Article Observation

Recital 41 It would add legal certainty if the draft general Regulation listed the specific provisions on State aid regarding financial instruments.

Recital 87 The Court recommends to change the text as follows ‘…In order that the level of auditing by the Commission is proportionate to the risk, the Commission should be able to reduce its audit work in relation to operational programmes where there are no significant deficiencies and where the audit authority can be relied on.’

Article 4(5) It is not clear from the regulation how the principle of proportionality should be applied and how proportionality should be assessed.

Article 4(9) This provision, limited to effectiveness, is redundant and contradictory with Article 4(8) which refers to Article 73 of the Financial Regulation, and therefore also to the principles of economy and efficiency. In any event, the stages of ‘planning’ and ‘implementing’ should be added to monitoring, reporting and evaluation.

Article 8 This Article introduces the ‘polluter pays’ principle in the secondary legislation. However, for example in agriculture, the application of the principle suffers from weaknesses in the supervisory and control systems (lack of relevant controls, reductions of subsidies calculated as a proportion of aid rather than as a proportion of the impact on the environment) as well as in the actual enforcement of the reductions of payments. The Court recommends reinforcing this principle by ensuring its application in the relevant parts of the fund-specific regulations as well as in the programmes of the Member States.

Article 24(3), Article 40(2)(h) The indicators required will be over and on top of the SMART indicators specific to financial instruments. Given the combination of such indicators with numerous but general operational programme indicators for grants, there is another argument why financial instruments should preferably be co-financed from one single operational programme.

Articles 28 to 31 The ‘Community-led local development’ could be an important mechanism to create and upgrade local institutional capability towards result oriented implementation. While recital 21 of the draft Regulation states that ‘to better mobilise local potential it is necessary to facilitate community-led local development … Responsibility … should be given to Local Action Groups (LAGs) representing the interests of the community… ’, most rural (and urban) areas already have structures that represent the interests of the local community, i.e. communes, councils or other local government structures. These have advantages over LAGs in that they are representative of the local population; they are democratically accountable and have already established administrations with the capacity to manage budgets. Attention should be paid to ensure that the LEADER approach offers a real added-value over the alternative of channelling the funding for local development strategies through these existing bodies.

Articles 32 to 40 The term ‘financial instrument’ should be defined. The term is commonly used in the financial industry to designate securities or contracts providing their holder (or owner) with a claim. Such instruments are typically loans, guarantees, equity or quasi-equity investments or participations or other risk-bearing instruments. A similar definition is used in the proposal for amendment of the Financial Regulation (Article 130). However, Article 33 of the draft general Regulation does not refer to the above mentioned instruments, but to vehicles that provide financial instruments, i.e. fund of funds and funds. The Regulation should further clarify whether and under which conditions the provision of working capital is eligible for support and whether there should be a ceiling for management costs borne by the EU.

Article 32 Article 32 provides that an intervention may be justified not just by market failures but also in ‘sub-optimal investment situations’. Without further precisions, this could lead to support for poorly justified financial instruments. The circumstances in which EU support for financial instruments may be available should be more narrowly defined in the draft general Regulation. For financial instruments strict rules have to be imposed: — on the use of the bank accounts on which the CSF resources are deposited, and — on the relevant accounting and reporting requirements. In particular, one bank account should be open for each financial instrument, where all in- and outflows (initial contributions, loans granted, payment linked to guaranteed defaulted borrowers, premia, interests, returned resources, management fees) are respectively deposited/withdrawn. A separate accounting for the financial instruments should be kept, which should be reconciled with the bank account. Annual financial statements for the financial instruments should be prepared and audited. Failing to lay down these constraints entails the risk that, under the proposed legal framework, (a) financial instruments are used to circumvent the obligation of national co-financing and that (b) the auditors are unable to detect this breach of the EU regulation.

Article 32(2) When final recipients are also beneficiaries of grants from various public sources (CSF funds, other EU grants, national/regional grants), the requirement to maintain separate records creates an additional complication, as the information reported would miss out on the actual level of public support received. In order to ensure completeness, the Annual Implementation Reports should report on a consolidated basis on the different sources of financing used for financial instruments in the programme area.

Article 33(3) Article 33(3)(b) leaves the door open to funding vehicles not regulated by future implementing acts under Article 143.

Article 33(4)(a) and (c) There is a risk of supporting Managing Authorities without significant experience in financial services. In addition to that, under Article 33(4)(a), a Managing Authority may recapitalise public banks or funds overloaded with liabilities as long as new investment vehicles are set up without any funding of new SMEs or SMEs particularly at risk.

(b)(i) ‘EIB’ and not ‘European Investment Bank’ as only the former is a defined term and should comprise the EIF.

Article 35 This Article allows declaring expenditure paid or expected to be paid to the financial instruments over a predefined period of maximum 2 years. It is unclear whether this means that the request for payment can include payments not yet incurred. In addition, Article 35(3) requires an adjustment of the eligible expenditure presented to take account of the difference between amounts paid to the financial instruments and by these instruments to the final recipients. It is not clear whether this requirement only refers to the disclosure of the adjustment or also to the adjustment of the total eligible expenditure recorded.

Articles 36(1), 55(2) and 114(4) The capping of management costs per type of vehicle (fund of funds and other funds per type of financial instrument) should be regulated. As in the 2007-13 general Regulation, the Proposal is ambiguous regarding guarantees. Provided that a sound financing gap assessment has been prepared, guaranteed amounts of portfolio guarantees should be eligible expenditure. Article 36(1) is unclear whether portfolio guarantees committed during the eligibility period would be eligible even if the underlying instruments (e.g. loans) are issued after closure of the programming period.

Article 36(2) Given the delays observed during operational programming, in the case of Venture Capital funds, the extension of the period for eligible expenditure should be longer (e.g. 10 years), which, in combination with the respect of pari passu and leverage requirements, would help EU funds delivering increased legacy funding.

Articles 37 and 39 As under the 2007-13 Regulation, it is unclear whether interest and other gains attributable to EU support paid to financial instruments should be used for the same type of financial instruments and for how long after closure (revolving nature of interest and capital gains). As per Article 39, legacy funding (including gains and other earnings) may be used to fund grant schemes, therefore limiting the revolving effect.

Article 38(1) and (2) In its Communication on the financial rules applicable to the EU Budget, the Commission indicates the need to increase the leverage of EU funds as the rationale to use financial instruments. However, this Article fails to address sound financial management issues: — It adds the distinction between capital resources paid back and other resources, which would imply technical difficulties in determining the amount to set aside to pay for the management costs. — The re-use ‘in accordance with the aims of the programme(s)’ gives no legal certainty that the public sector sets funds aside. — The preferential remuneration of investors is foreseen as a standard, without being balanced by leverage or other requirements. Preferential treatment of investors in case of fund liquidation has not been addressed. — The pari passu principle, applied under the Multiannual programme for enterprises and entrepreneurship (MAP) and the Competitiveness and Innovation Framework Programme (CIP) (for equity instruments) has not been referred to. It leaves the EU funds subject to any kind of preferential treatment. Alternatively, the Commission could refer to the alignment of interest principle. Without further clarification, the EU legacy funding foreseen for future SMEs is at risk. In addition, resources returned to and revenues earned by the financial instruments should not be re-directed elsewhere before the closure of the operational programme, as it is proposed in Article 38(1) and 38(2): such resources should return to the relevant financial instruments.

Article 38(3) The period during which records pertaining to the re-use of resources have to be kept and may be audited is not defined.

Article 39 Article 39 defines to re-use of financial instrument resources attributable for CSF Funds (10 years after the closure of the programme). It is still not clear however how this will be monitored. Whilst the definition of the minimum revolving period of 10 years is welcomed, it does not take into account the specificities of the different types of financial instruments and is not detailed in terms of leverage ratios and indicators. The possibility to recycle in the form of grants after closure of the programme has not been specified. After the closure of the programme (2022) and in the case of equity funds benefiting from legacy funding follow-on investments have been made impossible.

Article 40(2)(b) and (g) The wording used in (b), ‘description of the financial instrument and implementation arrangements’, is imprecise (Article 44(2) of Commission Regulation (EC) No 1828/2006 contains more adequate wording), and in (g) confuses the reader with a ‘multiplier effect’, which is not defined. Recital 22 correctly refers to the ‘leverage effect’, not the ‘multiplier effect’. Furthermore, the multiplier effect strongly differs between equity, loan and guarantee instruments, a fact not recognised in this draft general Regulation.

Article 44 The Member States shall submit a final report on the implementation of the programme by 30 September 2023 for the ERDF, ESF and CF and an annual implementation report for the EAFRD and EMFF. It is not clear why this distinction is made between the structural funds on one hand and the EAFRD and EMFF on the other hand.

Articles 51 and 52 The Court takes the view that technical assistance should support the generation and upgrading of ‘local lasting institutional capability’ which goes beyond the generation and implementation of a single project or the carrying out of related operations with the help of external expertise.

Article 56 This Article introduces new forms of support, such as prize and repayable assistance. No definition however, especially for prize, is provided. The conditions for repayable assistance should be more detailed, for example for State aid schemes.

Article 57 It is unclear at which level the possible methods are to be defined and monitored. It would not be acceptable that the calculation method is established by the beneficiaries. It is unclear whether the simplified cost method can be used for cost categories which were subject to procurement.

Article 58 The acceptable direct and indirect costs are to be clarified.

Article 59 The ‘period of support for the operation’ in Article 59(2)(c) and the ‘permitted higher percentage’ in Article 59(3)(b) needs to be defined.

Article 60(2)(b) It is unclear why a different approach is followed between the two groups of funds.

Article 60(2)(d) The sort of agreements envisaged needs to be clarified.

Article 61(1) Article 61(1) should clarify that it is in any event the Member State that should reimburse EU funds, regardless whether it has recovered the funds from final recipients.

Article 63(2) It would be useful to make reference also to the principles laid down in Article 62.

Article 64 Reference should be made to the criteria set by the Commission (Article 117(1)).

Article 76 It is unclear what is meant by veracity of the annual accounts.

Article 77 Article 77(2) seems to suggest that financial corrections will be applied only to compliance issues. This would be inconsistent with Article 20(4). Article 77(4) of the draft general Regulation stipulates that the criteria and the procedures for applying financial corrections shall be laid down in the Fund-specific rules, but the Fund Regulations are silent in this respect.

Article 84(4) and (5) It is unclear how these amounts will be divided up by Member State.

Article 90 There is no conceptual or legal argument why financial instruments could not be considered as major projects if their combined size exceeds 50 million euro. On the contrary, there is a lost opportunity here, as recognition as a ‘major project’ could be a way to promote the creation of fund of funds with sufficient critical mass, considering the legal certainty a Member State obtains after applying for a ‘major project’.

Articles 91 and 92 The funding gap issue is not resolved; it is unclear whether the funding gap needs to be applied for interim payments.

Article 97(1) It should be provided that the Commission definitively participates in the steering committees.

Article 100 This Article overlaps with Article 43.

Article 110(7) The Court advises the Commission to further define the framework of the 100 % co-financing option for financial instruments and to address the risks: — that CSF funds crowd out EU funds managed centrally by the Commission, and — that the combined legacy funding of CSF and other EU funds remains subject to de-commitments.

Article 117(4) The Commission should be in a position to request the report and the opinion of the independent audit body and the description of the management and control system for all operational programmes, independently from the amount of EU support.

Article 130 The Court recommends specifying an additional date at which the Annual Management Declaration needs to be produced to make the proposed timetable work.

Article 131 There are several uncertainties about this proposed procedure, for instance with regard to the deduction of revenues for already completed projects. The arrangements for ERDF/CF and the ESF should be aligned, i.e. for ESF the rolling closure should also apply to ‘operations’ and the related expenditure rather than just ‘expenditure’.

Article 132 This provision limits the Court’s powers and leaves solely to the Commission the possibility to ask for an extension of the availability period. With the new electronic systems to be used it is important to clarify what form of documents can be accepted as audit evidence (i.e. use of certification of conformity of documents at national level — point 5, and security standard of electronic documents — point 6).

Article 137(2) The Court recommends specifying that the examination should not only be subject to the agreement of the Commission but also that the latter has responsibility for verifying the nature and extent of the examination undertaken and the appropriateness of the conclusions drawn.