1. Financial management of EU Programmes
Bölgesel Rekabet Edebilirlik Operasyonel Programı’nın Uygulanması için Kurumsal Kapasitenin Oluşturulmasına Yönelik Teknik Yardım
Technical Assistance on Institutional Building for the Implementation of RCOP in Turkey
This project is co-financed by the European Union and the Republic of Turkey
Financial management of EU Programmes
Cash-flow management & N + 3
Andrea Steigler

2. 2ND DAY AGENDA Budget planning and cash flow forecast
Cash flow management
Managing N + 3
Commitment and automatic decommitment
Early Warning System

3. Budget planning – programming phase
Why is it so important?
Financial planning
How much money? Where does it come from? Who decides?
The principle of co-financing
Why national money is also involved? How and how much?
Financial flows in EU rules
When does EU pays, at which conditions? What is “N+3”?
Reporting eligible expenditure
Why not all the expenditure is eligible? Which are the eligibility criteria? 3

4. Financial planning
A multilevel, multiannual process to take crucial decisions
How much money is needed?
Where the money has to be found?
What has to be done with the money?
The levels:
EU budget - for funding the global EU activity;
IPA MIFF - for funding IPA countries and components
RCOP - for funding OP axis and measures 4

5. EU BUDGET
Yearly value, but according to a 7 years strategy (“Financial Framework” )
Approved by the EU Parliament, together with the Council, on a Commission proposal
The budget is approved at the beginning of the year and establishes the following:
Revenues needed
Expenditure foreseen, policy by policy
All the activities of the EU for the year MUST respect the budget.
So, the Budget is the main document to understand EU priorities and their relative importance! 5

6. Financial assistance for Turkey
Where these figures
come from? AND
How do you plan them? 6

7. Programme and project implementation is always a learning process7

8. The CO-FINANCING PRINCIPLE
EU wants the beneficiary Country to share the efforts of financing an Operational Programme;
Why?
To prove that the Country believes in the shared strategy;
To have a guarantee that the Country will do its best to implement the OP
Cofinancing assures the EU on the willingness
of the State to implement the strategy
“Money often costs too much” 8

9. Basic principles of cash flow management
The amounts of money described in the OP financial plan are not immediately available;
EU pays the money at the times and conditions established by EU rules;
Mainly, the payments are based on the principle of reimbursement: EU only pays after the OP has spent and according to this expenditure. 9

10. Monthly basis – showing the status of each project and
Cash flow forecast
Monthly basis – showing the status of each project and
evidencing the needs for the following periods.
“The art is not in making money, but in keeping it” 10

11. Forecasted commiment (1)
Case from a Member State 11

12. Forecasted commiment (2)
Case from a Member State 12

13. Forecasted commiment (3)
Case from a Member State
Automatic decommitment can only be engaged in two cases:
Case 1: At the end of the second year following the initial commitment
If the commitment at the end of year “N” is not the subject of correct payment applications before the end of the second following year (N+2), the funds are automatically decommitted and cannot normally be recommitted.
Case 2: At the end of the deadline for submitting the final report
This is thus the final decommitment possible, which would be liable to arise at 30 June 2016 according to the state of the final financial progress of the programme. 13

14. IPA Implementing Regulation Article 40 – Payments
“Each payment shall be posted to the earliest open budget commitments of the IPA component concerned”. - is critical to understanding the N+3 rule
This means that OS is always drawing down funds from the earliest year’s allocation (budget commitment), until either the funding is used up (in which case, the payment is ‘posted’ to the next year’s allocation), or the operating structure runs out of time. 14

15. IPA Implementing Regulation Article 42 (3) – Pre-financing
“The total amount paid as pre-financing shall be reimbursed to the Commission if no payment application for the programme concerned is sent within 15 months of the date on which the Commission pays the first pre-financing amount. The Community contribution to the programme concerned shall not be affected by such reimbursement.”
This means that a certified statement of expenditure with payment application must be sent by the NAO to the Commission within 15 months of the date of the first pre-financing payment, otherwise the pre-financing must be re-paid to the Commission. This presents an additional pressure on spending to be managed alongside N+3. 15

16. IPA Implementing Regulation Article 160 (3) – Payments
Pre-financing (2)
IPA Implementing Regulation Article 160 (3) – Payments
“In addition to the provisions of Article 42, payments for the pre-financing payments for the pre-financing shall amount to 30 % of the Community contribution for the first three years of the programme concerned, and shall be made once the conditions laid down in Article 42(1) are met. Where necessary, with regard to the availability of budgetary commitment, the pre-financing may be made in two instalments.”
This pre-financing of the OP is treated as expenditure, for the purposes of the management of the N+3 rule. 16

17. Interim payments
In the Commission’s eyes, the beneficiary country is only considered to have incurred expenditure on the OP at the time it submits the declaration.
For the purposes of managing N+3, the Commission does not recognize the actual spending by individual projects which occurs up to that point.
Once the declaration is received, and the interim payment is made, the Commission “posts” the value of the expenditure (that is, the payment) against the earliest available budget commitment under N+3. 17

18. IPA Implementing Regulation Article 42 (4) – Pre-financing
Final payment
IPA Implementing Regulation Article 42 (4) – Pre-financing
“The total pre-financing amount shall be cleared at the latest when the programme is closed. Throughout the lifetime of the programme, the national authorising officer shall use the prefinancing payment only to pay the Community contribution to expenditure in compliance with this Regulation”.
IPA Implementing Regulation Article 45 (2) – Payment of the final balance
“That part of budget commitments referring to multi-annual programmes still open on 31 December 2017, for which the documents referred to in paragraph 1 have not been transmitted to the Commission by 31 December 2018, shall be automatically de-committed.” 18

19. REPORTING THE EXPENDITURE
A crucial activity in order to:
Obtain EU money through interim payments
Avoid automatic decommitment
But which is the expenditure that can be reported to EC?
Only the eligible expenditure!
EC rules establish a lot of principles and criteria of eligibility, defining which expenditure can be reported and at which conditions. A list of uneligible expenditures is also provided

20. ELIGIBILITY OF EXPENDITURE- The issue
Not all the costs and expenditures generated by a financed project can be covered by the OP financing.
This because the financing authorities want to maximise the cost-effectiveness of the public expenditure
Rules on eligibility of expenditure can be established at 4 levels:
EC regulations on IPA
Agreements between EC and candidate country on the use of IPA
Operational Programme
Administrative Orders/Acts of implementation

21. ELIGIBILITY OF EXPENDITURE- The issue
Rules on eligibility can be of 2 different kinds:
General principles of eligibility, established to set requirrements of eligibility that every expenditure must respect
Specific rules establishing the uneligibility of certain costs/expenditures or conditions for their eligibility
Administrative acts can not extend the limits foreseen in the EU legislation/agreements but they can narrow them
Possible problems for the operators:
Unconsistency between rules provided at different levels of the hierarchy
Absence of rules applicable to actual cases in any of the levels

22. ELIGIBILITY OF EXPENDITURE- general principles
In order to be eligible, and succesfully reported to EC any expenditure has to be:
Incurred by the “Final beneficiary” / „Contractor”
Actually paid
Adequately substantiated by receipted invoices or other accounting documents
Incurred in the eligibility period
Consistent with the OP and the relevant operation
Respectful of any relevant national legislation
Not covered by any other EU contribution
In line with the principles of sound financial management (economy and cost-effectiveness)

23. Eligibility of expenditure – specific rules
Uneligible expenditures and costs
Certain conditions/limitations of eligible costs

24. Managing N+3 to maximise absorption and meet objectives
The OS must monitor both the performance of individual projects and their aggregate effect – and manage this project portfolio accordingly. The remainder of section 4 considers this monitoring and management at the following levels:
Projects
Measures (including across projects)
Priority axes (across measures)
The whole OP (across priority axes)

25. Monitoring and managing N+3 (1)
Managing N+3 means monitoring, but this is not a backward-looking exercise. It is the source of management information and intelligence that drives decision-making about the future.
If the gap between performance and plan is significant, this should a more thorough review by the OS and a decision as to whether action should be taken.

26. Monitoring and managing N+3 (1)
What can be the potential options in these cases?
- Accepting assurances that the budget and timescale should remain the same, but that the expenditure profile will be changed
- Allowing the project to continue, with an unchanged budget, but a longer timescale and a new expenditure profile
Allowing the project to continue, to the same timescale and profile as originally envisaged, but with a reduced budget
Allowing the project to continue, with a reduced budget and an extended timescale and new profile
- Allowing the project to continue, with a reduced budget , shortened timescale and new profile
- Stopping the project completely and terminating the contract

27. CASE STUDY - EXCERSISE 3

28. Case study from other country
OP Commitments
Year
Annual Allocation
2007
2008
2009
Total
Advance payment:

29. Case study from other country

30. Excersise 3 Advance payment: 18.510.075 2007-2009 OP Commitments Year
Annual Allocation
2007
2008
2009
2010
2011
Total
Advance payment:

31. DECOMMITMENT (N+3 rule)
The AUTOMATIC
DECOMMITMENT (N+3 rule)
A rule established by EU to make sure OPs are effectively and timely delivered, and the commitments for OP are not left unused for a long time;
Every commitment made by EC for the year ‘n’ of the OP financial plan, has to give rise to payments within the 31/12 of the year ‘n+3’.
Commitments – or parts of them – left unpaid after the deadline are automatically decommitted. It means that the country loses the right to have that money and the financial plan of the OP is accordingly reduced. 31

32. The AUTOMATIC DECOMMITMENT
2007
2008
2009
2010
2011
2012
2013
Total
50,2
52,9
55,6
63,4
77,6
89,93 96
485,63
to be paid by EC to Beneficiary Country within 31/12/2010
to be paid by EC to Beneficiary Country within 31/12/2011
… and so on… 32

33. DECOMMITMENT (N+3 rule)
The AUTOMATIC
DECOMMITMENT (N+3 rule)
How to avoid it?
Getting payments from EC! …At the beginning it’s easy (the pre-financing arrives automatically..) but then it becomes hard. The only way is rapidly reporting expenditure and getting interim payments in a sufficient level.
A good strategic direction of the OP is needed: to avoid N+3 you need expenditure, to have expenditure you need projects, to have projects you need contracts, to have contracts you need TORs/calls… and so on. All the OS is involved in the target.
Opposite risk to be avoided (problem in the 27 MS): indiscriminately increase the speed of expenditure, forgetting about quality and strategic targets.

34. Main reasons leading to a risk of automatic decommitment
Difficulties in partnership relations between the OS and other programme actors
Errors in the programming strategy: these errors increase the risks of automatic decommitment do not arise as a result of relationship or partnership problems but because of too ambitious or badly calculated programming. There are potentially numerous causes of these strategic errors
Problems arising in the administrative and financial monitoring of the programme and the projects: this category of problems is more technical than the previous problems and their occurrence depends on the experience of the OS and its partners in the programme.

35. TYPES OF RISKS
REAL RISKS encountered by the programmes: it is important to identify and to rank these risks underlined by the programme in the sample.
THEORETICAL RISKS that could occur. Even if these risks are not „real”, potentially could be occured.

36. REAL RISKS (1) Overly slow start-up of the programmes
Problem in the submission of invoices
Submitting invoices to the OS is closely linked to the question of automatic decommitment, notably during the final quarter of the calendar year, a few weeks from the cut-off point 31/12/N, when the sums at risk can already be detected and proactive measures must be taken to encourage lead partners to present receipted invoices.
Overly slow start-up of the programmes
In this case N+2 rule in distorted from the beginning.
Poor preparation of the projects

37. REAL RISKS (2) Insufficient monitoring of the projects
Contracts that are not restrictive enough
Overly quick selection favouring quantitative programming to the detriment of qualitative programming
Lack of coordination between the key players
Systematic errors in the criteria for eligibility of expense
Misunderstanding of the final date for the selection of projects, submitting invoices/declaring expenditure and completion of projects

38. THEORETICAL RISKS (1)
Lack of coordination between the OS and End recipients
Lack of coordination between the OS and the control services
The support of the Leader of the Consortium (Contractor)
Differences in strategy between elected representatives and programme managers
Intercultural problems or difficulties in cooperation between OS/Contracting Authority and Contractor
Problems of communication
Reduced level of cofinancing

39. THEORETICAL RISKS (2)
Unforeseen events blocking the proper progress of the projects, like:
Lack of organisation and coordination of the project.
Failure of a public procurement procedure or failure of an environmental impact study/CBA/etc.
Defection of one of the partners or divergence on the implementation of the project.
Loss or delay in the transfer of a public subsidy.
Technical impossibility in the completion of all or part of the project.
Difficulties to cope with the administrative complexity of the management of IPA funds.

40. THEORETICAL RISKS (3)
Insufficient trainings, lack of training for the key players
Contradiction between the automatic decommitment rule and the usual public finance practices
The non-insertion of automatic decommitment within the general framework of the programme

41. TOOLS helping to prevent a risk of automatic decommitment (1)
Training and awareness actions
Regular coordination meetings between the programme authorities
Possible difficulties in certain projects
Progress reports on the priorities and measures of the programme to redirect the animation and preparation strategy
The necessity to proceed to coordinated plans/schedules for submitting the declarations of expenditure in each of the programme zones;
Risks of unwarranted expenditure and recovery procedures to be put in place;
Questions of interpretation on eligibility rules that could pose problems;
Consequences to be drawn from 5% control and quality control operations led by different actors

42. TOOLS helping to prevent a risk of automatic decommitment (2)
Increasing awareness among all partners of the logic of automatic decommitment
and its consequences - Upstream information for the Contractor
Identification of projects and themes at risk, for example:
projects where the participants have shown, through other operations, difficulties in implementation;
projects where implementation is subordinated to the completion of prior studies (feasibility, impact, environmental studies, etc.) or to the implementation of call for tender procedures;
projects where the theme makes implementation more complex (infrastructure works, university research etc.);
projects involving a large number of partners.

43. TOOLS helping to prevent a risk of automatic decommitment (3)
2. Establishment of adapted monitoring tools and procedures
Completion of a management chart for monitoring
Implementation of a schedule for the submission of invoices and expenses
Receipts
A well-drafted contract between the Contracting Authority and the Contractor
The link between eligibility of expenditure and automatic decommitment
Proposals for improvement in the consideration of the question of automatic decommitment within the framework of the next programming period
3. Establishment of motivation system for successful planning, implementation and complition of projects and programmes

44. Early Warning System (1)
Two tools at the Commission to ensure the sound financial management of EU funds:
EWS – identifies bodies and individuals representing financial and other risks to the EU, so the Commission can take precautionary measures
Central Exclusion Database – database for all bodies and individuals excluded from EU funding for various reasons: insolvement entitites, final court judgements for fraud, corruption, decision of a CA for grave professional misconduct, conflict of interest.
EWS covers:
Contracts and grants managed directly the Commission
Contracts and grants managed by non-eu countries 44

45. Early Warning System (2)
C(2004) 193/3, as last amended by the 2007 internal rules
COMMISSION DECISION on the Early Warning System (EWS)
Categories of warning to be entered in the EWS
W1, where information give sufficient reason to believe that findings of fraud, serious administrative errors or other irregularities will be recorded
W2, where a third party is subject to findings of serious administrative errors or fraud
W3, where a third party is subject to pending legal proceedings
W4 shall be activated by the Accounting Officer vis-à-vis third parties subject to recovery orders issued by the Commission exceeding a certain amount and on which payment is significantly overdue.
W5, where a third party is excluded in accordance with regulatory provisions 45

46. CASE STUDY - EXCERSISE 4

47. Excersise 4 (1)
Budget Allocation Year: 2009 47

48. Excersise 4 (2) 48

49. Excersise 4 (3) 49

50. THANK YOU FOR YOUR PARTICIPATION WISH YOU THE BEST ABSORPTION OF IPA FUNDS!