INTERACT Financial Management Handbook

TERRITORIAL COOPERATION OBJECTIVE FINANCIAL MANAGEMENT HANDBOOK
March 2007
INTERACT is financed by the European Regional Development Fund (ERDF)

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Financial Management Handbook
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) 87 27 10 85, f: (+45) 86 60 16 80 ip.qt@interact-eu.net www.interact-eu.net
Contents
Glossary ...................................................................................................................... 7 Introduction ............................................................................................................... 11 Note on terminology and abbreviations..................................................................... 14 Main abbreviations used in the text........................................................................... 14 Different rules for new Member States 2007 2013................................................. 15 1. The programme cycle in Territorial Cooperation programmes.............................. 16 1.1 Key Financial Activities in the programme lifecycle......................................... 16 1.2 Key challenges in Territorial Cooperation programmes .................................. 18 1.3 Quality targets for key activities....................................................................... 19 2. Start up phase: Programme level.......................................................................... 21 2.1 Key elements to support financial activities (2007 2013) ............................. 21 2.2 Key points in developing programme management structures ....................... 22 2.3 Programme management bodies .................................................................... 23 2.3.1 The Monitoring Committee and the Member States................................. 23 2.3.2 The Steering Committee .......................................................................... 25 2.3.3 The Managing Authority ........................................................................... 26 2.3.4 The Joint Technical Secretariat................................................................ 28 2.3.5 The Paying Authority / Certifying Authority............................................... 29 2.3.7 Intermediate Bodies ................................................................................. 32 2.3.8 Audit Authority .......................................................................................... 34 2.4 The responsibility chain................................................................................... 35 2.5 The main programme documents ................................................................... 36 2.5.1 The Operational Programme (OP) ........................................................... 36 2.5.2 The Description of Management and Control Systems............................ 37 2.5.3 Memoranda of Understanding between the programme and the Member States ................................................................................................................ 39 2.5.4 Project contracts and partnership agreements......................................... 39 2.6 The need for strong cooperation between management bodies ..................... 40 2.7 Staff and Training............................................................................................ 42 2.8 From systems to start-up................................................................................. 43 3. Financial framework .............................................................................................. 44 3.1 Sources and uses of programme funds .......................................................... 44 3.1.1 ERDF........................................................................................................ 44 3.1.2 Pre-financing or the programme advance payment ................................. 46 3.1.3 Co-financing (or match-funding)............................................................... 46 3.1.3 Private co-financing.................................................................................. 48 3.1.4 Own contribution ...................................................................................... 49 3.1.5 Letters of Commitment ............................................................................. 50 3.2 Programme financial tables............................................................................. 51 3.3 Priorities and measures .................................................................................. 53 3.4 ERDF grant rates in the new period 2007 2013 ........................................... 54 3.5 The Technical Assistance (TA) budget ........................................................... 58 3.6 Additional Administration Tools ....................................................................... 61 3.6.1 Bank accounts.......................................................................................... 61 3.6.2 Interest on programme accounts.............................................................. 61 3.6.3 Monitoring systems .................................................................................. 62 3.6.4 More on the Business Plan ...................................................................... 63 4. Operating Phase: Programme Level..................................................................... 65 4.1 Allocation of funding........................................................................................ 65 4.2 Calls for applications ....................................................................................... 70 4.3 Project approval and rejection......................................................................... 71 4.4 Contracting...................................................................................................... 72 4.5 Basic programme financial flows..................................................................... 73 4.6 Spending forecasts ......................................................................................... 75
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Financial Management Handbook 4.7 Project claims for payment .............................................................................. 76 4.8 Tackling poor project spending ....................................................................... 80 4.9 Tackling a de-commitment threat .................................................................... 82 4.10 Recycling funds and end of programme de-commitment.............................. 83 4.11 Payment Claims to the Commission ............................................................. 84 5. Start-up phase: Project Level................................................................................ 85 5.1 How to get project budget right ....................................................................... 86 5.1.1 Resource Planning ................................................................................... 87 5.1.2 Cost Estimating ........................................................................................ 88 5.1.3 Cost Budgeting......................................................................................... 88 5.2 Budget detail vs. flexibility ............................................................................... 90 5.3 Helping projects get it right.............................................................................. 92 5.4 The assessment process ................................................................................ 93 5.4.1 Eligibility check ......................................................................................... 94 5.4.2 Assessing project budgets ....................................................................... 96 5.4.3 Risk assessment ...................................................................................... 97 5.5 After approval .................................................................................................. 97 6. Operating phase: Project Level............................................................................. 99 6.1 Avoiding project financial problems................................................................. 99 6.2 The payment chain Project reporting and claims for payment ................... 101 6.2.1 Reporting requirements.......................................................................... 101 6.2.2 Control / certification of claims ............................................................... 102 6.2.3 Assessment of reports............................................................................ 102 6.3 Helping projects with implementation problems ............................................ 103 7. Certification of payment and financial control ..................................................... 106 7.1 First Level Control ......................................................................................... 108 7.1.1 Who is checked? .................................................................................... 110 7.1.2 Who are the controllers? ........................................................................ 110 7.1.3 What is checked by the first level controller? ......................................... 113 7.1.4 What is checked by programme management bodies? ......................... 118 7.1.5 What happens if there are problems? .................................................... 118 7.2 Second Level Control / Audit......................................................................... 119 7.2.1 Content of audits and common problems detected................................ 125 7.3 Financial Corrections and Recovery ............................................................. 126 8. Project and programme closure .......................................................................... 129 8.1 Project closure .............................................................................................. 129 8.2 Steps to project closure................................................................................. 130 8.3 Programme closure ....................................................................................... 132 8.4 Third Level Control ........................................................................................ 135 Annex 1 Regulatory Framework.............................................................................. 136 Annex 2 First level control in INTERREG 2000-2006 ............................................. 138
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: http://www.interact-eu.net/604900/443793/0/0
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Glossary
Advance payment (also called pre-financing): A small part of the ERDF paid to the programme at the start to cover the programmes start up costs and to make the first payments to the projects. In the 2000-2006 funding period the Advance Payment was 5% for all programmes and in the new funding period 2007-2013 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

is certified by that partners 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 partners 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 controllers 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 1083/2006 + Art 21 1828/2006) 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--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.

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 programmes 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 programmes 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.
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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 operations 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 programmes 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.
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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 2000 2006 and proposed changes in requirements for the next funding period 2007 - 2013. 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
Council Regulation No 1605/2002 on the Financial Regulation applicable to the general budget of the European Commission. 27.2
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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 http://www.interact-eu.net/913123/1068570/0/0 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 www.interact-eu.net under Events. Alternatively, send an e-mail 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 2000 2006 New period 2007 2013
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. 448/2004
7. 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.
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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
Programme Bodies Systems Tools Documentation
Implementation
Funds management and payments First and Second Level Control
Closure
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.
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Note on terminology and abbreviations

At the time of writing programmes are in a period of transition with the old programmes (2000-2006) still running and preparations well underway for the launch of the new programmes (2007-2013). 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 2000 2006
New period 2007 2013
INTERREG
Territorial Cooperation Objective (sometimes called INTERREG IV) Operational Programme Certifying Authority Audit Authority Art 71 Declaration (Description of management and control systems)
Community Initiative Programme Paying Authority Second Level Control Group Art 5 Declaration
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 Europen 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)
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Different rules for new Member States 2007 2013

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 lnder) Different rules on advance payments from the Commission will apply to all programmes involving at least one of the new2 MS (EU12) as compared to programmes involving only old3 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 lnder)
Up to 75% (programme level) (Excluding Greece and Portugal)
De-commitment
N+3 in the first half of the programme period changing to N+2 for the second half (Including Greece and Portugal)
N+2 in the whole programme period (Excluding Greece and Portugal)
Spending on housing
Eligible (with conditions)
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)
New MS are countries that acceded to the European Union on or after 1 May 2004. Though increasingly outdated, the terminology is maintained for ease of reference. 3 Old MS refers to EU-15
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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.
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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
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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.
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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 programmes 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.
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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 programmes 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.
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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 (2007 2013)

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;
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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.
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
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Key programme management bodies: Monitoring Committee Steering Committee Managing Authority Joint Technical Secretariat Certifying Authority Control and audit bodies (FLC bodies and Audit Authority) Intermediate Bodies Single management bodies Two of the programme management bodies in the new period are referred to as single: The Managing Authority (MA) and Certifying Authority (CA). Put simply this means that there will only be one in each programme. In the past some programmes have divided these bodies by country with one body to look after projects and partners from each country. In future the principle of cooperation will be extended to programme management and each single authority will have to look after all projects from all countries participating in the programme. The concentration of programme functions in a limited number of joint bodies should ensure improved cooperation and efficiency as well as cost savings. The main challenge for these joint bodies is to define the standards and systems that need to be in place in other Member States to ensure sound financial management and to define their responsibilities with regard to these systems. In the past, the division of management tasks and responsibilities between too many different bodies has too often meant that different standards have been applied and that no central source of reliable programme data has been available. Joint management bodies Only one body is referred to as joint the Joint Technical Secretariat. The single bodies are generally national or regional institutions in one of the Member States and staffed by public servants of that Member State. The JTS on the other hand has a representative international staff. Its role is to provide services to all parts of the programme area.
2.3 Programme management bodies

2.3.1 The Monitoring Committee and the Member States
The Monitoring Committee (MC) provides each Member State with representation in the programme and safeguards the Member States interests. Equally importantly, it allows programme bodies to inform and remind Member States of the actions needed to fulfil their obligations under the regulations. The MC comprises representatives from national, regional and/or local bodies (in the cross-border programmes the regional level will generally play a stronger role). 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. The strategic role of the MC should be made clear to all members: The committee is expected not just to follow but also to forecast programme performance based on the information provided by other programme bodies. It should also be ready to intervene if this progress is not satisfactory. The MC also approves all official programme documentation such as fact sheets on eligibility questions and thus needs a detailed understanding of the issues at stake.
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In the current period attendance at some committee meetings has been low and this can make decision-making difficult. The best way of avoiding the problem seems to be to ensure that the MC is given an active development role rather than just rubber-stamping the standard monitoring data that need to be approved. This means that the papers provided to the committee are very important for providing an informed basis for discussions. Financial input will be required for:
Briefing on programme progress in realisation of the agreed business plan Business plan update
What is the Business Plan? Most programmes have a business plan though it has many different names. The business plan describes how the TA budget will be used to meet the programmes objectives and fulfil its obligations. It focuses on concrete actions and should be used as a tool for midterm planning (i.e. 2 years ahead). The content of the business plan can then be used for defining individual annual work plans for different members of staff. It should as a minimum cover the activities of all bodies drawing funds from the TA budget. The plan allows programme bodies to agree realistic management strategies and assess workloads for decisions on staffing. It is approved at the beginning of programme implementation and generally updated every 6 months following programme needs. The business plan also includes programme financial targets and ways of achieving them. Not all actions can be predicted and there is a need for flexibility to deal with actions not in the plan. Such actions should however be an exception so that all management bodies have a sufficient degree of certainty for planning their activities. Basic required content includes: An overview of the current status of the programme and developments since the last MC meeting A forecast of expected developments in the coming period The main tasks to be carried out to meet objectives in the coming period broken down by unit / department An analysis of whether existing resources and particularly staff are sufficient to carry out these tasks An analysis of the TA funds available and how they should be used
Review of the programmes financial position comparing the current position with the targeted position. If there are major differences, a proposal needs to be made for overcoming this problem. Key figures for the MC include: o o o o o Programme allocation by priority (and measure in the current programming period) Payments to date and N+2. What is the programme situation concerning N+2? Is there any threat of de-commitment? The TA budget Is extra spending required by the programme? How much? What initiatives can be taken to secure this? If the programme has de-committed, where will the money be taken from? (This is a discussion that every MC should have near the start of the programme)
Future programme strategy: Over time every programme will encounter problems that need to be solved and situations that call for an adjustment of strategy. Many of these issues are related to the number, quality and thematic focus of the project applications being received at different stages of the programme lifecycle. Information on the financial framework will give the MC an understanding of its options for addressing these situations, such as:
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o o o Deciding what to do if the programme needs more projects What to do in case the programme has too many eligible projects (advice to the SC on prioritising applications) Suitable actions to attract projects within a certain measure
As noted above, the MC also provides a forum for programme bodies to question MS representatives on the actions being taken to meet national authority obligations in the programme. This is essential as a number of financial control decisions need to be taken on a national level and experience from the current period has shown that delays in taking these decisions can endanger the whole programme. The main point to bear in mind is that each MS is ultimately responsible for all activities carried out on its own territory. Further responsibilities can be divided into four groups: Information: MS must provide the MA, CA and AA with access to the information they need to carry out their functions. Management and Control: MS are responsible for setting up effectively functioning management and control systems for OP (via the MC) Within max 12 months of the approval of the OP, MS must submit to the Commission a description of systems covering the organisation and procedures of the managing, certifying and audit authorities (this task is generally delegated to the MA) MS will establish procedures for ensuring that all documents in the audit trial meet national audit requirements MS will designate First Level Controllers and ensure that the appointed body completes certification within max 3 months MS, through First Level Controllers, will ensure that all expenditure incurred by partners in the MS complies with Community and national rules MS must delegate a representative to sit on the group of auditors assisting the Audit Authority and to carry out second level control work on their territory when this work has not been sub-contracted Eligibility: MS must provide the national eligibility rules in use for each OP. These rules will apply to determine the eligibility of expenditure except where Community rules are laid down. Irregularities: MS will reimburse to the CA any irrecoverable amounts unduly paid to partners on the Member States territory; MS will report to the Commission each quarter on any irregularities which have been the subject of a primary administrative or judicial finding. Even if no irregularities have been reported, MS still need to submit this report; MS will follow up in each quarterly report on actions taken as a result of previously reported irregularities
2.3.2 The Steering Committee

In the current period most programmes have also had a Steering Committee (SC) responsible for the selection of projects and in some cases for post-approval monitoring. In the new period, it is recommended that wherever possible the two committees should be combined in order to reduce the number of meetings. Some programmes will however retain a separate Steering Committee in order to separate decisions on the programme level (MC) and decisions on the project level (SC). Programmes already using a joint committee strongly recommend that members are reminded of their role at different points in the meeting (MC or SC) and that a clear division is maintained between the two parts of the discussion. The SC decides on the allocation of ERDF funds but these decisions have a major impact on progress towards meeting programme objectives so the MC clearly has a role in monitoring them. This is especially true
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because SC decisions tend more often to be politically motivated and may place national and regional interests above programme considerations, especially at the end of a programme when funds are scarce. In the current period, for example, some SCs have regularly rejected assessments made according to the agreed programme criteria. The result is that weak applications are approved and many of the projects concerned perform badly. As will be seen later, this has a direct impact on programme de-commitment. Two approaches have been introduced to limit this problem without affecting the independence of SC decisions (and indeed the MA has an obligation under the regulations to intervene if the approved criteria are not being used). Firstly, the committee rules of procedure are agreed at the first meeting. These rules can include a number of safeguards: SC members should commit themselves to providing sound reasons for rejecting the project assessments presented to them. These reasons are recorded in the minutes of the meeting and are available to all stakeholders. Decisions should be based only on the information in the applications to prevent some projects gaining an unfair advantage. All committee members who have been involved in the development of a project should declare a conflict of interest when it is discussed and play no role in making the decision about that project. Secondly, if the recommendations of the assessments are still regularly rejected, the MC needs to play a role: Regular disagreement with assessment conclusions means that the programme assessment criteria are wrong, the assessments are being performed poorly or SC decisions are not being made in accordance with the criteria decided by the Monitoring Committee. In each of these cases, the MC together with the MA needs to take action and adjust the programme. These actions are mentioned here (with apologies to the many well-functioning SCs) because they are essential for the financial management of the programme. The approval of poorly prepared projects is a major factor in programme under-performance and the Steering Committee must apply sound financial criteria as part of the project selection process. Regardless of whether it is a separate or joint committee, the SC needs to be provided with a strong assessment of project financial plans and information on the impact on programme finances of approving different projects (fundamentally whether there is enough money) in order to make these decisions. In case a current INTERREG III programme continues in the new period with no changes to the participating MS, the programmes MC can take decisions on both current and future programmes as long as there is a clear separation of these two roles.
2.3.3 The Managing Authority

The Managing Authoritys role can be summarised by saying that it is responsible for ensuring the effective implementation of the agreed programme strategy to pre-determined quality standards. It therefore takes the lead in establishing systems and procedures and ensuring that they are maintained though many MAs prefer to assign daily operation of these systems to the JTS. The indicative list of MA responsibilities below is based on the regulations for the new period but does not differ substantially from the current period. The main responsibilities are:
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Maintaining standards Ensuring that projects are approved, delivered and monitored in accordance with agreed criteria On-the-spot checks on at least a sample of projects Ensuring project accounting standards, maintenance of the project audit trail and that payments have been certified correctly by the designated first level controllers Ensuring that project partners are aware of the terms under which grants are awarded and that they have sufficient capacity to fulfil these conditions (Implementing Regulation 13.1) Ensuring compliance with information and publicity requirements
Maintaining standards Ensuring that projects are approved, delivered and monitored in accordance with agreed criteria On-the-spot checks on at least a sample of projects Ensuring project accounting standards, maintenance of the project audit trail and that payments have been certified correctly by the designated first level controllers Ensuring that project partners are aware of the terms under which grants are awarded and that they have sufficient capacity to fulfil these conditions (Implementing Regulation 13.1) Ensuring compliance with information and publicity requirements
Providing reliable data to other management bodies Ensuring that adequate information is provided to the Certifying Authority Guiding the MC and providing it with documents on which to base its decisions Drawing up and submitting reports to the Commission Ensuring evaluations are carried out and meet quality standards
One additional feature of the MA in the future territorial cooperation programmes as opposed to the national programmes is worth mentioning. Under the Territorial Cooperation Objective the MA is not responsible for ensuring compliance with national and Community rules regarding project expenditure5 because different national rules are in place in each country. This task becomes instead the responsibility of the first level controllers in each country. The MAs responsibility in this respect is limited to ensuring that the agreed checks have been carried out by the designated body. Ensuring is a key word in the MA responsibilities as defined in the regulations: The MA does not carry out many of these tasks itself but instead delegates them to another body. Most often it is the JTS that takes on these responsibilities.
General Regulation, 60 (b) and Regulation (EC) No 1080/2006 on the European Regional Development Fund, 15.1
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What is the audit trail? The regulations and many programme documents refer to the need to safeguard the audit trail. Put simply this means keeping records to show how every EURO of programme money has been spent. In most cases this is simply a matter of storing the invoices issued for products and services delivered. The MA keeps a record of where all of these documents are stored (most of them will be in project offices) so that financial controllers can always know where to check if they have questions. These documents have to be kept until three years after the formal closure of the programme (in theory until 31.01.2019 for the new programmes), as it is still possible for European audit bodies to carry out checks until then. There are, however, some costs for which it is not possible to show an individual project invoice such as overheads where the project will only pay part of e.g. a larger heating bill. In this case documents of equivalent probative value need to be provided. This means that they provide reliable proof of how the money was spent and different programmes and countries have different rules for defining how such documents should be presented. Finally, it is not always enough to prove that the money has been spent. In many cases proof also needs to be supplied that value for money principles have been observed. The most common requirement is for evidence of public procurement procedures showing that attempts have been made to find the cheapest suppliers. See section 7.1.3 for more details of documents required to secure the audit trail. Generally speaking, original documents are needed for the audit trail. In the new programme period each Member State will draw up national standards to be met if copies, electronic versions or other formats are used. If this documentation is not available, the spending it covers will be rejected. The basic rule is: If you cant prove it, it never happened!
2.3.4 The Joint Technical Secretariat

The JTS is the body whose role is least defined in the regulations, which state only that it: shall assist the managing authority and the monitoring committee, and, where appropriate, the audit authority, in carrying out their respective duties.6 Most JTS responsibilities are therefore delegated from other bodies while its central role in project development varies too much between programmes to be defined in standard terms. In the most successful examples in the current programmes, the JTS has specialized in all communication down to the project level and in processing the reporting information received from the projects. The MA tends to specialize in more formal communications upwards to the Member States and Commission. Reports on programme progress tend to be shared tasks. The JTS is the first point of contact for many project developers and project partners and provides guidelines and support during project development as well as often carrying out at least part of the assessment of project applications. It also generally plays a strong role in monitoring project implementation and spending, and recommending changes based on the results. As such its staff need considerable financial expertise and there is a need for programme level discussion of the advice they will give and the systems they will use. It is important to note that the MA retains responsibility for checking that, for example, the financial control of projects has been completed satisfactorily even if this work is carried out by another body. This is the reason why the systems established by the programme play such a vital role: They define the MAs requirements and allow it to rely on declarations from other bodies that these requirements have been fulfilled.
ERDF Regulation, 14.1

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According to the regulations the JTS is not meant to provide support to the CA since the CA would normally be working on payment claims prepared by the JTS. However, if the CA issues a request for information, the JTS is of course required to provide all necessary information to the CA in order for it to carry out its work correctly.
2.3.5 The Paying Authority / Certifying Authority

One other single programme body is important in implementation: The Paying Authority or Certifying Authority as it will be known in the new period. There is no significant change in function between the PA and the CA so for ease of reference we refer always to the CA below. As can be seen from the figure below, the CA plays a key role in payment procedures and also acts as a final control body before claims are made to the Commission. The main tasks are as follows: Certification and quality control Certifies accuracy and standards used to calculate statement of expenditure In general, guarantees uniform quality standards in certification of expenditure and payment requests to the Commission as well as clarifies the nature and quality of the information these requests are based on Managing programme funds and transactions with the Commission Draws up claims to the Commission Maintains computerized accounting records of expenditure declared to the Commission and payments received Receives funds from the Commission and makes payments to LP Keeps a separate programme bank account for ERDF Recovering incorrectly paid funds Recovers funds unduly paid to beneficiaries / project partners (together with Lead Partners and Member States) The CA administers the programme bank accounts (generally one for project payments and one for TA) and is often responsible for ensuring programme liquidity (that there are enough funds in the account to make payments). It gathers project claims for payment from the MA and compiles these into claims to the Commission generally two or three times a year. As a result, many CAs also play a role in drawing up spending forecasts and managing the N+2 situation. The accounting records it keeps will cover the claims made, amounts received from the Commission and payments actually made to projects. Separate records held by the MA will record the amounts claimed by projects and any deductions made as a result of control work. It must be possible at all times to reconcile these accounts and ensure that both systems agree on the amounts that have or should be paid. The CAs role in dealing with irregularities (basically funds that should not have been paid out) is covered later in the handbook and has to be summarized in an annual report to the Commission submitted by 31 March each year.7
2.3.6 Relationship between the Certifying Authority and Managing Authority

One main difficulty that has arisen in the current period is in defining where the MA responsibility for certification stops and where the CAs starts. It is clear that the CA has a supervisory role towards the MA but that there is little value in repeating all of the checks of project expenditure already carried out by the MA. This means that the CA too must focus on ensuring that reliable systems and procedures are in place and that programme documents
7
Implementing Regulation, 20
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require all programme bodies and projects use them and only allow certifications based on the agreed procedures. Clarity about the CA role in this respect is vital: The change of name in the new period stresses that the key role of the CA is certification of expenditure and it must define how it will achieve sufficient certainty about the standards in place to make this certification.
Managing Authority Certifying Authority Relationship Managing Authority (MA) Certifying Authority (CA)
Approves individual project claims Ensures that project level financial control has been carried out properly Keeps accounting records on project level
Prepares programme claims Ensures the reliability of the MAs work
Keeps accounting records on programme level Checks that control and audit findings have been implemented
Implements control and audit findings
Clear separation of functions and independence is essential Important to avoid duplication of control work
In general terms then, the MA is responsible for approving project claims (on the basis of satisfactory first level control) and for providing the project figures used for drawing up programme claims to the Commission. The CA is responsible for certifying these claims to the Commission by carrying out a control of the information behind the claim. The nature of these checks by the CA varies but they must include a review of: - Measures taken to prevent, detect and correct irregularities, and to report them to the Commission - The conditions pursuant to Article 32(3) and (4) were met (submission of programme complement, annual implementation report, mid-term evaluation etc); - The expenditure declared was incurred and paid within the period of eligibility, and is supported by evidence - The operations complied with the relevant provisions of the assistance as adopted by the Commission Decision and went through the proper selection procedures - Operations related to State Aid were approved by the Commission and requirements from other Community policies, such as public procurement, publicity and environment, have been complied with - Recoveries made since the last statement of expenditure have been deducted from the present statement of expenditure and the amounts recovered are indicated in an annex by measure.
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Basic Territorial Cooperation programme payment procedures and bodies responsible
6. Makes payment to project
1. Draws up project report and claim payment 1. Project Lead Partner
6. CA
2. First level control bodies
5. Approves valid claims and transfers money to CA
2. Certify that expenditure claimed complies with relevant rules and regulations
5. Commission
3. MA and/or JTS
4. CA 3. Confirms that certification and reports are satisfactory
4. Certifies programme claim based on MA / JTS information
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The paper highlights some good practice in carrying out this role. It suggests that the CA should review reports of Article 4 and Article 10 control work and follow-ups to ensure quality. It should also review some of the MA systems and information held on projects to make sure that agreed procedures are in use and that the expenditure declared can be reconciled with other records. Some of these checks can be limited based on positive outcomes of other systems controls but the CA still has a responsibility to carry out and document meaningful checks. To conclude, the CA is very clearly charged with checking the correctness of the expenditure declared by the MA (and any intermediate bodies). In order to do this it must develop sufficient knowledge of the systems in place and the key findings of other control work.
What are Article 4, Article 9 and Article 10 checks? These article numbers come from Regulation 438/2001, which contains information on financial control in INTERREG. This regulation will no longer apply in the new period but all of the checks it describes will continue just with different names. All project expenditure needs to be checked to make sure that it has really been spent on carrying out project activities and that none of the relevant rules have been broken. After it has been checked, it is officially approved or certified. This process is called First Level Control or Article 4 checks (after the article in the regulation which describes what needs to be done). As outlined above, the CA needs to check that everything has been done properly before accepting project claims and actually paying the money to them. These are the Article 9 checks. Finally, an independent outsider is sometimes asked to check a sample of this control work. This process is called Second Level Control or Article 10 checks. You can find a lot more information on this later in the handbook.
Control and audit: What is the difference? In the current period these two words have been used differently in different programmes leading to considerable confusion in some cases. The new regulations make the terminology clear: Control is first level control and audit is second level control (see the box above for definitions of these terms). Control is carried out by a controller, audits by an auditor.
2.3.7 Intermediate Bodies

In addition to the main management bodies described above, the regulations allow for Intermediate Bodies (IBs) to take over part of the management of the programme. Intermediate Bodies are defined as: 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--vis beneficiaries implementing operations.8 The number and tasks of the IBs established by programmes in the current period (and particularly the cross-border programmes) has varied enormously but four main groups can be identified:
General Regulation (EC) 1083/2006, 2 (6)

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Many Member States making the transition from PHARE9 to INTERREG have kept the structures used to implement PHARE. Rather than redesigning the whole programme structure halfway through implementation, PHARE management bodies have taken over the same role in INTERREG on the new Member State side of the border. This has led to the formation of sub-MAs and sub-Pas amongst others. Intermediate bodies are often established to ensure that the programme has representation on the local / regional level and that programme activities are not centralised at one MA / JTS. These bodies are generally concerned mostly with project development and can be particularly valuable in large programme areas. Sometimes a whole office is established (a sub-JTS). In other cases only one person is employed (often called a Contact Point). Organisations with in-depth knowledge of a particular theme (e.g. ministries) are sometimes given responsibility for selecting and monitoring projects under that theme. Programme efficiency. Language and administrative barriers have often meant that it is simply easier to manage funds separately on different sides of a border. This has, however, limited active cooperation and will not be accepted in future. In the new period there is considerable pressure, however, to streamline programme structures and as a result the added value of some of these bodies is being seriously questioned. There have been two main complaints. Firstly, true cooperation is expected from projects and should therefore also be a requirement for programme bodies: One basic condition for this is that management should be entrusted to single bodies working for all participating Member States. The second problem has been one of coordination. In too many cases, IBs have pulled in different directions developing their own interpretations of programme strategy and using different standards. Perhaps more importantly, they have not been properly integrated into the main management systems and procedures and in the worst cases this means that it is not possible to get a collected picture of programme status and that errors enter the programmes monitoring and accounting systems. Sub-Paying Authorities have a particularly bad reputation in this respect and it is unlikely that they will be allowed in future territorial cooperation programmes. These problems are addressed in the new regulations. As explained previously, they propose that each programme should have only one single MA and CA and a Joint Technical Secretariat. Although still allowed, Intermediate Bodies should be seen as the exception and will only be approved if their added value can be convincingly demonstrated. A likely example of IBs that will be accepted is the use of sub-JTSs or Contact Points to achieve better coverage of the programme area, as they have been a valuable addition in many existing programmes. IBs that duplicate key management functions on either side of a border are, on the other hand, extremely unlikely to be approved. Two questions therefore need to be asked about every organisation in the programme management structure: What value does it add to programme activities? How will it be integrated into programme information, management, monitoring and control systems? The second of these questions is also covered in the new regulations, which contain strict requirements for defining the role and organisation of IBs in relation to other programme structures: The Member State may designate one or more intermediate bodies to carry out some or all of the tasks of the managing or certifying authority under the responsibility of that authority.10 Where one or more of the tasks of a Managing Authority or Certifying Authority are performed by an intermediate body, the relevant arrangements shall be formally recorded in writing.
9
Poland Hungary Assistance for the Reconstruction of the Economy. Despite the name, the PHARE programme was extended to cover most of the countries of Central and Eastern Europe. 10 General Regulation 1083/2006, 59.2
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The provisions of this regulation concerning the Managing Authority and Certifying Authority shall apply to that intermediate body.11 There are a number of key points here. Firstly, the main programme bodies retain full responsibility for all of the actions of IBs. Secondly, the relationship must be described and will be included in the Description of Systems and Procedures for approval by the Commission. Finally, the provisions mentioned in the last section refer in particular to the information to be provided according to Article 21 of the same regulation. This requires a full written description of all of the main systems and procedures in place (amongst other things), thereby ensuring that IB actions will be properly integrated with other management bodies. In conclusion, setting up an IB that is adequate for meeting these requirements will be an extensive procedure. In programmes where there have previously been many IBs, management bodies should ask themselves whether these bodies could not effectively be incorporated into the programme in a less formal way (e.g. through participation on committees and working groups).
2.3.8 Audit Authority

The Audit Authority is the last of the compulsory programme management bodies. It is covered in detail in the chapter on Certification of payment and financial control but we provide some basics here. The Audit Authority is based in the same country as the MA but in Territorial Cooperation programmes it will generally be assisted by a Group of Auditors with one representative from each participating country. The Audit Authority plays a vital role in programme start-up, implementation and closure. Firstly, it is generally the Audit Authority that carried out the independent check of a programmes management systems as laid out in the Description of Systems and Procedures. The AA must approve the proposed structures if they are to be accepted by the Commission. During implementation the AA is responsible for organising second level control. In particular, the AA should verify the effective functioning of programme management and control systems and control an appropriate sample of operations. The AA will draw up the audit strategy and decide which projects should be checked on the basis of a representative random statistical sample. In some programmes the actual audit visits to projects are sub-contracted to an external company. In others they are carried out by the AA and the members of the Group of Auditors. At programme closure it is also the AA that is responsible for drawing up the Winding up declaration. This is 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. Some of this terminology is new but this way of working is actually in place in most programmes already. The main reason for including the AA as part of the formal management structure is to ensure that it is set up at programme start and that second level control work is not delayed as it has been in many cases in the current period12.
11 12
Implementing Regulation, 12 See Implementing Regulation, 23 for the information that needs to be provided about the AA at programme start-up.
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The Audit Authority and the Group of Auditors
National Auditor
Audit Authority (MA country)
Group of Auditors
Project checks
Project checks
Combined report on each checked project
Commission
Annual report on second level
control
2.4 The responsibility chain

The whole system of Territorial Cooperation programme management depends on the delegation of responsibility from the Member State level down to the project implementers. Each level of the programme management hierarchy assigns tasks to be implemented at the next level down and defines the controls it will require to ensure that this implementation is properly managed. In this way, financial liability for European funds is distributed across the programme and should finally pass to the end-user of those funds: The project implementer. The framework description of the key programme management bodies contained in the regulations is the main tool for building programme finance systems to ensure that this happens. Where though should programmes start? Fundamentally, there are four programme management tasks: allocating funds, certifying correct expenditure, claiming funds from the Commission and paying these funds to final beneficiaries. In addition to the main management structures, the various control and audit bodies assisting the programme also need to be integrated into. If the bodies and tasks involved in each of these key procedures are clearly defined, the basic framework will be in pace. Each level needs to define the framework under which it will allow other bodies to act independently. For example, the MA (together with the MSC) will generally define the decision-making powers of the head of the JTS and the limits where additional authorisation must be requested. It will also define the tasks that the JTS must carry out in order to comply with programme requirements. Within this framework, the head of the JTS will then have the freedom on how best to meet objectives on a day-to-day basis.
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These points need to be stressed because of experiences from some current programmes. In some cases, roles have not been adequately defined and this has led to unnecessary conflicts about who should be doing what. In other cases, management bodies have not been willing to delegate powers and this has led to unnecessary delays due to the need to seek approval for even minor decisions. Both situations have seriously impacted programme performance. Certainly, the relationship between programme bodies is a trust-building process and new structures should expect some tensions. This is why it is so essential to invest time in laying out the main requirements in the programme documents.
2.5 The main programme documents
Key programme management documents 1. Operational Programme (OP) 2. Description of Systems and Procedures 3. Letter of Agreement / Memorandum of understanding
2.5.1 The Operational Programme (OP)

The OP is the most important programme document and is used by the Commission to make a decision on whether the programme should go ahead. It is defined in the regulations as the: document submitted by a Member State and adopted by the Commission setting out a development strategy with a coherent set of priorities to be carried out with the aid of a Fund,13 More specifically, it should include: Analysis of the cooperation area, including strengths and weaknesses and how to deal with them this should reflect the specific programme objectives identified and the allocation of funds to each priority. Outcome of the ex-ante evaluation on the expected impact of the programme. An outline of the different programme priorities and a justification for why these have been chosen. The priorities should be further specified in overall goals and quantified indicators on implementation, results and impact to measure the progress towards achieving the goals. Breakdown of the spheres of assistance by category i.e. description of the type of actions that will be funded under each priority. This has important implications for the eligibility of project applications. Joint programme financial tables (i.e. no breakdown by Member State). The first table should show the ERDF contribution split by programme year. The second table should show the total funding available, i.e. ERDF and public co-financing, for the whole programming period and per priority. Information on programme implementation arrangements, structures and responsibilities (see below), the monitoring and evaluation system and the Monitoring Committee, procedures for financial flows, information and publicity activities. Information on the electronic monitoring system for exchange of digital data between the programme and the Commission. An indicative list of any major projects expected to be submitted under the programme. It is very unlikely, however, that most Territorial Cooperation programmes will carry out this kind of project (generally over 50 million and requiring special procedures and Commission approval) they are best run under national programmes. Certainly, the emphasis of the OP is on programme content and strategy but it also contains basic information on management structures, the responsibilities of the bodies involved and
13
General Regulation (EC) 1083/2006, 2 (1)

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the relationships between them (details of requirements can be found in the ERDF Regulation, 12). As a minimum this will cover the institutions that will take on the different management functions and which of the responsibilities listed in the regulations are assigned to them.
2.5.2 The Description of Management and Control Systems

After approval, the programme needs to move from the general structures of the OP to a more detailed description of exactly how programme management will operate. This is included in a separate document known in the 2000-2006 period as the Article 5 Declaration. Requirements for this description have been made stricter in the new period and it must cover the MA, CA, AA and all IBs (and should also include the MSC and JTS). The declaration develops the information in the OP to provide a step-by-step description of how different programme bodies will handle the main documentation and procedures. The new General Regulation (Art 58) lays out the general principles governing the establishment of management and control systems and requires: A clear definition of the functions of the bodies concerned in management and control and a clear allocation of functions within each body Compliance with the principle of separation of functions between and within each body Procedures for ensuring the correctness and regularity of expenditure declared under the operational programme 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 Effective arrangements for auditing the proper operation of the system Systems and procedures to ensure an adequate audit trail Reporting and monitoring procedures for irregularities and for recovery of amounts unduly paid
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Responsibilities and bodies in Territorial Cooperation management structures

Main responsibilities defined in OP and national letters of agreement with the programme Main responsibilities defined in OP and Rules of Procedure
Certifying Authority Managing Authority Intermediate Bodies
Member States
European Commission
Responsibility and liability
Monitoring Committe
Main responsibilities are defined in OP, description of systems and procedures and letters of agreement
Audit Authority
Joint Technical Secretariat
Project Lead Partners
Main responsibilities defined in OP, Art 5 declaration (description of systems and procedures), subsidy contract and approved application Main responsibilities defined in project partnership agreement and approved application
Project Partners
The full content to be included in the description covers four articles of the Implementing Regulation ( 21 - 24) but some of the key information it should provide on each body is: The description of the tasks entrusted to them The organisation chart of the body, the allocation of tasks between or within their departments, and the indicative number of posts allocated The procedures for selecting and approving operations The procedures by which beneficiaries' applications for reimbursement are received, verified and validated, and in particular the rules and procedures laid down for verification purposes in Article 13 [MA administrative and on-the-spot checks], and the procedures by which payments to beneficiaries are authorised, executed and entered in the accounts The procedures by which statements of expenditure are drawn up, certified and submitted to the Commission Reference to the written procedures established for the purposes of points (3), (4) and (5) Eligibility rules laid down by the Member State and applicable to the operational programme The system for keeping the detailed accounting records of operations and information referred to in Article 14(1) under the operational programme.14
14
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When completed this document is submitted to the Audit Authority which will audit the systems in place to ensure that programme staff are familiar with what needs to be done although where systems and procedures are essentially the same in the new period as they have been in the past, this systems check will be less detailed. The AA needs to complete its checks in time for the approved document to be submitted to the Commission within twelve months of programme approval. Preparing this description can be a major task but in addition to setting out the procedures to be used, it has a number of benefits. First and foremost it provides all programme stakeholders (especially staff) and the Commission with an accepted version of how the programme will be run. Lack of security about roles and responsibilities has been a significant problem in some programmes so far and is often stated as a major factor in high staff turnovers. Secondly, it provides confidence in the standards being applied and reduces the risk of systemic faults (problems that are assessed as affecting large parts of the programme and can lead to major cuts in Commission funding). Finally, it aids cooperation and serves as a reference point in cases of disputes about programme implementation. The description of systems and procedures will perhaps be the most important document from a financial management perspective, as it contains the first detailed description of financial management and control systems for each programme. The importance of these systems cannot be over-emphasised.
2.5.3 Memoranda of Understanding between the programme and the Member States
Sometimes also known as letters of agreement, these documents are generally drawn up between the national or regional authorities assigned responsibility for programme implementation in each participating Member State and the Managing Authority (on behalf of other programme bodies). They are reciprocal agreements defining both MS requirements from the programme and the programmes requirements from the MSs. Much of the content is standard and defines the relationship between the programme and the MSs and the bodies appointed in each MS for various programme related tasks. Some individual requirements are also included such as additional reporting on projects from a given MS and procedures for paying MS contributions to the TA budget. In general, these agreements attempt to harmonise programme procedures with particular national requirements. In turn the MSs commit to fulfilling their obligations in the recovery of funds incorrectly paid out and providing the information required for the MA, CA and AA to carry out their duties. In the new period this will refer particularly to the timely identification of approved controllers and auditors and providing the national eligibility rules that are to be used in the programme.
2.5.4 Project contracts and partnership agreements

Another important link to consider is the one between the programme and its projects. This is covered in detail in the project section of the handbook but is mentioned here to emphasise that the process of delegation must extend right down to the project partners. The subsidy contract (or grant offer letter) between the MA and the project LP ensures that final beneficiaries (project partners) are required to meet the standards of, and supply adequate information for, programme management and control. In the new period subsidy contracts should also address failures of project implementation and the risk of projects losing funds if they are responsible for programme de-commitment. In the new period a Lead Partner will be responsible for laying down the arrangements for its relations with all the partners participating in the operation. The agreement will take form of a partnership agreement and it will extend the arrangements agreed upon between the MA and the LP to the level of each partner. It should also stress that the partners are financially liable for all of the expenditure they incur and that any funds incorrectly paid out will be recovered from the partner concerned.
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Some key principles Territorial Cooperation programming, including the set up of financial management and control systems, is based on a number of key principles. Proposals for systems and procedures should always be checked to see that they comply with these principles: Partnership: The countries and regions participating in a programme need to cooperate on finding optimal solutions. Most programme tasks should not be carried out on a national basis but rather on behalf of and for the benefit of the whole programme area. Proportionality: Expenditure on financial management and control should be limited in relation to the funds available to the programme. Programmes need to find cost effective solutions that can still deliver the necessary quality. Subsidiarity: Functions should not be centralised but should instead be carried out by a competent body at the most appropriate level. Transparency: Information on all systems, procedures and requirements should be freely available along with evidence that these systems, procedures and requirements are being consistently applied. Additionality: Programme funding shall not replace national, regional and/or local funding. Programme funding shall not be used to fund activities that participating organisations have a statutory requirement to carry out. Some other keys to success: Simplicity: Reduce burdens on projects and programme bodies, speed up processes and avoid mistakes by removing complexity and unnecessary detail. Introducing new rules is rarely the way to improve management. Place projects at the centre: Helping projects operate effectively and spend their grants in full and on time should be the first aim of all the bodies involved in programme operations. National and regional rules that put barriers on effective implementation should be identified and challenged Flexibility: Operations must of course always respect EU and national legal requirements. However, it is important to distinguish between these requirements and the programmes administrative rules. For the latter, there may be opportunities to relax requirements and deadlines sometimes if this can help projects without risk to standards.
2.6 The need for strong cooperation between management bodies
Bodies in the joint structure should: Work together and communicate regularly Set up good formal and informal communication mechanisms Have clearly defined responsibilities Identify, monitor and adjust the programmes objectives and address all factors threatening their achievement Recognise and respect the challenges of working with different cultures, in different languages and with physical distance
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No matter how well responsibilities are defined and how good the programmes documentation is, no programme can succeed if the different bodies involved do not work together. Many programme functions involve the close working of at least three or four of the programme bodies. One good example where there have been problems in the current programmes is creating an accurate annual spending forecast. This involves collection of reliable figures from the projects, analysis and adjustment of this data by the MA or JTS before the PA sends the forecast to the Commission. If, as has happened, another programme body steps in during this process and grants extensions to large numbers of projects, all previous work will have been wasted. It is therefore crucial to clearly identify the division of financial responsibilities between the bodies in the joint structure, to identify the programmes goals in terms of financial performance and agree on the measures that will achieve these goals (and perhaps those that will be damaging and should be avoided). It is also important to set up good communication mechanisms, both formal and informal, between the bodies in the joint structure. It may seem too obvious to repeat but different languages and cultures and physical distance can hinder communication and understanding. Despite this, in many programmes staff at different implementing bodies do not meet. This can result in pointless and unfounded criticism while dialogue frequently leads to rapid problem-solving. Investing a little time in this type of meeting may be the single most effective way of tackling internal programme difficulties. Regular communications between the MA, JTS and CA should be established as a priority. In the current programmes physical distance has sometimes prevented this and this has led to the proposal in the new regulations for the MA and JTS to be located close to each other. Some programmes have found it helpful to set out responsibilities and relationships in formal agreements or memoranda of understanding not only between MA and each participating country or region but also between programme bodies such as the MA and CA. It may also help all parts of the joint structure and the MC and SC to operate more effectively if briefing on the nature of financial activities and issues likely to arise during the period of the programme is given at the start of the programme e.g. in a workshop. This may be particularly useful for SC members, who need to be made aware of the implications of approving weak projects. It should also be remembered that many committee members are not financial experts. Good briefing material and an overview of the decisions required should therefore be provided well in advance of each meeting.
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2.7 Staff and Training

Ensure adequate staff levels for managing programmes and have these approved in a business plan Promote customer service approach of all programme staff when dealing with projects Useful programme staff expertise: Basic accounting procedures EU regulations on financial management Management of project finances Accounting and public procurement procedures of the country hosting MA and CA Knowledge of national eligibility rules in participating MS Advisory and presentation skills Essential to separate: Programme management, control and payment functions Advising projects vs. managing projects Important to: Develop programme confidence on eligibility Give consistent advise to projects Bear in mind there is high risk of losing knowledge and expertise due to high staff turnover
There is no standard answer to the question of how many staff are needed for the financial management of a Territorial Cooperation programme. The answer depends on the set-up of the programme and the stage of the programme cycle that has been reached (there is a general need for more finance staff in later years when many projects are reporting). This is why it is so important for programmes to predict and monitor workflows, and adjust staffing levels accordingly (see the info box on Business Plans earlier in this chapter). It is clear, however, that some existing staff levels are inadequate and that the bottlenecks this can create are a major threat to programme implementation. This has been particularly problematic in first level control bodies in the current period and has led to the introduction of the three-month time limit for certification in the new period. Obviously, staffing will be the main factor in ensuring that this deadline can be met. As noted above, the Description of Systems and Procedures for the new period requires that indicative staffing levels for management bodies are included to set a realistic baseline. This should be extended to include financial control bodies. Staff carrying out first level control in the current period have in some cases also been neglected in terms of training and support. Their role is vital but they are sometimes left alone with this responsibility and have no formal support structure for providing advice on difficult issues. Programmes should in future consider providing on-going training to address this problem. Where staff are particularly inexperienced, the Audit Authority and national auditors should also be prepared to act as experts providing binding decisions on difficult eligibility questions. In terms of required skills for programme secretariats and MAs the main areas are financial expertise in basic accounting procedures, the operation of EU regulations concerning financial operations, and management of project finances. Staff should also be familiar with the accounting and public procurement procedures of the country hosting the MA and CA and should have some knowledge of national eligibility rules in participating countries. Advisory and presentational skills are also useful for interaction with the MC and SC. The problem of inexperienced staff and high turnover has been identified by system controllers as a major risk factor. This is particularly true of international JTS staff. These staff generally form the interface between the programme management and the projects and need to give fast, clear and consistent advice. The description of systems and procedures can
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again play an invaluable role here (if it contains a detailed enough description of procedures) by ensuring that knowledge of essential systems and procedures is not lost when staff leave. Some programmes have therefore developed the original declaration into a staff training manual and use this to keep all important information updated. In general, however, the staff situation in all programme bodies needs to be managed. Some losses are due to unclear roles and responsibilities. Others because salaries are uncompetitive compared to similar private sector positions. Others again because of insufficient training and development possibilities. Whatever the cause, keeping good staff is clearly a major factor in programme success.
2.8 From systems to start-up

Formal approval of a programme by the Commission is only the starting point and workloads should be expected to rise after approval. Aside from preparing the Description of Systems and Procedures for submission, there are a number of other deadlines in the new regulations, which require a rapid pace of development over the first year of the programme and aim to ensure that the first projects are up and running by the second year at latest. Finance staff will be involved in most of this work.
Programme deadlines Submission of programme to Commission No more than five months after adoption of the Community Strategic Guidelines (General Regulation 32.3). Latest estimated date for adoption of CSG = 6 October 2006. Latest date for programme submission = 6 March 2007 Spending forecast for 2007 + 2008 to the Commission No later than 30 April 2007 (General Regulation 76) Set up Monitoring and Steering Committee (MSC) No more than 3 months after approval (General Regulation 63) Members must be identified in the OP (ERDF Regulation 12+14) Communication Plan No more than 4 months after approval (Implementing Regulation 3) Approval of project selection criteria by MSC No more than 6 months after approval of programme (General Regulation 64) AA to present Audit Strategy, (including sampling technique, indicative audit plan) Within 9 months of approval (General Regulation 62) Description of systems and procedures No later than 12 months after approval and before submission of first payment claim to Commission (General Regulation 71) To include a report on the results of the system audit (probably by Audit Authority)
The remaining parts of this handbook cover the requirements that need to met by the programme implementing arrangements established.
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3. Financial framework
3.1 Sources and uses of programme funds
Basic funding mechanism in Territorial Cooperation programmes
EU contribution (ERDF) 75%
75%*
Contributions of participating countries, regions and organisations (co-financing) 25%*
25%*
Programme budget (allocated into priorities)
94%*
6%
Programme operating costs (Technical Assistance) 6%*
Grants to projects - 94%*
* Figures vary between programmes details
Programme financing comes from two different sources: European funding from the European Regional Development Fund (or ERDF) and co-financing provided by organisations in each Member State. Once allocated to the programmes, these funds are divided between a number of programme priorities (e.g. 50% for job creation, 25% for the environment and 25% for transport). Projects apply for grants from these priorities and 94% of total programme funds are awarded to the successful applicants. 6% of the ERDF contribution to programme funds (plus the agreed cofinancing) are retained within the programme to cover operating costs. (This is according to the current interpretation of the regulations. This interpretation may however change in the future and the TA budget may be calculated on the basis of 6% of the total programme funds including cofinancing. This section of the handbook covers some of the factors that affect these basic financial flows.
3.1.1 ERDF
The Territorial Cooperation programmes are just one small part of the much larger European Regional Development Fund (ERDF)15. The overall funds for the programmes are decided on the European level. They are then divided between the Member States, which allocate the funds to the programmes they are involved in, based largely on population in the programme
15
Relatively small. Total ERDF funds for the period 2007-2013 are 308,041,000,000. Of this the approximately 80 Territorial Cooperation programmes are allocated 2.52% or 7,750,081,461.
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area. As soon as they have been allocated to a programme, however, the funds enter a common pot and should be accessible to projects from any of the participating countries. The common pot and the programme bank account Member States allocate funds to the programmes they are involved in and most programmes get quite different amounts from the different countries involved. In theory, this should be irrelevant to the programme. Once the money enters the common pot, it should be granted to the best projects no matter where they come from. In practice, the situation is often more complex. Some programmes in the current period have used the regional MS allocations to the programme as the basis for deciding which projects get approved: If a country puts in 50 million, its projects should get 50 million back. This has led to funding imbalances with one country claiming a majority of programme funds. Projects from the other country will not have enough funds to actively participate in all projects and this of course has a negative effect on cooperation. Obviously, Member States do monitor how much their projects are receiving from each programme and compare it to the amounts allocated but in the most successful programmes funds are never guaranteed to any one country or region: If they want to access the funding, they have to develop quality projects. This has led to the requirement in the new programmes that there can be no national (or regional) sub-accounts because money committed to a programme does not belong to a Member State. It is in the common pot and available to all. Therefore programmes should not in future monitor or report on allocation by Member State or region.
Country A allocates 50 million to programme
Country B allocates 15 million to programme
Common pot
Project partners in country A granted 40 million
Project partners in country B granted 25 million
Funds are allocated (committed) to the programme at the start of each year 2007-2013, with most programmes having a pretty equal allocation for each year. The funds are not, however, paid to the programme bank account. Instead, the programme must claim the funds from the Commission after the projects have spent them, with every programme entitled to claim as much as the Commission has so far allocated. Programme claims actually take some time to start arriving at the Commission because projects must first be approved and start spending. This means that there is always more than enough money committed to cover programme claims. In the past this meant that large amounts were committed to the programmes but were not claimed until many years later (and could not therefore be used more constructively). This was the reason for the introduction of the de-commitment rule whereby the Commission reduces the amount it has allocated to a programme if the funds have not been spent after three (N+2) or four (N+3) years. See the info box on page 13 and later sections of the handbook for more information on how this works.
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Financial Management Handbook 3.1.2 Pre-financing or the programme advance payment

One small part of the ERDF allocated to the programme is paid into the programmes account at the start. This advance payment is to cover the programmes start-up costs and to make the first payments to projects. This advance should be deposited in an interest bearing account to generate extra funds for programme actions. When any claim to the Commission is paid, the programme again has the amount of the advance in its accounts minus any expenses incurred between making the claim and receiving the payment. This means that the programme should always have a reasonable operating budget. The annual ERDF contribution to the programmes Technical Assistance is generally transferred to the TA account at the start of each year to provide these operating funds. TA expenditure claimed from the Commission is then paid back into the account holding the advance. The amount of the advance payment and the way in which it is paid are two of the major changes in the new programme period. In the current period all programmes have received an advance of 7% of the total ERDF allocated, paid in one instalment at programme start up. In future, two different systems will operate. Programmes that only include EU15 countries will receive a 5% advance with 2% paid in the first year and 3% in the second year. All programmes that include one of the other Member States (the new Member States) will receive 7%, where 2% paid in the first year, 3% in the second year and 2% in the third year. Calculating the advance payment Example 1: DK-SE (both EU15) Programme ERDF: 50 million* Advance in 2007 (2%): 1 million Advance in 2008 (3%): 1.5 million Total advance: (2%+3%): 2.5 million Example 2: IT-SL (one EU12) Programme ERDF: 50 million* Advance in 2007 (2%): 1 million Advance in 2008 (3%): 1.5 million Advance in 2009 (2%): 1 million Total advance: (2%+3%+2%): 3.5 million * The figures given are just examples and in no way reflect the real programme budgets
In addition to providing the programme with funds to cover operating costs, the advance payment has important implications for de-commitment. See section 4.1 for more on how this works.
3.1.3 Co-financing (or match-funding)

75% of programme funds come from the ERDF. The other 25% are contributions from other sources (though see the section on ERDF rates for important clarifications about how these figures can vary).16 Co-financing is an important principle in the Territorial Cooperation programmes. On the one hand it requires a financial commitment from the organisations participating and ensures that they have a stake in ensuring successful project implementation and promoting results. On the other, co-financing is often paid out in full or in part at project start-up and gives them operating capital until the first claim to the programme is paid. Despite this, projects will sometimes actually need to find more than the co-financing amount in order to start operations because of the reimbursement approach of the
16
This is a complex subject with significant national variations and we cover only some of the main points here. Anyone wanting to know more should see National Co-Financing of INTERREG IIIA Programmes produced by INTERACT Point Managing Transition and External Cooperation and available on the INTERACT website.
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programmes whereby money can only be claimed after it has been spent. Although the money is ultimately paid back, project partners need sufficient liquidity if they are to become involved in cooperation projects. Co-financing is provided through a number of different systems at present. Again, the diagram at the start of this chapter is a simplification. Generally co-financing is not paid into the programme budget (though there are a few programmes that manage these funds on behalf of participating regions). Instead, the co-financing is normally paid direct to the approved projects. When the projects prepare a statement of expenditure and claim funds from the programme, the programme pays 75% of the total expenditure ensuring that 25% of funds are always provided from other sources. Projects normally have to provide information on where this funding has come from and this is vital if private co-financing is involved (see below). The term co-financing can also be misleading. This contribution is not always in the form of money and can instead be provided as staff hours or other resources. This is discussed in more detail in the section on own contributions. When co-financing is given in the form of funds, it comes in varying proportions from national, regional and local sources depending on the programme though regional funds tend to dominate. Some programmes also allow the private sector to contribute and the special requirements for this are discussed below. There are two main ways of deciding which projects receive these funds. On the one hand, automatic co-financing systems operate in some countries. In these cases there is an allocation in national, regional and/or local budgets, which guarantees to provide co-financing for approved projects. Other countries run a competition system. Here there is no guarantee of co-financing even though national and/or regional bodies normally have some funds allocated for this purpose. Project partners must instead put together a package of funds from different bodies, which each contribute according to the value that they place on the projects objectives. This also spreads the ownership of the project, making it more likely that several different bodies will take up the project results when it is completed. Both systems have advantages and disadvantages. The key disadvantage of the competition system is that it can be hard for projects to secure the co-financing they need. This can, however, be a good way of improving general project quality, as partners must convince the bodies involved of the value of the activities planned. In areas where public budgets are already very limited, however, there is a danger that failure to secure co-financing may be a serious limiting factor in a programmes ability to allocate funds. This is particularly true for cross-border programmes where many of the partners are small organisations, which lack the networks to effectively lobby for funding. Automatic co-financing certainly removes this problem but can create a new problem that is more serious. Consider, for example, automatic co-financing coming from a region. Every year, the region needs to know how much money it will be expected to provide in co-financing so that the regional budget can be prepared. Furthermore, any co-financing that has not been allocated by the end of the year will probably have to be returned to the regional budget and will be lost to the body responsible for administering the co-financing. This means that programmes need to ensure that each region meets its co-financing targets and that meeting these budget targets becomes a dominant factor in project selection. There is a clear danger that project quality suffers and that, when coupled with a guarantee of ERDF funding to each region, narrower regional aims may well be pursued at the expense of wider programme objectives. It is also hard to coordinate annual budgeting in regions with the seven year budget cycle of the programmes: Programmes need to allocate heavily in the first years but regions may well prefer to spread co-financing commitments more evenly across the programme period. This can lead to de-commitment problems if the programme is prevented from allocating funds because of a lack of available co-financing. These issues are equally relevant to national automatic co-financing. Problems can be avoided if the regions concerned are sufficiently flexible and are willing to apply longer timeframes to budgets allocated to Territorial Cooperation programmes.
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Financial Management Handbook 3.1.3 Private co-financing

A small number of programmes in the current period have included private co-financing. This decision needs to be taken when writing the Operational Programme and estimates need to be included in the programme financial tables of the amount of private co-financing. In the 20002006 period private co-financing has been problematic. One reason is that projects using private co-financing must report on the amounts involved and the total can never exceed the programme estimate included in the financial tables in the OP. It needs to be remembered that private organisations can claim a lot more from the programme than they contribute themselves and as their own contribution is often made up of staff time, EU funds can look like a very attractive opportunity. The programmes, however, are aimed primarily at public sector actions to support regional cooperation and development and not at the support of private enterprises. The limits set in the programme financial tables ensure that the private sector does not secure a disproportionate share of programme funds. As a result, excess private funds in the programme above the amount stated in the financial tables do not generate ERDF. In the current period they are instead treated as programme revenue and can actually lead to a reduction in the ERDF paid whenever there is a shortfall in the public co-financing promised (see the info box below for an example). In future excess private funds will not be a problem as long as all of the public funds originally promised have also been paid. Similar problems can also arise each time a claim is made to the Commission. We take the example of a programme funded 50% ERDF, 40% public co-financing and 10% private cofinancing. These rates apply to the programme and it will not be possible to apply them in all projects, as some projects will have no interest for the private sector. Individual projects may therefore have a larger proportion of private funding. If projects with a strong element of private co-financing perform well, it is quite possible that a claim to the Commission will report spending of 50% ERDF, 35% public and 15% private co-financing. When processing such a claim, the Commission cannot know whether this trend will be reversed in later claims or whether the amount of private co-financing will eventually exceed the amount in the financial tables. In such cases the Commission generally caps the claim, paying out a lower amount of ERDF than the total claimed and reserving the rest to see whether the necessary public co-financing is made available at a later point (see section 3.4 for a more detailed discussion of the capping procedure). The effect of excess private funds on programme finances in 2000 2006 The programme budget is 100 million total split in the OP financial tables as follows: ERDF: 75% Public co-financing: 15% ERDF paid: 75 million Private co-financing: 10%
The actual amounts claimed at the end of the programme are split as follows: ERDF: 75% Public co-financing: 10% ERDF paid: 60 million Private co-financing: 15%
In this case the Commission will say that only 20 million of the required co-financing has been provided (5 million of the necessary public contribution was missing). As a result, the Commission will only pay a total of 60 million out of a possible total of 75 million. Member States have to pay the 15 million bill. Some programmes have made this expensive mistake in the past. Private sector involvement has to be very carefully monitored.
A couple of additional points also need to be considered by programmes planning to include private co-financing. Firstly, there is the risk of bankruptcy, which can be made more acute by the fact that all partners must spend first and wait for payment. If a company collapses halfway through a project this can leave programme authorities trying to reclaim funds for unfinished activities. For this reason many programmes demand bank guarantees from
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private partners. Secondly, once a private partner enters a project, the funds it spends become subject to the same controls as all other Territorial Cooperation funding and this is particularly important when ensuring that private partners are only reporting real costs and are not making a profit from their involvement. Private partners are often unhappy about these arrangements, which require them to allow full access to their accounts by outside controllers. Finally there is the question of compliance with State Aid rules. These rules were established to prevent unfair distortion of competition through public support to private companies. There are strict threshold values and rules regarding how such payments can be made and any programme that funds the private sector must carefully monitor compliance with these rules. In the new programming period 2007 2013 it will again be possible to include private cofinancing in the programme financial tables. The amount of private contribution will be indicated at the start and will need to be approved by the European Commission as an integral part of the operational programme. Consequently, these amounts will be binding and the programme will need to provide the indicated shares of public and private funds. In case programmes provide more private co-financing than stated in the financial tables, it will not be regarded as revenue and will not have to be deducted from the ERDF claimed by the programme but it will not generate additional ERDF. In case programmes are unable to provide the agreed amount of private co-financing, it will be possible to replace the missing part with public co-financing. However this mechanism will not work the other way round as it will not be possible to replace the missing public co-financing with the private co-financing. This is because by agreeing the overall financial tables at the beginning of the programme, Member States have committed themselves to providing a certain amount of public funding to the programme. Replacing that with private funding later in the programme means that they no longer meet their commitments. In conclusion, private funding can be increased but public funding cannot be decreased. The easy solution to private sector involvement Most programmes do not include private co-financing in their financial tables. Private enterprises are welcome to take part in project activities but they cannot receive ERDF payments and their financial contribution cannot be used as co-financing. An exception has been made in some programmes for organisations acting in a publicsimilar way for the purposes of the project. In these cases, private organisations can get ERDF in the same way as public organisations (even though there is no private cofinancing in the financial tables). There has been quite a lot of discussion about the definition of public-similar. Most importantly, no profit can be made during or after the project, all project results must be made freely available to the public and partners have no physical or intellectual ownership rights. ERDF funds in these cases cannot be used for business start-up, funding regular operations or acquiring assets. This system allows the easy incorporation of businesses providing services like research and organisations covered by private law such as the French associations.
3.1.4 Own contribution

As noted above, funding comes from many different sources and in many cases the organisations actually participating as project partners will provide their own contribution. This is worth mentioning as such contributions are often not paid as cash: There is little value in paying funds out of an organisation only to pay them back at a later date. Such contributions tend therefore to take the form of services such as paid staff time and office space. Most such contributions are covered by the eligibility rules on in-kind contributions, which cap the maximum value allowed. One exception is paid staff costs, which count as an in-cash contribution are not subject to any limits under the regulations. It is therefore possible for participating organisations to fund their whole contribution through staff costs and
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programmes need to pay particular attention to ensuring that these are real costs based on standard rates. Financial control and rules governing co-financing As soon as co-financing is allocated to a project, it becomes subject to the same regulations and controls covering all Territorial Cooperation spending. All co-financed expenditure must therefore be included in standard financial controls because if it is spent on ineligible costs, the ERDF grant will have to be reduced in proportion. Many co-financing organisations, however, insist on carrying out their own controls to ensure that the co-financing has been spent in accordance with internal financial management rules. As this control must be additional to the programme controls and cannot replace them, these results in considerable duplication of effort. Most problems actually tend to occur when co-financing is still regarded as a component of e.g. regional funds and is not distinguished as programme funds. Projects, for example, sometimes need to transfer funds across the border to other partners to pay for shared activities. Internal budgetary rules governing project funds must be flexible enough to allow for this type of transaction. This is not always the case.
3.1.5 Letters of Commitment

In addition to proof that co-financing is being paid (provided through the statements of expenditure), programmes also require proof at the project application stage that co-financers are aware of the project and have allocated funds for financing it. This proof is in the form of Letters of Commitment, which guarantee that each co-financing organisation will provide a set amount of funding to the project. They are required for the full amount of co-financing. Some programmes have experienced significant problems with co-financing organisations refusing to pay the promised co-financing, while other programmes very rarely have problems. Past experience will obviously influence the legal status that each programme assigns to the letters of commitment. If the programme has had this type of problem, the commitment to provide co-financing should be put on a contractual basis as soon as possible so the original letter promising co-financing represents a legal commitment. If this cannot be done, special provisions must be included in the project subsidy contract and partnership agreements. Projects sometimes have difficulty providing these documents to accompany the application form. Applications tend to be worked on until the last minute but co-financers will not provide the letters without having studied the final application. Programmes therefore need to take a pragmatic approach and rather than rejecting or delaying an application to the next application round, allow projects to submit these documents up to the day on which the SC meets. Projects unable to provide the documents by this date should not be approved as the partnership is not in place. Sources and uses of programme funds: Summary Regardless of their original source, once allocated to a project all funds are subject to the rules governing the Territorial Cooperation Objective Requirements in the regulations are the minimum standards for implementing Territorial Cooperation programmes Programmes should not monitor allocations or spending by Member State or region. Funds allocated to the programme enter a common pot Programme resources should be allocated to projects on merit and regardless of location - if one region / country is under-performing in project generation, programmes should assist them rather than provide funding guarantees
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3.2 Programme financial tables

The programme financial tables in the OP provide the basic information required for financial management on the programme level. They indicate the flow of funds into the programme and because of the de-commitment rule also dictate the rate at which funds must be spent and claimed (e.g. maximum three years after they have been committed to the programme for N+2 programmes). As such they provide the baseline against which annual targets can be set and performance measured. In case a programme decommits part of its ERDF, the programme financial tables need to be reprogrammed in order to reflect the modification in funds allocation. Key elements of programme financial tables: Must be in EURO regardless of currencies in participating Member States There should be no breakdown by Member State or region Show the ERDF allocation for each priority and each year, the total amount of public/ equivalent funding and estimated private funding (if used) Show separately estimates of non Member State funding Need to be reprogrammed if a programme decommits funds
Example of programme financial table in 20002006 (showing split by year)

Member States Total Eligible cost 1=2+13 TOTAL YEARS 2000 2001 2002 2003 2004 2005 2006 TOTAL Total ERDF 0 0 38.831.506 38.831.506 43.932.800 43.932.800 43.742.228 43.742.228 45.083.526 45.083.526 47.500.308 47.500.308 50.218.560 50.218.560 269.308.928 269.308.928 0 0 38.831.506 38.831.506 43.932.800 43.932.800 43.742.228 43.742.228 45.083.526 45.083.526 47.500.308 47.500.308 50.218.560 50.218.560 269.308.928 269.308.928 0 0 19.415.753 19.415.753 21.966.400 21.966.400 21.871.114 21.871.114 22.541.763 22.541.763 23.750.154 23.750.154 25.109.280 25.109.280 134.654.464 134.654.464 0 0 19.415.753 19.415.753 21.966.400 21.966.400 21.871.114 21.871.114 22.541.763 22.541.763 23.750.154 23.750.154 25.109.280 25.109.280 134.654.464 134.654.464 0 0 19.415.753 19.415.753 21.966.400 21.966.400 21.871.114 21.871.114 22.541.763 22.541.763 23.750.154 23.750.154 25.109.280 25.109.280 134.654.464 134.654.464 0 0 5.582.031 5.582.031 6.315.341 6.315.341 6.287.946 6.287.946 6.458.801 6.458.801 6.761.908 6.761.908 7.103.427 7.103.427 38.509.454 38.509.454 0 0 4.611.241 4.611.241 5.217.021 5.217.021 5.194.390 5.194.390 5.360.988 5.360.988 5.662.750 5.662.750 6.001.953 6.001.953 32.048.343 32.048.343 0 0 4.611.241 4.611.241 5.217.019 5.217.019 5.194.390 5.194.390 5.360.987 5.360.987 5.662.749 5.662.749 6.001.952 6.001.952 32.048.338 32.048.338 0 0 4.611.240 4.611.240 5.217.019 5.217.019 5.194.388 5.194.388 5.360.987 5.360.987 5.662.747 5.662.747 6.001.948 6.001.948 32.048.329 32.048.329 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Public expenditure Total Public Elig. Cost 2=3+8 Community participation Total 3 ERDF Total 4 8=912 National public participation Central 9 Regional 10 Local 11 Other 12 13 16 Private Elig. Cost EURO Other financial instruments*
Structure
The example above is from the current programme period. In future the split between national, regional and local sources of co-financing will not be required. Column 4 shows the annual ERDF commitments to the programme and will thus set the spending targets for the programme. Other essential information is also included: Separate information on the budget for participating Non-Member States. The table above covers all participating Member States but if Non-Member States such as Norway and Switzerland are participating, a separate table will have to be provided showing their contribution. This allows programmes to ensure that allocations to partners from these countries do not exceed permitted levels (i.e. the amount these countries have paid into the programme). This will continue to be the case for Norway and Switzerland in the new period. Most other participating non-Member States will be covered by the IPA or ENPI17. Some programmes in the current period have also included a split by Member State based on each countrys allocation to the programme. This will not be permitted in future.
17
Instrument for Pre-Accession and European Neighbourhood and Partnership Instrument

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A breakdown of funding by priority (including one for TA) Included in a separate table. This indicates the general split of funds across the programme and ensures that spending is appropriately distributed across programme objectives Public and private co-financing. The table above has public co-financing only. Any planned private contribution would be included in column 13. Programmes can choose one of two ways for calculating the total programme funds using either total eligible expenditure or total eligible public expenditure. If the tables are based on total eligible expenditure, private sector co-financing can be included. Additional public funding can be used to replace private funding but if, on the other hand, there is more private cofinancing than is included in the tables, the difference will be counted as programme revenue and the ERDF grant will be cut. Example of programme financial tables in 2007 2013
Programme financial tables in the new period will be simplified offering flexibility to programmes. According to EC 1080/2006 12.6, each OP shall contain 2 financial tables. The first one should break down for each year the amount of the total financing appropriation envisaged for the contribution from ERDF. It is much simpler compared to the tables required in the current period as it only gives information on the ERDF budget available each year.
Programme financial table: Split by year Year 2007 2008 2009 2010 2011 2012 2013 Grand Total 2007 2013 ERDF
Programme financial table 1, EC 1080/2006 12.6a The second programme financial table required in the new period specifies for the whole programming period, for the OP and for each priority axis, the amount of the total financial appropriation of the Community contribution, the national counterparts, and the rate of ERDF contribution.
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Programme financial table: spit by priority axis and financing source For information EIB Other
ERDF (1) Priority Axis 1 Priority Axis 2 Priority Axis Total
National public (2)
National private (3)
Total Cofunding financing (1)+(2)+(3) rate
Programme financial table 2, EC 1080/2006 12.6b
3.3 Priorities and measures

Priorities and measures: Summary Programmes are managed through a number of thematic priorities Each priority has a separate budget allocation Allocation and spending in each priority should be closely monitored Movement of money between priorities requires new financial tables approved by the Commission Final changes to the financial tables in the current programmes must have been submitted for the Commissions approval by 31 December 2006 Priorities can be used for managing sub-programmes There will be no measures in the new programme period
The programme budget is divided between a number of different priorities, defined as: One of the priorities of the strategy in an operational programme comprising a group of operations which are related and have specific measurable goals;18 The allocation of funds between priorities ensures that different funds are targeted at different objectives and each priority will receive a higher or lower share of the total funds depending on its importance. Typically there should be 3 or 4 priorities in each programme in the new period. Current programmes are also managed through priorities but each priority is also divided into a number of more detailed measures. There is a separate budget allocation for each priority and measure (though the split between measures is not included in the programme financial tables). In future there will be no measures and the priorities will instead be managed through quantified targets set for each priority (the measurable goals referred to above). These quantified targets should provide a useful tool for monitoring the distribution of programme funds across priorities and give a clear indicator of when there is a need to allocate additional funding to under-performing priorities.
18
EC 1083/2006 General Regulation, 2 (2)

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The movement of money between priorities (sometimes called virement) requires Commission approval as it can imply a shift in programme focus (if most funds are taken out of the environment priority and put into transport for example). Generally, however, there should only be a need for this type of transfer in the later stages of the programme when funding is running out and, in particular, after unspent funding is returned to the programme by the projects. This unspent funding returns to the priority from which it was originally allocated and problems can arise if very small amounts are returned to one priority and there is not enough to fund a worthwhile project. These amounts can therefore be moved so that one priority has enough money to fund a good project. Other movements of funds are related to project performance against the targets for each priority. If it is clear that the targets for one priority will be met but other priorities have not yet reached their goals, there can be arguments for providing additional funds to the weaker priorities. Final changes to the financial tables for the current programmes must have been submitted for approval by 31 December 200619. Project implementation and programme spending can in theory continue until 31.12.2008 (though in practice all project spending needs to be completed well before this to complete financial control and closure procedures). The final programme statement of expenditure to the Commission must therefore comply with the limits set in the tables submitted over two years before closure and this can be complicated if projects return funds and new actions are launched to try to absorb this money. In the final years of the programme it is therefore important that allocations and spending in each priority are monitored closely. Programmes where private co-financing is included in the financial tables or different ERDF rates are applied should see the section on calculating the final payment for a description of how the 2% flexibility rule is applied. Finally, priorities are also used in the management of sub-programmes. Particularly where programme areas have been combined, sub-programmes are often used to ensure that programme activities remain closely linked to local institutions and populations. Assigning each sub-programme a priority means that the budget for each sub-programme can be easily monitored and funds can be relatively easily transferred out of under-performing subprogrammes. Some programmes using this system in the current period have experienced problems, however, as sub-programmes do not agree to release funding until it is too late for the other parts of the programme to absorb the funds and avoid de-commitment problems. Agreements therefore need to be in place to assess degrees of under-performance and when money should be transferred. Alternatively, a general agreement about the funding split between sub-programmes can be made outside the framework of the priorities. All subprogrammes can then use the same thematic priorities and actions to compensate underperformance of one sub-programme will not require a Commission decision.
3.4 ERDF grant rates in the new period 2007 2013

New ERDF grant rates and their implications The new grant rates are 75% or 85% ERDF maximum applied at programme level Different grant rates may be applied to different priorities with a minimum 20% and maximum 100% ERDF contribution Transfer of funds between priorities with different grant rates will be complicated Claims to the Commission may be capped if different priority rates are used With higher grant rates, allocation and the risk of under-spend will be concentrated in a smaller number of projects Higher ERDF grant rates imply a substantial cut in co-financing going to projects Higher ERDF grant rates imply smaller total programme budgets Some programmes are considering using lower ERDF grant rates to avoid reduced cofinancing contributions Different ERDF grant rates in neighbouring programmes bring a danger of funding competition
19
Draft Guidelines on closure of assistance (2000-2006) from the Structural Funds.

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It was stated above that programme funds were made up of 75% ERDF and 25% cofinancing. In actual fact, the situation is more varied than this and will be even more so in the coming period. Current period 2000 2006 In the current period, the percentage of ERDF funding granted to projects varied according to the region where the project partner was located: The standard rate was 50% but regions in the less wealthy Objective 1 areas received 75%. This meant that two partners from the same project might have different grant rates and this has been very difficult to manage. New period 2007 2013 In future, all project partners in the same programme will be eligible for the same rate of ERDF funding either 75% or 85%. The two different ERDF rates depend on the GDP of the participating Member States with 85% ERDF for programmes including a new Member State, Greece, Portugal or one of the east German lnder. All programmes including at least one of these countries will use the 85% rate (though see below). All other programmes will use the 75% ERDF rate. Co-financing will therefore be reduced to 15% or 25% respectively. It is, however, important to note that these rates are maximums and are applied to the programme level. This means firstly that programmes may adopt a lower ERDF rate for the whole programme if they can gain the support of participating Member States. This can be essential if total programme budgets are not to be cut significantly (see the info box below). Secondly, different ERDF rates may be applied to different priorities with a minimum of 20% and up to a maximum of 100%. The most urgent priorities may therefore be funded at a higher rate to encourage applications (though 100% ERDF funded projects imply a risky lack of financial commitment from participating partners). Finally, different projects within the same priority may also be funded at different rates: The only requirements are that decisions are taken on the rates for the priorities when the programmes financial tables are drawn up and that the costs reported for the programme as a whole do not exceed the 75% / 85% maximum. Why some programmes are rejecting 75% ERDF The increase in ERDF payments is a real benefit to projects as it greatly reduces the amount of co-financing they will have to find. On the programme level, however, it reduces the funds available for the programme area considerably. For example:
2000-2006 Programme ERDF budget ERDF rate Co-financing provided Total budget available 100 million 50% 100 million 200 million
2007-2013 100 million 75% 33 million 133 million
As a result some programmes in Member States where finding co-financing has not generally been a problem in the past have already decided to keep the 50% ERDF rate. Other programmes will see an increase in the ERDF budget, which will offset the reductions in co-financing. Others again accept the reduction as a necessary consequence of improving a difficult co-financing situation. One unfortunate consequence is that there may be funding competition between overlapping programme areas with regions eligible in two programmes choosing the one with the higher ERDF grant. This again needs to be monitored and tackled if the problem is emerging.
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A certain amount of caution will be required if different rates are used for each priority. If priorities with low ERDF rates do not attract enough applications, it will not be possible to just transfer these funds to another priority because of the different funding rates being applied. The final programme statement of expenditure still needs to show 75% ERDF and 25% cofinancing or 85% ERDF and 15% co-financing and managing this while moving funds between priorities with different funding rates may be challenging as is shown in the example below. Moving funds between priorities with different ERDF rates Example: Priority 1 ERDF rate Funds transferred Value with co-financing 50% 10.000 20.000 Priority 2 80% 0 12500
As can be seen, if funds are moved to a priority with a higher ERDF rate, the value of these funds shrinks because the co-financing provided is smaller. This means that the programme will not provide all of the required co-financing and risks a cut in the ERDF contribution. There are many possible solutions but the missing co-financing must be provided somehow.
Claims to the Commission may also run into related difficulties if different rates are used. Spending in a given period will be weaker in some projects and priorities than others. If projects with one grant rate under-perform while those with another do well, the spending reported to the Commission may not reflect the required split between ERDF and cofinancing. Different priority rates and implications: Example ERDF rate by priority (Programme =75%) Reported expenditure by priority Total ERDF reported Total co-financing reported 60% 75% 90%
Total 225
176,25 (=78.3%) 48.75 (=21.6%)
50
75
100
30 20
56.25 18.75
90 10
Solutions have already been proposed in the Communication from the Commission on the simplification, clarification, coordination and flexible management of the structural policies 2000-0620. Two possible solutions can be applied and are already used in similar situations in existing programmes. Under payment option A (see section 9.3.2 of the communication), the Commission caps payments at 75% ERDF. In the example above, the Commission would pay only 168,75. The remainder of the ERDF claimed would be held until a future claim included less than 75% ERDF. At this point the remaining funds would be paid out provided that total payments did not exceed 75% ERDF. It should be noted that all ERDF claimed counts towards meeting de-commitment targets even if it has not been paid because of capping.
20
C(2003) 1255 Communication from the Commission on the simplification, clarification, coordination and flexible management of the structural policies 2000-06
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This on-going monitoring and revision of payments should be quite easy to manage but will not prevent all problems at programme closure: Projects rarely spend their full budgets so different small amounts will probably be returned to each priority too late for recycling. This means that the total ERDF spend declared at the end of the programme may again be lacking part of the co-financing if high ERDF grant priorities have spent most. The amounts concerned should, however, be relatively small and it will hopefully be possible to cover them with interest money. The situation does however need to be monitored. There is also a second payment option option B. Under this procedure the Commission pays the full amount on every claim even if it is above the programme ERDF grant rate. In return it demands written guarantees that the rates will stabilise back to 75-25 (or whatever rates are in use) by the end of the programme. Obtaining these guarantees is often simply too complex for a cooperation programme and is advised against though some programmes have done it successfully in the current period. Obviously, programmes using this procedure still run a risk of small imbalances between the proportions of ERDF and cofinancing reported at the close of the programme. Many cross-border programmes also use variable ERDF rates for projects within the same priority. For example, some programmes simply regard some projects as less important for achieving programme objectives and reduce the grant rate accordingly. Others use sliding scales with grants being reduced for each application for similar activities therefore encouraging projects to develop financial independence. At an extreme, a cross-border programme might make a grant to a much larger infrastructure project at a rate as low as 2%. It is not, however an optimal solution. 100% of the expenditure of the large project will then be subject to Territorial Cooperation rules and financial control and this an unnecessary complication. Most programmes prefer therefore to ask for applications from sub-projects focusing on the cross-border dimension of larger projects. The sub-project might still represent 2% of the total expenditure but can be given a grant at the normal rates without bringing the rest of the project into programme control procedures. One important recommendation needs to be observed if variable grant rates are awarded to individual projects: Treat the priority rate as a maximum and only adjust ERDF downwards. If higher rates are also used, financial managers will have a constant struggle to balance ERDF and co-financing and there is a high risk that some co-financing will be missing at the close of the programme. In addition, transparency requires that projects are informed of the likely grant rate before submitting an application, that the criteria for deciding grant rates are publicly available and that formal written decisions are provided recording the reasons for any reductions. Implications Regardless of which of the two new rates a programme is using, there are major changes from the current period and there is a risk to be managed here. The programmes ERDF will be absorbed by a smaller number of projects each receiving a larger grant than the 50% most would have got under the current programmes. Allocation and the risk of project underspending may therefore be expected to be concentrated in a smaller number of projects and avoiding under-spend becomes even more important.
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3.5 The Technical Assistance (TA) budget
Summary The TA budget funds programme operating costs Programmes should present a Business Plan at the first meeting of the MSC explaining how the TA budget will be spent. The Business Plan should be updated annually to reflect progress, changes in objectives and activities, efficiency savings and resources required for the coming year The most satisfactory approach to making national or regional contributions to the TA budget is to secure advance payments based on detailed forecasts of activities and budget requirements over the year ahead It is important to apply cost control to the TA budget, particularly in smaller programmes where fixed costs take up a larger amount of the budget. Interest arising from Member State or regional contributions to the TA budget can be spent on general measures to support the programme There is a substantial change in the new programme period: TA budgets will be capped at 6% of total programme funds (According to the current interpretation of regulations)
One of the priorities in the financial tables will also show the TA budget or operating costs for the programme. This is financed in the same way as all other costs with an ERDF contribution and a co-financing component. The programmes TA budget is kept in a separate bank account to ensure that there can be no confusion with other programme funds. Current period 2000 2006 The TA budget to fund programme administration is currently split into two headings. One covers staff, training, office, travel and accommodation, programme meetings, audit and financial control, financial management, employer costs and miscellaneous. This should constitute no more than 5% of total programme funds. The second heading covers other expenditure such as seminars, studies, evaluation, computerised management systems and communication costs and there is no ceiling (other than what is approved in the programme financial tables). Big programmes have tended to set aside 5% for all TA activities while smaller programmes have made use of this flexibility to increase total TA budgets to as much as 10%. New period 2007 2013 In the new period, the TA budget will not be split in this way and the limit for technical assistance covering all activities will be 6% of the total programme funds meaning a cut for some programmes. (This is according to the current interpretation of regulations and this may be changed in the future, i.e. TA budget may be calculated as 6% ERDF contribution to the programme). The fact that TA is based on a percentage of total programme funds has always been problematic for small programmes and will continue to be so. Small programmes have previously made most use of the flexibility to increase overall TA budgets: Since the fixed costs of operating programmes tend not to vary greatly, there is less freedom for smaller programmes to adjust their level of activities and associated costs. So, the smaller the programme, the greater the importance of closely monitoring the TA budget. Even programmes increasing their TA budget from 5% to 6% may well face a fall in the actual funds available because of the new ERDF and co-financing rates (see the info box below). With more bodies (such as the AA) potentially able to claim TA funds, there will be a real need for strict budgeting.
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Calculating the TA budget (2007 2013) In the new period thought needs to be given to the co-financing rate applied to the TA budget. In the current period, the TA budget has generally consisted of 5% of the total ERDF budget and has been co-financed at 50% by the Member States. Example 1: TA in 2000 2006 ERDF for programme: ? 100.000 TA = 5% of ERDF: ? 5.000 +50% Member State TA co-financing: ? 5.000 Total TA: ? 10.000 In the new period the ERDF financing rate is e.g. 75% with only 25% Member State cofinancing. If these rates are applied to the TA budget, it may lead to a cut in the budget available: Example 2: TA in 2007 2013 (75% ERDF and 25% MS co-financing rates for TA 75% ERDF for programme? 100.000 25% MS co-financing: ? 33.000 Total programme funds: ? 133.000 TA: 6% of ? 133.000 = ? 7.980 Total TA = ? 7.980
This example uses a 75% ERDF rate. Obviously, the situation will be worse in programmes with an 85% ERDF rate. In large programmes this kind of TA cut may be acceptable as there will still be enough money to carry out activities. In others (especially small programmes) the possibility could be used to vary the co-financing rate between priorities. The TA priority could still be co-financed, for example, at the 50% etc, ensuring no cut in TA funds. This situation is presented in example 3 and 4. Example 3: Programme uses the flexibility rule allowing it to decide different grant rates for different priorities Calculation of TA in 2007 2013 in case of 75% ERDF and 25% MS co-financing for all priorities with the exception of 50% ERDF and 50% MS co-financing for TA priority 75% ERDF for programme: ? 100.000 25% MS co-financing: ? 33.000 Total programme funds: ? 133.000 If 75% - 25% rates were applied to TA, TA budget is: 6% of ? 133.000 = ? 7.980 ERDF contribution to TA: 6% of ? 100.000 = ? 6.000 an the ERDF rate in this case is 50% MS contribution to TA: 6% of ? 100.000 = ? 6.000 since MA agreed a 50% co-financing rate Total TA budget: ? 12.000 In this example, 75% - 25% rates are used for all priorities except TA. This represents a situation where MSs participating in the programme have agreed different rates for TA: 50% ERDF and 50% co-financing in order to get a higher TA budget. It is possible for MS to agree a higher co-financing rate for the selected priorities, e.g. TA as long as it does not influence the co-financing amount promised by MS. Example 4: Programme uses the flexibility rule allowing it to decide different grant rates for different priorities Calculation of TA in 2007 2013 in case of 85% ERDF and 15% MS co-financing for all priorities with the exception of 50% ERDF and 50% MS co-financing for TA priority 85% ERDF for programme: ? 100.000
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15% MS co-financing: ? 17.5 Total programme funds: ? 117.600 If 85% - 15% rates were applied: TA budget: 6% of ? 117.600 = ? 7.056 ERDF contribution to TA: 6% of ? 100.000 = ? 6.000 an the ERDF rate in this case is 50% MS contribution to TA: 6% of ? 100.000 = ? 6.000 since MA agreed a 50% co-financing rate Total TA budget: ? 12.000 In the example 4, 85% - 15% rates are used for all priorities except TA. This example again represents a situation where MS participating in the programme have agreed different rates for TA: 50% ERDF and 50% co-financing in order to get a higher TA budget. As previously, it is possible for MS to agree a higher co-financing rate for the selected priorities, e.g. TA as long as it does not influence the co-financing amount promised by MS. To justify TA budget proposals it is advisable to present a Business Plan to the first MC setting out resources needed for operation of the programme over its life, including staffing levels needed in the various phases, and a more detailed account of resources required for the next two years of operation. The TA budget should also be adjusted to reflect experience with costs under the different headings. Cost accounting of conferences and seminars is essential in order to fully predict the financial implications of proposals to, for example, increase the number of seminars or brochures. The costs under some TA budget headings are more predictable than others. For example, once office space has been hired and staff appointed, costs can be predicted fairly accurately. However, the variable number of people attending events, which affects for example catering costs, is more difficult to predict. In order to monitor costs, TA budgets should be broken down further and on a monthly basis. The headings used to plan and monitor TA budgets are typically very similar to those for the projects with staff, overheads, travel and accommodation and publications. Some larger oneoff costs such as establishing monitoring systems and websites are treated separately. Once outline budgets are approved, the bodies claiming TA funds should be given relative freedom of action within the approved budget. Some programmes have in the past asked for very detailed information about the TA budget and required committee approval for even quite small amounts of expenditure by programme management bodies. If the level of detail is too great, these requests may interfere with programme work. In principle, the information presented about the TA should be on the level of budget lines with main activities and targets presented in a Business Plan. Since Member States co-finance the budget, the first MC should also agree a method of securing contributions from the participating countries or regions. There are no formal requirements for how contributions from countries to the TA budget should be made. Experience shows that the most satisfactory approach is to secure annual advance payments of TA co-financing calculated pro-rata from MS contributions to the programme and based on a detailed forecast of activities and budget requirements in the coming year. This ensures that the programme has the necessary funds to carry out its activities. Any expenditure incurred by Member States or regions carrying out some of the forecast activities should then be reimbursed from the central programme TA account. This system allows proper certification of claims and secures the audit trail. An alternative approach is to allow countries to deduct expenses they incur during the course of the year before making payment of any remaining TA contribution owed to the central TA budget at the end of the year. This makes life difficult for central budgeting and is less desirable from the audit viewpoint as it is often impossible for the MA to know exactly how the funds have been used. It also means that the programme is forced to use more of the 7% advance from the Commission to fund TA activities. This is not the purpose of the advance, which is intended principally as a fund for paying project claims. Procedures for reporting on and monitoring TA budget expenditure should be set up as part of the programmes control system. In many programmes expenditure incurred against the TA budget by the secretariat and other programme bodies is checked by the MA for approval before being passed to the PA for payment. The MA must also ensure independent audit of TA expenditure (bearing in mind that it also spends from this budget). This is more difficult
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where Member States or regions have spent their TA budget contributions directly rather than contributing them to the TA budget and then invoicing this budget for payment. Programme structures with large numbers of Intermediate Bodies can also drain the TA budget. Sufficient funds must be retained for carrying out key programme functions. TA expenditure is also an important aspect of meeting de-commitment targets for the first years of the programme when project spending can be expected to be slow. Many of the most costly TA actions (establishing websites and monitoring systems, preparing programme publicity actions, running large scale events to attract project developers etc) should be carried out in the first year of operations and TA may well be the only expenditure claimed in 2007. Although the share of TA in total programme expenditure is relatively low, this early expenditure can mean that it is a key factor in meeting the first N+2 target. Most of the current INTERREG programmes will continue in the new programming period. The Commission has confirmed that these programmes will be able to use the current TA budget to cover the costs related to the preparation of the new programmes. They will also be able to use the TA budget from the new programme to cover costs related to the closure of the current programmes. This includes e.g. costs of preparing and printing the final programme report.
3.6 Additional Administration Tools

3.6.1 Bank accounts
In order to promote the joint management of funds, it is a requirement to be continued under the new funding period that the ERDF contribution is paid into a single account with no national sub-accounts. Similarly, ERDF payments should under no circumstances be incorporated into regional and national budgets and accounts. If this happens, ERDF funds become subject to national and / or regional limitations that are frequently in conflict with Territorial Cooperation programme requirements (for example, concerning the need to transfer funds to other Member States). To enable the programme to get underway, the CA should open two EURO bank accounts: One for the programme overall and one for Technical Assistance. This second account will hold Member State and ERDF contributions to be used for meeting programme operating costs. The ERDF contribution for technical assistance is initially paid into the programme account and then transferred to the TA account. The separation of accounts is to avoid any confusion between TA funds and those available to be allocated to projects.
3.6.2 Interest on programme accounts

The advance payment from the Commission, TA funds and any other funds the programme holds before payments are made to projects should be placed in interest bearing accounts. The interest gained is a useful source of additional funding for the programme. There is one restriction on the use of the interest money: Any transnational financial transaction charges incurred by the programme must be covered from the interest earned (otherwise these expenses will be deemed ineligible). The remainder of the money belongs to the Member States but it must be allocated to the programme. There are two ways of doing this. Firstly, the money can be used to replace co-financing that participating Member States would otherwise have provided (with the funds divided between Member States in proportion to their original contribution to the programme). Alternatively, the interest can be used as additional funding to increase the budget available in whatever priority it is assigned to. This additional co-financing does not generate extra ERDF payments. The allocation of interest money needs to be carefully considered. If it is used to replace Member State funds (i.e. it is used as co-financing) there will be no change to the programme but on the other hand these funds will then have no added value. If interest money is added to programme funds, additional actions will be possible. It is not necessary to include interest
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in the programme financial tables but annual and final reports must contain an explanation of how the interest money has been used. Possibilities include funding extra projects, compensating for small de-commitment losses, funding second level control activities and preparations for the new programme period (it is eligible to use TA from the current period to do this). It should be noted that interest money is subject to the same eligibility rules as all other programme funds. Regardless of how the funds are used, they all need to be spent by the end of the programme period and the programme final report must include a section of how this money was used.
3.6.3 Monitoring systems

The Monitoring system Is a useful tool for programme management and needs to be put in place at the start of the programme Is a common database and should be shared by all programme management bodies removing the risk of different bodies using different figures Provides programme bodies with a quickly generated overview Aggregates information on projects and provides an overview of programme progress Tracks individual project spending and progress Helps programmes spot serious under-performance
Monitoring systems consist of two important elements: The data that is collected and the databases for handling this data. These systems need to be set up to fulfil regulations but should also be a useful tool for financial management. Once more, the main factor in developing useful systems is to ensure that they are put in place at the start of the programme: Project applications, report forms and the monitoring system should all draw on the same key data and all three need to be developed together. Territorial Cooperation programme monitoring systems need to fulfil a number of different requirements. Firstly, there is a need to track individual project spending on the one hand and the progress of the programme on the other. Project monitoring should track performance against financial targets and allow finance staff to check spending on different budget lines, by partner etc. This information is used in processing and approving project claims and for assessing project progress. This part of the system must provide reliable data and include targets against which to measure actual performance. Monitoring systems also need to be able to aggregate this information and provide an overview of spending on priority level, programme level, for non-Member States etc. in order to provide the information needed for reporting to the Monitoring Committee and making claims to the Commission. The Implementing Regulation contains the minimum information required21. This essential programme information must be accessible by the Managing, Certifying and Audit Authorities22. In addition programme level monitoring should provide information on achievement of the measurable goals for each priority. Just as importantly, monitoring systems need to track activity progress alongside spending and allow comparison between the two. Project application forms should provide enough information to assign costs by year, by partner, by budget line and to the main work packages and the monitoring system should mirror this. Progress on activities can then be monitored
21
List of data on operations to be communicated on request to the Commission, EC 1828/2006, Annex III 22 Implementing Regulation, 14.1
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for serious over or under-spending. There is no consensus on the exact information required and programmes should base their decision on what they will need to know to spot problems. Increasingly, the programme monitoring systems in place also automatically generate and/or check a number of important programme documents such as financial tables for report forms. Systems can be used to generate automatic warnings if budget lines are over-spent; to store a record of important questions from projects and the programmes answers; to send automatic reminders to programme staff when deadlines are approaching. Perhaps most importantly, if all changes to budgets and financial tables are made directly in the system, this removes the risk of different programme bodies using different figures. The staff who can change different types of data need to be identified and a system of controls put in place. This type of function can save a great deal of time on basic financial management tasks and provide programme management with quickly generated overviews. In the current period monitoring system development has been a process of constant finetuning as programmes learn which data are most valuable. A separate study is available on some of the systems developed23. The main problem should be easy to resolve and this was simply that monitoring systems were not always developed early enough in the current programmes. Another issue that has sometimes been difficult is when programme databases are based on standard national systems for handling mainstream Structural Funds programmes or standard software packages. Care is needed to modify these standard systems to meet the particular requirements of Territorial Cooperation programmes, for example, in the handling of different currencies or less or more frequent claims rounds than is usual in the domestic system. In the worst cases, programmes have to operate two systems because national systems are inappropriate to programme needs.
3.6.4 More on the Business Plan

Programme management needs to be planned on different timescales. The programme itself provides a 6-8 year timescale but it is impossible to predict all of the situations that will arise at the start of this period. The period between MC meetings (typically 6 months) provides short-term action plans but there is a clear need for a mid-term planning tool (considering approx. the next two years of implementation), which can forecast future developments with reasonable accuracy and develop the programme response in time to launch effective initiatives and secure the necessary resources (especially staff). This is the role of the Business Plan setting out the main programme management activities that need to be carried out. MC meetings should be used to fine-tune the plan, which then becomes the basis for TA spending. From experience, there is much value in preparing a Business and Implementation Plan. It pulls together all the activities required of the different programme bodies and produces a costed workplan for the coming years. This then forms the basis of the technical assistance budget and coordinating work flows. Since the plan is in effect a statement of activity planned by all programme bodies, they should all be involved in its preparation. To realize the full benefit of the Business Plan, an accurate estimate of the costs and timing should be made of all activities, including the approved staffing levels, office space, IT resources required, publicity strategy, estimated number of MC and SC meetings for each year of the programmes operation, etc. The plan should be updated annually to take account of MC decisions and agreed action following the mid term review of the programme. Reports on progress in implementing the Business Plan should be submitted to the MC at least annually. They should review progress in activities, and identify efficiency savings, new activities and resources required in the coming year. The plan is a useful tool for helping to keep control of the TA budget and monitoring costs as well as in longer term management of resources for staffing. It also provides the basis for seeking co-financing contributions to the TA budget.
23
Study on Selected Monitoring Systems published by INTERACT Point Managing Transition and External Cooperation and available on the INTERACT website.
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Financial framework: Summary
Current vs. new funding period 2000 2006

50% or 75% ERDF grant rate
2007 2013
2 grant rates: Up to 85% ERDF programmes with new MS, Greece, Portugal or one of the east Germany lnder. Up to 75% ERDF other programmes
Claims to the Commission may be capped if different priority rates are used
Transfer of funds between priorities with different grant rates can be complex TA consists of two measures Measure 1 capped at 5% of total programme funds Measure 2 uncapped No breakdown of TA. 6% of all programme funds for all TA activities (according to the current interpretation of regulations, which may be changed in the future, i.e. TA will be calculated as 6% of ERDF contribution to the programme) Upon MS agreement, it is possible to use different grant rates for TA
Simplified financial tables recommended by the Commission No split by MS in the programmes financial tables Some programmes monitored spending by MS National/regional sub-accounts for ERDF sometimes exist National / regional sub-accounts for ERDF must not exist (official sub-programme funds are possible) Programmes should set up only two joint programme bank accounts for: Funds to be allocated to projects TA Priorities and measures in the programme financial tables Only priorities in the programme financial tables Priorities will be managed through quantified targets set for each priority
7% Advance Payment paid to programme at once 7% or 5% Advance Payment paid to programme at the start in annual instalments: 2%-3%-2% or 2%-3%. Programmes liquidity in the first year may be reduced
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4. Operating Phase: Programme Level

This section considers in more detail how key financial management activities (Funds Management, Payments to Projects, Certification of Expenditure and Monitoring Controls) can best be run to help meet programme objectives. Operating phase on the programme level: Summary Reporting systems should underpin annual forecasts of payment claims, annual implementation reports and certified payment claims to the Commission. Reporting systems should continually review spend against targets and report to the MC and SC on appropriate action if spending is below target. The way in which allocations to projects are made at frequent intervals, to existing projects for extensions, via waiting lists, without conditions can help speed up spending Recycling of funds unspent by projects before the end of the projects will give the opportunity to fund other projects / extensions and may help avoid de-commitment. All measures to recycle funds into existing or new projects require Steering Committee approval Interest on Commission advances provides additional resources for allocation to new / extended projects.
Programmes enter their main operating phase when they start to allocate funds to projects. The phase has two main objectives. Firstly, ensuring the quality of the operations funded through effective selection, monitoring and control. Secondly there is programme efficiency: The aim should be to make 100% use of funds by ensuring that nothing is lost to decommitment and that this process is part of day-to-day management and not an annual end of year crisis. One key to success is to avoid slow and/or insufficient spending by projects. Another, which forms the focus of this chapter, is the basic programme procedures governing the granting, monitoring and payment of funds.
4.1 Allocation of funding

The approach taken to the allocation process has far reaching implications for funds management. Programmes must ensure that allocations in the first years are sufficient to generate enough actual spending to comfortably meet the first de-commitment targets. This means removing barriers to allocation and project start-up and understanding the relationship between how much is allocated and how much is likely to actually be spent. De-commitment 2 (see page 13 for more) As explained before, the Commission commits money to each programme on 1 January of each year 2007-2013. If the money has not been used within three years (N+2) it is deducted from the total allocation to the programme. The amount committed each year therefore provides the spending target that must have been achieved three years later (or four years in the case of N+3). As usual, the situation is actually slightly more complicated than this. The amount of the advance payment to the programme must be deducted from the amount of the first commitment by the Commission in 2007 to provide the target for the end of 2009. This is because de-commitment calculations are based on the amount the Commission has paid out to the programme and the advance is counted as a payment. Furthermore, even though the advance is paid over two or three years, the whole amount is deducted from the first de-commitment target because:
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Each payment shall be posted to the earliest open budget commitments of the Fund concerned. (General Regulation, 76.1) This means that the first de-commitment target is much easier to achieve than the targets for later years. This compensates for the fact that projects take time to get started and very little project expenditure can be expected in the first year of a programme.
N+2
Calculating N+2. Money committed on 1 January 2007 and unspent by 31 December 2009 will be de-committed. Money committed in 2008 must be spent by 2010 etc.
2%
3%
2007
2008
2009
2010
2011
2012
2013
2014
Example: Calculating de-commitment targets in case of a programme working with 5% Advance Payment (3% - 2%) Total programme ERDF budget: 100 million Programme advance payment (5%): 5 million Total ERDF committed to programme 01.01.07: 14.28 million Total ERDF committed to programme 01.01.08: 14.28 million Total to be spent by 31.12.09: 9.28 million (= First commitment advance) Total to be spent by 31.12.10: 23.56 million (= Total of first target + second target) The same applies to programmes working with a 7% advance, as the final 3% instalment will still be paid in 2009 in time to be counted towards the 2010 de-commitment target. One final point applies to programmes working with N+3. N+3 only applies for the first half of the programme period and in 2011 these programmes will switch back to N+2. This means that at the end of 2013 these programmes must achieve the double target of spending all the funds from 2010 and 2011.
N+2 N+2 N+2 N+2 N+3 N+3 N+3 N+3
Double targets for 2013 in N+3 programmes
N
2007 2008 2009 2010 2011 2012 20 13 2014 2015 2016 2017
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There are two basic approaches to allocation: Some programmes allocate strongly at the start to build up a good safety margin. Others prefer to spread allocations more evenly throughout the programmes lifetime by limiting the amount of funds that can be granted at any one meeting of the Steering Committee. This approach is risky and requires strict monitoring and project budget discipline to compensate for the small safety margins. As a result, projects under this system tend to be smaller and have a fixed and limited running time (e.g. two years) making it easier to detect and take action against under-performance at an early stage. Put simply, allocating a large proportion of programme funds in the early years of the programme is safer and it is this approach we focus on. Financial targets and safety margins As explained above, the commitments of funds from the Commission and the threat of decommitment set the main targets for programme performance. Finance managers must monitor expected TA and project spending against these targets and ensure that annual spending will exceed the de-commitment threshold.
Expected TA spend 2010 140.000 Total programme funds allocated 50 million Forecast project spend 2010 (according to project budgets) 23 million Safety margin 2.140.000 Expected real project spend 2010 15 million
Committed 01.01.08 / Target 31.12.10 13 million
As can be seen, a large proportion of programme funds need to be allocated at an early stage to provide a sufficient safety margin. It is also important to note that the annual spending targets provided by the projects themselves are generally not a reliable way of determining real programme spending forecasts. Projects tend to under-perform particularly in their first years of operation and finance staff need to develop a picture of the normal extent of this under-performance and adjust expectations about project performance downwards.
To avoid de-commitment, it is crucial to get projects up and running early in the programme cycle so as to generate payment claims at least in the second year after programme approval. Given that project spending is generally slow at first, a large percentage of the programme funds will have to be committed in the first two years of the programme if reasonable de-commitment safety margins are to be established. It is difficult to provide exact figures because they will depend very much on the projects approved (some projects, for example, do achieve significant spending in their first year) so finance staff need to update forecasts after every SC meeting.
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Avoiding de-commitment: Three simple steps Allocate a good proportion of funds near the start of the programme to generate project spending. Make sure projects set annual spending targets. Monitor and take action in cases of serious under-performance. Remove bottlenecks in programme administration (contracting, financial control etc.) so projects can spend and claim.
The main requirement for this approach is a good supply of quality applications from the start of the programme meaning that project development activities should start even before programme approval and a significant proportion of TA funds in the first years of the programme should be devoted to project development activities. The main drawback is that it creates a funding gap in the later years of the programme when there are very few funds to allocate to projects. This, however, is the price for avoiding de-commitment and keeping all funds in the programme rather than returning them to the Commission. Programme opinions vary on what sort of projects it is better to go for in the early years of a programme. Large projects can provide significant spending and can spin off other projects later in the programme. However, they can also be at higher risk of not spending all of their allocation and can be slow to start spending creating major problems because of the scale of funding involved. Short projects (i.e. two years) often progress well because of the time pressure and make it easy to recycle money left at the end of a project in later years. However, if these projects plan a follow-up, there may be disappointment if there is no funding left for this purpose. One proposal for avoiding this problem is to approve the whole project budget at the start but only release the second half of the grant on satisfactory completion of the first half of the project (effectively creating two sub-projects). On balance, a varied portfolio of different projects will spread the risk more evenly. Of course, it is the Steering Committee that actually decides on which projects are approved. Finance managers however need to guide the committee on the pace of allocations required if de-commitment is to be avoided and the programme as a whole needs to ensure that there are enough quality project applications available to meet the required pace of allocations. The diagram below shows an approximate profile.
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Programme safe allocation profile
"Safe" allocation profile

100 % of total programme allocation 80 60 40 20 0 2007 2008 2009 2010 Year 2011 2012 2013
Clearly, this allocation profile creates a very different situation towards the end of the programme allocation phase by which time funds are very limited. To manage the final project approvals, the total budget available in each priority should also be announced to guide applicants on the realistic levels of grants that can be expected. Finance staff have a key role in trying to advise projects on realistic budgets at this stage (without encouraging applicants to go for the maximum funding available). Some programmes advise funding exploratory projects at this stage, which will generate early spending in the next programme funding period when submitting full implementation proposals. Caution is needed here, however. Exploratory projects should explore new concepts rather than developing actual applications for the new period (an ineligible activity). There can be difficulties when funds are running low. Often there are more eligible applications than funds available and as a result some programmes have reduced the budgets offered to the approved projects. This does not seem to be an acceptable way of proceeding. A project cannot be expected to carry out the same activities in the application with a significantly lower budget. If both budget and activities need to be changed what exactly is the SC approving? The SC needs instead to take the difficult decision to reject projects that would have been approved if there was enough funding. Finance staff need to play a key role at this kind of meeting and to show the effects of each approval on the budget remaining in each priority. The allocation phase ends when the programme has allocated all of its funds. This must also include as much as possible of the unspent project funds, which will be released back to the programme budget as projects begin to close. Although the programmes run 2007-2013, these are the years in which the Commission commits money to the programmes. The deadline for spending the final funds in the new period will be 31 December 2015 (the N+2 deadline for the final funds committed on 1 January 2013). This means that all project activities have realistically to be completed no later than June 2015 to allow the programme to assess final reports etc. The last allocations for short study projects could therefore in theory be as late as January 2015 so although the allocation process will certainly slow down, it does not end until just before the end of the programme (the same timelines refer to the current programmes with the deadline for spending set at 31 December 2008).
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What went wrong with this process in the current programme period? Actually very few programmes de-committed funds and the amounts involved were relatively small. This is despite the fact that many programmes were delayed and started operations one or two years into the programme funding period with few if any projects ready to apply for funding. The ones that avoided de-commitment were the ones that were able to move quickly from programme approval to allocating funds and which were not delayed further by administrative problems. All programmes are being encouraged to submit their OPs to the Commission as soon as possible in 2007 to avoid these problems in future though some programmes will not meet this deadline. Any programme that has not been approved by the end of 2007 will probably just lose the funds for this year. A few programmes have been troubled by serious delays in basic administrative procedures such as contracting and we look at some of the issues involved later in this chapter. Others again have had to deal with completely new types of operations (the Regional Framework Operations (RFOs) in the IIIC inter-regional cooperation programmes are a good example) and the time involved in establishing these has led to de-commitment losses. In conclusion, too much emphasis has perhaps been put on de-commitment very few programmes have de-committed two years or more in a row. This is, however, partly the fault of the programmes, as too many have been unable to provide realistic spending forecasts. The unfortunate impression created is that meeting the targets has often been a matter of chance. How to help ensure programme de-commitment security? SC needs to be guided by finance managers on the required pace of allocation Get projects up and running early in the programme cycle Generate project payment claims at least in the second year after OP approval Establish reasonable de-commitment safety margins by committing large percentage of programme funds in the first two years A good supply of quality project applications from the start is crucial What sort of projects will you go for at programme start: Large or small & short? Avoid unsound projects calling for conditional approval Good programme spending forecast
4.2 Calls for applications

Closely linked to the allocation process is the approach to getting project applications for the programme. Again, there are two basic approaches. Some cross border programmes allow continuous applications, allowing project developers to submit an application whenever it is ready. The allocations process continues until the funds in a priority are fully committed. This approach is relatively straightforward and can result in quick allocations provided SCs are held very frequently and/or some decisions are delegated to the programme bodies or taken by SC members by written approval (often used for very small projects). The other programmes and particularly the transnational and inter-regional programmes have calls for proposals. These usually take place twice a year when funds are plentiful with SC meetings following each call to decide which projects should be approved. This approach is favoured largely because of the greater difficulty in holding meetings of transnational and inter-regional representatives who, by and large, have to travel greater distances to meet up. It also makes direct comparison of similar projects easier and so promotes competition for funds (leading hopefully to quality gains). The most common system to date has been to launch open calls whereby any project can apply under any priority provided that there are still funds left in that priority. Towards the end of the current programmes there has been a tendency to launch focused calls requesting very specific types of projects to fill gaps in programme objectives. This may well become more common in future because of the increasing shift to strategic projects, which will have to fulfil stricter criteria. Other variations on the call system have also been tried. Sometimes the total funds available for the call are limited to ensure that funds remain for later calls.
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Flexibility is a must here, as it is ridiculous to reject or delay quality applications on this basis. Some programmes limit calls to projects in certain priorities allowing a comparison of all projects coming forward under these priorities and giving the programme the chance to get specialist help on the themes concerned. This system can work provided that all priorities have a call early in the programme to ensure that work on a particular theme is not unnecessarily concentrated into the later years of the programme. Finally, almost all programmes set indicative minimum and maximum project budget sizes. This is an essential guide for project developers to decide on the scale of activities to be involved but again requires a flexible approach to special cases exceeding these limits. The continuous application system perhaps allows finance managers to better monitor the flow of applications into the programme and the likely allocations at the next SC meeting. The implications for financial management are, however, small. Both systems require a meeting of the Steering Committee before projects can be approved and start so there will always be some delay until this meeting can be held. The most important thing in both systems is to ensure continuous project development activity and provide detailed advice to applicants so that large numbers of high quality applications are received. All programmes should also provide the date of the next SC meeting and the likely date for issuing contracts to successful projects so project managers can set a realistic start date and with it a realistic budget for the first part of the project.
4.3 Project approval and rejection

Decisions on project applications are taken by the SC according to criteria agreed by the MC at the start of the programme. It is the responsibility of the MA to ensure that these criteria are used and that the reasons for decisions are properly documented. The criteria should include assessment of project budgets both in terms of value for money and the realistic distribution of resources over activities and years. Finance staff should also consider the split of funds between partners as an effective way of assessing the real involvement of different organisations in the project. The basic decisions open to the SC are approval or rejection. In some cases rejections are given with an invitation to re-apply if project activities are generally good but some modification is needed or the SC wants two projects to combine their ideas. A fourth type of decision has also been used and is often related to doubts about project finances: Conditional approval. Under conditional approvals, the project is allowed to go ahead provided that it makes a number of modifications. These generally involve budget cuts and the conditions have to be fulfilled before a grant offer letter or subsidy contract is issued (or in some cases before the first project claim for payment is submitted). Opinion is divided about whether projects should be approved with conditions and the success of the procedure depends very much on the attitude to setting conditions and making sure they have been fulfilled.
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Ground rules for conditional approvals Only set clear conditions. Make sure that asking whether conditions have been met can be answered with a simple yes or no. o E.g. Include one German regional partner o Increase private sector involvement Set clear deadlines for when conditions have to be met o E.g. Within two months o Before a contract will be issued Do not set conditions that fundamentally change the project o E.g. Add a publicity work package o Remove the research work package Reduce the budget by 250.000 Do not allow the conditions stage to drag on. Either the conditions are met in time and the project is approved or they are not and the project must re-apply. Conditions that break these basic rules are likely to be the result of requests for quite major project changes. In such situations the correct approach is to instead reject the project and ask it to return with a sound application that can actually be used as the basis for contracting and implementation. Major changes to budgets are particularly common and particularly problematic (and often stated by project managers as one of the most negative features of programme management). Programmes have to assume that budgets are based on a realistic assessment of the resources required to complete activities. Budget changes can therefore be expected to fundamentally change the activities that will be carried out. Of course, some budgets are unrealistic but these projects should be rejected and asked to return with a usable budget; budget conditions should be limited to fine-tuning as is done very successfully in some current programmes. There is, however, in many cases an unfortunate link between conditional approvals and automatic co-financing (see section 3.1.3). It can be important for co-financers to get their co-financing funds allocated by certain deadlines and one way of doing this can be to approve bad projects with major conditions to try and make them better. This either takes a long time or it never happens and the programme is stuck with weak projects. Conditional approvals can also increase when programme calls for applications are organised by priority, as it is not certain when a rejected project will have another opportunity to apply under its theme. Again, flexibility is the key here by allowing these projects to re-apply under any call.
Conditional approvals have sometimes led to long delays and considerable anger among project developers. One benefit of these delays can be that they give programme management a chance to get management of the project off to a good start. But it is better to avoid unsound projects in the first place. For relatively minor conditions it may be appropriate to write the condition into the subsidy contract and check that it has been met when the first payment claim is made.
4.4 Contracting
The final step of the approval process before project operations can begin is issuing the contract. Although programmes encourage projects to start as soon as they receive formal notification of approval, many will not or cannot. Contracting should be a formality and contracts should be standardised as much as possible. A maximum of two months should be
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the deadline for issuing all contracts after a SC meeting. This obviously becomes impossible if projects have extensive conditions to fulfil. The contract is generally signed between the MA and the Lead Partner of the project. It should include the approved application as the basis for the activities to be carried out and the budget agreed, the start and end date for eligible expenditure, partnership members, grant rate and control provisions. It must allow sufficient flexibility. Some programmes, for example, are currently using contracts that do not permit transfer of funds across borders. This will be unworkable once the Lead Partner principle becomes compulsory and the documents will have to be changed. The legal aspects vary enormously between different Member States but as a rule the contract should be kept as simple as possible. In future programmes, all contracts should also contain a requirement that projects are implemented in line with the budget provided (i.e. that they meet annual spending targets). If this is not done and the programme loses funds to de-commitment as a result, the contract should allow the programme to reduce the grants to under-performing projects.
4.5 Basic programme financial flows

As soon as the first projects are approved, the programme cash flow can become an issue particularly if there has been strong allocation in the first part of the programme to avoid decommitment. The advance from the Commission covers immediate operating costs and only ex-post payments are made to projects (i.e. the money is spent first and then reimbursed by the programme). The most important consideration is to ensure that generally speaking there is always enough money to pay project claims as soon as possible after they arrive.
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Basic financial flows

Project spends own funds and/or possible advance payment of co-financing. Partners must have enough own funds to start project activities. Programme reporting deadline: Project provides report, certified statement of expenditure and claim for payment
Funds available from advance CA pays project No funds available CA initiates claim to Commission
? ?
CA approve s claim
Programme (JTS/MA) approves claim
CA draws up statement of all funds paid to projects + approved claims awaiting payment + TA expenditure
Commission approves the claim and makes payment to programme account CA pays outstanding claims
Approx 3 times per year CA makes a claim to the Commission
Claim cycle repeated
As can be seen the aim of the advance payment is to pay the first project costs before the first claim is submitted to the Commission and to fund the TA activities required during start up. Generally speaking problems tend to occur in the early stages if there are problems in certifying project expenditure. There are very few cash flow problems as the totals of the project claims received at any one time rarely exceed the amount of the Commission advance. When cash flow problems are expected there are two basic approaches: Small partners and limited resources. In some programmes average partners do not have the funds to pre-finance project activities and they cannot afford to wait long periods for programme payments. In these cases the aim is always to make payments as soon as possible and to ensure that the programme always has sufficient funds in its account to cover the claims expected. This requires reliable spending forecasts and quick procedures for drawing up claims to the Commission. Programmes in this situation often also use rolling reporting allowing projects to report and claim whenever they have sufficient expenditure rather than according to set deadlines. This allows project partners to monitor and manage their own cash flow.
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Larger partners and good resources. Other programmes (and in particular the transnational and inter-regional programmes) tend to have larger partners such as regional authorities. These partners can often afford to pre-finance activities and wait for payments. Here the advance is still used to make the first project payments but there is less pressure on receiving the payment from the Commission before the advance is exhausted: If there are no funds available, the last projects to submit a claim must wait (and a clause in project contracts should explain that this is possible). Obviously, there is still a need to ensure that projects do not wait too long for large amounts but the programme can afford to submit a smaller number of larger claims to the Commission. Even the biggest partners can have problems if payment is delayed until an unspecified future date, particularly if this means that amounts claimed are not paid until the next financial year. Sometimes advance ERDF payments are also made to projects to finance their start up. This is an effective way of minimising delays but involves a certain risk: If there are problems the money will have to be recovered rather than just deducted form the next claim and recoveries can be difficult. It should be noted also that these advance payments do not count as incurred programme expenditure before the programme has certification that the project has actually spent the money. This means that the programme cannot issue advance payments to meet de-commitment targets.
4.6 Spending forecasts

Managing the correct rate of funds allocation and cash flows both depend on reasonably accurate project spending forecasts: Programmes need to know how much will be claimed and when. Projects should produce their own spending forecasts in the budgets they submit with the application but experience has shown that these are often inaccurate (this is discussed in much more detail in the project section). This means that if project spending forecasts are to provide a reliable basis for programme spending forecasts, they will almost certainly have to be adjusted downwards in the early years of project implementation (i.e. the programmes spending forecast is reduced rather than the actual project budgets). This adjustment should be made based on data from earlier projects and only after this adjustment will most finance managers have a reliable way of forecasting programme spending. Once adjusted, individual project spending targets can be combined to provide a realistic spending forecast for the programme. Programme experience of average project spending performance can also be developed to predict the amount of funds that will have to be allocated in a certain period if spending is to meet de-commitment targets. This will generally show that large amounts have to be allocated in order to achieve even a relatively low spend in the first two years of the programme. Until project budgeting becomes more accurate (and there are limits to how accurate we can ever expect budgeting to be) this interpretation of project data will be an important task for finance managers. The project spending forecasts are aggregated and combined with the TA forecast to provide the programme spending forecast for the Commission. This has to be sent by the end of April every year and must cover the current year and the year to come. It is important to note that these forecasts serve two different purposes. Firstly, they are a requirement from DG BUDGET and are used by the Commission to make its own funding forecast to the Member States. DG BUDGET therefore wants a forecast of how much the programme actually expects to get paid in the year concerned and this should include amounts claimed but actually paid out in the previous year. So this is the figure that should be sent in the forecast to the Commission. This figure is not, however, very useful for the programmes, which need to forecast how much they will be able to claim from the Commission by the end of the year for decommitment purposes regardless of whether it is actually paid that year. Programmes should therefore also keep this data, as it is an essential de-commitment management tool (and they will almost certainly be asked for it by Commission Desk Officers).
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Two different spending forecasts
2007
2008
Programme claims to the Commission The forecast sent to the Commission for 2008 should include the amount claimed in the end of year claim for 2007 and the mid-year claim for 2008 and both of these amounts will be paid in 2008. It should not include the end of year claim for 2008 because this will not be paid until 2009. All claims for payment received by the Commission before 31 October each year will be guaranteed payment in the same year and should therefore be included in the forecast. Claims sent later should be part of the forecast for the next year. Programmes, however, need to monitor how much they will be able to claim from the Commission each year not how much is actually paid in that year because all amounts for which the Commission receives a claim on or before 31 December each year count towards meeting de-commitment targets. The programmes forecast will therefore cover the claims included in each year.
In the past, programme forecasts have often been extremely inaccurate - in part due to confusion about what is actually required. This has unfortunately contributed to the perception that the INTERREG programmes are in some cases badly managed, as the figures forecast bear little relation to the actual spend achieved. If effective project monitoring tools are in place and project management is of a sufficient standard, the data for making reliable forecasts should be easily available. At least one common practice in the current period has made effective forecasting in some programmes impossible. This is the granting of allow time extensions to projects. All programmes are willing to consider this type of request from projects but approval should be granted by central programme management bodies and implications should be integrated into programme forecasts. In some cases however, Intermediate Bodies make this decision independently with some programmes reporting that the number of projects given extra time may be as high as 80%. Clearly this means that it is impossible to predict project spending over time. In addition to the forecasting problems this presents, it also raises serious questions about the quality of project management and the effectiveness of programme cooperation. It also means that the management of N+2 becomes almost impossible as programmes can never know what a project will actually spend in any given year.
4.7 Project claims for payment

The programme financial tables decide the required allocation and spending rates in the programme. Project budgets give information on the contribution each project will make towards meeting the financial targets each year (though project spending forecasts should always be treated as being over optimistic, especially in the early months or years of implementation). If the calculations behind the programme targets have been done properly, the programme should not have any major problems as long as the projects are able to claim and receive the funds they have been allocated. In order for this to happen, the programmes payment claims cycle needs to run smoothly from the start with quick certification and processing of project claims for payment. There are a number of factors that influence this. Firstly, there is the decision on whether to have a system of rolling claims (projects submit claims whenever they want) or to use set deadlines for claims each year. The aim must be to get as much of the expenditure from each year certified and included in the last claim to the Commission submitted at latest on 31 December each year.
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The rolling claims system spreads the workload of those processing the claims and is therefore particularly useful when a centralised first level control system is in place, as small numbers of staff have to certify project spending. It also allows the projects maximum flexibility and provided the minimum amount for the claim is not set too high, it gives small project partners a good chance to manage their cash flow. The main problem with this system is that some projects may decide to limit their administrative burden and not submit claims for a long time even though they have incurred significant spending. The usual response is for programmes to set a maximum time limit between claims and possibly a deadline for submitting the first claim. A fixed claim system allows programmes to predict their workload and plan other activities around the claim procedure. It also ensures a regular flow of information on the implementation status of all projects and makes it easier to decide when action should be taken on under-performing projects. Nevertheless, when the programme is in its main implementation phase, it may receive hundreds of reports and claims simultaneously. Some bottlenecks and delays are inevitable. Another important issue is the timing of the claim deadlines. There are two dates involved: On the one hand the end date of a reporting period (usually 30 June and 31 December) and on the other, the date by which the report and certified claim for payment have to reach the programme. At the start of the current period, most programmes using deadlines asked for reports to arrive around mid-February and the end of August in order to be able to prepare the last claim for the Commission by 31 October (therefore allowing 1 - 2 months for the project to draw up the report and 1 months for the programme to process the claims and compile them into a claim to the Commission). These dates also gave the possibility of scheduling an extra claim for payment at the start of October if targets were not going to be met. It also of course meant that spending incurred in later months of the year could not be included until the February report in the next year. As a result some programmes have moved their deadlines back with the second report due in October / November in time for a claim to the Commission in December. Another alternative to standard reporting dates is to base the reporting date for each project on the date of its date of approval or the date the subsidy contract is issued. The key advantage here is that the workflow for programmes to process reports can be spread throughout the year and this can be especially useful for programmes with large numbers of projects. A good database should allow programmes to keep track of when each project is due to report. There are three potential delays in the process. Firstly, projects need to be able to collect reports and claims from each partner and put them together. Not all Lead Partners will realise how long this can take (approximately 1 months as a guideline), especially in programmes where the Lead Partner principle is new, and some projects may miss deadlines. The project section contains more on how to avoid this. Secondly, the certification of project expenditure has taken as long as a year in some programmes. Clearly this totally disrupts the claims cycle and the new regulations contain a time limit of three months for certifying project claims for payment (even this is quite a long time). Finally, programme processing of claims can be a factor and TA resources need to be allocated to ensure that there is sufficient staff capacity to avoid this. The biggest delays are, however, the result of project claims that cannot be approved for one reason or another, as it can take a lot of work to resolve the problems involved. Most project claim problems are detected during first level control before the claims reach the programme. These problems should be dealt with by the controller and the relevant amounts should be deducted from the claim but controllers sometimes make unquantified reservations and pass on the problem to programme authorities. For example, controllers may point to insufficient documentation or failure to comply with publicity requirements without saying that this has led to incorrect expenditure. This type of issue takes time to resolve. Aside from this, many problems arise because formal requirements have not been met such as notification of budget line changes before expenditure is incurred. This is one of the main areas where programmes need to be flexible and improve information activities if problems are repeated in several projects: Project partners gain nothing from submitting reports that do
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not fulfil requirements and this generally only happens because they are not aware there is a problem. Below is a list of common problems and there is more discussion of these issues later in the handbook. Some are more serious than others and will mean blocking the report until they are resolved. Some can be sorted out with a phone call. Late reporting Bank information wrong Payment request amount does not match finance report and/or cover letter Budget of a budget line or a project partner is exceeded Missing signatures and/or stamps Costs are reported under wrong budget line and/or work package Submission of incomplete progress reports Changes made without prior agreement of the programme Costs do not correspond to the activity report Wrong exchange rate used Controllers change the confirmation text and limit their liability Investments and other costs not clearly specified Location / project partner of equipment / investment not in line with the application Amount of the equipment / investment is higher than stated in the application Changes in the partnership: Project partners withdraw or there are new partners Costs reported by project partners with no approved ERDF budget
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Common problem points in the project payment cycle
Delays in submitting claims and reporting information is inadequate CA can be slow to make payments. Projects become less willing to support the programme and make claims 1. Project
6. CA
2. First level control bodies
Claim must fit figures in the OP financial tables. Maths mistakes common.
Missing and / or inaccurate information means report has to be resubmitted
May reveal significant problems with claims and can take as much as 1 year in some countries. Max 3 months in future!
5. Commission 3. MA and/or JTS
4. CA Understaffing and uncertainty on interpreting project data may cause bottlenecks in processing. More information may be needed from projects.
Will block project claims if information is inadequate or there are unresolved control issues with the payment declared
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4.8 Tackling poor project spending

Even if programme spending forecasts are good and the administration of claims is efficient, programmes may still face de-commitment problems if projects simply do not spend the funds allocated. An important distinction needs to be made here. Project efficiency that results in cost savings is of course to be encouraged. This is, however, not the case in the majority of projects that fail to meet budget targets. The projects are instead delayed and normally catch up on spending eventually. Many of them have also over-budgeted their projects and simply do not need all of the funds they have been allocated. When we refer here and in later sections to under-spend, it is this latter situation we are describing. The first issue is to identify the projects that are under-performing. Provided that all projects are required to provide annual spending targets as part of the application form, project performance can be easily assessed on an annual basis. A split by partner by year gives valuable additional information. Programmes tend to deal directly with Lead Partners but reporting on partner spending may well reveal that the true problem lies elsewhere. This should of course influence the advice that the programme gives the project. Flexibility is also essential here. We have already discussed the need for sufficient safety margins, and projects with minor under-spends should not be concerned. The programme only needs to step in when the under-spend becomes major and threatens programme performance. It also needs to recognise that some delays are beyond project control. A bad summer can be a massive setback for an infrastructure project and should not be penalised. The second step is for programme management bodies to secure a mandate from the MSC to take action on under-performing projects. Committee members need to be informed about the potential effects of under-performance (most obviously the de-commitment threat) and the extent of the problem. Measures then need to be decided for dealing with underperformance. These should certainly include the possibility to reduce project grants if the programme de-commits as a result of poor project performance (and this must be included in the project contract). This should however be the final step and a range of corrective actions can be tried first with the ultimate threat of de-commitment serving as a powerful motivator. In some programmes nothing is done and projects are given (sometimes repeated) time extensions to allow them to use their full budget. This clearly strengthens the position of the projects and gives them a great deal of flexibility though it does nothing to promote effective project management. Unfortunately, it also means that avoiding de-commitment becomes a matter of luck, as programmes have no firm control over what will be spent when. In effect, poor project management in these projects can mean that other ideas do not even have a chance because the funding they would have used has been de-committed from the programme. Good financial management therefore requires that action is taken before the situation becomes acute. This is especially true because of the trend in the current programmes towards supporting material investments, which has implied bigger projects. Although this trend may be reversed in programmes with reduced budgets in the new period, the focus will remain on strategic projects that deliver measurable results to the programme area. This implies that substantial funds will be concentrated in a number of large projects. If a few of these projects seriously under-perform they will cancel out the work of all the others. This is clearly unacceptable. Most programmes are already taking action and using a variety of methods to ensure reasonable performance. In many cases all projects are also flagged as low, medium or high risk based on past performance so programme actions can be focused on the biggest problems. Other effective actions taken include: Setting a deadline for incurring the first expenditure (e.g. three months after approval). This forces the project to activate the partnership straight after approval and begin implementation. Sending reminders / warning letters and explaining the impact of project underperformance on the programme and other projects. Projects need to be fully informed
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about the problems they are creating for the programme and other projects. Simple but effective. On-site visits. It has often been effective to visit Lead Partners to discuss the problem. It is not the job of programmes to manage the projects but these visits force project managers to analyse and confront the problems they face and work with the programme to find solutions. There is a need for programme flexibility as budgets and resource levels may need to be changed. As a general rule, projects that are under-spending will continue to do so if changes are not made to way the project is being managed. Limiting carry over of unspent funds. If a project uses only a small amount of its budget for a particular year, i.e. 20%, it can only carry over the unspent part of its budget into the following year and not later in the project thus forcing the project to catch up or cut its budget. The programme can then monitor the success of these budget reallocations and offer assistance to projects that are still in difficulty. Cutting unspent annual budgets. At least one programme simply reduces budgets if under-spend is more than 25% after two years. Other programmes require projects to explain the reasons for a serious under-spend in any year and what the project is going to do to correct the situation. If the project cannot provide an adequate plan, the underspend is cut from the budget. Keep the MC informed of the situation and what actions have already been taken to correct it. There is understandable reluctance from most committee members when it actually comes to cutting budgets. If there is a serious threat of a cut, national / regional pressure on project partners through MC members may have an effect if programme actions have failed. All programmes should include the possibility of cutting budgets in project contracts to provide a firm legal basis. It seems likely that this will become standard in most programmes in future and that there will be less tolerance for bad project management. This is justified by the scale of the problem with almost all programmes reporting that this is their biggest difficulty in the main implementation phase. The alternative to cutting project budget is allowing project under-spend to continue and risking de-commitment of programme funds. If this means project budgets have to be cut, these cuts should obviously only be applied to under-performing projects. Monitoring systems must therefore provide information that allows the programme to decide which projects deserve to lose money and which do not. If there are unallocated funds remaining, they can be used to meet the de-commitment loss but this will mean depriving potential new projects or project extensions of funding. Helping projects to get their budgets right and putting pressure on under-performers is clearly a better way forward. Cutting project budgets can, of course, create further problems. For example, large infrastructure projects may depend on receiving the full grant in order to complete their work. A budget cut here may lead to the collapse of the project and only make de-commitment problem worse. Budget cuts should therefore be the last measure to be used and should only happen if advice and assistance have been offered but have failed. There is one further reason for caution as well. Many projects blame problems on programme procedures such as delays in issuing contracts, sorting out conditions after approval and carrying out first level control. Unfortunately, this criticism is in some cases justified. If the programme has delayed a project, it must be ready to renegotiate project targets and accept the consequences. This is particularly true of delayed contracts. Programmes cannot expect projects to comply with their start date if the contract is not provided until months afterwards. If the same programme failure is affecting several projects, this suggests systemic problems and it needs to be taken up urgently by the MA and Monitoring Committee.
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4.9 Tackling a de-commitment threat

As has been emphasised earlier, the main elements for avoiding de-commitment are a strong allocation of funds and a proactive approach to project management problems. Having enough projects approved at an early stage in the programme ensures that even if some under-perform, the spending of the others will absorb the shortfall. If the programme has failed to achieve this, there is often little that can be done and the situation becomes one of minimising de-commitment rather than avoiding it (though see below for some possible emergency measures). The second important consideration is that programme forecasting and monitoring systems must be able to identify that there is actually a problem and the scale of that problem. If programmes only realise that targets have not been met when the last project claims come in, it is too late to take action. Monitoring systems should be able to provide a quite an accurate assessment at the start of each year and this gives time to take action. If forecasting is poor, the emergency actions available are very limited. They include retrospective approvals of projects which have not yet finished but which have already incurred significant expenditure that can then be claimed from the programme. These actions should only be considered with the advice of the Commission and should preferably be avoided at all costs. Longer-term actions include: Project Extensions and Waiting Lists: Programmes which expanded to encompass new Member States and neighbouring countries following enlargement held calls restricted to existing projects to allow them to bring in partners from the new participating countries. This appears to have been a successful way of quickly allocating new funds. This technique can be used in any programme to extend the activities and coverage of particularly successful projects. The decision to expand the partnership must, however, be subject to SC approval. Another practice used to help quick take up of funds when they become available is to create stand-by lists of projects already approved subject to funding becoming available. There is a danger that partnerships may weaken and startup periods may be extended if projects are left to wait too long so good communication is needed and a realistic estimate of when funds will be available. Including all possible expenditure in claims to the Commission: To help meet decommitment targets, the Commission has allowed claims from the PA on the basis of unaudited project expenditure which has been the subject of a project claim but not yet been paid by the PA. This is an exceptional measure to avoid de-commitment and should not be standard practice. Payment of such project claims by the PA should be delayed until the appropriate project controller has certified the expenditure claim. Even though this option has been used by some of the programmes in the 20002006 funding period, in early 2007 the Commission issued an opinion that no such option will be allowed in future and consequently no unaudited expenditure declared by the CA in the programme payment claim will be accepted.24 Over-commitment. In theory over-commitment of funds to a small degree would not be risky given the consistency with which projects have under-spent overall to date. If projects typically spend only 90% of funds, the programme should be safe allocating 105% of the funds available. In practice, however, over-commitment has not been entered into deliberately in Territorial Cooperation programmes given that participating countries would ultimately have to fund the difference if spending did reach over 100%. The risk is perceived as being too great. If all of these actions fail, the programme will de-commit. This generally happens in the first three or four years of the programme (i.e. because of failure to meet the first and second decommitment targets). At this stage there are generally unallocated funds still available and programmes absorb the de-commitment loss by reducing the total amount that will be
24
Recent Commission audits have been critical of the use of this rule. It is very unlikely that this practise can be accepted in the future.
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committed to projects. Later on in the programme, once all funds have been allocated, the only possibility is to cut project budgets. In the current period, however, this has not been necessary: By the time all funds are allocated, there should be enough projects approved and spending to easily meet later de-commitment targets. The cuts that have been made to project budgets in the current period are instead motivated by the desire to exploit the full potential of the programmes funds and this is discussed below.
4.10 Recycling funds and end of programme de-commitment

We have so far considered de-commitment during the early years of a programme but any funds left unspent at the end of the programme must also of course be returned to the Commission (in the sense that they will never be paid out). For example, during the last period of INTERREG (the old INTERREG II programmes), almost all programmes managed to allocate 100% of their funds but the total spend reported at the end of the programmes typically ranged between 80% and 95%. The reason is that most projects do not spend 100% of the funds that are allocated to them so the programme ends up with an under-spend. This has led to a determination to try and improve overall spending rates in the current programmes by recycling funds. Once money has been allocated to a project, it is generally locked in this project until the project closes and the programme can calculate how much money has not been used. The aim of recycling is to calculate these amounts as soon as possible and use them to approve new projects. This should be quite easy with projects approved early in the programme lifecycle: They generally finish well before the end of the programme and there should be plenty of time to reallocate their unspent funds. Programmes have realised, however, that this addresses only a small part of the problem. By the time final reporting and closure have been completed for projects approved later in the programme, there may not be enough time to launch new projects using their unspent funds. This is despite the fact that it is often obvious for some time that these projects will not spend their full budgets. As a result many programmes are moving towards recycling funds from still running projects if it becomes clear they will not spend the full budget. This allows them to make active use of the funds rather than leaving them locked in the project. The difficulty is in deciding when it is clear that a project will not spend the full budget. This is generally obvious to the programme staff monitoring the project but for the sake of transparency clear criteria need to be set for when a cut will be made and these criteria need to be applied equally to all projects. Section 4.8 contains some examples of criteria already in use and these should be combined with dialogue with project managers to discuss the implications of the cut. Project partners are naturally hostile to cuts in their grants they may accept that the funds will probably not be used but cuts reduce their budgetary safety margins. MSC backing is therefore essential for this kind of measure but can be difficult to obtain. Reliable figures on the actual extent of project under-spending are the most convincing argument. Finally, it needs to be stressed again that projects must have annual budgets so programmes can assess their performance over time. Where annual figures are not available, there is no way of demonstrating that spending is not on schedule and programmes are powerless to take action. Once funds have been freed up from projects, it is important to get them reallocated as soon as possible so the new projects can be completed before programme closure. The most effective methods are project extensions (subject to SC approval) and trying to develop a pipeline of small project ideas that are ready for almost immediate implementation. In this connection it is important to note that calls for applications do not always have to be open. Funding opportunities can instead be offered to a limited number of projects to save time as long as they are then assessed with the same criteria used on all other projects.
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4.11 Payment Claims to the Commission

Approximately three times a year25 (many programmes only do it twice) the Certifying Authority submits a claim for payment to the Commission. If the programme wants to ensure payment before the end of the year, the deadline is 31 October. All claims received on or before 31 December count towards spending for the year (and thus meeting de-commitment targets). These statements of interim expenditure, certified by the CA, use a simple template (currently Annex X of the Implementing Regulation) and include a statement of expenditure by priority on the basis of expenditure actually paid out and audited. Any amounts that have previously been paid out incorrectly and have now been recovered need to be deducted and reported on. Aside from occasional problems with the type of co-financing reported (as discussed previously), most problems with claims to the Commission arise from inconsistencies in the figures reported at different times and places or simple mathematical errors. Some desk officers will look at draft claims to detect any errors but others do not have time. Once the completed claim is formally submitted to the Commission, however, any error has to be addressed in a formal letter from the Commission to the programme. This of course takes time so it is essential that mistakes are avoided. The Commission pays claims until the total paid (including the advance from the Commission) reaches 95% of programme funds. The last 5% is withheld until the programme has been officially closed.
25
General Regulation 1083/2006, 87.1

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5. Start-up phase: Project Level

The following sections are written from a programme perspective and focus on what programmes can do to assist projects at various stages. Most of the content will, however, also be useful for project managers. The project perspective is covered more fully in another INTERACT publication26. Start up phase at project level: Summary Project budgeting is as important as developing a project idea. Programmes can help projects with financial management through written advice, fact sheets, guides to the application form and LP seminars Key elements in drawing up a project budget include: Resource planning, cost estimating and cost budgeting in the form of a Detailed Costed Workplan. Advice should also be given on eligible expenditure. The assessment process should include scrutiny of eligible costs, assessment of risk that a partner or project may fail or not meet all objectives and how realistic the budget is. Straight after approval extensive advice should be provided to projects on a wide range of financial management issues. We have already seen that many projects are over-budgeted and that budgetary management during implementation is often poor. The results are slow spending and the eventual return of unspent funds to the programme. Many project managers admit that they do not know how to develop the budget and there is very little programme advice available on this. Most also say that when budgeting tools like the Detailed Costed Workplan are not part of programme requirements, they are not used. Budgets are instead based on guesses and estimates and it is little wonder that they are often wildly inaccurate. This section therefore looks at how programmes can support the development of soundly based projects, which will be well managed over the project life cycle. This need will be particularly urgent in cross-border programmes that are using the Lead Partner principle for the first time, as there will be important changes from existing procedures.
What is a project and what is a project budget? These questions may seem too obvious to even ask but the answers influence a programmes whole approach to managing the implementation phase. Projects are defined by two features: They have limited and fixed objectives. These are additional to the activities normally carried out by the organisation involved. They have a limited lifetime. Objectives should be met within the time specified and the project should then be closed. These two features should allow project developers to develop a budget based on the activities needed to meet the objectives and the resources required to carry out these activities within the time allowed. The role of the project manager is to ensure that objectives, time limits and budgets are respected. If they are not, project management is failing.
26
Territorial Cooperation Project Management. Produced by INTERACT Point Qualification and Transfer in Denmark.
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5.1 How to get project budget right

It is vital that projects start to consider financial issues from the very beginning. As planning meetings move from general objectives to specific objectives and an outline of the activities needed to meet them, each activity proposal should be budgeted. All partners should be involved in this process and it is important to also include a realistic budget for the Lead Partners project administration role. Of course this approach requires preparatory work and planning meetings during the development of the project application. Time invested here, however, results in strong partnerships with clear responsibilities and well-justified budget allocations. Successful project managers consistently name good preparation as the main factor in smooth project implementation. It would be unrealistic to suggest that this process does not sometimes work in reverse: A total budget is decided that will probably be approved by the programme and this is then filled in with activities. In the worst cases this definition of the actual activities to be carried out is not done until after the programme has approved the budget, with the application form kept vague enough to allow considerable re-interpretation post-approval. Programmes need to make sure that the level of detail required in applications makes this approach impossible. Another common bad practice is for Lead Partners to develop projects in isolation and try to assign activities and budgets to possible partners. This generates resentment in the partnership and results in unrealistic proposals: All partners need to take responsibility for their own budgeting. These approaches to project development do not always result in bad projects. An estimation of the funds potentially available can be an important factor in defining the scope of the project. Experience in the current period has shown however that saving time on proper budgeting almost always results in tensions within the partnership and with programme management. Finance staff need to be aware of such practices and develop application, assessment and monitoring procedures that keep them to a minimum.
Two approaches to deciding the project budget THE RIGHT WAY THE WRONG WAY
Activities to be carried out
Budget available
Budget required
Activities to be carried out
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How in more detail should a project move from an activity plan to a realistic budget? There is a three-step process that should provide the right level of accuracy: Resource planning, Cost estimating and Cost budgeting. These steps form the basis for cost control once the project is operational. At first sight this process may seem overly complicated and intimidating. In actual fact it is not. It is really just the same process you would use if you were going to redecorate your kitchen just on a bigger scale. Put basically, you need to decide what your new kitchen will look like, how and when you will do the work, what supplies you will need and how much outside help you will need for the specialist jobs. You then use this to put a price on everything. If you have done something similar in the past, your experiences will help you make sure that your plan is realistic. If not, you might want some expert advice to make sure you have not missed anything. You will probably also want to allow a little bit of extra money and time for those nasty unexpected surprises that always happen.
Three-step project budgeting
Project budgeting
Resource Planning
Cost estimating
Cost budgeting
Cost control
Defined objectives Breakdown of work packages Time plan with milestones
Bottom-up estimate Resource rates Historical information
Detailed Costed Workplan Annual spending targets per partner
Compare actual and planned expenditure Progress reports Budget updates
5.1.1 Resource Planning

First of all, you need a clear idea of what you want to achieve and how you plan to do it. Break this down into work packages and decide what you will need to do to complete each work package. In partnership projects it is particularly important to think about how different work packages fit together: The work of one partner often depends on delivery of another partners work. This needs to be emphasised to all partners and possible delays should be built into the time plan. Identify the objectives and sub-objectives of the project Define the work packages and determine how the objectives will be achieved, who will do it and what physical resources i.e. people, equipment and materials will be needed. It is essential that all the partners are involved in this process. Define a time plan with milestones.
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Identify the additional tasks required for the effective cooperation of the partnership and allocate resources to the partners who will incur these costs (regular face-to-face meetings of the partnership are a key success factor).
5.1.2 Cost Estimating

You should now have a reasonable accurate picture of what will happen over the course of the project. The next step is to try and work out how much it will all cost Develop an approximation of the costs of the resources needed to complete project activities. Some costs are reasonably easy to calculate. For example, you will know the number and type of staff required and the standard salary for this type of staff. Other costs are more difficult. For example, if you plan a pilot activity based on the results of initial research carried out by the project it will be impossible to know exact costs at the start. The best approach is to define a realistic maximum price for the activity. One question when drawing up the budget is always, What if we do not have enough money to do what we plan? The answer is easy. Project managers ensure that there is a surplus of funds by adding a bit to the estimates. Even if things cost a bit more than expected, the project will have enough to pay. The problem is that by adding a bit to every estimate, you soon end up with a seriously over-budgeted project and you prevent other projects making use of the funds that have been unnecessarily allocated to your project. Some activities will actually be completed under-budget, others can be adjusted if the money is running low. The partnership should therefore try to keep estimates as accurate as possible and then agree a reasonable surplus to meet unexpected problems. This bottom-up estimate of the cost of individual activities should be aggregated to get the total estimated amount.
5.1.3 Cost Budgeting

You should now know the main activities, which partners will carry them out, the estimated start and end dates and the approximate resources (and therefore budget) required. The final step involves re-organising these figures to show the main categories of spending (sometimes called budget lines for example staff, travel, publications etc.), the partners that will spend the funds and what year this will happen. Every programme has slightly different requirements for how this information should be presented and the level of detail required. Whatever the formal requirements, every project should have a Detailed Costed Workplan showing this information in detail: It is the most important part of the agreement between the partnership on how the project is going to be implemented. Examples of the main tables needed for the work plan are included below they should obviously be changed to suit the requirements of each project and programme. Allocate the overall cost estimates to individual activities and partners. Programmes often require this in some form (the Detailed Costed Workplan) as part of the application form. One key element of the Detailed Costed Workplan is annual budget targets in total and per partner. These form the basis of the projects spending targets and give indicative information on the scope of involvement of each partner. It also makes it easier in the operational phase for the Lead Partner and programme management to see which partners may be lagging behind in spending. Project schedule and resource allocation. The schedule includes planned start and expected finish dates for the components of the project to which costs have been allocated. These timings should be reflected in the descriptive material accompanying the financial tables.
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Detailed Costed Workplan 1 Split by partner and year
Detailed Costed Workplan 2 Split by partner and budget line
Expenditure in Euro 1. External experts and consultants 2. Staff 3. Travel and accommodation 4. Meetings, conferences, seminars 5. General costs (specify in appendix) 6. Promotion and publications 7. Material investments, including infrastructure 8. Audit 9. Other (specify) 10. Irrecoverable VAT Total eligible expenditure ERDF Own contribution Total funding
Lead Partner
Partner 2
Partner 3
Partner 4
Partner 5
Total
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Detailed Costed Workplan 3 Split by partner and work package
Project timetab le Tasks 1 Phase 1 Task 1.1 Task 1.2 Task 1.3 Phase 2 Task 2.1 Task 2.2 Task 2.3 Phase 3 Task 3.1 Task 3.2 Task 3.3 xxx xxx xx xxx x xx xxx x xxx xxx xx xxx x x xxx xx xxx xxx xx xxx x x xxx xx 2 3 M onth s 4 5 6 7 8 9
Resou rce allo cation Days 1 Phase 1 Task 1.1 Task 1.2 Task 1.3 P1 - s ub total Phase 2 Task 2.1 Task 2.2 Task 2.3 P2 - s ub total Phase 3 Task 3.1 Task 3.2 Task 3.3 P3 - s ub total Gran d total 1 2 3 6 18 1 2 3 6 18 1 2 3 6 18 1 2 3 6 18 1 2 3 6 18 1 2 3 6 18 1 2 3 6 18 7 14 21 42 126 1 2 3 6 1 2 3 6 1 2 3 6 1 2 3 6 1 2 3 6 1 2 3 6 1 2 3 6 7 14 21 42 1 2 3 6 1 2 3 6 1 2 3 6 1 2 3 6 1 2 3 6 1 2 3 6 1 2 3 6 7 14 21 42 2 3 Partners 4 5 6 7 Total
5.2 Budget detail vs. flexibility

The project budget is always an estimate. How many pages will the project final report have? How much will heating prices increase over the project lifetime? These types of questions are impossible to answer at the start of the project. Good planning can only mean that the estimate is more accurate.
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The main implication of this is that programmes need to be realistic about the level of detail required in the application form. This decision is a reflection of where each programme feels the reasonable limits lie and an assessment of the capacity of its project partners. In some cases a very detailed budget and work plan are demanded identifying individual costs. This allows programmes to ensure that inexperienced partners have done the necessary planning. Requiring this level of information also allows the programmes to enforce strict cost control. It must be realised, however, that much of this information cannot be decided so accurately in advance and programmes choosing this approach need to be extremely flexible about allowing later budget changes. This level of detail also demands a lot more project preparation work, the bureaucracy involved may discourage applicants and the benefits are uncertain: Generally, programmes requesting very detailed information have not seen this translated into better project performance. At the other extreme, budgets are limited to providing one figure (the total grant requested for the project), as it assumed that project managers have the experience to have done their own budget breakdown and stick to it (unfortunately this is often an over optimistic assumption). This is advised against in the strongest terms, as it does not provide enough information to properly assess or monitor projects. The majority of programmes adopt various compromises taking into account the experience and past reliability of project managers in the programme area and the information regarded as essential for project assessment and monitoring. The most common approach is to require information on how the budget is split into approximately 10 budget lines with additional detail generally required on budget lines such as Material Investments. This allows the programme to check that the basic division of funds is realistic and disproportionate funds are not being allocated to, for example, overheads. These budget lines are often, but by no means always, split between partners (allowing an assessment of who is really doing what in the project), between years (giving an overview of expected progress) and sometimes between the main work packages (seeing how it all fits together). If, as should probably be the case, the third part of the Detailed Costed Workplan is required as part of the application, it should be regarded more as proof that the work has been done rather than as unchangeable plan for project implementation: Project managers will certainly need to make changes to this document as they go along. Key information to collect in the application form Who is in the partnership? What activities will be carried out? When will they happen? Who will be responsible? What indicators are used to demonstrate that the projects objectives have been met? What is the total budget? What should each partner spend each year / for each main activity? Is there reliable project management and a strong partnership in place?
In summary, the application needs to provide enough information for programmes and project managers to assess and monitor: Partner performance over time Partner performance by budget line compared to outputs achieved Whether work packages are being achieved on time and in line with the budget This will allow them to identify quite precisely the cause of any problem and target their response. In the worst case if money is de-committed from the programme and project grants have to be cut, this information can also be used to target these budget cuts so partners who are delivering as agreed are not affected. This makes it possible to judge whether the budget corresponds to the activities proposed in the application form and whether resource allocation to, for example, staffing seems reasonable in terms of the activities planned.
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Once the initial project budget information is collected, flexibility is required. As every project progresses there will be differences between estimated costs and the actual costs incurred. These will be cumulative and the longer the project lifetime and the bigger the budget, the greater the difference between the estimate and actual expenditure can be expected to be. This needs to be accepted as normal and programmes should expect and allow budget adjustments (particularly if the original budget was very strict. Typically programmes allow movements of funds between budget lines up to 10%-20% of the total project budget. Normally these changes are limited to one per year to reduce administration for projects and programmes. In some cases MA/JTS approval is required. In most cases it is sufficient just to notify the programme. Larger changes normally require SC approval because they may fundamentally alter the nature of the project. Some programmes apply conditions, such as a need for detailed information and programme approval, for certain changes where it is felt that these may also significantly alter the project. Common examples are changes in the amount of funds being spent on staff and infrastructure and movements of funds between partners.
5.3 Helping projects get it right

There are repeated requests from the project level for assistance with budget preparation. The most important advice programmes can probably give is that projects need to invest time in the process. To support this preparation many programmes allow projects to claim costs incurred during the development phase. In some cases, approved projects can claim expenses incurred during a fixed period before the date of approval say 6 months and up to a maximum of perhaps 10.000 (subject to the usual financial controls). In other programmes, projects can apply for seed money a small grant to fund development activities27. Seed money reduces the risk faced by project developers when they allocate resources to putting the project together and should increase the quality of applications. It has to be kept in mind, however, that such schemes are by their nature granting small amounts of money to many people - relatively time consuming to administer. As a result some programmes that used seed money in the current period have decided against continuing the scheme. It may still make sense, however, in large programme areas where travel costs to project planning meetings are high or in programmes that are having trouble attracting applications. Beyond assisting with preparation, the key requirement is to provide clear information. Programmes should be willing to give advice on budgets while making it clear that the SC will not automatically approve applications that have followed this advice. There are various communication channels that can be used. Ideally a combination of all of them should be developed. Written advice, which is easily available and clearly presented on programme websites including: o The Operational Programme clearly stating objectives and the activities eligible for financing. o Programme Fact Sheets on particular aspects of finances e.g. eligibility of expenditure, State Aid rules, cooperation requirements, Exchange Rates, the Lead Partner Principle, Infrastructure Projects, Private-Public Involvement, De-commitment and Detailed Costed Workplans. o Guidelines on how to fill in application forms and underlying budgeting techniques. o Frequently asked questions sections on the programme website Programme contact points to assist project development in each participating country or region. They tend to focus more on the content and partnership aspects of projects rather than finances but in some programmes they are able to provide information on financial aspects.
27
See the Handbook on financial support to draft INTERREG project applications produced by INTERACT Point Toolbox in Valencia for more details on the administration of these schemes.
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Bilateral meetings and seminars with project developers covering basic financial aspects in project development. Formal or informal pre-assessment before the main SC assessment. Informal assessments appear to be the easier way of giving advice but strict limits need to be set on the documents that will be considered and the level of advice provided. It is essential to avoid conflicts of interest and giving the impression that pre-assessment will lead to automatic approval of an application. Encourage Lead Partners to take an active role in tutoring partners and securing their commitment to following financial requirements in the operational phase. Projects may be based on large, inexperienced partnerships which may not at first even recognise the need for strong project management and proper accounting systems. The LP should be encouraged to involve a finance expert in drawing up the application form. It appears that those projects which have not done this may take as much as an extra 6 months after approval to get off the ground. Projects may also need advice on establishing agreements within project partnerships including financial obligations. Some programmes publish model partnership agreements, although projects should always take their own legal advice before using any standard model. Professional project management. Not all participating organisations have an interest in developing their project management capacity. These partners will prefer to focus on content and to leave project management and administration to others. Consultants are an option here and some have extensive experience, which can significantly improve the quality of the application. There are two main risks to monitor. Firstly, it is important that the full partnership remains involved in developing the project and that they support the activities and objectives as finally expressed in the application. Secondly, the partnership needs to agree a practical implementation plan for after the projects approval if the consultant is not staying with the project. This ensures that partners understand how the plans in the application are going to be put into effect.
5.4 The assessment process

The assessment process focuses on the activities proposed but also includes an analysis of the budget in comparison to these activities. As noted previously, programme requirements for the application form vary enormously but in all programmes the keys to success are presenting all activities clearly and logically, showing how each member of the partnership is important for overall project implementation and demonstrating that these activities are under-pinned by a well-planned budget. The project should be assessed only on the basis of the information contained in the application and confused or vague proposals are a main reason for rejection. The job of assessment falls to different bodies in different programmes. In many cases the JTS does the job, particularly the formal eligibility check described below. In other programmes (the inter-regional programmes are a good example), outside experts are contracted to do the assessments. In other cases again (and particularly cross-border programmes) regional and / or sectoral sub-committees play an important role. Regardless of the method chosen, it is important that none of the assessing bodies have played a role in the development of the projects and that the assessment is based on clear criteria28.
28
See Good Practice INTERREG III Strands A, B & C selection and eligibility criteria produced by INTERACT Point Toolbox, Valencia. The main argument presented here is to ensure that criteria are not based on subjective, qualitative judgments.
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Financial Management Handbook 5.4.1 Eligibility check
What is eligibility? Eligibility is a key term in project implementation. There are EU, national and programme rules on the type of costs that will be accepted and those that will not be accepted. Generally these are a matter of common sense it is clearly unacceptable to use taxpayers money on first class travel, five star hotels and champagne. This type of rule is discussed in more detail in the section on financial control. As well as addressing costs, however, eligibility is also concerned with activities. Each programme defines the type of activities it will support. These are designed to address the most urgent problems in the programme area and must be in accordance with relevant EU, national and regional policies. Programmes must also check that the activities they plan to fund are not covered by other EU programmes operating in the environment, agriculture, transport sectors etc. This may mean that some actions that are relevant for regional development are not allowed under the programme. Project developers need to accept this and follow programme guidance even if it means dropping otherwise valuable activities. There are also rules about the types of organisation that can be involved in a project. Some programmes exclude the private sector (see the section on private co-financing) and all have strict rules about involving partners from outside the programme area. Finally, eligibility covers some basic project requirements. For example, are there enough partners from enough countries? Is all of the co-financing in place? These rules come from various levels and there is generally a good reason for them. Projects must know them and respect them: Once they are in place programmes are required to enforce them rigidly.
The eligibility check during the assessment stage is mainly concerned with assessing whether the activities proposed fit the programme and the relevant rules and regulations as well as checking formal requirements such as letters of commitment for co-financing. It is not concerned with assessing individual items of expenditure, which is the job of first level control. A good application should contain sufficient detail about the activities to be carried out for the programme to be able to spot obviously ineligible activities and areas where there is a possibility of later problems. The more effort put into the process, the fewer the problems likely to arise at payment claim and monitoring stages. The eligibility check should also confirm that project activities comply with national laws and rules. Unlike other Structural Funds programmes, in Territorial Cooperation programmes this is not normally the job of the MA. Because of the large number of countries that may be involved in a programme, it is unrealistic for one body to assess compliance with all of the different national rules. As a result, representatives in each Member State play an important role in the assessment of eligibility as they often carry out the first check against national rules. In some cases this is done by Steering Committee members after they receive the assessed applications and before the committee meeting. In other cases there are separate sub-committees that consider all applications including a partner from the Member State concerned. The formal member of the Steering Committee then presents the views of the sub-committee. Whichever system is used for making these decisions, any problems should be reported to the programme as soon as possible and before the official meeting of the Steering Committee.
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Two new eligibility criteria: Cooperation criteria and the partner capacity check Many cross-border programmes will experience one significant change at the start of the new programme period: It will no longer be possible to have projects with partners from just one country: All cross-border and transnational projects must have partners from at least two countries and all inter-regional projects must have at least three countries (of which at least two must be Member States). In addition, there are a number of cooperation criteria and every cross-border and transnational project must fulfil at least two of these criteria. All inter-regional projects must fulfil all four criteria. The cooperation criteria all future projects will have to comply with are: Joint development. Meaning that the project must be designed by representatives from both sides of the border. Project proposals must clearly integrate the ideas, priorities and actions of stakeholders on both sides of the border. The Lead Partner is the coordinator of this process but should include other partners from the start of the design process. Joint implementation. Meaning that activities must be carried out and coordinated on both sides of the border. It is not enough that activities run in parallel: There must be clear content based links between what is happening on either side of the border and regular contact between the two sides. The Lead Partner is responsible for ensuring that activities are properly coordinated, that schedules are kept and that the right quality levels are achieved. Joint staffing. Meaning that the project should not duplicate functions on both sides of the border and staff on both sides of the border should work together on the project. Partners should not merely carry out activities in parallel without coordination and exchange. As a minimum there should be a joint project manager with overall responsibility for project activities on both sides of the border. The Lead Partner is generally the employer of core project staff, but project partners should also allocate staff according to their responsibilities within the project. It is essential that the Lead Partner is allocated sufficient resources for overall project management. Joint financing. Meaning that there will be only one joint project budget. This budget should be divided between partners according to the activities carried out. There is also only one project bank account (held by the Lead Partner) and payments are made from the programme to this account. The Lead Partner is responsible for administration and distribution of these funds and for reporting on their use (through collecting partial reports from partners). Co-financing should come from both sides of the border and from all partners and illustrates the commitment by each partner to the joint project. It should be stressed that meeting two of these conditions is a minimum requirement. In many programmes projects already meet all four conditions and this will be expected to continue. The number of projects fulfilling two, three or four of the cooperation criteria is also a programme performance indicator in Territorial Cooperation programmes and fulfilling more than two of the criteria will strengthen project applications. Also, once the process of integration has started through, for example, joint project development it is probably actually easier to cooperate on all four levels. Finally, it is possible for operations to be implemented on the territory of just one country but they still need to be presented by organisations form at least two countries and fulfil two of the cooperation criteria. These points are covered in the ERDF Regulation 1080/2006, 19. The second new check covers the capacity of the partners to fulfil their role in the project. This check is defined under the responsibilities of the Managing Authority in the Draft Implementing Regulation, 13.1 where it is stated that the MA:
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shall ensure that beneficiaries are informed of the specific conditions concerning the products or services to be delivered under the operation, the financing plan, the time-limit for execution, and the financial and other information to be kept and communicated. It shall satisfy itself that the beneficiary has the capacity to fulfil these conditions before the approval decision is taken. As a result future application forms can be expected to request basic information on partner capacity. Most of this checking will, however, probably be delegated to the Member States in Territorial Cooperation programmes. It is easier for each country to check the partners on its own territory and this already takes place in most programmes as part of the preparations for Steering Committee meetings.
In conclusion, the eligibility check provides basic information such as whether activities will be carried out in the eligible area and whether partners are from eligible organisations. It may sometimes be possible to identify specific activities that are ineligible because, for example, they break State Aid rules but assessment of the application can never guarantee that ineligible activities will not be carried out and can never replace post-approval advice and control of eligibility.
5.4.2 Assessing project budgets

If the project passes the eligibility check, the next step is a detailed assessment of the activities and the budget proposed. We focus here on aspects of the budget that are worth considering. As discussed earlier, project budgets are often unrealistic in terms of the amount needed and/or the time required to complete activities and claim the funds. This is often the result of poor planning and finance staff need to be able to spot the biggest problems and recommend revision of the budget (preferably in anew application but perhaps in postapproval conditions). There are two main reasons for taking a hard line on project budgets. Firstly there is the question of de-commitment and the problem of unused project funds, which mean that programmes need to try to assess whether projects are likely to meet their spending targets or under-spend. Secondly, there is the question of value for money. Quantitatively assessing project value for money is difficult. For example, assessing the cost of infrastructure investment (and particularly innovative pilot projects) can only be done by experts and first and foremost the project managers who drew up the budget. A great deal can, however, be done to assess whether the projects contribution to programme objectives justifies the grant requested taking into account the added value of cooperation. This can then be compared to similar existing projects to provide a basic assessment of value for money. The budget can also reveal a lot about the partnership involved and particularly whether there is a reasonable split of resources in terms of the work to be carried out. Clearly, every project is different and what is a problem in one may have a good explanation in another. This work therefore depends on a good understanding of the activities to be financed. Potential danger signals include: Budget too big compared to expected outcomes and other similar projects. Uneven split among partners. If there are major imbalances they may indicate that it is a weak partnership, which is likely to run into trouble when the project is operational. The allocation of funds to different budget lines can also be a cause for concern. For example, if there are no staff costs but only costs for a service, such as production of a report, this can mean that the partner involved is delivering a contracted service and has been included in the partnership to avoid public procurement procedures. Too many funds are allocated to staff and too few tangible outputs are forecast. A high proportion of funds are allocated to organisations permanent staff. This can mean that programmes are being asked to cover normal operating costs and the activities planned are not additional.
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High external expert costs may signal limited involvement of the various actors and handing over responsibility to external consultants. Some programmes put a limit of 40% of the project budget to be used by external experts. Nevertheless, in some countries major public service cuts have been made and consultants are encouraged to take on tasks formerly carried out by public organisations. Background knowledge of the situation in each partner country is therefore required before making this kind of judgement. Unrealistic annual spending targets. Particularly if large amounts of funds are forecast to be spent at the beginning or end of a projects lifecycle. A realistic project spending profile will generally show a very slow start up phase, particularly if this is the first project the partnership has undertaken together, which will then speed up as start-up problems are resolved. The budget and activity plan should reflect the time required for building the partnership, getting to know each other, initiating talks, deciding on detailed action plans and dividing tasks among partners. Many of these issues should of course have been decided in outline during the application phase. Decisions on how to practically implement these plans can, however, be expected to generate many additional questions and complications. Generally, a slower start up phase indicates that the project is taking these issues seriously and is coordinating future actions. Many first-time Territorial Cooperation projects are simply not aware of the added complication and delays involved in cooperation. It is essential that programmes provide them with information on typical start-up problems and budget impacts and give new project managers the chance to discuss these issues with more experienced colleagues. Projects also need to be very clear that they will be expected to stick quite closely to the targets they fix and that there may be implications for the project grant if they do not.
5.4.3 Risk assessment

Risk assessment of projects is a largely subjective but still valuable part of the assessment. Generally speaking, the type of risk factors typically used in identifying projects for inclusion in second level control checks can be combined with an assessment of the quality of the application to provide a guide on the risks involved in approving the project. The type of risk factors to be considered include: Partners from the private and/or voluntary sectors Large budget New partnership. Territorial Cooperation programmes generally seek innovative projects and to spread involvement in co-operation projects to new partners. As a result, it would be inappropriate to rule out new partnerships as too risky but the chance of problems is greater than in a partnership that knows the system. Large partnership
None of these factors are sufficient reason for rejecting a project but if they are combined with an application that leaves doubts about the exact activities to be carried out and the allocation of resources to these activities, the project risk is probably too high. The size of the risk (i.e. the size of the project budget) should definitely be considered. Large projects should be expected to be very specific about their plans, while a micro-project of 10.000 can be accepted on the basis of a much briefer outline. It is worth considering this element of risk and trying to develop a portfolio of approved projects that have a reasonable balance of higher and lower risks. This will allow programmes to absorb delays in some projects without encountering significant de-commitment problems.
5.5 After approval

The main things that need to happen are to inform the project of the Steering Committee decision and issue a contract as soon as possible29. Within the partnership, a kick-off meeting
29
See the section on programme documents and Recommendations for the implementation of INTERREG III subsidy contracts produced by INTERACT Point Toolbox in Valencia. Note that this
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needs to be held as soon as possible (some programmes have strict deadlines for starting up project activities). The partnership also needs to finalise and sign a partnership agreement30. The main aim of this document is to ensure that all partners are aware of their responsibilities and there is a binding agreement about how these will be met (see the info box below for more). As soon as possible after approval, Lead Partners should be invited to a programme seminar to go over reporting requirements and ask any questions they may have about the rules. Lead Partner and partner responsibilities By signing the contract with the programme (generally the MA), the Lead Partner (or Lead Beneficiary) takes on a number of responsibilities. The purpose of the Partnership Agreement is to make sure that all partners deliver the information that the Lead Partner needs to fulfill its responsibilities and that if anything goes wrong, the partner concerned will accept responsibility and pay back any incorrectly used funds. There is one major change here between the future period and programmes that have used the Lead Partner principle in the current period. Previously, the Lead Partner bore financial responsibility for implementation of the project for all partners actions. In future, the partner spending the funds is clearly (financially) responsible for the use of these funds. All partners therefore need to fully understand the rules and commit to paying back these funds if necessary. First and foremost then, the project partnership agreement needs to cover provisions for sound financial management including ensuring that separate project accounts are opened and that all spending is properly certified. It must also contain the name of the (nationally approved) designated first level controller for each partner, as the LP must check that all partner expenditure has been validated by the approved controllers. There should also be a reference to all rules governing Territorial Cooperation expenditure so partners are clear about where to find information on eligibility issues. The agreement should also include the approved application: The LP is responsible for ensuring implementation of all parts of the project and checking that spending has been incurred only on agreed and approved activities. Information on both activities and spending needs to be included in all reports to the programme and the agreement should provide guarantees that every partner will provide this information in good time. Finally, the agreement should cover financial flows in the project with the LP committing to transfer funds to all partners as soon as they are received from the programme and partners guaranteeing to repay incorrectly paid funds. There may also be provisions covering shared project management costs and various project specific requirements. Some programmes provide a template. The Lead Partner responsibility is primarily to check compliance of all project partners with the main rules. It remains the responsibility of every partner to carry out the activities assigned to it in the approved application, to ensure that expenditure has been certified by the approved controller, and to take financial liability for any irregularity in the expenditure it has declared.
second document covers the current period 2000 - 2006 and some modifications may be required for the new period 2007 2013. 30 See Good practice INTERREG III partnership agreement, produced by INTERACT Point Toolbox.
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6. Operating phase: Project Level

Operating phase at project level: Summary Programme bodies should give advice to projects on budget management, payments, reporting and certification following project approval. While focusing on Lead Partners, care should be taken to ensure advice is being passed on to other project partners. Financial managers and auditors of projects should be targets for advice. Inexperienced projects may be particularly in need of advice. Others can be identified through the payments and reporting systems, visits and annual project partner meetings. Projects should be encouraged to monitor spend and make minor adjustments to their budgets, with the written approval of the programme body. Handling of minor adjustments can be streamlined through making only one change a year. Approval for major budget changes may cause delays to project spending whilst approval is sought and subsidy contracts are reissued. There is much valuable expertise within experienced projects, which can be used to help other projects. The first and most important point to make is that for many projects, implementation is relatively problem-free and financial management is limited to monitoring and adjusting budgets, and doing the reports and claims for the programmes every six months or so. A lot of projects start more slowly than expected but many catch up. Most are over-budgeted but in many cases the amounts concerned are not excessive. That said, some projects go badly wrong and in extreme cases the programme will refuse to pay funds to the project concerned and legal action is possible. This section therefore focuses on the relatively easy actions projects and programmes can take to avoid this situation. We start with the projects.
6.1 Avoiding project financial problems

It is important to remember exactly what project approval means. When projects are accepted they agree to act: In accordance with the latest approved application. The description of activities in the application gives the project its mandate and it is only allowed to carry out these activities. The reason is that programmes need to be able to assess whether activities are appropriate / valuable / legal etc and adding activities can be used as a way of avoiding the assessment process. Most activity changes actually involve improving on what was planned or doing extra work and programmes will generally accept them. It is vital, however, that projects inform programmes and get approval before starting work on such actions. With the approved partnership. For the same reason, only approved partners are eligible to spend project funds. If any other organisation spends project funds without the prior approval of the programme, this spending will be ineligible. If the partnership needs to be changed (partners do sometimes drop out), the programme must be informed. Possible replacement partners need to be found (with co-financing) and arrangements need to be made for deciding how much should be paid to the partner that has left, making possible recoveries of funds and ensuring that such partners are aware that programme financial control requirements still apply to all of the funds they have received.
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According to the approved budget and timeline. This is covered in detail in previous sections. Projects will never be paid more ERDF than they have been granted (even if they have provided extra co-financing). Projects should only be granted time extensions with the prior written approval of central programme management bodies. In accordance with the relevant rules and regulations. There are EU, national, regional and programme rules and they should be made available to all project managers at project start-up. If in doubt, ask. As long as these basic rules are followed, there should be no problems with financial control or following the standard programme procedures described below.
How to avoid project spending problems Set up separate accounts for project funds. Or at least ensure that every partners accounting system can clearly separate project costs. Control visits have sometimes revealed that this basic requirement is missing. When this is the case, there is no evidence for which costs have been assigned to the project or why. The probable result is that large parts of the expenditure involved will be judged ineligible. Involve partner finance managers from the start. Organisations have their own financial management systems and procedures. All partners need to check that these comply with programme requirements and the systems can deliver the evidence that is needed. Secure the audit trail. All partners must keep all invoices. Supporting documents are also needed such as timesheets for part-time staff and calculations of overhead costs. If these documents are missing, the costs involved will not be accepted. Keep your filing up to date and find out what to file. Control visits typically have to be announced only two weeks in advance. You should make sure that you always have all documents available. Commonly missing documents are contracts and evidence of public procurement procedures. If you cannot provide these documents, it will be assumed that you have not followed the rules. Find out what the national public procurement thresholds are in each partner country. Put basically, public procurement rules require that public organisations request offers for providing services and products. They are designed to promote a free and open market and give value for money. There are three values that generally need to be considered. Very small contracts do not need to be tendered. Larger contracts can be the subject of a limited tender, whereby a smaller number of offers are requested. Large contracts must be the subject of a full public tender with strict rules and procedures. Small and large are relative terms here: There are enormous differences between countries in the threshold values (the amount of the contract that determines which tender procedure needs to be used). In some countries, full public tendering is required for very small amounts and project managers should be aware of the delays this will cause. You must respect the threshold values and the relevant rules - you cannot divide contracts into smaller jobs to get around these rules. If you award a contract for products or services, you must be able to prove that you used the right tender procedure. These documents are often missing and the most common reason is that partners say they did not know anyone else who could do the job involved. This is not an acceptable reason and the full value of the contract will probably be judged ineligible.
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6.2 The payment chain Project reporting and claims for payment
Normally twice a year, projects are required to report on their progress so far (in an activity report) and provide a statement of the money that all of the partners have spent (in a financial report and claim for payment). The statement of expenditure must be certified by each partners designated first level controller. The aim for projects is to ensure that all partners deliver the proper documents on time and that enough information is provided to avoid the need for programme follow-up. The aim for programmes should be to secure ongoing project spending according to annual targets and within audit rules. In part this involves making sure that projects have the information needed to get things right first time. It also involves looking at programme procedures to make sure that they allow for quick processing and follow-up on project claims and have sufficient flexibility to allow for the inevitable changes projects will sometimes need to make. To secure a speedy payments system it is worth looking at the critical path of events right from project approval to payment of a claim. The most effective improvements are to the early part of the process, such as contracting, and have been covered already. Actually making a payment should only take a short time so there is less to be gained from efficiencies in this part of the process. As a general rule, the simpler the chain, the lower the risk of mistakes and the quicker the cycle can be completed. It is also worth making sure that the different programme bodies involved CA, MA, JTS are adequately staffed to handle this part of the programmes operations.
6.2.1 Reporting requirements

As discussed previously, some programmes allow projects to claim whenever they are ready but most have claim deadlines to make sure that spending is reported in time to be included in programme claims and to ensure that projects are progressing. Two claim deadlines per year is standard and should allow regular enough project checks to ensure that problems are spotted before they become serious. Sometimes a full activity report is required each time. Sometimes only a short report is provided with one of the claims. Some form of activity report is almost always required to cross check that expenditure has actually been incurred in pursuit of project activities. Some programmes have up to four claims rounds a year trading off increased workloads and audit costs against the added security of frequent progress checks and financial control. This may be particularly helpful where partners are inexperienced or there have been frequent problems in the past. Programmes with two rounds have also sometimes been forced to hold extra rounds to help avoid de-commitment in the early years of the programme. Measures to avoid de-commitment problems are covered in depth earlier in the handbook but may not always be enough to prevent this kind of situation in the future period. Not surprisingly, it is unpopular with projects because of the extra effort involved in generating an additional report and it is better to drop the requirement for an activity report if these extra claims are needed. Activities must then be explained in the next standard report. Projects may also not have anticipated the cost of auditing an extra claim (in programmes where there is a charge for providing this service). While audit costs are an eligible expense it can be difficult to cover these costs if they have not been budgeted for. In most cases, audit costs do not vary significantly with the size of the claim so it is best to try to avoid procedures that force projects to audit small amounts.
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Payment chain: Summary In most cases there are two claim deadlines per year An extra claim round may help programme avoid decommitment Consider the balance between the number of reporting claims required and the increased workload and audit costs for projects Programmes should set-up a quick payment system The simpler the payment chain, the lower the risk of mistakes and quicker the cycle can be completed The payment chain should be looked at in its entirety. Apart from delays due to certification difficulties, time-savings are often easier to find early on in the chain during issue of subsidy contract stage. A customer orientation is needed, especially from the CA. It is good practice to pay claims within no more than 5 working days of receipt of a correctly certified claim by the CA. Electronic claims systems can help speed up payments and avoid mathematical mistakes - the most common error in payment claims. The most serious delays in payment are caused by financial control problems
The actual content of financial and activity reports reflects the content of the application form so there are again big differences between programmes. In general, financial reports need to show expenditure by budget line and by partner. Activity reports need to describe all main activities and progress on meeting project targets (the indicators). This allows controllers and the programme to assess progress against expenditure and identify any significant activities that are not in line with the approved application or relevant rules and regulations. Assessment of individual items of expenditure is the task of the first level controller. Some programmes have introduced online claims systems, which give access to the applicant, JTS, MA and CA. Online claims can help to speed up payment and cut down on simple mistakes in filling in the claim form by using formulas to make most calculations automatically (mathematical errors by projects account for most mistakes in making claims). It is important that the system, if adapted from the mainstream Structural Funds, adequately reflects Territorial Cooperation programme needs. It is also important to set up electronic and protected signatures in advance for comparison with claims signatures from controllers. For longer-term audit and record keeping, paper copies may still be needed.
6.2.2 Control / certification of claims

Any claim for ERDF funding must be checked by first level control at some point. The burden of checking the correctness of claims falls initially on the first level controller who certifies the expenditure claim from the project. A full description of what should be checked and common problems is included in the separate chapter on financial control.
6.2.3 Assessment of reports

First level controllers tend to focus on the financial aspects of project implementation a study of invoices and a check on whether totals have been calculated correctly (though as we explain later, a more detailed check is actually required). Once a certified claim and report reach the programme, they are often subject to an additional check focusing on the activities carried out and making sure that the amounts claimed can be safely certified by the CA. In some current programmes, claims are submitted directly to the Paying Authority, which then carries out checks itself on whether all documentation is in place. Sometimes project claims are first approved by the JTS, which carries out checks on activities and documentation before passing the claim on to the PA. Sometimes, the claim goes from the JTS to the PA via the MA. There is a full discussion of good practice in the performance of these various checks in chapter 2. Basically, the MA (or the JTS) is required to approve
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individual project claims while the CA draws up and certifies the claim for the programme. The split is emphasised in the Implementing Regulation, which contains more details on the MA checks (also covered in the financial control chapter). Once programme level report assessment starts, a customer-based approach is important. Delays in payment generally have little effect on large public bodies (but send a very bad signal to projects about how seriously they should treat programme deadlines). Some smaller project partners on the other hand run on very small budgets and any delays in payments can have a serious effect. A few programmes make small advanced payments to these sorts of bodies if they are confident that their accounting systems and management are good enough. Some programmes also set the minimum amount for a payment claim as low as ? 25.000 to allow small claims for organisations with very small budgets and tight cash flows. This needs, however, to be balanced against the cost of auditing such small claims. The customer centred approach also extends to the treatment of problems in claims and reports. In some cases the whole claim is blocked if a problem is found and this should certainly be done if the problem is major or suggests that there may be further problems not yet discovered (e.g. lack of basic of accounting evidence). In other cases, however, where doubts are limited to an isolated case (e.g. a missing time sheet), this amount can be deducted from the claim until it is resolved and then the main claim processed to allow the full continuation of project activities. Programmes also need to be flexible if first level control systems in one of the countries make it impossible for one or more partners to be included in a claim. In these situations it should be possible for the rest of the partnership to go ahead. The partner in the country with delays unfortunately has no option but to wait for the certification to arrive. It is good practice for Certifying Authorities to set target times for payment to projects from date of receipt of a certified claim and to inform the project of the reason for any delay in payment (for example if the programme is waiting for a payment from the Commission). Efficient Paying Authorities in the current period have set a 5-day maximum payment target. It is good practice to pay claims for preparatory costs with or before the first payment claim.
6.3 Helping projects with implementation problems

Aside from problems with eligibility of expenditure and activities, the main finding of report assessment tends to be that some projects are seriously delayed. To give an idea of the extent of this problem, in some programmes all projects are behind budget and behinds schedule. As an extreme case, one project in the current period had only spent 2% of its budget after two years of operations. The de-commitment rule creates a pressing demand for financial discipline at the programme level and programmes cannot function if the project level under-performs to this extent. There is therefore a growing realisation amongst programmes that many projects need help in meeting their spending targets well before serious slow or under spending becomes apparent through the payment claims process by which time it is often too late. In most programmes there are too many projects and too few programme resources to give support directly to each partner. Programmes instead offer post approval advice to Lead Partners at seminars but care should be taken to make sure that the advice given to a LP is being passed on to other partners. Fact sheets on budget management and the payment claims, reporting and certification processes can help to supplement this face-to-face advice. The topics most often covered in Lead Partner seminars include making payment claims, reporting and certification requirements. It is also useful to discuss general budget management and procedures for changing budgets. It is worth trying to secure attendance at Lead Partner seminars from project finance officers, as well as project managers. A variety of other approaches have also been developed by joint secretariats and other programme bodies to help the projects most in need of advice once implementation starts. These include: Targeting projects led by an inexperienced Lead Partner or where there is a new partnership
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Automatic follow up if a project fails to submit a report and payment claim on time Requiring regular (sometimes even monthly or weekly) reporting on activities even if a project is not due to claim payment. If a project has slipped in carrying out an activity the associated spending will clearly be late Carrying out site visits to a project early on in the projects life, although some expenditure has to have been incurred before this is worthwhile A project is required to notify the programme body of when they are going to hold a full partnership meeting so that the programme can send a representative if they wish to The project can also be asked to go through a checklist of factors which might limit or slow down spending i.e. securing planning permission for an investment, the loss of a project partner. This type of risk management should feature in all Lead Partner project planning. All of these methods should help to detect danger signs and allow the programme to take action. When taking this action, it is important that the programme does not try to take over project management, which remains the responsibility of the partnership. The programme can, however, request action in a number of areas or ask for an updated and more realistic budget or time plan. Over-budgeting Project developers have a natural tendency to over-budget it gives them a reserve for unexpected costs. It becomes a problem when projects significantly under-perform against their budget targets either because they are badly delayed or the original budget was too high. Over-budgeting locks funds in projects and makes it impossible for other projects to use them Unused funds trapped in projects threaten programme de-commitment performance Time invested by programmes in tutoring projects on developing budgets is time well invested
It is unlikely that the measures described above will prevent all problems and programmes also need to make sure that they provide themselves with the tools needed to tackle underperformance once it does occur. In this connection, the estimated project budget per year provides an essential monitoring baseline for the programmes. It represents the projects own calculation of acceptable spending levels and therefore provides a fair indicator for assessing under-spend. If there are no annual targets, there will be no standard against which to assess whether the project is actually under-performing. The N+2 rule means that there are strict limits to the under-performance a programme can tolerate in project budgets because it cannot afford to have large amounts of inactive funding. It is important to firmly establish the principle of projects keeping close to annual spending forecasts and the risk of losing funds if this is not done. See section 4.8 on tackling poor project spending for more ideas on what can be done about this problem. Nevertheless, few projects run exactly according to plan and most projects will need to make changes to their budgets during the projects lifetime. Adjusting plans is not a symptom of failure. It shows that the project manager is making necessary alterations and programmes need to be flexible and ensure that this kind of change can be made quickly and easily. If, however, there is any attempt to change project objectives, there is a reason for extreme concern. With all changes it is important to note that failure to keep proper records of all alterations is perhaps the single most common cause of mistakes detected in programme finances. It is therefore essential that the programme has a procedure for updating budgets and making sure that all management bodies use the latest versions.
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Minor Changes. Requests for minor changes (generally up to 10% of a projects budget) are not surprising and do not generally denote a serious underlying problem. However, it is always advisable to require written requests or notifications of budget modifications with an explanation of the reason for the modification. Frequent budget changes should also be avoided. If a budget adjustment looks necessary it may be worth advising a project to wait until the end of the year to see if any other changes are required so as to avoid making several changes in the same year (and more work for everyone involved). Some changes cannot wait. If the amount allocated to a budget line has been exceeded, more funds will need to be transferred to this budget line before the next claim can be certified. Some changes should automatically require further information (e.g. material investment), as these changes can lead to major alterations in the work to be carried out. Major Changes. There may also be a need to adjust the budget to reflect modifications in the activities envisaged. These tend to be larger adjustments requiring the approval of programme management (generally the MSC which originally approved the project). Referring budget changes to these bodies can cause delays and a written procedure should be used if possible to minimise this. There may be further delay if a contract has to be reissued. This level of change is a clear warning sign that there may be big problems in the project and that either the budget has not been prepared properly or serious changes are going to be made to activities. This kind of change therefore needs to be well supported with explanatory documentation. Shift of budget between partners. Programmes have different attitudes to budgets shifts between partners. In some they are generally not permitted except in exceptional situations they suggest a change in the balance of activities between partners and may have implications for co-financing as the original co-financers are unwilling to support activities in another country. In other programmes, they are regarded as unimportant as long as all members of the partnership remain actively engaged in the project. Such changes can after all reflect nothing more than deciding to run an event in another country or may happen when a project is ending and a Lead Partner still has a lot of administrative work to do. In all programmes, budget shifts will normally be allowed in such cases provided that the amount involved is small. When large amounts are involved, the SC will need to take a decision. Spare money and new activities. There may be situations when a project would like to make a change in the budget because there has been some saving, i.e. an activity has cost less than originally planned. In these cases, however, the money should instead be returned to the programme unless there is an SC decision approving new activities for these unspent funds as only activities included in the original application are eligible. One other solution to project implementation problems also needs to be utilised. The greatest source of knowledge on improving project management and finding effective solutions to the most common problems is undoubtedly the projects themselves. Some experienced projects have developed very good and innovative financial management practices within their partnerships, which can be promoted to other projects. Other Lead Partners publish handbooks or guidelines on management procedures for all project partners. Some have set up online monitoring systems, which are systematically updated by all project partners, and having shared digital data systems can help secure commitment and information from partners. There are also good examples of local expertise in public agencies or local authorities for advising on project finances. This type of resource should be identified as part of project monitoring and good practice should be passed on to the rest of the programme31.
31
Most main points and documents will also be included in the upcoming handbook on project management produced by INTERACT Point Qualification and Transfer
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7. Certification of payment and financial control

The aims of financial control in the Territorial Cooperation Objective Prevent misuse of funds Prevent paying funds back to the Commission Provide security that expenditure claimed is correct and spot problems Identify projects with management problems and undertake corrective actions Allow problem free programme closure Problems with control in 2000 2006 Lack of communication between control bodies Different control bodies use different interpretations of the same rules Member States fail to prioritise control: Control arrangements are made too late and too few staff are employed Tips about control Ensure dialogue between control bodies Communicate early and clearly what is required from projects and controllers
The aim of financial control is to prevent misuse of funds and, as the ultimate consequence, the need to reclaim incorrectly paid funds. Control work should provide security for the Commission, Member States, programme bodies and, importantly, the projects themselves by ensuring that problems are spotted and dealt with before they get too big. A multi-level system has been established to do this based on a process with each level passing on information, documents and specifications on what kind of certification will be provided to the next level in order to build confidence that all expenditure declared is correct and the programme can eventually be closed safely. It perhaps helps to think of this process as a production line with each level working towards the end product: Problem free programme closure. Each level in this process needs to know what has been done before and what will be done afterwards in order to ensure that its own work will contribute to and not interfere with the process. Everyone needs to know what information they will be required to provide and what standards will be enforced. This means that every level of the control process needs to be involved in a dialogue on control issues and ensure that the information is passed on to the project partners who must meet these standards. The diagram below shows the main actors involved in the current period (2000-2006). The terminology will change in the new period but the basic process is fundamentally unchanged. First level control should be regarded as a day-to-day check and consists of: ...verifications made by management within an organisation should ensure that the processes for which it is responsible are being properly carried out and are in compliance with the relevant rules and regulations.32 First level control covers 100% of programme expenditure. Second level control should be regarded as a quality check of this work. It covers only a 5% sample of programme expenditure. Third Level Control should be a formality. It involves checking that all other control work has been completed and any recommendations have been carried out before the programme is closed.
32
CDRR 06-0002-00 Draft working document concerning good practice in relation to management verifications to be carried out by Member States on projects co-financed by the Structural Funds and the Cohesion Fund (21/12/2005). The following section draws heavily on this paper.
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Financial control structure in INTERREG (2000-2006) Carried out by: Competent first level control bodies and JTS / MA Purpose: To check project activities and expenditure Carried out by: Competent second level control body Purpose: To check programme systems and procedures and verify quality of project level checks
Article 4 / First Level Control Article 10 / Second Level Control
Article 9
Article 15 / Third Level Control
Carried out by: PA Purpose: To check that project controls have been satisfactorily carried out
Carried out by: The winding up body. Sometimes the same body that carries out Article 10 checks Purpose: To check that Article 10 checks have been satisfactorily completed and it is safe to close the programme
All article numbers refer to Commission Regulation (EC) No 438/2001, setting out control requirements
In the current period, however, things have not always run smoothly. Some control bodies were not identified until late in the programme and as a result problems that should have been spotted were allowed to continue unchecked. Communication between first and second level control bodies has often been poor and this has led to different organisations in the same Member State using different interpretations of the same rules with disastrous consequences for the projects, despite the fact they have no influence on these decisions. This section of the handbook focuses on the new period 2007-2013. A detailed description of first level control procedures in the current period is contained in Annex 2. In order to improve control work a clearer control structure has been proposed in the regulations governing the new period, with better defined divisions of responsibilities. This
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should prevent duplication of control work. Each control body must now also be identified soon after programme start and, as national rules are so important, each Member State will also be required to publish the rules it is using.
7.1 First Level Control

First level control: Summary First level control is central to programme implementation. It clears the way for payments to be made to projects and is the best place to identify and correct ineligible expenditure. Higher levels of control are fundamentally a check of the quality of this first level control work. Member States are obliged to designate a first level control body for each OP Delays in certification during first level control may lead to very serious delays in the payments claim process. Member States in a programme should help to speed up the certification process by ensuring adequate staffing and clear rules. Member State shall ensure that expenditure can be certified within a period of three months The audit trail: You always need it and it must allow controllers and auditors to enter the management system at any level and trace back all declared expenditure to original invoices or documents or equivalent value Most problems identified at FLC arise from misunderstanding rather than fraud. Programmes must therefore provide information on what is required from projects (through the Lead Partner) and first level controllers. Repeated mistakes may well be a result of poor programme information.
In formal terms, the first level control of project expenditure should verify: Delivery of the products and services co-financed Reality of the expenditure claimed Eligibility of the expenditure Compliance with the Commission decision on the programme, Community and national rules on eligibility, other national and Community rules including those on public procurement, State Aid publicity and information, protection of the environment and equal opportunities. In practical terms this means verifying: If the project report is correct with no essential errors or omissions If the conditions for receiving the grant are fulfilled If the grant is used for the purpose documented in the subsidy contract If the information given by the final beneficiaries is correct and documented If the reported expenditure complies with relevant rules The first level controllers declaration has to cover 100% of the expenditure claimed and 100% of invoices are normally checked to provide sufficient security for signing the claim. Generally this happens every time a project makes a payment claim.
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Basic guide to financial control terminology One of the most intimidating aspects of financial control for outsiders is the wide range of terms in use. We try and cut through some of the confusion here with a guide to some of the most important. Audit / auditor: In Territorial Cooperation programmes this refers only to second level control. An Audit Authority is set up and with the help of a Group of Auditors from the countries participating in the programme, an audit strategy is developed. This audit checks the quality of first level controls for at least 5% of the total programme expenditure. Audit trail: The documentation kept by every partner that proves how all funds have been spent. Beneficiary: A beneficiary is defined as an operator, body or firm, whether public or private, responsible for initiating or initiating and implementing operations. In financial control terms this means all of the partners participating in a project. Certified: 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 is certified by that partners 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 a similar procedure when they want to claim money from the Commission. Control / controller: In Territorial Cooperation this is used to refer only to the first level control check. 100% of project expenditure is checked by a designated controller in each partners country. This may result in deductions if some of the expenditure is incorrect. When the correct amount has been confirmed, the controller will sign a controllers declaration certifying that the expenditure has been approved. Eligible: Used in financial control to describe expenditure that complies with all of the relevant EU, national and programme rules. Spending that breaks one of these rules will be found ineligible and will not be paid by the programme. Irregularity: An irregularity is defined as any infringement of a provision of Community law resulting from an act of 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. In practical terms this means any attempt to claim ineligible expenditure whether deliberately or accidentally. Most irregularities are accidental and are dealt with in first level control before funds are even claimed. 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) 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 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. The Commission does the same to the programmes. Systems audit: Generally also a task for the Audit Authority. This is done at the start of the programme and checks the procedures established by all of the different management bodies for administering the programme.
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Systemic error: These are problems detected in management systems, which can be expected to cause wide-ranging problems. 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). They generally result in a suspension of payments and large grant cuts. 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 or all controls and audits have been implemented. This control must be completed before the programme can close.
7.1.1 Who is checked?

In the new 2007 2013 period all projects will be run according to the Lead Partner principle. The Lead Partner is the administrative head of the project and the contact with programme management bodies. Project partners will need to include organisations from at least one other country. It is an important principle that first level control is carried out in each partners own country and checks compliance with the national rules governing each partner. The Lead Partner collects certified statements of expenditure from each partner and checks that the approved controller has signed the claim and whether each partner has spent the funds on the agreed activities only. They then calculate the claim for the whole project and draw up a total statement of expenditure, which is sent to the programme together with each partners statement. Controllers therefore do not need to check expenditure incurred in other countries where other rules will apply.
7.1.2 Who are the controllers?

One major change in the new period will be that all Member States are obliged to designate a first level control body for each OP. Some programmes in the current period have allowed projects to select their own internal, qualified controller and this will no longer be possible. Only external first level control bodies will carry out certification of expenditure incurred by project partners. This new requirement should increase independence of the first level controller from the project partner, transparency of the control process, the consistency of standards applied and will encourage the development of control expertise. It is also to be hoped that having more centralised control bodies will promote dialogue between these bodies and second level controllers. It will be possible for programmes to designate one controller for the whole programme area33 but this is unlikely to be used in most programmes because each participating country uses different rules. The regulations for the new funding period also require each Member State to ensure that expenditure can be certified within a period of three months34. Planning for how to make this requirement work in practice should start as soon as it is possible since many programmes are not currently meeting this target. Delays in payments to projects have been a significant contributory factor to loss of funds under de-commitment rules. It is clear that programmes should not expect efficient, financial management in projects if they are unable to live up to these standards themselves. The MA (but often the JTS on its behalf) will also continue to play an important role. Checks by these bodies focus on the delivery of activities and compliance with non-financial rules such as those on publicity and information. The MA is also responsible for again checking that all partner claims have been certified by the approved controller (the Lead Partner should already have checked this once before submitting the claim). Controllers and programme management bodies can make deductions for the amount a project has claimed if they find incorrect expenditure. As such they form inter-linking parts of the first level control procedure.
33 34
ERDF Regulation (1080/2006), 16.1 ERDF Regulation (1080/2006), 16.2

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First level control procedure (2007-2013)
Partner
PP 2
LP
MA
MA
CA
LP All project partners (including LP) draw up statement of expenditure and have it checked by nationally designated first level controllers LP checks that all claims have been certified by the approved controllers. Draws up an aggregate project claim (calculations may also be checked by LP controller) MA (possibly delegated to JTS) checks certification again. Also checks reports to ensure the project is being delivered in accordance with the approved application. MA (possibly delegated to JTS) does on the spot checks of a sample of operations checking administrativ e, financial, technical and physical aspects as appropriate. CA checks a sample of the project claims to confirm that the work that has been done provides a sound basis for making the programme claim.
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One final body should also be included in the programme first level control structure the Certifying Authority. Even though the name is new, the Certifying Authority will play a similar role to the Paying Authority in the current period. The new name indicates the major role the Certifying Authority plays in certifying programme expenditure before a payment claim is submitted to the Commission. This third control of the payment process checks the quality of the control work carried by the MA and LP as the basis of the programme claim to the Commission. It is important to bear in mind that the control work carried by the CA must not repeat all of the control work already carried out. If the programme system audit has been positive, CA checks can focus on checking a few key procedures and perhaps a small sample of claims.
7.1.3 What is checked by the first level controller?

First level controllers will check every item of expenditure entered in the programme accounts, supporting documents such as time sheets and the calculation of the totals for each budget line and the claim as a whole. The whole system is designed to provide guarantees of the eligibility and correctness of all expenditure declared and this is the focus of the checks. As such, first level controllers will also look at key documents in the audit trail to make sure that the costs claimed are real costs (e.g. overhead calculations), that the activities really took place (e.g. participant lists from seminars) and that rules are being followed (e.g. evidence of tendering procedures). The audit trail must allow controllers and auditors to enter the management system at any level and eventually trace back all declared expenditure to the original invoices (or documents of equivalent value). It should also be possible to verify the transfer of funds to final beneficiaries. A clear description of the accounting evidence to be held at each level is therefore essential as is communicating this information to everyone involved. This is particularly important in the case of project partners, who play a key role but are not always properly informed about programme requirements by Lead Partners. As a general rule for all programme actors, expenditure that is not documented cannot be claimed. An indicative list of the accounting evidence needed to secure the audit trail has been developed by the inter-regional IIIC programmes. It seems like a lot of detail but all of the information should be standard and easily obtained: All partners should get into the habit of collecting this evidence from project start up. It is always worth remembering that one of the main reasons that claims are reduced is missing evidence. Key points include: Staff costs List of staff working on a project stating name, qualifications, function, percentage of work dedicated to the project and total salary For people working part-time: Total salary, calculation of daily cost and total amount charged to the project Payroll and social security documents Monthly time sheet, properly filled-in and signed, both by the employee and the supervisor Overheads Explanation of the calculation method for setting the real cost of overheads List of costs included in the calculation of the pro rata attribution of costs to the project External experts Contract explaining the type of task/ activities to be developed, duration and costs Detailed invoices in accordance with the contract Where applicable, deliverables produced by the expert Where applicable, evidence that public procurement has been respected Travel and accommodation Travel invoices paid directly by the company/ institutions Reimbursement request, with the relevant documentation required according to national rules or institutional procedures, related to expenses incurred directly by the person travelling.
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When private cars are used, reimbursement request through mileage sheet, according to national procedures and using agreed values. Documentation providing evidence of participation in the activity involved. Meetings and events Evidence that the cheapest appropriate option has been chosen and, if applicable, evidence that public procurement has been respected. Contract with the service provider clearly stating the type of service to be provided, the date of the service and the total cost. Detailed invoice, clearly stating date of the invoice, the payee, the payer, description of the services, quantification of the services, price per unit and the total cost. Supporting documents such as the agenda and/ or minutes of the meeting. Promotion costs Evidence that the cheapest appropriate option has been chosen and, if applicable, evidence that public procurement has been respected. Contract with the service provider clearly stating the type of service to be provided, the date of the service and the total cost. Detailed invoice, clearly stating date of the invoice, the payee, description of the services, quantification of the services, price per unit and total price. Investments
In infrastructure:
Evidence of selection procedure for service provider Contract with the service provider clearly stating the type of service to be provided, the date of service and the total cost. Invoices in accordance with the contract
In equipment:
Evidence that the cheapest option has been chosen for the required quality level Detailed invoice, clearly stating date of the invoice, the payee, the payer, description of the goods, quantification of the goods, price per unit and total price. If relevant, depreciation method and amount charged in every payment request. The audit trail: You still need it even if the controller does not ask to see it The actual documents that a first level controller asks to see vary enormously. Some will check everything while others will assume that a lot of the supporting evidence is in place without looking at it. You still need these documents even if they are never used during first level control. If you are part of a programme on the spot check, a second level control check, a Commission audit or a check by the European Court of Auditors, you will be required to produce the documents. If you cannot do so, you face having to pay back large amounts of money just because you did not file a few papers.
Controllers are also required to certify not just whether expenditure has been properly documented but also whether it is eligible or not. Most of this work will again be based on the documents in the audit trail with a particular focus on expenditure for which there are no invoices (generally the overhead calculations and the staff costs). The level of ineligible expenditure detected during first level control varies enormously between about 3% and 25% of the expenditure claimed in different programmes. Almost all of the incorrect expenditure is, however, due to lack of knowledge about the rules and what can be claimed rather than deliberate fraud. Most programmes have started special seminars for project finance managers in order to reduce the number of problems before they reach the control stage. If the basic tips included throughout this handbook are used, there should be few problems.
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Eligibility basics Eligibility is often a cause for concern for project managers, as the rules can seem very complicated and different national rules apply in each programme. When there is doubt about an item of expenditure, the following questions should be asked: Is it covered by the regulations? There are a very limited number of rules (see below). For example, interest on debt is never eligible. Is it covered in national rules? These mostly cover value for money. For example, some countries set maximum rates for hotel stays in different European countries. You should make sure that the rules in your organisation fit these national rules. Is it covered in programme rules? For example, private partners may be excluded. Is this expenditure part of delivering the approved application? If the activity involved is not clearly mentioned in the application, it will not be eligible. Is this expenditure really necessary for delivering the project? For example, do you really need to update office computers? You will be expected to prove any claims you make. Eligibility in the current period 2000 2006
In the current period the eligibility regulation (EC 448/2004) only covers a small number of problem cases in twelve eligibility rules35: Expenditure actually paid out Accounting treatment of receipts Financial and other charges and legal expenses Purchase of second-hand equipment Purchase of land Purchase of real estate VAT and other tax charges Venture capital and loan funds Guarantee funds Leasing Costs incurred in managing and implementing the Structural Funds Eligibility of operations depending on the location All other eligibility questions are subject to national rules (EC 1260/1999) and the answer to one essential question: Is the expenditure necessary for the implementation of the project? The same system will apply in the new period though with a slightly reduced set of rules in the regulations. This means that most eligibility questions should be referred to national authorities. This should be aided by the new requirement for all Member States to include the eligibility rules they are using for the programme in the programme documents. Difficulties are usually the result of projects trying to stretch the basic principles into grey areas. A good example is the attempts in the current period to divide staff hours into productive time and non-productive time and calculate hourly rates on productive time only. This artificially inflates the staff costs claimed from the programme and contradicts the real cost principle. Claim what you really pay and you will avoid problems. The interpretation of
35
For more information and practical examples on the 12 eligibility rules see: The Eligibility Handbook developed by INTERACT Point Managing Transition available at: http://www.interacteu.net/913123/1068570/0/0
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eligibility rules follows some very basic principles. Costs necessary for carrying out the operation being funded are eligible unless clearly stated otherwise. Unnecessary costs are ineligible. Some programmes have published their own guidelines with the agreement of national audit representatives. If this kind of document can be agreed in the programme, it provides an invaluable tool. Eligibility in the new period 2007 2013 The basic principles of eligibility remain unchanged. Expenditure will be eligible for a contribution from ERDF funds if it has been incurred between the date of submission of the operational programme to the Commission or 1 January 2007 (whichever is the earliest) and 31 December 2015. Most programmes will only accept projects that start after approval by the MSC but technically operations co-financed by ERDF can have started but must not have been completed before the starting date of eligibility. Expenditure will be eligible for funding only where incurred for operations decided on by the Steering Committee in accordance with criteria fixed by the Monitoring Committee. Most of the eligibility issues in the new funding period will again be regulated by Member State national rules. Member States are obliged to publish their national eligibility rules within 12 months of OP approval and to make them easily accessible. This will increase transparency as projects have not always been able to get reliable advice on the rules in the current period and some countries seem to have applied different rules in different programmes. It may also be a step towards harmonising eligibility rules as obvious and unnecessary discrepancies may become apparent. It will mean that again that different partners within the same project may be allowed to different things (for example claiming a flat rate for every night away from home or only being able to claim real costs). These differences are normally unavoidable and must be accepted by project partners. Some programmes in the current period with differences in national eligibility rules have, however, managed to develop a common set of rules based generally on the strictest interpretations of the rules involved. Such common rules should be decided by the programme MSC and described in the programme documents (e.g. Fact Sheets). As mentioned above there are also slightly fewer Community rules on eligibility of expenditure in the new period. Those that have been published so far are laid out in basic form in the table below. It is also important to note that some of the twelve rules have simply been incorporated into the main text of the regulations so while they no longer exist as separate eligibility rules, the principles are essentially unchanged (for example the rules on expenditure actually paid out and the accounting treatment of receipts). In all eligibility questions it is, however, essential that the regulations are always consulted as the only binding text and the relevant article numbers are also supplied. An innovation in the new funding period is the possibility for transnational programmes to spend part of the programme funds outside the programme eligible area (20% of ERDF allocated to the programme) and for all programmes to spend funds outside the EU (10% of ERDF allocated to the programme). This is regulated by 21 EC 1080/2006. It is important to remember that spending funds outside the programme eligible area is possible only where such expenditure is for the benefit of the regions of the cooperation area. However, this decision should be made by programmes and projects planning their activities outside the eligible area must get the programmes permission (this is generally an MA decision, as the MA remains financially liable for these funds). There are a number of issues, which need to be considered before funds are spent outside the programme area. One of them is securing the audit trial and financial control situation. Handing funds over to a non-Member State would still leave the Managing Authority responsible for how the funds have been spent, but without the legal coverage of the regulations. In this case an agreement with the non-MS involved should be required where the non-MS takes on the ultimate responsibility and liability for the funds spent on its territory. If the 10% rule is to be used, the Member States participating in the programme must make arrangements for ensuring that it will not be misused 24 EC 1828/2006)
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Summary: Key articles on eligibility in 2007 2013
Regulation
1083/2006
Article
56
Eligible
In-kind contribution Depreciation costs Overheads (See below for more details on all of these costs)
Not Eligible
1080/2006
Expenditure on housing for the new MS only (and subject to the conditions laid down in the Draft Implementing Regulation, 47)
Interest on debt The purchase of land for an amount exceeding 10% of the total eligible expenditure for the operation Decommission of nuclear power stations Recoverable VAT
1828/2006 49
Charges for transnational financial transactions + bank charges for accounts required for implementation of the operation Legal consultancy fees, notarial fees and costs of technical or financial experts necessary for implementation Accounting and audit costs related to MA requirements Bank guarantees required by legislation
Fines, financial penalties and expenditure on legal disputes
1828/2006 51
In-kind contributions when calculated according to the approved methods
1828/2006 52 Overheads based on real costs. Flat rates are possible based on the average real costs of the type of operation (properly documented) and subject to review. Flat rates may not exceed 25% of the overhead generating costs of an operation Purchase costs for these assets
1828/2006
53 Depreciation of assets actually used for an operation for the period of that operation
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1080/2006
21
Flexibility rules: In the context of cross border cooperation, up to 20% of OP ERDF can finance operations in adjacent areas In the context of transnational cooperation, up to 20% of OP ERDF may finance expenditure incurred by partners outside the programme area In the context of cross-border, transnational and interregional cooperation, up to 10%of OP ERDF may finance operations outside EU
7.1.4 What is checked by programme management bodies?

The programme is required to carry out an administrative check of the project claims and reports received. This is formally the responsibility of the MA but the task is often delegated to the JTS. On a very basic level this check will confirm that all partner claims have been correctly certified. The programme will also check the activity report to make sure that project progress is on track, the activities carried out are in line with the application and no ineligible activities have been included in the claim. The new regulations also include a clear requirement for MAs to carry out on the spot checks of projects36. At least a sample of projects must be checked with the possibility that any project may be checked at any point in its lifecycle and repeat visits may be carried out. Every programme should provide a checklist of the issues that could be covered during such checks and they can cover administrative, financial, technical and physical aspects. What this means in practical terms is that the check will, for example, require projects to again produce evidence from the audit trail, explain and demonstrate accounting systems, prove the delivery of the products and services financed etc. Because of the frequency of errors in calculating overhead and staff costs, this expenditure will almost always be included in the check. Most on the spot checks are targeted at Lead Partners but any partner may be checked, particularly if a Lead Partner check had revealed weaknesses in the project. In order to be effective, on the spot visits must control expenditure down to a project partner who actually spends the money, rather than stopping at the LP level.
7.1.5 What happens if there are problems?

There are three basic results of first level control checks. Normally, project expenses are approved and no further action is required. In cases where problems are detected, the incorrect expenditure will be deducted from the project claim and will not be paid by the programme. In other cases, controllers may have reservations regarding, for example, the lack of important documentation. In these cases the programme will require that documentation or other clarification is provided within a fixed time. If the evidence is not provided, the expenditure will be refused. In the most serious cases control findings may create doubts about funds previously paid out to projects. These situations normally arise after on the spot visits. Controllers check expenditure that has not yet been paid out so it is easy to make deductions. On the spot visits, on the other hand, can go back over the whole expenditure declared by a project and may find problems in amounts that have already been certified. Once again, a lack of reliable evidence for staff and overhead costs is a typical problem. This may create a reasonable suspicion that all such costs reported by the project
36
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partner concerned are incorrect and as a result the programme may actually claim back money that has already been paid. The amounts concerned may also need to be reported to OLAF (the European Anti-Fraud Office). Reservations and recoveries both take time to resolve and the whole partnership will have to wait for payment. It is therefore essential that the whole partnership is made aware of requirements and the Lead Partners with suspicions about the expenditure of a partner consult the programme as soon as possible.
7.2 Second Level Control / Audit

Second level control: Summary The Audit Authority is a new programme body responsible for Second Level Control Audit Authority may be supported by a Group of Auditors Second Level Control consists of audits of programme management and control systems and an appropriate sample of project expenditure Second Level Control is carried out according to the Audit Strategy presented by the Audit Authority to the Commission within nine months of the OP approval Audits should be carried out at least once during the programmes life on all programme bodies in the financial circuit
Second level control consists mainly of a quality check of a sample of first level control work. In the 20002006 period the sample to be audited was not less than 5% of total programme expenditure. Regulations for the new period 20072013 do not specify how big the sample should be but according to 62b EC 1083/2006, audits should be carried out on the basis of an appropriate sample of expenditure declared and should be sufficient to ensure a confidence level of no less than 60%. This generally means that more than 5% will have to be audited. The other important element of second level control is a check of management and control systems to ensure that the systems in place are being used and should be able to detect and correct problems at project and programme level. Second level control is therefore an audit of all aspects of the programme at both the management and project levels to make sure that everything is working as it should be. Second Level Control should be carried out according to the Audit Strategy decided by the Audit Authority no later than 9 months after programme approval. The Audit Strategy should outline how Second Level Control audits will be carried out and should draw up common risk assessment criteria to select an appropriate, representative sample of programme funds subject to the Second Level Control audits.
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Second level control process

Check by Audit Authority and nationally designated Group of Auditors
STAGE 4
Certifying Authority
STAGE 3
Responsibilities assigned by Member States On-the-spot Administrative check

Checked
First Level Control

Checked
Project
Designated controllers
STAGE 2
STAGE 1
Responsibilities of the control bodies in the new period have been defined in Regulations: General (EC) 1083/2006, ERDF (EC) 1080/2006 and Implementing Regulation 1828/2006 The content of second level control will change little in the new period but there are some changes to the structures that will be responsible. A new management body the Audit Authority will be set up in the Member State hosting the MA and will be in charge of the controls. It will normally be assisted by a Group of Auditors with one representative from each participating country though programmes can decide to let the Audit Authority work alone. The auditors will be responsible for checks carried out in their country. The actual checks will either be carried out by these auditors or will be sub-contracted to an outside audit firm. In actual fact most of the changes involved here are a matter of terminology: The role of the AA has in the current period been carried out by the national controller of the Member State hosting the MA and he/she has been assisted by a Financial Control Group consisting of the national controllers from the other participating countries. The main difference between the Audit Authority and the current arrangements is that the AA will be a formal, fixed programme body and must be set up within 3 months of OP approval. This should reduce the problems caused by delays in initiating second level control checks in the current period.
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Audit Authority and Group of Auditors work flow
National auditor
Audit Authority (MA country)
Group of Auditors
Project checks
Project checks
INPUT
Compiled project control audit report report (was Article 10 report )
Commission
Annual control audit report (was Article 13)
In regulatory terms, the Audit Authority must be a national, regional or local public authority or body, functionally independent of MA and CA, designated by the MS of each OP. The Audit Authority will: Ensure that audits are carried out to verify the effective functioning of the management and control system of the operational programme; (= systems audit) Ensure that audits are carried out on operations on the basis of an appropriate sample to verify expenditure declared; (= check of an appropriate, representative sample
of programme expenditure)
Present to the Commission within nine months of the approval of the OP an audit strategy covering the bodies which will perform the audits (as in point 1 and 2), the method to be used, the sampling method for audits on operations and the indicative planning of audits to ensure that the main bodies are audited and that audits are spread evenly throughout the programming period; By 31 December each year form 2008 to 2015: Submit to the Commission an annual control report setting out the findings of the audits carried out during the previous 12 month period ending on 30 June for the year concerned in accordance with the audit strategy of the operational programme and reporting any shortcomings found in the systems for the management and control of the programme. The first report to be submitted by 31 December 2008 shall cover the period form 1 January 2007 to 30 June 2008 (= annual audit report)
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Issue an opinion, on the basis of the controls and audits that have been carried out under the responsibility of the Audit Authority, as to whether the management and control system functions effectively, so as to provide a reasonable assurance that statements of expenditure presented to the Commission are correct and as a consequence reasonable assurance that the underlying transactions are legal and regular (= annual audit report) Submit any declaration for partial closure assessing the legality and regularity of the expenditure concerned Submit to the Commission at the latest by 31 March 2017 a closure declaration assessing the validity of the application for payment of the final balance and the legality and regularity of the underlying transactions covered by the final statement of expenditure which shall be supported by a final control report. (= winding up
declaration)
The Audit Authority shall ensure that the audit work takes account of international accepted audit standards; Where the audits and controls are carried out by a body other than the Audit Authority, the Audit Authority shall ensure that such bodies have the necessary functional independence;37 The programme systems audit ensures that programme bodies, procedures and documents have been set up and function in line with the principles described earlier in this handbook. Very importantly it will also check the day-to-day working of programme systems - particularly in relation to the link between programme management and projects. Some of the project checks will then follow-up on the project side of these procedures to combine the results of the systems of audit and the audit of projects and gain an overall picture of the programme38. We focus here on the audit of projects. These audits must cover a minimum of 5% of the total programme expenditure. The projects to be included in the checks are selected on the basis of two sampling techniques carried out in line with various International Standards on Auditing (ISA) and with different purposes. The main technique used is representative random statistical sampling. As the name suggests, the aim is to find a random sample of projects which can be assumed to be a fair representation of the programme as a whole: If there are few problems in these projects it can be reasonably assumed that there are few problems in the rest of the programme. The only weighting here is that projects receiving the largest grants should be more likely to be selected (though some small projects must also be included). In addition, a complementary sample is selected. This aims firstly to ensure the completeness of the checks by guaranteeing coverage of: An adequate mix of different types and sizes of operations All the priorities under the operational programme Operations managed by the main Authorities and intermediate bodies Operations concentrated under certain beneficiaries The second aim is to allow the use of risk analysis results to target the projects that are most likely to have problems. The intention here is clearly to identify and correct irregularities by going after the weakest projects rather than those that fairly represent the programme as a whole. As a result, the results of audits on these projects are treated separately and are not used when calculating the overall irregularity rate for the programme. The methods used for selecting different samples, the projects selected and a plan for carrying out the actual audits are combined in a regularly updated audit strategy.
37 38
Based on General Regulation (1083/2006), 62 The information here draws heavily on the Implementing Regulation, 16-18 and the relevant annexes (especially Annex V, VI, VII, VIII, XII)
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The purpose of second level control checks is to gain an overall picture of the programme and how many errors there normally are in the expenditure declared. Second level control should not just target the highest risk projects, as this will create a distorted picture of the programme with a higher rate of irregularities than is true for the whole programme. In the new period, high-risk projects are targeted separately and the same principle needs to be applied in the control of the current programmes.
Second Level Control work should start as soon as the programme has been approved. The initial systems audit is carried out as part of the procedure to gain Commission approval for the programmes systems and procedures. It should be completed in the early months of the programme as its purpose is to confirm that sound management practices are in place: It is pointless to suggest major changes later in the programme when most of the damage will already have been done and needless effort will be required to correct errors. The check of projects should also start as soon as possible though it is possible to wait and audit a sample of the combined expenditure from 2007 and the first part of 2008, as few programmes will have much project spending in 2007. Most auditors prefer not to consider projects that have spent less than 50% of their budgets. There are two reasons. Firstly, the auditors need a reasonable amount of spending to check if their conclusions are to be of value. Secondly, they need to check an appropriate sample of the total programme spending and are obviously able to reach this target quicker if they are able to check a project when it has spent 1 million rather than 500.000. In some cases this means that auditors prefer to check completed projects but this needs to be balanced against the difficulty of taking corrective action: There is not much that a project can do after it has submitted its final report and claim. Ideally therefore, second level control should be carried out on ongoing projects and it is requirement of the regulations that these audits are spread evenly across the programmes lifetime. Audit visits are coordinated to take place simultaneously, with each auditor visiting the project offices of a partner in their own Member State so different parts of the project partnership are checked (only the expenditure of the partners checked counts towards achieving an appropriate sample required by the regulation). These results are then merged into a report on each project including an overall opinion and any follow-up actions that need to be taken. Every year the Audit Authority also submits to the Commission an annual audit report summarising the work that it has carried out and its opinion of the way that the programme is functioning. If a large number of problems have been detected, this can lead to a suspension of payments to the programme until the problems are resolved.
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Likely division of tasks between the Audit Authority and the Group of Auditors
AA (= Audit Authority)
AA + GoA (=Group of Auditors)
Compliance assessment opinion on the Art 71 Description of management and control systems
Members of the Group of Auditors may be involved in compliance assessment of management bodies outside the MA host country Audit strategy Audit methodology and selection of an appropriate sample Audits of operations Partial (national) reports
Audit strategy Audit methodology
Systems audit Compiling integrated project audit reports Integrated annual control reports to Commission Annual opinion on the management and control systems AA is a coordinating body for the MSs, contact point with the Commission and usually auditor in the MA Member State
The costs for this audit work can be met in full or in part from the TA budget. However, it is recommended by the Commission that the costs of second level control should be borne by the MS as the establishment of control and audit systems are MS responsibilities. This should be agreed in advance between Member States. The AA may also draw on the assistance of the JTS though this relationship needs to be carefully defined and is normally limited to administrative support because the JTS is a key part of the programme and project system that is being audited.
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Audit Authority and Group of Auditors basic procedures
Annual audit report
Commission
Administrative reports
SOME BASIC PROCEDURES

Quarterly irregularity report
Audit Authority
Instructions
Feedback / follow-up Audit reports and recommendations
Member States
JTS
Meeting arrangement and papers Project documentation
Group of Auditors
7.2.1 Content of audits and common problems detected

As noted, second level control is fundamentally a check of the work carried out during first level control and as such the things that are checked are very similar. One major difference already mentioned is that first level control only considers the expenditure in the claim that is being certified. Second level control addresses the whole of the project. In technical terms, audit of an appropriate sample of the programme expenditure can include actions to: Verify practical application and effectiveness of project management and control systems Prevent and take actions against irregularities Recover any amount lost as a result of an irregularity or negligence Verify selectively declarations on expenditure made at the various levels concerned Verify the correctness of accounting records held by the final beneficiaries and the firms carrying out the projects and in particular that: o Programme records correspond with supporting documents held by the project o The nature and timing of the relevant expenditure comply with Community provisions and correspond to the approved specifications and the work actually executed o Services and actions funded under the Structural Funds are procured on the basis of a proper call for tenders according to public procurement rules, if applicable, and are fully evaluated before a final decision is made on the supplier of the service o Project LP/PP complied with the Community rules on publicity, information, equality and the environment and any other relevant Community law Verify the presence of a suitable audit trial and that: o o The first level controller is qualified and familiar with relevant regulations and has experience with auditing EU-funded projects o The first level controller signs a confirmation of project first level control Verify that the appropriate national co-financing has in fact been made available Facilitate the identification of possible weaknesses or risks in the execution of actions and operations
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Provide for corrective measures to be taken to eliminate weaknesses or risks in the execution, in particular as regards financial management We could summarise this by saying that the audit again checks whether there is proof that costs have been incurred only for relevant activities, whether the expenditure is eligible (note the specific mention of public procurement) and whether project systems and procedures provide reasonable assurance that this is the case for all of the partners expenditure. Where problems are detected, auditors are also specifically responsible for making corrections and ensuring that any money owing to the programme as a result is paid back. As such, projects that are part of the second control audits should not expect anything fundamentally different from other controls: It is a check of the same evidence that should be available before any expenditure is claimed. The amount of deliberate fraud detected in audits is low. Most problems arise because of confusion about programme requirements and poor first level control. This is particularly true when first level controllers do not ask to see supporting documents in the audit trail: Project managers sometimes assume this means they are not needed or take a gamble and hope they will not be included in the second level control sample. This can be an expensive mistake. The list of common problems included below is based on the findings reported by one Member State but seems fairly representative: Requirements of regulations (particularly the eligibility rules) were unknown Public procurement rules were unknown Documentation was not available to demonstrate a clear link between work actually executed and the declared expenditure (i.e. parts of the audit trail were missing) The EU sign was missing on all publications and the relevant papers had already been distributed (i.e. EU communication and publicity rules were broken) No documents and evidence for the co-financing were available The project partner had changed address without informing the programme The project title was missing from some invoices Financial departments are decentralised and the book-keeping system could not be checked Payments were without invoices, only bank account statements The project partner did not submit all original invoices. Original invoices for travelling costs were not available Invoices from one sub-partner were paid after payments were received from the EU Personnel costs included overheads without a comprehensible calculation One invoice was included twice Exchange rate - invoices contained two different exchange rates The financial report was not signed by the first level controller If you have read the other sections of the handbook, most of these problems will come as no surprise they are exactly the same issues that turn up again and again at every level of checking. Avoiding problems in programme audits is therefore a matter of sticking to a few simple rules but these findings suggest that programmes still have more to do on communicating these rules and projects have more to do on making sure they are respected.
7.3 Financial Corrections and Recovery

One last important point needs to be made about second level control. As it concerns the audit of funds that have already been paid out by the programme, any errors detected may result in the project having to pay back money. The errors are termed irregularities. The process of getting the money back is called recovery39.
39
Based largely on the Implementing Regulation which in turn closely follows EC Regulation 2035/2005 amending Regulation (EC) No 1681/1994 concerning irregularities and the recovery of sums wrongly paid in connection with the financing of the structural policies and the organisation of an information system in this field.
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Any irregularities detected must be demonstrated to have been resolved before the project (or indeed the programme) can close. The Certifying Authority is responsible for launching the recovery procedure and initially recovers the funds directly from the Lead Partner. The Lead Partner then initiates a recovery of the funds from the project partner concerned. Problems are relatively rare but can occur that the project partner involved will not or cannot return the funds concerned (in cases of bankruptcy for example). In these cases the Member State where the non-paying partner is located will pay the funds to the Certifying Authority, which will then repay the Lead Partner40. This is another reason that a Lead Partner needs a certain level of financial resources in order to be able to take on the role. Beyond this programme level treatment of irregularities, however, there are also additional procedures between the Member States and the Commission. Two months after the end of every quarter, every MS must send the Commission a report with details of all irregularities concerning amounts over 10.000 detected on its territory and a description of the follow-up action taken on previously reported irregularities (information generally provided by the second level controllers). If there have been no irregularities over 10.000, the report must state this and still needs to be sent. These reports ensure that action is taken and that there are continual deadlines at each step of the procedure. As has been discussed previously, the official definition of irregularities is extremely broad and covers not just funds incorrectly paid but also actions that could have led to funds being paid out incorrectly. For this reason the Implementing Regulation introduces some qualifications to the concept and what needs to be reported to the Commission. The following are not reported: cases where the irregularity consists solely of the failure to partially or totally execute an operation included in the co-financed operational programme owing to the bankruptcy of the beneficiary; cases brought to the attention of the Managing or Certifying Authority by the beneficiary voluntarily and before detection by either of them, whether before or after the payment of the public contribution; cases detected and corrected by the Managing or Certifying Authority before any payment to the beneficiary of the public contribution and before inclusion of the expenditure concerned in a statement of expenditure submitted to the Commission and which do not involve suspected fraud. However, irregularities preceding a bankruptcy and cases of suspected fraud must be reported.41 In these cases (which cover the majority of irregularities detected in cooperation programmes) the programme has the power to resolve the issue independently though the amounts concerned will still need to be recovered and reported on by the Certifying Authority. One final improvement in the new system should also be mentioned. In the past some Member States have refused to accept second level control findings because they create the need for a recovery from partners on their territory. The new regulation therefore contains a trigger point for defining when a problem should be treated as an irregularity or possible irregularity the primary administrative or judicial finding which: means a first written assessment by a competent authority, either administrative or judicial, concluding on the basis of specific facts that an irregularity has been committed, without prejudice to the possibility that this conclusion may subsequently have to be revised or withdrawn as a result of developments in the course of the administrative or judicial procedure.42 The reports of the national auditors will constitute such findings and once the written assessment has been provided, all Member States are obliged to include all the operations
40 41
ERDF Regulation (EC) 1080/2006, 17 Implementing Regulation, 28.2 42 Implementing Regulation, 27 (b)
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covered in these findings in their quarterly irregularity reports to the Commission. In future it will therefore be impossible to avoid taking action on control findings.
Comparison: Control in the current and new period

2000 2006 2007 2013
First Level Control Not all MSs designate FLC bodies FLC sometimes carried out at LP level only No deadline for certifying expenditure MS designate FLC bodies for each OP FLC carried out at all partners level MS must ensure a 3 month deadline for certifying expenditure is respected
Second Level Control
Second Level Control Group is not formalised and sometimes not established until late in the programme
SLC is carried out by Audit Authority, formal programme body Audit Authority is based in the same MS as MA Audit Authority is assisted by group of auditors from MS in the OP Group of Auditors is established within 3 months after OP approval
Audit Authority presents to the Commission the audit strategy within nine months of the OP approval Audit Authority approves OP description of systems and procedures
Recovery of funds unduly paid LP ultimately responsible for the unduly paid LP repays the irregularly paid amount to CA amount LP initiates a recovery process and recovers the amount from a Project Partner responsible MS of the project partner responsible for irregularity is ultimately responsible for unduly paid amount
Eligibility -National rules -(EC) General Reg. 1260/1999 -Implementing Reg. 448/2004 covering 12 Eligibility Rues -National rules published by MS within 12 months of OP approval -General Reg. (EC) 1083/2006 -ERDF Reg. (EC) 1080/2006 -Implementing Reg. 1828/2006 More transparent rules A step towards harmonisation
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8. Project and programme closure

The closure of the new programmes (2007-2013) is a long time in the future while the current programmes will be closing over the next few years. This section therefore focuses on the current period and uses the corresponding terminology. Project and programme closure: Summary The main aim in this phase is to properly account for the resources used to meet programme objectives Quick problem-free project closure depends on the effectiveness of the project management that has been in place for the duration of the operational phase of the project. It also depends on the efficient working of the Member States or regions with the financial controllers for the programme and the PA Programmes should try to avoid delays in making final payments to projects particularly those with very small budgets and cash flows Programmes could use the opportunity given in final reporting from projects to seek feedback on the future operation of financial activities at the programme level. Programme closure documents must be submitted to the Commission no later than 15 months after final programme eligibility date (31 December 2008), i.e. 31 of March 2010. It is possible for programmes which will continue in 2007 2013 to finance programme closure related activities of the old programme with the new TA budget
8.1 Project closure
Project closure: Summary Focus on the end goals, results and impacts No questions can be left open It is the last chance to identify and deal smoothly with irregularities It is a final confirmation of the findings of all first level control checks After closure projects are still subject to second level control or checks by Commission auditors Project closure is the final phase in the project implementation process and if implementation has been successful, it should be relatively problem-free. The focus at project closure is on the end-goals, results and impacts achieved in comparison to the activities proposed in the application and changes approved by the programme. Attention therefore needs to be paid to indicators and the completion of all work packages. If these have been successfully completed within budget the project can close once it has completed the final financial control. Programmes need to be confident to answer a number of fundamental questions: Has the project delivered the activities outlined in the application? Is there sufficient evidence to support this? Has first level control been good enough to ensure that no serious problems should be experienced if the project is later controlled by another body? Have all questions and problems identified by first level control been satisfactorily resolved?
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While projects are in the main implementation phase, programmes can afford to be flexible: Deductions can always be made from later payments and it is not yet possible to provide a final assessment of activities. Project closure means, however, that no more questions can be left open. This is the main challenge of project closure: It represents the last chance to identify and deal with irregularities relatively easily. The extent of programme concerns will be determined by the systems in place for normal project control. If a centralised first level control system is in place, there should be few doubts about the eligibility of expenditure but there may be concerns about the need for verifying the reality and quality of the outputs delivered (on-the-spot checks are rare in centralised systems). If a decentralised model is being used, there may be doubts about the quality of the first level control work carried out and whether controllers have sufficient knowledge of INTERREG requirements. The special procedures for processing final reports and claims for expenditure need to be designed to compensate for whatever weaknesses the general system may be felt to have. Another tool that programmes make use of is to withhold payment of a portion of the project budget (typically 5%) until all project closure procedures have been completed (though this is not a regulatory requirement). This means that even at this stage most irregularities can be resolved by simply deducting the amount concerned from the payment to the project. Some programmes go further and retain up to 20% in order to ensure that they are withholding sufficient funds to deal with this type of problem. Programmes that only retain 5% should also decide whether this should be 5% of the total project budget or 5% of the total funds claimed: The average under-spend for projects in INTERREG programmes seems to be about 5% so if programmes are working on the total approved budget, they will actually have little room for manoeuvre. If programmes instead work on 5% of the claimed budget, they will have to monitor projects closely when they are nearing closure to be sure that none of this final 5% is actually paid out. In addition to providing insurance against irregularities, the 5% retention also gives programmes leverage to ensure that projects submit final reports in good time. After the 5% has been paid out, errors can only be corrected by initiating a recovery procedure and programmes prefer understandably to avoid this if at all possible. Project closure should be a final confirmation of the findings of other first level control checks and there is no real difference in procedure as far as financial checks are concerned (other than the need to use an external controller if this has not been done before). Activity checks are generally stricter in order to ensure that the project has delivered all outputs and that there is a reasonable probability that expected results and impacts will be achieved. One other important issue is to make sure that projects understand the meaning of closure. It is a closure of the programmes grant to the project but does not represent the end of programme requirements towards the project. Even though the programme has accepted the final report and made the final payment, the project is still subject to second level control and checks by Commission auditors and the Court of Auditors. All project records and documentation therefore need to be retained and stored until three years after the formal closure of the programme (in theory this could mean until 2013). The same applies, of course, on the programme level and a key weakness on both levels is that key staff who could explain project actions have usually left the organisation long before later control visits take place. Project and programme records (the audit trail) should therefore be good enough to allow new staff to provide these explanations.
8.2 Steps to project closure

Accumulation of project records. The initial step in closing an INTERREG project is the accumulation of all official project records. These records include all accounts, papers, photographs or other documentary materials made or received by the project partnership in connection with the implementation of this project. These records should be kept by the project partnership. Preparation of project final reports. In order to receive the final payment, projects need to submit final reports. There are no standard rules about deadlines and documentation
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required to accompany final reports. In some programmes, the final report must be submitted by the end date for the project. In others the end date is used as the time for stopping implementation and the final report does not need to be submitted until three months after this (the actual close date). No activities are eligible after the project close date. Only one exception is sometimes made in programmes that also regard the end date as the close date. In these programmes it is sometimes possible to claim costs for activities related to the development of the final report after the end date (e.g. staff costs, printing and the final project audit) if these services have been contracted on a fixed cost basis before project end. They may then be included in the final statement of project expenditure even though they have not yet been formally incurred (the only time this is possible). Content of final reports. The required documentation differs across programmes though in general, programmes tend to ask their projects for a lot of information in the final reports. Programmes prefer to get more rather than less information to be sure they have what they need in future. A final report is divided into the activity and financial sections. The activity section sometimes includes the last periodic report covering the activities carried out in the final months of the project. Sometimes, however, the last standard report is kept separate and the final report focuses on lasting impacts of the project activities as a whole. In general, the activity report needs to include: Executive summary. The executive summary is also a good source of information for the programme database. Results obtained referring to the targets for these in the approved application. Overall project evaluation and project impact indicators How the project results will be disseminated and activities followed up Partnership evaluation. Programmes may use the project closure phase as an opportunity to ask Lead Partners for the overall evaluation of the partnership, how it worked, what kind of problems were experienced and what solutions were proposed. Programmes should also ask projects to assess programme performance. The finance section of the final report includes: Completion of first level control - The final financial report must include audited statements from all project partners and an audited statement for the whole partnership. The final first level control refers not just to individual items of expenditure but to the overall use of the funds granted in obtaining project goals. The controller here certifies all expenditure for the whole project thereby declaring that all claimed expenditure is correct. Controllers should also describe the first level controls carried out for each partner with their findings and conclusions, sum up the extent to which the project has been carried out in accordance with the approved application, subsidy contract and any other conditions. The controller must also confirm that all control issues have been satisfactorily resolved. Drawing up this report may also require that a new controller is used. Where internal controllers have been allowed for interim claims in the current period, an independent external controller must be used for the final report. Assessment of the Final Report. At project closure, programmes assess final reports against the project applications with approved changes. At this stage they may discover that the project has not implemented all activities in the application or that it has carried out activities not included in the application. Strictly speaking there should be a cut in the ERDF grant in both cases as changes have been made but never discussed and agreed with the programme and in many cases this is exactly what will happen. In some cases programmes take a more lenient approach and try to analyse the activities performed and paid for by projects even if they have not been approved before. If the activity is assessed as having added value to the project and the amount in question is not significant, most programmes approve it as an eligible cost. If the activity adds value to the project but the amount is significant, the issue is discussed with the SC. If there is no added value (such
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as using extra funds to purchase new computer equipment) the amount should be declared ineligible. The total paid to the project can never exceed the initial grant.
8.3 Programme closure

Once projects have been satisfactorily closed, the programme itself can move towards formal closure. This is the subject of an upcoming handbook from INTERACT Point Toolbox and we cover only the main points here. The programme closure procedure represents a declaration to the Commission that all spending declared has been confirmed correct, that all irregularities have been satisfactorily resolved and that it is safe for the Commission to make the final payment (i.e. that it is reasonable to assume there will be no need to later recover part of these funds). It can be a difficult time for programmes as it requires that all project issues have been resolved and there are normally a few problematic projects whose closure is delayed. A recent and considerable extension to the deadline for submitting closure documents to the Commission (the new deadline is 31 March 2010 15 months after programme end43) should ease some of the closure pressure. It will be important, however, that programmes do not become too relaxed about closure and still try to do as much as possible as soon as possible: If the process takes too long key stakeholders will lose interest or move on and deadlines will slip. Furthermore in principle, there is no funding available for closure activities after 31 December 2008 and this tends to mean that they are given a low priority after this date. However programmes, which will continue to operate in the new period 2007 2013, may use part of their new TA budget to cover costs strictly related to the closure of the current programme. These include e.g. printing of the final report, staff costs etc. Nevertheless, the advice must be to only make use of the extra time and new TA funds if absolutely required and otherwise close quickly so final payments can be made to projects. Three documents are required for programme closure: An audited statement of accounts
and application for the final payment, a final report and a declaration on winding-up the assistance, which gives an audit opinion on the programme. We focus here on producing the winding up declaration - or third level control as it is sometimes known.
The last 5% of programme funds is retained until after these documents have been submitted to the Commission and the Commissions auditors have assessed them as satisfactory. The 5% is calculated on the basis of total programme funds rather than funds claimed. If the programme has lost money to de-commitment, this will be deducted from the programme budget before calculating the 5%. This means of course that the last 5% of project payments will also have to be delayed until the last funds are received from the Commission (project final claims are generally paid on a first come first served basis until there are no funds left in the programme account). If there is any problem with the closure statement this part of the process can take a long time and some projects may be waiting for final payments for several years. It is imperative that programme closure is completed as swiftly as possible and in a way which enables quick Commission approval. The key actions which can be taken to assist this are to have accurate financial management and control systems and records during the lifetime of the programme.
43
General Regulation (1083/2006), 105.3. It is important to note that this part of the new regulation applies to the current period 2000-2006.
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Figure: Project closing phase Stage 1 Accumulation of project records Stage 2 Preparation of Final report Report on activities Report of finances
Stage 3 Submission of the Final Report
P R O J E C T
Stage 1
C L O S I N G
Stage 2
P H A S E
Stage 3
Potential problems encounteredUnresolved FLC problems - Unresolved SLC problems
How to facilitate Stage 2? - Start early so there is enough time to resolve control problems - Use retention of final project payment to encourage early delivery of project materials
Potential problems encountered -
Eligibility after closure: - Staff costs - Audit of the final report
Missing documents = incomplete audit trail
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Indicative timeline for programme closure TA expenditure still eligible. Advisable to get as much work as possible done in this period. Urgent need to close projects in time to get final audited statements of expenditure.
Provisional statement of total eligible expenditure as soon as possible.
All programme actions completed. Completion of winding up declaration.
1 January 2009
Completion of final report. Preparation for Monitoring Committee meeting.
31 March 2010
2008
Normal deadline for submission

Completion of second level control work. Draw up final statement of expenditure for programme including all adjustments made as a result of control. Check against final approved financial tables and programme accounting records. Costs incurred between 31.12.2008 31.03.2010 and purely related to the programme closure can be covered by TA of the new programmes. MA must be consulted about it.
Revision of final report
Last chance to respond to findings of winding up declaration / take corrective action.
MC meeting approves / comments on final report
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8.4 Third Level Control

The winding up declaration is sometimes prepared by the second level controllers of the Financial Control Group and sometimes by a separate body (and therefore called Third Level Control). This control work again checks the quality of earlier checks at both project and programme level and has to ensure that any recommendations made have been followed up. More specifically, preparation of the winding up declaration focuses on: The independence of the bodies carrying out second level control work The sampling method used for second level control checks How the final statement was drawn up The nature and quality of the audit work carried out The implementation of audit recommendations and correction of errors (meaning errors are reported to relevant bodies, amounts concerned are deducted from the statement of expenditure, recovery procedures are launched when necessary and systemic errors are corrected). Two negative results are possible. On the one hand, the winding up body may state that it has no opinion. This happens for example when second level control checks have been inadequate or serious management failures have not been addressed. The winding up body may also deliver a qualified opinion if the second level control sampling technique is weak or there are no formal procedures for identifying and treating systemic problems. Both of these decisions will result in delayed final payment and a request to the winding up body to quantify the extent of the problems (how much money to deduct). The winding up declaration will also address the frequency of irregularities and errors found during the second level control checks and any other audits that have been carried out. This is used to assess the overall reliability of management and control systems though errors are also weighted according to the impact they can be expected to have (for example, whether they are formal or substantive, will have a financial impact etc.) In general, however, a 2% rate of errors or irregularities is the limit. If the rate is higher this will lead to a qualified opinion unless the MA and PA can take effective corrective action. It is therefore important to start the winding up process as soon as possible in 2009 so that programme bodies have a chance to act on any negative findings. Programme closure also rests ultimately on the quality of first level control work carried out and the soundness of the systems and procedures described in the original description of programme management systems and procedures. These systems are perhaps the most important element if they have been used properly, as they should ensure that the programme avoids systemic errors (broadly speaking, errors that will probably be repeated every time the procedure involved is used). Avoiding this type of error is particularly important as they can lead to cuts in funding for all measures / priorities where these systems / procedures are in place if corrective action cannot be taken. On past experience it may take two or three years to complete programme closure. After 2008, however, funding for this process is ineligible and programme bodies may no longer be in place unless the programme will be prolonged in 2007 2013 and uses part of its new TA budget to cover closure related costs. Member States need to agree who has responsibility for holding programme records and dealing with any associated issues which might arise and how they are to be paid for this. In most current programmes the actual amount of the final payment can be calculated relatively easily as the balance of funds to be paid from the final statement of expenditure after deductions arising from control work. In programmes using different ERDF rates or including private co-financing in the financial tables, the situation can be more complex. This situation will be more common in future if programmes make use of the chance to vary ERDF rates between priorities. In these situations the 2% flexibility rule may be used. Its basic purpose is to balance out the ERDF rate if the final amounts claimed do not correspond exactly with the ERDF / co-financing split in the programme financial tables. Anyone wanting to know more should see the Commission Guidelines on closure.
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Annex 1 Regulatory Framework

Current programme period 2000 2006 The INTERACT website http://www.interact-eu.net/604900/443793/0/0 provides downloadable list of EU regulations for Structural Funds and communications of relevance to INTERREG. INTERREG III - Communication from the Commission of 2 September 2004 laying down guidelines for a Community initiative concerning trans-European cooperation intended to encourage harmonious and balanced development of the European territory (2004/C 226/02) Communication from the Commission of 2 September 2004 INTERREG III - Communication from the Commission amending the guidelines for INTERREG III (2001/C 239/03) Communication from the Commission amending the guidelines for INTERREG III INTERREG III - Communication from the Commission to the Member States of 28 April 2000 laying down the guidelines for a Community Initiative concerning trans-European territory INTERREG III INTERREG - Communication from the Commission of 1 July 2003 COM(2003) 393 final Paving the way for a New Neighbourhood Instrument INTERREG - Communication from the Commission to the Member States of 7 May 2001 'Inter-regional Cooperation' Strand C of the INTERREG III Community Initiative Commission communication C(2001) 1188 final Regulation - Commission Regulation (EC) No 448/2004 of 10 March 2004 amending Regulation (EC) No 1685/2000 as regards to eligibility of expenditure of operations cofinanced by the Structural Funds and withdrawing Regulation (EC) No 1145/2003 Regulation - Commission Regulation (EC) No 1145/2003 of 27 June 2003 amending Regulation (EC) No 1685/2000 as regards the rules of eligibility for co-financing by the Structural Funds Regulation - Commission Regulation (EC) No 2355/2002 of 27 December 2002 amending Commission Regulation (EC) No 438/2001 Regulation - Commission Regulation (EC) No 438/2001 of 2 March 2001 laying down detailed rules for the implementation of Council Regulation (EC) No 1260/1999 Regulation - Council Regulation (EC) No 448/2001 of 2 March 2001 laying down detailed rules for the implementation of Council Regulation (EC) No 1260/1999 Regulation - Commission Regulation (EC) No 1685/2000 of 28 July 2000 laying down detailed rules for the implementation of Council Regulation (EC) No 1260/1999 Regulation - Commission Regulation (EC) No 1159/2000 of 30 May 2000 on information and publicity measures (...) concerning assistance from the Structural Funds Regulation - Commission Regulation (EC) No 643/2000 of 28 March 2000 on arrangements for using the euro for the purpose of the budgetary management of the Structural Funds Regulation - Regulation (EC) No 1783/1999 of the European Parliament and of the Council of 12 July 1999 on the European Regional Development Fund Regulation - Regulation (EC) No 1784/1999 of the European Parliament and the Council of 12 July 1999 on the European Social Fund Regulation - Council Regulation (EC) No 1260/1999 of 21 June 1999 laying down general provisions on Structural Funds
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Regulation - Commission Regulation (EC) No 1681/94 of 11 July 1994 concerning irregularities and the recovery of sums wrongly paid in connection with the financing of the structural policies and the organization of an information system in this field New programme period 2007 2013 Regulation 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 replacing Regulation (EC) No 1260/1999 Regulation Regulation (EC) No 1080/2006 of the European Parliament and the Council on the European Regional Development Fund and replacing Regulation (EC) No 1783/1999 Regulation Commission Regulation (EC) No 1828/2006 setting out rules for the implementation of Council regulation (EC) No 1083/2006 and 1080/2006
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Annex 2 First level control in INTERREG 2000-2006

This annex covers some important features of the current system, which will however disappear in the new period. Anyone wanting information on the content of first level control checks should refer to the section handbook on first level control in the new period as there are no substantial changes.
Who is checked?
This is an important question. In the current period FLC has been carried out at the final beneficiary level: Anyone who is a final beneficiary gets controlled and likewise, if you are not a final beneficiary, there is no direct control - invoices are instead sent to the final beneficiary for control. The final beneficiary has been defined as the Lead Partner of a project meaning that financial control of all partners should be carried out by the Lead Partners controller. When this interpretation is used in INTERREG projects, it means that the Lead Partners controller will have to control expenditure from other countries where other rules and laws are in place and that he/she may also be unable to check supporting documents. Some programmes have made this work by harmonising the rules on both sides of the border. A shared language seems to be a minimum requirement for this kind of intensive cooperation. Often, however, controllers have refused to certify expenditure incurred in other countries. As a result, a number of different interpretations of the Lead Partner principle have developed and each has different financial control implications. Different interpretations are appropriate depending on the circumstances and in many programmes several different models are possible with each partnership left to decide which will work best for them. Some projects have operated under a central cash system. In these projects the Lead Partner receives the majority of the grant and pays partner invoices in effect serving as the bank for the rest of the project. The other partners generally have a small grant of their own to pay for e.g. travel costs and meetings. The Lead Partner is therefore responsible for First Level Control of the whole project but can monitor all spending carefully as it occurs. This system is particularly useful for projects with large numbers of small and/or inexperienced partners as it removes much of the administrative burden from them. It is also a good way of reducing audit costs. Another way of including small partners has been to make use of the sub-partner concept. Sub-partners are not part of the formal partnership and do not therefore need to appear in the application or contract - although the programme should be informed of all sub-partner participation. Sub-partners are organisations that play a minor but integrated role in implementation of the project. As such their costs are generally limited to small amounts of staff time. Evidence for this time can be collected and controlled at the partner level and expenditure included in the partners statements. If this is done, it is essential that the audit trail is secured and arrangements are made for preserving documentation after the end of the project. Sub-partners also need to fulfil the criteria laid out in the Interpretative note from the Commission Services on Council regulation 1260/1999 Article 32 (1). These criteria ensure that the Lead Partner retains ultimate responsibility, that there is a documented agreement of the full partnership on the participation of any sub-partners and that standard financial management requirements apply equally to spending incurred by sub-partners.
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Control structure of Lead partner project with sub-partners (2000-2006)
Lead Partner
Project Partner
Project Partner
Project Partner
Sub-Partner
Sub-Partner
Sub-Partner
In this connection, it is also worth noting the role of other final recipients. These are not part of the partnership at all and make no contribution in terms of hours etc they only receive funding. An example would be businesses receiving small grants under a scheme administered by a partner. It is important to recognise that these final recipients are still covered by financial control requirements and that steps must be taken to ensure the correctness of their expenditure and document the audit trail. Responsibility for ensuring that this is done will lie with the partner making the grant. INTERREG also allows projects to use the Extended Final Beneficiary Principle according to which all of the partners in a project can become final beneficiaries and are therefore controlled independently. This means that each partner can be controlled by a controller from its own country and this is the system in place in most programmes. The Lead Partner controller then signs a declaration that they have received properly certified statements of expenditure from all partners: They do not have to assess the quality of the control work done as this remains the responsibility of the first level control body in each country. In order for this system to work, programme management bodies have to agree on how the Lead Partners responsibilities will be interpreted in terms of First Level Control. The INTERREG Guidelines state that the Lead Partner will bear financial and legal responsibility to the Managing Authority. (INTERREG Guidelines, Point 31) Many programmes have interpreted this as meaning that the Lead Partner has financial liability for all expenditure even if another partner incurred and the expenditure and had it certified. Although most project partnership agreements transfer the responsibility for incorrect expenditure to the partner concerned, the financial liability of the Lead Partner has been an unreasonable demand in the current period and this will be changed.
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Defining the final beneficiary for first level control (2000-2006)
1. Central Cash System Generally more difficult to work with
Lead Partner
LP as only final beneficiary. Whole projects FLC done here
Project Partner 1
Project Partner 2
Project Partner 3
2. Extended Final Beneficiary System Removes most FLC barriers
All partners are final beneficiaries. FLC carried out in partner MS
Lead Partner
Project Partner 1
Project Partner 2
Project Partner 3
A complex partnership could in theory contain all of the elements outlined above - as in the example below. Partners 1, 2 and 3 are standard partners and take care of their own first level control under the extended final beneficiary principle. Partners 4 and 5 on the other hand are part of a central cash system and have most of their budget administered by the Lead Partner. Partner 1 is responsible for a small group of NGOs and administers them as sub-partners. Partner 2 makes grants to small businesses and is responsible for collecting and holding evidence for the audit trail of this expenditure. Using all of these features in one project would be extremely unusual and the complexity alone would make this a high-risk project. This shows the flexibility of the Lead Partner principle and that there is no single right structure for Lead Partner projects.
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First level control
Other project implementers
1. Other aspects of partnerships
Project partner 4 + 5
Lead Partner
Project Partner 1 Project Partner 2
Project Partner 3
Sub-partners 1,2 + 3
Final recipients
Who does the First Level Control?

First Level Control has been carried out by competent bodies in each Member State with the Member States free to define the most appropriate bodies in their own country. There have been two main systems though several programmes also operate a combination of the two. Decentralised control. In decentralised systems invoices are controlled at the premises of the final beneficiary by a controller appointed by the project. The Member State concerned defines the competent bodies that can carry out this control work. Examples include private audit firms, national public control bodies and controllers from the projects organisation as long as they are completely independent from the projects management (e.g. from the central finance or chief executives part of the organisation). This last option is a cheap and easy solution in the short-term but can cause longer-term problems, as the final control of the project must be carried out by an independent external controller. Normally these external controllers are not identified by the Member States until the first projects are ready to close. After they have been appointed, they have in some cases refused to accept the control work carried out in internal controls. This again highlights the need to identify all control bodies at the start of the programme and ensure that they accept the rest of the control structure. The main concern about the decentralised system is the quality of checks being carried out. Each controller may only work with one or a few projects and it is not easy for them to ensure consistency of approach to e.g. eligibility questions and to build up knowledge of the particular demands of INTERREG project management. To combat this, programme bodies are increasingly targeting these controllers with information and guidelines on audit and checks. Many programmes also run training events for project finance managers and/ or controllers immediately following project approval to ensure that the necessary financial management and control systems are put in place from day one.
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Centralised control. Some countries have centralised systems where all expenditure from all project partners is controlled by a regional or national level body. These centralised systems allow those who carry out the controls to build up specialist knowledge on INTERREG operations and ensure consistent and generally high standards. On the other hand, almost all such organisations are under-staffed and in some cases there are very serious delays in certification. In these systems there is generally a separate control body for partners from each country but in a small number of cases a centralised body will also control expenditure from other participating Member States. Programme controls. Controls tend to focus on financial aspects and checking invoices but the regulations make clear that checking progress on activities is equally important. For this reason, MAs and JTSs also normally play a role in first level control through the report checking they do. The main task here is to check the activities reported against the approved application and also try to identify ineligible activities (such as the purchase of equipment not mentioned in the application). These checks can also lead to cuts in the amount claimed and most programmes will not forward project claims to the PA until these checks have been made. They are therefore be considered as an integral part of the first level control process. Co-financing controls. Some countries and regions also carry out separate checks of the co-financed part of partner budgets. As noted previously, these checks can only be extra and cannot replace normal first level control. (i.e. programme control must anyway include both ERDF and co-financing). Project partners should anyway be following their national rules. These additional checks seem redundant and should be stopped if at all possible.
On the spot checks

Article 4 of Commission Regulation 438/2001 requires that First Level Control procedures shall require the recording of verification of individual operations on the spot. There have been considerable differences in interpretation of this regulation and whether it means checks should be carried out where original invoices and other documentation are stored or whether controllers should actually visits the sites where the project claims to have carried out its activities. Many programmes do now visit every project at least once in its lifetime but the status of these checks varies. Sometimes they are informal and are offered as an advisory service. In other cases they are related to other First Level Control activities and findings are fed into second level control decisions. Every programme has to make its own decision on the nature of these checks and ensure sufficient separation of management and control functions if on the spot visits are not carried out by first level controllers. A CDCR paper44 on good practice in Article 4 checks recommends that a sample of projects should be visited and that it should be possible to visit any project if necessary. This solution reduces the administrative burden on the programme, which can otherwise become excessive if there are too many projects. The extent of the visit depends on the nature of the project. Often visiting the office of the Lead Partner is sufficient. With major investment projects, visits to see the resulting outputs are essential: There are extreme cases of infrastructure that has been reported on and invoiced but never built. The decision on whether a site visit is required will depend on whether the reported outputs can be checked in any other way. In this connection it is worth noting the advice of the Commission that the only projects which should be approved are those which present a clear work programme with, for each activity, an identifiable product which makes it possible to check afterwards whether or not the event occurred (e.g. conference papers, a web site, implementation document, a report on activities undertaken. When carried out, on the spot checks have proved to be useful. They have often revealed weaknesses with project management and control systems that have otherwise gone
44
CDRR 06-0002-00 Draft working document concerning good practice in relation to management verifications to be carried out by Member States on projects co-financed by the Structural Funds and the Cohesion Fund (21/12/2005) 142

unnoticed. To make on the spot visits as effective as possible, programmes should send projects a checklist informing them in advance about what information they should have available. If projects cannot then provide key documents, this will be a clear sign of where efforts should be focused. Identifying these problems at an early stage means that they can be tackled before becoming a problem during later controls.
143

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TERRITORIAL COOPERATION OBJECTIVE FINANCIAL MANAGEMENT HANDBOOK

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

Financial Management Handbook

INTERACT Point Qualification and Transfer January 2007

Financial Management Handbook

Financial Management Handbook

Financial Management Handbook

Financial Management Handbook

Financial Management Handbook

Financial Management Handbook

Financial Management Handbook

Financial Management Handbook

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. 448/2004

Financial Management Handbook

Structure of the handbook

Key financial activities during programme and project life cycles

Budget plans Application Contracting Partnership Agreements

Monitoring First and Second Level Control

Financial Management Handbook

Note on terminology and abbreviations

Current period 2000 2006

New period 2007 2013

Main abbreviations used in the text

Financial Management Handbook

Different rules for new Member States 2007 2013

Changes in the new programme period: Comparison New MS vs. Old MS

ERDF grant rates

Up to 75% (programme level) (Excluding Greece and Portugal)

N+2 in the whole programme period (Excluding Greece and Portugal)

Eligible (with conditions)

7% paid in 3 annual instalments: 2%-3%-2%

5% paid in 2 annual instalments: 2%-3% (Including Greece and Portugal)

Financial Management Handbook

1. The programme cycle in Territorial Cooperation programmes

1.1 Key Financial Activities in the programme lifecycle

Financial Management Handbook

Start up: In Operational Programme

Start up: Other elements required

Implementation: Initial stage

Implementation: Main stage

Financial Management Handbook

1.2 Key challenges in Territorial Cooperation programmes

Financial Management Handbook

1.3 Quality targets for key activities

Financial Management Handbook

Financial Management Handbook

2. Start up phase: Programme level

2.1 Key elements to support financial activities (2007 2013)

Financial Management Handbook

2.2 Key points in developing programme management structures

Financial Management Handbook

2.3 Programme management bodies

Financial Management Handbook

Financial Management Handbook

2.3.2 The Steering Committee

Financial Management Handbook

2.3.3 The Managing Authority