TERRITORIAL COOPERATION OBJECTIVE FINANCIAL MANAGEMENT HANDBOOK

Transcription

1 TERRITORIAL COOPERATION OBJECTIVE FINANCIAL MANAGEMENT HANDBOOK March 2007

2 INTERACT is financed by the European Regional Development Fund (ERDF) 2

3 This handbook is for information only. It is not designed to replace the regulations, which remain the only binding legal text. The views contained in this document are those of the authors and the Managing Authority of the INTERACT programme is in no way liable for any use made of the information contained herein. This handbook has been written to accompany the INTERACT training seminars on financial management originally developed by INTERACT Point Qualification and Transfer in Denmark. It aims to cover all the most common procedures and questions relating to the financial management of Territorial Cooperation programmes and projects and give insights into how the regulations are implemented in practice. We would like to thank the European Commission DG Regional Policy for commenting on the content of this handbook and recommending changes. We would also like to thank the many programmes and projects from all strands of INTERREG and from across Europe who contributed their expertise, documents and time. Finally we would like to thank the participants of all previous financial management seminars, whose opinions and questions have been invaluable in further developing the content of the handbook. INTERACT Point Qualification and Transfer January 2007 INTERACT Point Qualification and Transfer Jernabengade, 22 DK 8800 Viborg t: (+45) , f: (+45)

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5 Contents Glossary... 7 Introduction Note on terminology and abbreviations Main abbreviations used in the text Different rules for new Member States The programme cycle in Territorial Cooperation programmes Key Financial Activities in the programme lifecycle Key challenges in Territorial Cooperation programmes Quality targets for key activities Start up phase: Programme level Key elements to support financial activities ( ) Key points in developing programme management structures Programme management bodies The Monitoring Committee and the Member States The Steering Committee The Managing Authority The Joint Technical Secretariat The Paying Authority / Certifying Authority Intermediate Bodies Audit Authority The responsibility chain The main programme documents The Operational Programme (OP) The Description of Management and Control Systems Memoranda of Understanding between the programme and the Member States Project contracts and partnership agreements The need for strong cooperation between management bodies Staff and Training From systems to start-up Financial framework Sources and uses of programme funds ERDF Pre-financing or the programme advance payment Co-financing (or match-funding) Private co-financing Own contribution Letters of Commitment Programme financial tables Priorities and measures ERDF grant rates in the new period The Technical Assistance (TA) budget Additional Administration Tools Bank accounts Interest on programme accounts Monitoring systems More on the Business Plan Operating Phase: Programme Level Allocation of funding Calls for applications Project approval and rejection Contracting Basic programme financial flows Spending forecasts

6 4.7 Project claims for payment Tackling poor project spending Tackling a de-commitment threat Recycling funds and end of programme de-commitment Payment Claims to the Commission Start-up phase: Project Level How to get project budget right Resource Planning Cost Estimating Cost Budgeting Budget detail vs. flexibility Helping projects get it right The assessment process Eligibility check Assessing project budgets Risk assessment After approval Operating phase: Project Level Avoiding project financial problems The payment chain Project reporting and claims for payment Reporting requirements Control / certification of claims Assessment of reports Helping projects with implementation problems Certification of payment and financial control First Level Control Who is checked? Who are the controllers? What is checked by the first level controller? What is checked by programme management bodies? What happens if there are problems? Second Level Control / Audit Content of audits and common problems detected Financial Corrections and Recovery Project and programme closure Project closure Steps to project closure Programme closure Third Level Control Annex 1 Regulatory Framework Annex 2 First level control in INTERREG All the EU regulations referred to in this document have been listed in Annex 1 and they can be downloaded from the INTERACT website at: 6

7 Glossary Advance payment (also called pre-financing): A small part of the ERDF paid to the programme at the start to cover the programme s start up costs and to make the first payments to the projects. In the funding period the Advance Payment was 5% for all programmes and in the new funding period it will be 7% for programmes involving at least one of the new EU Member States, Greece or Portugal and 5% for programmes involving the EU-15 MS spread over three or two years respectively. Audit Authority: A national, regional or local authority or body, functionally independent of the managing authority and certifying authority, designated by the Member State for each operational programme and responsible for verifying the effective functioning of the management and control systems. (Source: Art. 59 EC 1083/2006) Assisted by a Group of Auditors from the countries participating in the programme, the Audit Authority develops an audit strategy according to which it carries out the inspection of the programme systems and procedures and of a selected sample of projects. Actual audits are sometimes contracted to audit firms. Audit: In Territorial Cooperation programmes this term refers to second level control and the audits carried out by other organisations such as the Commission. Audit is an inspection of the programme systems and the financial records of a sample of projects. It should confirm the sound operation of the programme management and control systems and the accuracy, reliability and eligibility of funding claims. Audit trail: A sequence of information i.e. accounting records that provide detailed information about expenditure actually incurred. The accounting records show the date they were created, the amount of each item of expenditure, the nature of the supporting documents and the date and method of payment. The audit trail provides evidence of the expenditure claimed and enables tracing the financial data to its source. (Source: Annex 1 EC 438/2001). Automatic De-commitment (N+2 rule): A process whereby money can be taken back by the European Commission from programmes that are not spending at a predefined rate. It is a tool to encourage efficient financial management and avoid funds being left inactive in programme accounts for many years as it intends to speed up the absorption of funds within programmes. According to the N+2 rule, funds allocated to a programme must be spent within three years (where N is the commitment year and +2 is the year by the end of which funds committed in N have to be spent). The rule is applied at programme level but programme managers may choose to reallocate expenditure away from inefficient projects that are slowing programme spending. Beneficiary: Operator, body or firm, whether public or private, responsible for initiating or initiating and implementing operations. In the context of Territorial Cooperation programmes, this means all partners participating in a project. (Source: Art 2 EC 1083/2006) Business Plan: A document setting out the main programme management activities that need to be carried out. It is fine-tuned at the Monitoring Committee meetings and becomes the basis for Technical Assistance spending. The business plan is a medium term planning tool providing a longer perspective than the annual or 6-monthly work plans normally submitted to Monitoring Committees but providing greater detail and accuracy than the long term plans provided in the Operational Programme. Certifying Authority: A national, regional or local authority or body designated by the Member State to certify statement of expenditure and applications for payment before they are sent to the Commission. (Source: Art 59 EC 1083/2006). The Certifying Authority manages programme funds and transactions with the Commission and recovers incorrectly paid funds. Certification: Means that expenses have been approved by the body officially responsible. It occurs at two stages in the claims process: Firstly, all expenditure from every project partner 7

8 is certified by that partner s first level controller. Secondly, the Certifying Authority certifies every programme claim before it is sent to the Commission. Claim for payment: Every time a project reports to the programme it sends a statement of expenditure showing how much money it has spent. This statement also acts as a claim for the ERDF that the project expects to receive from the programme (based on the approved ERDF grant rate). Programmes follow the same procedure when they want to claim money from the Commission. Control / controllers: In Territorial Cooperation programmes this is used only to refer to the first level control check. 100% of project expenditure is certified by a designated controller in each partner s country. This may result in some deductions if some of the expenditure is incorrect. When the correct amount has been confirmed, the controller will sign a controller s declaration certifying that the expenditure has been approved. Detailed Costed Workplan: A project planning document containing a detailed breakdown of the activities to be carried out, when they will take place, the resources required (staff, equipment etc) and the cost for these resources. This document forms an essential basis for realistic project budget estimates but should not be regarded as a guarantee of how the project will be implemented: Project managers cannot predict everything that will happen in this project and the work plan is their best estimate. Description of management and control systems: A document which describes in detail the roles and responsibilities of the programme bodies (Monitoring and Steering Committee, Managing Authority, Certifying Authority, Audit Authority, Joint Technical Secretariat) and outlines step-by-step procedures for how to handle the main programme activities. (Source: Art 71 EC 1083/ Art /2006) Eligibility: This term is used in financial control to describe expenditure that complies with all the relevant EU, national and programme rules. Eligible expenditure can be reimbursed from funding allocated to the project under the Subsidy Contract. Any spending that breaks one of these rules will be found ineligible and will not be paid by the programme. Financial report: Part of the progress report. Project Lead Partners have to submit a progress report to their Joint Technical Secretariat at the end of each reporting period. It contains a retrospective accounting of the total costs incurred during the reporting period. First Level Control: Controls on the project level undertaken when project partners submit a Payment Claim. Ineligible expenditure: Expenditure presented for payment from the programme funds, which does not comply with eligibility rules. Intermediate bodies: Any public or private body or service which acts under the responsibility of a managing or certifying authority, or which carries out duties on behalf of such an authority vis-à-vis beneficiaries implementing operations. (Source: Art 2 (6) EC 1083/2006). International Audit Standards: Auditing good practice standards developed by a number of international organisations. These standards cover all aspects of audit work and in some cases are being further developed to specifically address audit in the public sector. Audit in the new programme period will have to comply with the relevant standards. Irregularity Any infringement of a provision of Community law resulting from an act or omission by an economic operator which has, or would have, the effect of prejudicing the general budget of the European Union by charging an unjustified item of expenditure to the general budget. (Source: Art 2 (7) EC 1083/2006). Joint Technical Secretariat (JTS): A body responsible for day-to-day management of the programme. It assists the managing authority, monitoring committee and audit authority with carrying out their tasks. 8

9 Lead Partner: Administrative leader of the project who is responsible for ensuring that all project activities are carried out according to the approved project application and that all partners have all expenditure certified by the designated first level controller. The Lead Partner signs a subsidy contract with the Managing Authority. Managing Authority: A single programme body responsible for ensuring the effective implementation of the agreed programme strategy in accordance with the pre-determined quality standards. The Managing Authority takes the lead in establishing systems and procedures and ensures they are maintained. Memorandum of understanding / Letters of agreement: Documents drawn up between the national or regional authorities participating in a programme and the programme s management bodies. They are reciprocal agreements defining both MA requirements from the Member States and the Member States requirements from the MA and other management bodies. (Source: Art 59.3 EC 1083/2006) Monitoring Committee: A committee which provides each Member State with representation in the programme and safeguards the Member States interests. It takes decisions on the programme level and needs to be kept informed of progress towards programme objectives, the status of programme finances and any problems in programme level bodies and procedures. OLAF (European Anti-Fraud Office): Community office charged with detecting and putting an end to irregular or fraudulent expenses within the Community budget framework. Operational Programme: Document submitted by a MS and adopted by the Commission setting out a development strategy with a coherent set of priorities to be carried out with the aid of ERDF. (Source: Art 2 EC 1083/2006). It is the most important programme document describing the programme s background, objectives, priorities, financing and implementation. Partnership Agreement: It is a requirement that for each operation a lead beneficiary shall lay down the arrangements for its relations with the beneficiaries participating in the operation in an agreement comprising provisions guaranteeing the sound financial management of the founds allocated to the operation, including the arrangements for recovering the amounts unduly paid. (Source: Art 20 EC 1080/2006) In practical terms the partnership agreement sets out the main responsibilities of the signatories (Lead Partner and Project Partners), financial provisions (how the project budget will be subdivided between partners, eligible expenditure and procedures for claiming payments) and governance issues (structures and roles, procedures including settlement of disputes, etc.) on how the project should be managed and implemented. Progress Report: Comprised of the Activity Report and Financial Report (Payment Claim) it documents the progress of the operation and serves as a payment request. Lead Partners of operations have to submit a progress report at the end of each reporting period to the Joint Technical Secretariat. Real costs: The whole system of payments is based on this principle. Projects can only claim amounts that they have really been charged (amounts incurred ) in connection with work required for the project, and can only claim them from the programme after these amounts have actually been paid by the project. Recovery: When funds are incorrectly (or unduly ) paid to a project, the programme has to get them back from the project partner concerned. Programmes normally do everything possible to avoid this sometimes difficult procedure by holding back the last part of project payments until they have control guarantees that the spending claimed is correct. Separation of functions: The management and control systems of operational programmes set up by Member States shall provide for compliance with the principle of separation of functions between and within such bodies. (Source: Art 58 (b) EC 1083/2006. It is required that the most important tasks in the programme management system are assigned to different bodies to allow for the checking of work carried out elsewhere and remove opportunities for corruption. 9

10 Steering Committee: An optional programme body responsible for the selection of projects and in some cases post-approval monitoring. Sub-contractor: A third party that is assigned tasks on behalf of the partnership. These tasks will be the subject of a contract and the sub-contractor will need to be selected through public procurement procedures. Subsidy Contract / Grant Offer Letter: Contract between the Managing Authority and the operation s Lead Partner. It determines the rights and responsibilities of the Lead Partner and the Managing Authority, the scope of activities to be carried out, terms of funding, requirements for reporting and financial controls, etc. In the new programme period contracts should also allow the possibility to de-commit money from under-performing projects. System audits: A task carried out under the responsibility of the Audit Authority throughout the programme lifetime to check the procedures established by all of the different management bodies for administering the programme. This check focuses on whether these systems will allow sound management of the programme and whether the systems described are actually in use. Systemic errors: Problems detected in the programme management and control system affecting large parts of the programme and which can lead to major cuts in the Commission funding. They can occur at project level (e.g. failure to secure the audit trail) or programme level (e.g. giving incorrect advice on public procurement). Systemic errors generally result in a suspension of payments and large grant cuts. Technical Assistance: One of the priorities in the INTERREG / Territorial Cooperation programmes covering the operating costs of the programme. It is financed in the same way as all other costs with an ERDF contribution and a co-financing component. The programme s TA budget is kept in a separate bank account to ensure that there can be no confusion with other programme funds. Third Level Control: In future this will also generally be carried out by the Audit Authority. It involves preparing and approving the final statement of programme expenditure, the final report and a winding up declaration certifying that all expenditure declared is correct and that the findings of all controls and audits have been implemented. This control must be completed before the programme can close. Winding up declaration: A document confirming that the necessary checks have been carried out and all corrective actions required have been completed. It is used by the Commission to make the decision to close the programme and make the final payment. Virement: Technical term sometimes used to describe the movement of money between priorities. These movements of funds require Commission approval. 10

11 Introduction 1. The aim of this handbook is to help programme administrators from all three strands of the Territorial Cooperation programmes and from different programme management bodies to maximise the use of ERDF and secure high quality projects while at the same time ensuring that financial management standards are met. These standards can be summarised by the term sound financial management, defined as consisting of three key principles: The principle of economy requires that the resources used by the institution for the pursuit of its activities shall be made available in due time, in appropriate quantity and quality and at the best price. The principle of efficiency is concerned with the best relationship between resources employed and results achieved. The principle of effectiveness is concerned with attaining the specific objectives set and achieving the intended results. 1 The handbook sets out to show how good financial management can act as a positive force rather than an obstacle in achieving programme objectives by providing programme and project managers with a clear framework and timelines for implementation. 2. The content has been developed from the official requirements for financial management contained in the EU regulations governing the current funding period and proposed changes in requirements for the next funding period Every effort has been made to provide the latest information on the requirements in the new period. In some cases however interpretation is needed from the European Commission and concerns about the accuracy or relevance of the content should be addressed to INTERACT Point Qualification and Transfer, who can provide updated information. In addition to the Community regulations governing Territorial Cooperation programmes, every Member State has its own national rules, in particular regarding the eligibility of different kinds of costs. It has not been possible to provide an overview of all of these rules and questions about national requirements should be directed to programme bodies. 3. The focus is on how the regulatory framework is applied in the programmes. In order to do this attention is paid to both good practices and common problems so as to suggest workable solutions. This may have the unintended effect of suggesting that financial management in Territorial Cooperation programmes is always problematic. On the contrary, the main elements are relatively simple. The Good Practice boxes included throughout the text build on these elements and suggest how they can be applied in practice. It is not suggested that everything proposed will be appropriate in all programmes. Every Member State has its own procedures and requirements for financial management. Full standardisation is not possible or desirable and some of the suggestions in this handbook may need to be tailored to programme conditions. Regardless of procedures, however, certain minimum performance targets are identifiable. If these targets are not being met, there is a clear need for change. The start of the new programme period presents an opportunity for every programme to reconsider its procedures and whether they could be simplified and streamlined. These good practices have been identified through over two years of dialogue with the programmes. 4. The main target group for the handbook is finance staff in Territorial Cooperation programmes and others whose work with programme management requires an understanding of the main financial principles and procedures. Wherever possible the content is limited to the financial aspects of programme implementation but it is sometimes necessary to consider wider programme management issues. Much of the information will also be 1 Council Regulation No 1605/2002 on the Financial Regulation applicable to the general budget of the European Commission

12 relevant to project level finance managers. Projects should, however, always check the requirements of their own programmes before using the recommendations in the handbook. There is perhaps one surprising omission. We have not included a detailed section on interpreting the 12 rules of the current eligibility regulation. This is because an excellent analysis of these rules is already available in the Eligibility Handbook produced by INTERACT Point Managing Transition and External Cooperation (MTEC) in Vienna. The handbook is available online at Financial controllers will nevertheless still find much that is relevant in this handbook. 5. The handbook was developed to accompany the INTERACT training seminar on Financial Management in Territorial Cooperation programmes. Anyone wanting further detail or the opportunity to discuss the points raised is recommended to attend the next seminar, which includes case studies and additional examples of many of the points discussed here. Details of the timing and location of future training seminars can be found on the INTERACT website at under Events. Alternatively, send an requesting information to ip.qt@interact-eu.net 6. Where relevant, boxes indicating the main changes in the new programme period and info boxes defining important terms have also been added to the text. The main regulations governing INTERREG / Territorial Cooperation programmes Current period New period General Reg. 1260/1999 General Reg. 1083/2006 ERDF Reg. 1783/1999 ERDF Reg. 1080/2006 Use of EURO Reg. 643/2000 Management and Control Systems Reg. 438/2001 Implementing Reg. 1828/2006 Eligibility of expenditure Reg. 448/ There are many text boxes in the handbook containing different kinds of background information. They have been flagged with one of the four icons and should help you find your way around. These sections cover the rules, regulations and main terminology involved in INTERREG / European Territorial Cooperation programmes. They are an introduction for those who are not familiar with the programmes. These sections contain information explaining how the rules work on a practical example. 12

13 These sections address good practise examples on how to successfully implement the regulatory requirements into workable solutions. These sections contain a summary of the key points presented. These may be valuable tips and ideas which are listed in a comprehensive way. Structure of the handbook One of the central points of this handbook is that all financial management activities are interlinked and sound financial management requires that these links are understood and exploited. Some division of the content has, however, been necessary and the handbook is broadly structured in two sections: Programme Level and Project Level. The table below gives an overview of some of the main points covered in each section. Key financial activities during programme and project life cycles Start Up Implementation Closure Programme Bodies Systems Tools Documentation Funds management and payments First and Second Level Control Closure statements Project Budget plans Application Contracting Partnership Agreements Management of spend Monitoring First and Second Level Control Final payments The text within each section follows the programme and project lifetime and the main procedures required at different stages. Nevertheless it is generally impossible to properly understand one level without also considering the other and we would recommend that all readers study both sections to get a full overview. Financial control has been included in a separate section towards the end, being of equal interest to the project and programme levels. The handbook ends with a brief discussion of both project and programme closure, which draws heavily on previous sections and has therefore been left as a concluding comment. 13

14 Note on terminology and abbreviations At the time of writing programmes are in a period of transition with the old programmes ( ) still running and preparations well underway for the launch of the new programmes ( ). This handbook is largely based on the new period. Where terminology from the previous period is used it should be understood as describing a practice or procedure that may no longer apply in future. Main changes in terminology Current period New period INTERREG Community Initiative Programme Paying Authority Second Level Control Group Art 5 Declaration Territorial Cooperation Objective (sometimes called INTERREG IV) Operational Programme Certifying Authority Audit Authority Art 71 Declaration (Description of management and control systems) Main abbreviations used in the text AA Audit Authority (new period) CA Certifying Authority (new period) CIP Community Initiative Programme (old period) CSG Community Strategic Guidelines ERDF European Regional Development Fund EU15 The 15 EU Member States joining before 1 May 2004 EU10 The 10 EU Member States joining on or after 1 May 2004 FLC First Level Control IB Intermediate Body ISA International Standards on Auditing JTS Joint Technical Secretariat LP Lead Partner MA Managing Authority MC Monitoring Committee MS Member State MSC Combined Monitoring and Steering Committee OLAF European Anti-Fraud Office (Office Européen de Lutte Anti-Fraude) OP Operational Programme (new period) PA Paying Authority (old period) SC Steering Committee SLC Second Level Control TA Technical Assistance TC Territorial Cooperation (new period) 14

15 Different rules for new Member States It is extremely important to realise that the new regulations define two different groups of Territorial Cooperation programmes with different rules in a number of key areas: Different rules will apply to programmes involving Member States with a GDP of below 85% of the EU average (the new Member States, Portugal, Greece and east German länder) Different rules on advance payments from the Commission will apply to all programmes involving at least one of the new 2 MS (EU12) as compared to programmes involving only old 3 MS (EU15) It is important to note that these different rules apply to the whole programme if it involves one of these countries (for example, the whole of the Finland-Estonia programme will be covered by the rules for new Member States). The changes are summarised below but much more detailed descriptions are available in relevant sections of the handbook for anyone unfamiliar with the old rules. Changes in the new programme period: Comparison New MS vs. Old MS New MS Old MS ERDF grant rates Up to 85% (programme level) (Including Greece, Portugal and east German länder) Up to 75% (programme level) (Excluding Greece and Portugal) De-commitment Spending on housing N+3 in the first half of the programme period changing to N+2 for the second half (Including Greece and Portugal) Eligible (with conditions) N+2 in the whole programme period (Excluding Greece and Portugal) Not eligible Advance Payment 7% paid in 3 annual instalments: 2%-3%-2% 5% paid in 2 annual instalments: 2%-3% (Including Greece and Portugal) 2 New MS are countries that acceded to the European Union on or after 1 May Though increasingly outdated, the terminology is maintained for ease of reference. 3 Old MS refers to EU-15 15

16 1. The programme cycle in Territorial Cooperation programmes Territorial Cooperation financial management Operational objectives Maximise the use of ERDF Secure high quality projects Secure quick enough pace of spend to avoid de-commitment Develop programme confidence on eligibility Ensure that financial control standards and deadlines are met Limit bureaucracy Actively manage potential problems using different planning timescales: o Long-term: Operational Programme o Mid-term: Business Plan o Short-term: Action points between Monitoring Committee meetings 1.1 Key Financial Activities in the programme lifecycle All Territorial Cooperation programmes and projects follow the same broad lifecycle with start up, implementation and closure phases. The first task of finance staff is to understand the key requirements at each stage so challenges can be predicted and managed. The programme lifecycle provides a basic framework of regular events and deadlines to which clear targets can be assigned. Commission spending deadlines ( de-commitment targets ) determine the programme spending targets which in turn will be used to set targets for allocating funds to projects. Similarly, workflows generally follow the project lifecycle with predictable peaks during calls for applications and assessment of reports. All of these elements should be considered at the start of every programme to gain an overview of the resources and procedures that will be needed to cover different needs as they arise. This initial assessment of the financial lifecycle of the programme should form the foundation for the two key documents describing the way that the programme will be implemented: the Operational Programme (CIP in the current programmes) and the Description of Systems and Procedures (Article 5 declaration in the current programmes). These documents should provide the outline for all financial management activities for the duration of the programme. Each phase of the lifecycle involves different activities though there is of course some overlap between phases. 16

17 Key financial activities in the programme lifecycle Start up: In Operational Programme - Identify programme management bodies and define roles - Establish legal framework e.g. agreements with Member States - Produce financial tables and financial sections of the OP - Decide split of funds between priorities and grant rates - Define as far as possible all financial management and control procedures e.g. for application and assessment, contracting, management of TA budget Start up: Other elements required - Define systems and requirements for work of programme management bodies (Description of management and control systems) - Produce application forms - Produce report forms - Set up monitoring system (based on application and report forms) for project and programme levels - Produce guide for applicants, FAQs and fact sheets - Carry out first project development events - Identify first, second and third level control bodies - Identify and secure required resources (e.g. staff) Implementation: Initial stage - Run first project developer events (including advice on project budgeting and financial management) - Produce spending forecasts and profile of allocations required - Assessment of initial applications and possible adjustment of programme documents - Allocation of funding - Systems control visit to programme Implementation: Main stage - Monitoring of funds in priorities and possible movement of funds - First level control - Verify spending and make payments - Continuing advice to projects on financial issues - Claims to the Commission - Payments to projects - Initiate second level control - Mid-term evaluation Closure - Final report - Winding up declaration - Payment of 5% retention from Commission - Final payments to projects - Closure of programme management bodies 17

18 1.2 Key challenges in Territorial Cooperation programmes There are a number of challenges that also need to be considered to smoothly implement this basic scheme. Perhaps the most important of these are the EU de-commitment rules. What is de-commitment and the N+2 rule? De-commitment was introduced as a tool to encourage efficient financial management and avoid large amounts of funds being left inactive in programme accounts for many years. At the start of each year (year N), the Commission allocates or commits funds to each programme. These funds have to be spent within three years (by the end of N+2). If they have not been spent they are returned to the Commission or de-committed from the programme. This means that programmes have to operate efficiently and begin allocating funds and therefore helping the regions of Europe as quickly as they can. It has been a very successful tool in these terms and has meant that programmes have re-evaluated not just the way funding is allocated but a whole range of management issues from speeding up control work to building project development capacity in programme areas. INTERREG programmes have sometimes struggled to spend the money in time because of the added challenges of building cooperation between different countries, which often delay both programme and project start-up. Despite this, the amounts lost to decommitment have been lower than anticipated though many other programmes avoided de-commitment of funds only through extraordinary effort and increasing the reporting burden on projects. Critics of the rule argue that it threatens quality and instead shifts the focus onto spending money. Indeed, the threat of de-commitment led to the creation of the concept of project under-spending (projects failing to meet the spending targets in their budgets). There is, however, strong Member State support for the rule as a way of ensuring the efficiency of EU funds management so, even though it has been relaxed for some programmes in the new period, it is extremely unlikely to ever be abolished. This means finance staff need to establish monitoring systems capable of detecting any waste of funds in project spending. De-commitment can put pressure on quality by encouraging programmes to approve inappropriate projects or activities in order to secure higher spending levels. The objective for finance staff is to ensure the efficiency and security of programme implementation while still avoiding a loss of funds and the regional development opportunities this funding should have provided. The key to success is effective planning. An additional challenge is transforming the regulatory framework conditions for implementing the different levels of financial control used in Territorial Cooperation programmes into workable systems. There is considerable nervousness about liability for the misuse of European funds and this has tended to lead to a steady increase in the number of financial controls in place. In some cases the controls used are already disproportionate to the funds involved with, for example, project statements of expenditure being checked three times during first level control in some programmes. Every effort must be made to reverse this trend while maintaining standards and here it is essential to secure the full backing of National Authorities. A related issue is that of eligibility of expenditure and the frequent confusion that arises from interpreting these rules. No regulation or guidelines will ever be able to cover all of the situations that arise in project implementation and no single interpretation will be acceptable to all Member States. This handbook therefore addresses eligibility from the perspective of a small number of key principles and the belief that programmes must develop the confidence to make their own decisions on these issues. 18

19 There is no magic solution to these problems but achieving spend of all funds allocated to a programme does depend on setting up and operating effective financial procedures from the start of a programme to its closure and on taking quick action as soon as any problems are discovered. This is the role of the programme s finance staff. 1.3 Quality targets for key activities In addition to the actual tasks, a number of important quality targets and the main factors influencing them can also be identified at different stages of the programme lifecycle. Quality targets and common problems At start-up Target: Set up an efficient programme management structure with good working relationships between the bodies in the structure and adequate staff resources, good systems to underpin key financial management activities, and clear documentation to make responsibilities and systems transparent. Common problems: Duplication and lack of clarity about the precise role of different bodies. This should be improved by the change to single management bodies in future and the requirement for a Handbook of Standard Procedures for every programme detailing the tasks of each body. Target: Managing de-commitment. Establish the exact amounts to be spent and deadlines. Set realistic allocation targets and deadlines to achieve the required spend and decide actions if projects are under-performing. Common problems: Programme spending targets are often too unrealistic because they are based on inaccurate project forecasts. Programmes, national and regional authorities are also sometimes unwilling to take action against under-performing projects. There is a need to set targets and discuss actions to improve projects early in the programme. Target: Secure good projects. Use the application and selection process to ensure soundly based projects, which spend according to forecast. Provide information to partners. It will allow them to meet programme requirements. Common problems: Not enough attention is paid to project and finances and management during the selection phase and these issues need to be included in selection criteria. Programmes also need to provide detailed information on budgeting and budget management. If programmes de-commit due to project under-performance, this loss needs to be passed on to the project concerned and project contracts should contain provisions for doing this. During Operation Target: Fund management. Allocate funds effectively and keep track of expenditure. Report to decision makers on progress and options for corrective action. Common problems: Programmes have not allocated sufficient funds during the start up phase. It is impossible to accurately predict annual project spending either because insufficient budget information is provided or projects are allowed to repeatedly miss targets without corrective action being taken. Targets: Make swift payments to meet verified spending and generate claims to the Commission. Common problems: Projects fail to declare spending in time. This is, however, often due to excessive bureaucracy and the time it takes authorities to certify spending. The new regulations include a three-month limit for completing this procedure. 19

20 Quality targets and common problems continued Target: Audit and monitoring. Ensure consistent and regular monitoring checks from programme start, deal swiftly with irregularities and recovery of funds, minimise their occurrence through advice to projects. Common problems: Many audit and control responsibilities rest with the Member States but Territorial Cooperation programmes have a low priority because of the relatively small amounts of funding involved. As a result, structures are not set up on time. The new regulations require that most of these structures are in place shortly after programme start. Target: Secure project spending. Give ongoing advice to projects and streamline the budget modification process. Common problems: Little advice is available on setting up project budgets and as a result spending forecasts for early stages are often much too optimistic. Programmes need to advise on realistic budget profiles, provide flexibility for changes and ensure that spending forecasts have a sufficient safety margin for project under-spending. Target: Administration of the Technical Assistance budget. Maximise the use of the TA budget and programme staff to support programme activities through Business Planning. Common problems: Especially in small programmes, TA budgets can be small in comparison to the tasks that need to be financed (and in many cases they will be smaller in the new period). Detailed forecasting is needed to ensure the liquidity of programme management bodies. At closure Target: Swiftly complete closure statements based on sound financial management and monitoring systems, which have been run during the programme s lifetime and minimise delays in making final payments to projects. Common problems: Closure should allow an analysis of project and programme achievements compared to the resources allocated. Monitoring systems are not always adequate for providing this kind of information. Delays in financial control work can also mean that critical findings are released too late for effective action to be taken. 20

21 2. Start up phase: Programme level Start up phase at programme level: Summary Establish a joint structure with clear financial responsibilities and good communication links between bodies within the structure. Ways of doing this include formal agreements, regular informal contacts, rules of procedure and briefing for the MC and SC. Ensure financial functions are adequately staffed with a clear separation of functions and that staff are well trained. Set up frameworks for: Funds management and prepare a first forecast of payment claims for the year Payments cycle Certification of payment claims to ensure that certification by approved auditors can be obtained within three months Monitoring controls including first and second level and final checks Dealing swiftly with irregularities Set up administration tools: Two bank accounts, neither split between Member States A digital database A technical assistance budget Present to the first MC a Business Plan describing resource requirements for administration of the programme. Agree arrangements for co-financing contributions from Member States/ regions. Provide documentation to meet the European Commission requirements including an indicative financial plan in the OP. Soon after approval draw up detailed requirements for securing the audit trial and the handbook of procedures. Programme start-up involves a number of key decisions that will have a lasting impact on the effectiveness and efficiency of implementation. The first of these is the selection of the programme management bodies and the next, delegation of the roles and responsibilities between these bodies. The basic outline for these structures needs to be included in the Operational Programme and forms a key part of the Commission decision on whether to approve the programme. The OP is supplemented after approval by a more detailed Description of Systems and Procedures and a Handbook of Standard Procedures. These documents form part of the independent systems check of the programme and also need to be approved by the Commission. Some major changes have been introduced in the new regulations particularly with regard to programme management bodies. These are covered in more detail below but we start with a summary of services that management structures have to deliver to the programme. 2.1 Key elements to support financial activities ( ) The key elements which should be set up at the start of a programme to support financial activities are outlined in the requirements for management and control systems in the regulations as follows: The management and control systems of operational programmes set up by Member States shall provide for: The definition of the functions of the bodies concerned in management and control and the allocation of functions within each body; Compliance with the principle of separation of functions between and within such bodies; Procedures for ensuring the correctness and regularity of expenditure declared under the operational programme; 21

22 Reliable accounting, monitoring and financial reporting systems in computerised form; A system of reporting and monitoring where the responsible body entrusts the execution of tasks to another body; Arrangements for auditing the functioning of the systems; Systems and procedures to ensure an adequate audit trail; Reporting and monitoring procedures for irregularities and for the recovery of amounts unduly paid. 4 These tasks are divided between a number of bodies including the Member States, the Monitoring and Steering Committee the single Managing Authority, Certifying Authority and Audit Authority and the Joint Technical Secretariat. The regulations contain clear descriptions of the role of each of these bodies and stress that the main principle to observe is the separation of functions between them and in particular of management, control and payment responsibilities. Two areas of potential conflict need to be addressed. Firstly, tasks assigned in the regulations to one body are often delegated to another (typically the JTS) and this needs to be defined in detail so all stakeholders are clear about precise roles. The second problem is related. Some tasks such as project monitoring require the input of more than one management body, with one body responsible for checking the work of the others. In the interests of efficiency, there is clear need to make sure that work is coordinated in order to secure quality standards while avoiding duplication. These relationships are therefore defined in two important documents the Operational Programme and the Description of Systems and Procedures both of which are covered in more detail later in this section. 2.2 Key points in developing programme management structures Key points in developing programme management structures The framework description of key programme management bodies contained in the regulations is the main tool for building programme management structure Set up a limited number of single programme bodies Single programme bodies serve the interests of all MS participating in the programme Draw up documentation defining roles of programme bodies Each body needs to add value to programme management Management bodies must be well integrated into programme information, managing, monitoring and control systems Management bodies must define the standards and systems that need to be in place in all MS participating in the programme Programme management bodies will perform 4 main programme management tasks: o Allocation of funds o Certifying correct expenditure o Claiming funds from the Commission o Paying funds to final beneficiaries The biggest change in the new period is the introduction of single programme management bodies and the joint technical secretariat to deliver management functions: Structures in one country that manage the programme on behalf of all participating countries. Every programme has found a different solution and there are many tasks to be assigned. However, the fundamental requirements are relatively clear. Programmes may want to adapt details to their own needs but effective management can be achieved with a limited number of responsible bodies. 4 Council Regulation (EC) No 1083/2006 laying down general provisions on the European Regional Development Fund, the European Social Fund and the Cohesion Fund and repealing Regulation (EC) 1260/1999, 58 22