007-2013 (OJ C 54, 4.3.2006)

How do you decide whether a partner and/or project is affected by State aid? State aid rules apply whenever an operator is involved in an economic activity that meets all four criteria: • Transfer of resources: Applies to any transfer of state funds regardless of whether the funds pass through an intermediary body (such as programme or project partner). • Applies to all projects • Selectivity: Applies when operators are selected to receive assistance. • Applies to projects • Economic advantage: The aid must give an economic advantage • Effect on competition and trade: If the beneficiary is involved in an economic activity and operates in a market in which there is trade between MS

State Aid and 5 block exemption schemes Two exceptions – basic rules only • Block exemption schemes cover a number of different categories of aid (see Commission Vademecum on State Aid for an overview) - Aid to small and medium-sized enterprises - Employment aid - Training aid - Transparent regional investment aid schemes • De minimis rule (aid to an enterprise below the threshold of € 200.000 over 3 financial years does not constitute State Aid). Check compliance with threshold values

Risk areas to be checked by management verifications in the area of State aid Checks to carry out for State Aid • That the aid scheme has been notified to and approved by the Commission or that it is covered by either a block exemption or satisfies the de minimis rules and does not need to be notified • That the undertakings in receipt of aid satisfy the conditions of the aid scheme as approved by the Commission or that the nature of operations covered by block exemption satisfy the particular exemption conditions • That there is no overlapping of aid from different sources which could breach the de minimis rule or the applicable rules on the cumulation of aid • All grants covered by a State Aid scheme (including de minimis) have a document retention period of 10 years

Management verifications in the environment area Checks against environmental rules - general • Water, air, nature, waste and chemicals are the main (but not the only) themes • Programme will include a Strategic Environmental Assessment (SEA) highlighting the main issues • Should also contain compulsory indicators for monitoring environmental impacts • National procedures for approving investments should take full account of EU environmental rules (including Environmental Impact Assessment and public consultation) • Project approval decision should be regarded as an initial acceptance of project’s environmental aspects

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