INTERACT Financial Management Handbook

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TERRITORIAL COOPERATION OBJECTIVE

FINANCIAL MANAGEMENT HANDBOOK

March 2007


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INTERACT is financed by the EuropeanRegional Development Fund (ERDF)


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Financial Management Handbook

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4.7 Project claims for payment ..............................................................................764.8 Tackling poor project spending ....................................................................... 804.9 Tackling a de-commitment threat....................................................................824.10 Recycling funds and end of programme de-commitment..............................834.11 Payment Claims to the Commission ............................................................. 84

5. Start-up phase: Project Level................................................................................855.1 How to get project budget right ....................................................................... 86

5.1.1 Resource Planning................................................................................... 875.1.2 Cost Estimating ........................................................................................ 885.1.3 Cost Budgeting......................................................................................... 88

5.2 Budget detail vs. flexibility ............................................................................... 905.3 Helping projects get it right.............................................................................. 925.4 The assessment process ................................................................................ 93

5.4.1 Eligibility check......................................................................................... 945.4.2 Assessing project budgets ....................................................................... 965.4.3 Risk assessment ...................................................................................... 97

5.5 After approval.................................................................................................. 976. Operating phase: Project Level............................................................................. 99

6.1 Avoiding project financial problems.................................................................996.2 The payment chainProject reporting and claims for payment ...................101

6.2.1 Reporting requirements.......................................................................... 1016.2.2 Control / certification of claims ............................................................... 1026.2.3 Assessment of reports............................................................................ 102

6.3 Helping projects with implementation problems............................................ 1037. Certification of payment and financial control ..................................................... 106

7.1 First Level Control ......................................................................................... 1087.1.1 Who is checked?.................................................................................... 1107.1.2 Who are the controllers? ........................................................................ 1107.1.3 What is checked by the first level controller? ......................................... 1137.1.4 What is checked by programme management bodies? ......................... 118

7.1.5 What happens if there are problems? .................................................... 1187.2 Second Level Control / Audit......................................................................... 1197.2.1 Content of audits and common problems detected................................ 125

7.3 Financial Corrections and Recovery .............................................................1268. Project and programme closure.......................................................................... 129

8.1 Project closure .............................................................................................. 1298.2 Steps to project closure................................................................................. 1308.3 Programme closure....................................................................................... 1328.4Third Level Control ........................................................................................ 135

Annex 1 Regulatory Framework.............................................................................. 136Annex 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
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 theprogramme at the start to cover the programmes start up costs and to make the firstpayments to the projects. In the 2000-2006 funding period the Advance Payment was 5% forall 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% forprogrammes involving the EU-15 MS spread over three or two years respectively.

Audit Authority: A national, regional or local authority or body, functionally independent ofthe managing authority and certifying authority, designated by the Member State for eachoperational programme and responsible for verifying the effective functioning of themanagement and control systems. (Source: Art. 59 EC 1083/2006) Assisted by a Group ofAuditors from the countries participating in the programme, the Audit Authority develops anaudit strategy according to which it carries out the inspection of the programme systems andprocedures and of a selected sample of projects. Actual audits are sometimes contracted toaudit 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 ofthe programme systems and the financial records of a sample of projects. It should confirmthe 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 detailedinformation about expenditure actually incurred. The accounting records show the date theywere created, the amount of each item of expenditure, the nature of the supportingdocuments and the date and method of payment. The audit trail provides evidence of theexpenditure claimed and enables tracing the financial data to its source. (Source: Annex 1EC 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 isa tool to encourage efficient financial management and avoid funds being left inactive inprogramme accounts for many years as it intends to speed up the absorption of funds withinprogrammes. According to the N+2 rule, funds allocated to a programme must be spentwithin three years (where N is the commitment year and +2 is the year by the end of whichfunds committed in N have to be spent). The rule is applied at programme level butprogramme managers may choose to reallocate expenditure away from inefficient projectsthat are slowing programme spending.

Beneficiary: Operator, body or firm, whether public or private, responsible for initiating orinitiating 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 thatneed to be carried out. It is fine-tuned at the Monitoring Committee meetings and becomesthe basis for Technical Assistance spending. The business plan is a medium term planningtool providing a longer perspective than the annual or 6-monthly work plans normallysubmitted to Monitoring Committees but providing greater detail and accuracy than the longterm plans provided in the Operational Programme.

Certifying Authority: A national, regional or local authority or body designated by theMember State to certify statement of expenditure and applications for payment before theyare sent to the Commission. (Source: Art 59 EC 1083/2006). The Certifying Authoritymanages programme funds and transactions with the Commission and recovers incorrectlypaid funds.

Certification: Means that expenses have been approved by the body officially responsible. Itoccurs at two stages in the claims process: Firstly, all expenditure from every project partner


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Lead Partner: Administrative leader of the project who is responsible for ensuring that allproject activities are carried out according to the approved project application and that allpartners have all expenditure certified by the designated first level controller. The LeadPartner signs a subsidy contract with the Managing Authority.

Managing Authority: A single programme body responsible for ensuring the effectiveimplementation of the agreed programme strategy in accordance with the pre-determined

quality standards. The Managing Authority takes the lead in establishing systems andprocedures and ensures they are maintained.

Memorandum of understanding / Letters of agreement: Documents drawn up betweenthe national or regional authorities participating in a programme and the programmesmanagement bodies. They are reciprocal agreements defining both MA requirements fromthe Member States and the Member States requirements from the MA and othermanagement bodies. (Source: Art 59.3 EC 1083/2006)

Monitoring Committee: A committee which provides each Member State withrepresentation in the programme and safeguards the Member States interests. It takesdecisions on the programme level and needs to be kept informed of progress towardsprogramme 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 puttingan end to irregular or fraudulent expenses within the Community budget framework.

Operational Programme: Document submitted by a MS and adopted by the Commissionsetting out a development strategy with a coherent set of priorities to be carried out with theaid of ERDF. (Source: Art 2 EC 1083/2006). It is the most important programme documentdescribing the programmes background, objectives, priorities, financing and implementation.

Partnership Agreement: It is a requirement that for each operation a lead beneficiary shalllay down the arrangements for its relations with the beneficiaries participating in the operationin an agreement comprising provisions guaranteeing the sound financial management of the

founds allocated to the operation, including the arrangements for recovering the amountsunduly paid. (Source: Art 20 EC 1080/2006) In practical terms the partnership agreementsets out the main responsibilities of the signatories (Lead Partner and Project Partners),financial provisions (how the project budget will be subdivided between partners, eligibleexpenditure and procedures for claiming payments) and governance issues (structures androles, procedures including settlement of disputes, etc.) on how the project should bemanaged and implemented.

Progress Report: Comprised of the Activity Report and Financial Report (Payment Claim) itdocuments the progress of the operation and serves as a payment request. Lead Partners ofoperations have to submit a progress report at the end of each reporting period to the JointTechnical Secretariat.

Real costs: The whole system of payments is based on this principle. Projects can onlyclaim amounts that they have really been charged (amounts incurred) in connection withwork required for the project, and can only claim them from the programme after theseamounts have actually been paid by the project.

Recovery: When funds are incorrectly (or unduly) paid to a project, the programme has toget them back from the project partner concerned. Programmes normally do everythingpossible to avoid this sometimes difficult procedure by holding back the last part of projectpayments until they have control guarantees that the spending claimed is correct.

Separation of functions: The management and control systems of operational programmesset up by Member States shall provide for compliance with the principle of separation offunctions 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 todifferent bodies to allow for the checking of work carried out elsewhere and removeopportunities for corruption.


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Steering Committee: An optional programme body responsible for the selection of projectsand in some cases post-approval monitoring.

Sub-contractor: A third party that is assigned tasks on behalf of the partnership. Thesetasks will be the subject of a contract and the sub-contractor will need to be selected throughpublic procurement procedures.

Subsidy Contract / Grant Offer Letter: Contract between the Managing Authority and theoperations Lead Partner. It determines the rights and responsibilities of the Lead Partner andthe 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 contractsshould 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 th roughoutthe programme lifetime to check the procedures established by all of the differentmanagement bodies for administering the programme. This check focuses on whether thesesystems will allow sound management of the programme and whether the systems describedare 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 Commissionfunding. They can occur at project level (e.g. failure to secure the audit trail) or programmelevel (e.g. giving incorrect advice on public procurement). Systemic errors generally result ina suspension of payments and large grant cuts.

Technical Assistance: One of the priorities in the INTERREG / Territorial Cooperationprogrammes covering the operating costs of the programme. It is financed in the same wayas all other costs with an ERDF contribution and a co-financing component. Theprogrammes TA budget is kept in a separate bank account to ensure that there can be noconfusion with other programme funds.

Third Level Control: In future this will also generally be carried out by the Audit Authority. Itinvolves preparing and approving the final statement of programme expenditure, the final

report and a winding up declaration certifying that all expenditure declared is correct andthat the findings of all controls and audits have been implemented. This control must becompleted before the programme can close.

Winding up declaration: A document confirming that the necessary checks have beencarried out and all corrective actions required have been completed. It is used by theCommission to make the decision to close the programme and make the final payment.

Virement:Technical term sometimes used to describe the movement of money betweenpriorities. These movements of funds require Commission approval.


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relevant to project level finance managers. Projects should, however, always check therequirements of their own programmes before using the recommendations in the handbook.

There is perhaps one surprising omission. We have not included a detailed section oninterpreting the 12 rules of the current eligibility regulation. This is because an excellentanalysis of these rules is already available in the Eligibility Handbook produced byINTERACT Point Managing Transition and External Cooperation (MTEC) in Vienna. The

handbook is available online athttp://www.interact

-eu.net/913123/1068570/0/0

Financialcontrollers will nevertheless still find much that is relevant in this handbook.

5. The handbook was developed to accompany the INTERACT training seminar on FinancialManagement in Territorial Cooperation programmes. Anyone wanting further detail or theopportunity to discuss the points raised is recommended to attend the next seminar, whichincludes case studies and additional examples of many of the points discussed here. Detailsof the timing and location of future training seminars can be found on the INTERACT websiteat www.interact-eu.net under Events. Alternatively, send an e-mail requesting information [email protected]

6. Where relevant, boxes indicating the main changes in the new programme period and infoboxes defining important terms have also been added to the text.

The main regulations governing INTERREG / Territorial Cooperation programmes

Current period20002006

New period20072013

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

Eligibility of expenditure Reg. 448/2004

Implementing Reg. 1828/2006

7. There are many text boxes in the handbook containing different kinds of backgroundinformation. They have been flagged with one of the four icons and should help you find yourway around.

These sections cover the rules, regulations and main terminology involved in INTERREG /European Territorial Cooperation programmes. They are an introduction for those who arenot familiar with the programmes.

These sections contain information explaining how the rules workon a practical example.
http://www.interact-eu.net/http://www.interact-eu.net/913123/1068570/0/0


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These sections address good practise examples on how to successfully implement theregulatory requirements into workable solutions.

These sections contain a summary of the key points presented. These may be valuabletips 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 inter-linked and sound financial management requires that these links are understood andexploited. Some division of the content has, however, been necessary and the handbook isbroadly structured in two sections: Programme Level and Project Level. The table belowgives an overview of some of the main points covered in each section.

Key financial activities during programme and project life cycles

Start Up Implementation Closure

Programme Bodies

Systems

Tools

Documentation

Fundsmanagement andpayments

First andSecond LevelControl

Closurestatements

Project Budget plans

Application

Contracting

PartnershipAgreements

Managementof spend

Monitoring

First andSecond LevelControl

Finalpayments

The text within each section follows the programme and project lifetime and the mainprocedures required at different stages. Nevertheless it is generally impossible to properlyunderstand one level without also considering the other and we would recommend that allreaders 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 ofboth project and programme closure, which draws heavily on previous sections and hastherefore 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 newprogrammes (2007-2013). This handbook is largely based on the new period. Whereterminology from the previous period is used it should be understood as describing a practiceor procedure that may no longer apply in future.

Main changes in terminology

Current period20002006

New period20072013

INTERREG

Community Initiative Programme

Territorial Cooperation Objective (sometimescalled INTERREG IV)

Operational Programme

Paying Authority Certifying Authority

Second Level Control Group Audit Authority

Art 5 Declaration Art71 Declaration(Description of managementand control systems)

Main abbreviations used in the text

AAAudit Authority (new period)CACertifying Authority (new period)CIPCommunity Initiative Programme (old period)CSGCommunity Strategic GuidelinesERDF European Regional Development FundEU15The 15 EU Member States joining before 1 May 2004EU10The 10 EU Member States joining on or after 1 May 2004FLCFirst Level ControlIBIntermediate BodyISAInternational Standards on AuditingJTSJoint Technical Secretariat

LPLead PartnerMAManaging AuthorityMCMonitoring CommitteeMSMember StateMSCCombined Monitoring and Steering CommitteeOLAFEuropean Anti-Fraud Office (Office Europen de Lutte Anti-Fraude)OPOperational Programme (new period)PAPaying Authority (old period)SCSteering CommitteeSLCSecond Level ControlTATechnical AssistanceTCTerritorial Cooperation (new period)


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Different rules for new Member States 20072013

It is extremely important to realise that the new regulations define two different groups ofTerritorial Cooperation programmes with different rules in a number of key areas:

Different rules will apply to programmes involving Member States with a GDP of below85% 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 programmesinvolving at least one of the new

2MS (EU12) as compared to programmes involving

only old3MS (EU15)

It is important to note that these different rules apply to the whole programme if it involvesone of these countries (for example, the whole of the Finland-Estonia programme will becovered by the rules for new Member States). The changes are summarised below but muchmore detailed descriptions are available in relevant sections of the handbook for anyoneunfamiliar 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 eastGerman lnder)

Up to 75% (programme level)

(Excluding Greece and Portugal)

De-commitment N+3 in the first half of the programmeperiod changing to N+2 for the secondhalf

(Including Greece and Portugal)

N+2 in the whole programmeperiod

(Excluding Greece and Portugal)

Spending onhousing

Eligible (with conditions) Not eligible

AdvancePayment

7% paid in 3 annual instalments:

2%-3%-2%

5% paid in 2 annual instalments:

2%-3%

(Including Greece and Portugal)

2 New MS are countries that acceded to the European Union on or after 1 May 2004. Though

increasingly outdated, the terminology is maintained for ease of reference.3Old MS refers to EU-15


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1. The programme cycle in Territorial Cooperationprogrammes

Territorial Cooperation financial managementOperational objectives

Maximise the use of ERDFSecure high quality projects

Secure quick enough pace of spend to avoid de-commitmentDevelop programme confidence on eligibilityEnsure that financial control standards and deadlines are metLimit bureaucracyActively manage potential problems using different planning timescales:

o Long-term: Operational Programmeo Mid-term: Business Plano 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 withstartup, implementation and closure phases. The first task of finance staff is to understandthe key requirements at each stage so challenges can be predicted and managed.

The programme lifecycle provides a basic framework of regular events and deadlines towhich clear targets can be assigned. Commission spending deadlines (de-commitmenttargets) determine the programme spending targets which in turn will be used to set targetsfor allocating funds to projects. Similarly, workflows generally follow the project lifecycle with

predictable peaks during calls for applications and assessment of reports. All of theseelements should be considered at the start of every programme to gain an overview of theresources 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 foundationfor the two key documents describing the way that the programme will be implemented: theOperational Programme(CIP in the current programmes) and the Description of Systemsand Procedures(Article 5 declaration in the current programmes). These documents shouldprovide 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 overlapbetween phases.


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Key financial activities in the programme lifecycle

Start up:In Operational

Programme

- Identify programme management bodies and defineroles

- Establish legal framework e.g. agreements withMember States

- Produce financial tables and financial sections of theOP

- Decide split of funds between priorities and grantrates

- Define as far as possible all financial managementand control procedures e.g. for application andassessment, contracting, management of TA budget

Start up:Other elements

required

- Define systems and requirements for work of programmemanagement bodies (Description of management and

control systems)- Produce application forms- Producereport 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 onproject 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 movementof 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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Quality targets and common problems continued

Target: Audit and monitoring. Ensure consistent and regular monitoring checks fromprogramme start, deal swiftly with irregularities and recovery of funds, minimise theiroccurrence through advice to projects.Common problems:Many audit and control responsibilities rest with the Member Statesbut 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 newregulations require that most of these structures are in place shortly after programme start.

Target: Secure project spending. Give ongoing advice to projects and streamline thebudget modification process.Common problems:Little advice is available on setting up project budgets and as a resultspending forecasts for early stages are often much too optimistic. Programmes need toadvise on realistic budget profiles, provide flexibility for changes and ensure that spendingforecasts have a sufficient safety margin for project under-spending.

Target: Administration of the Technical Assistance budget. Maximise the use of the TAbudget 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 smallerin the new period). Detailed forecasting is needed to ensure the liquidity of programmemanagement bodies.

At closure

Target: Swiftly complete closure statements based on sound financial management andmonitoring systems, which have been run during the programmes lifetime and minimisedelaysin making final payments to projects.

Common problems: Closure should allow an analysis of project and programmeachievements compared to the resources allocated. Monitoring systems are not alwaysadequate 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. Ensurefinancial functions are adequately staffed with a clear separation of functions and that staffare 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 beobtained within three monthsMonitoring 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 databaseA technical assistance budget

Present to the first MC a Business Plan describing resource requirements foradministration of the programme. Agree arrangements for co-financing contributions fromMember States/ regions.

Provide documentation to meet the European Commission requirements including anindicative financial plan in the OP. Soon after approval draw up detailed requirements forsecuring the audit trial and the handbook of procedures.

Programme start-up involves a number of key decisions that will have a lasting impact on theeffectiveness and efficiency of implementation. The first of these is the selection of theprogramme management bodies and the next, delegation of the roles and responsibilitiesbetween these bodies. The basic outline for these structures needs to be included in theOperational Programme and forms a key part of the Commission decision on whether toapprove the programme. The OP is supplemented after approval by a more detailedDescription of Systems and Procedures and a Handbook of Standard Procedures.These documents form part of the independent systems check of the programme and alsoneed to be approved by the Commission.

Some major changes have been introduced in the new regulations particularly with regard toprogramme management bodies. These are covered in more detail below but we start with asummary of services that management structures have to deliver to the programme.

2.1 Key elements to support financial activities (20072013)

The key elements which should be set up at the start of a programme to support financialactivities are outlined in the requirements for management and control systems in theregulations as follows:

The management and control systems of operational programmes set up by Member Statesshall 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 theoperational 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 executionof 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 amountsunduly paid.

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These tasks are divided between a number of bodies including the Member States, theMonitoring and Steering Committee the single Managing Authority, Certifying Authority andAudit Authority and the Joint Technical Secretariat. The regulations contain clear descriptionsof the role of each of these bodies and stress that the main principle to observe is theseparation of functions between them and in particular of management, control andpayment responsibilities. Two areas of potential conflict need to be addressed. Firstly, tasksassigned in the regulations to one body are often delegated to another (typically the JTS) andthis needs to be defined in detail so all stakeholders are clear about precise roles. Thesecond problem is related. Some tasks such as project monitoring require the input of morethan 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 inorder to secure quality standards while avoiding duplication. These relationships are

therefore defined in two important documents the Operational Programme and theDescription of Systems and Procedures both of which are covered in more detail later inthis 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 theregulations is the main tool for building programme management structure Set up a limited number of single programme bodiesSingle programme bodies serve the interests of all MS participating in the programme Draw up documentation defining roles of programme bodiesEach body needs to add value to programme management Management bodies must be well integrated into programme information, managing,monitoring and control systemsManagement bodies must define the standards and systems that need to be in place inall MS participating in the programmeProgramme management bodies will perform 4 main programme management tasks:

o Allocation of fundso Certifying correct expenditureo Claiming funds from the Commissiono Paying funds to final beneficiaries

The biggest change in the new period is the introduction of single programme managementbodiesand the joint technical secretariat to deliver management functions: Structures inone 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 adaptdetails to their own needs but effective management can be achieved with a limited numberof responsible bodies.

4 Council Regulation (EC) No 1083/2006 laying down general provisions on the European Regional

Development Fund, the European Social Fund and the Cohesion Fund and repealing Regulation (EC)

1260/1999, 58


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Key programme management bodies:

Monitoring CommitteeSteering CommitteeManaging AuthorityJoint Technical SecretariatCertifying AuthorityControl 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 thatthere will only be one in each programme.

In the past some programmes have divided these bodies by country with one body to lookafter projects and partners from each country. In future the principle of cooperationwill

be extended to programme management and each single authority will have to look afterall projects from all countries participating in the programme.

The concentration of programme functions in a limited number of joint bodies shouldensure improved cooperation and efficiency as well as cost savings. The main challengefor these joint bodies is to define the standards and systems that need to be in place inother Member States to ensure sound financial management and to define theirresponsibilities with regard to these systems. In the past, the division of management tasksand responsibilities between too many different bodies has too often meant that differentstandards have been applied and that no central source of reliable programme data hasbeen available.

Joint management bodies

Only one body is referred to as joint the Joint Technical Secretariat. The single bodiesare generally national or regional institutions in one of the Member States and staffed bypublic servants of that Member State. The JTS on the other hand has a representativeinternational 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 theprogramme and safeguards the Member States interests. Equally importantly, it allowsprogramme bodies to inform and remind Member States of the actions needed to fulfil theirobligations under the regulations. The MC comprises representatives from national, regionaland/or local bodies (in the cross-border programmes the regional level will generally play astronger role). It takes decisions on the programme level and needs to be kept informed ofprogress towards programme objectives, the status of programme finances and anyproblems in programme level bodies and procedures.

The strategic role of the MC should be made clear to all members: The committee isexpected not just to follow but also to forecast programme performance based on theinformation 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 documentationsuch as fact sheets on eligibility questions and thus needs a detailed understanding of theissues at stake.


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In the current period attendance at some committee meetings has been low and this canmake decision-making difficult. The best way of avoiding the problem seems to be to ensurethat the MC is given an active development role rather than just rubber-stamping thestandard monitoring data that need to be approved. This means that the papers provided tothe committee are very important for providing an informed basis for discussions. Financialinput will be required for:

Briefingon 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 businessplan describes how the TA budget will be used to meet the programmes objectives andfulfil its obligations. It focuses on concrete actions and should be used as a tool for mid-term planning (i.e. 2 years ahead). The content of the business plan can then be used fordefining individual annual work plans for different members of staff. It should as a minimumcover the activities of all bodies drawing funds from the TA budget.

The plan allows programme bodies to agree realistic management strategies and assessworkloads for decisions on staffing. It is approved at the beginning of programmeimplementation and generally updated every 6 months following programme needs. Thebusiness plan also includes programme financial targets and ways of achieving them. Notall actions can be predicted and there is a need for flexibility to deal with actions not in theplan. Such actions should however be an exception so that all management bodies have asufficient 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 periodThe main tasks to be carried out to meet objectives in the coming period broken downby unit / departmentAn analysis of whether existing resources and particularly staff are sufficient to carryout these tasksAn analysis of the TA funds available and how they should be used

Review of the programmes financial position comparing the current position with thetargeted position. If there are major differences, a proposal needs to be made forovercoming this problem. Key figures for the MC include:

o

Programme allocation by priority (and measure in the current programmingperiod)o Payments to date and N+2. What is the programme situation concerning

N+2? Is there any threat of de-commitment?o The TA budgeto Is extra spending required by the programme? How much? What initiatives

can be taken to secure this?o 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 theprogramme)

Future programme strategy: Over time every programme will encounter problems thatneed 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 applicationsbeing received at different stages of the programme lifecycle. Information on the financialframework will give the MC an understanding of its options for addressing thesesituations, such as:


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o Deciding what to do if the programme needs more projectso What to do in case the programme has too many eligible projects (advice to

the SC on prioritising applications)o Suitable actions to attract projects within a certain measure

As noted above, the MC also provides a forum for programme bodies to question MSrepresentativ

es on the actions being taken to meet national authority obligations in theprogramme. This is essential as a number of financial control decisions need to be taken on anational level and experience from the current period has shown that delays in taking thesedecisions can endanger the whole programme.

The main point to bear in mind is that each MS is ultimately responsible for all activitiescarried 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 carryout their functions.

Management and Control:

MS are responsible for setting up effectively functioning management and controlsystems for OP (via the MC)Within max 12 months of the approval of the OP, MS must submit to the Commission adescription 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 meetnational audit requirementsMS will designate First Level Controllers and ensure that the appointed body completescertification within max 3 months

MS, through First Level Controllers, will ensure that all expenditure incurred by partners inthe MS complies with Community and national rulesMS must delegate a representative to sit on the group of auditors assisting the AuditAuthority 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 todetermine 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 theMember States territory;MS will report to the Commission each quarter on any irregularities which have been thesubject of a primary administrative or judicial finding. Even if no irregularities have beenreported, MS still need to submit this report;

MS will follow up in each quarterly report on actions taken as a result of previouslyreported 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. Inthe new period, it is recommended that wherever possible the two committees should becombined in order to reduce the number of meetings. Some programmes will however retaina 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 ismaintained between the two parts of the discussion. The SC decides on the allocation ofERDF funds but these decisions have a major impact on progress towards meetingprogramme 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 andregional interests above programme considerations, especially at the end of a programmewhen funds are scarce.

In the current period, for example, some SCs have regularly rejected assessments madeaccording to the agreed programme criteria. The result is that weak applications areapproved 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 limitthis problem without affecting the independence of SC decisions (and indeed the MA has anobligation 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 caninclude a number of safeguards:

SC members should commit themselves to providing sound reasons for rejecting theproject assessments presented to them. These reasons are recorded in the minutes ofthe meeting and are available to all stakeholders.Decisions should be based only on the information in the applications to prevent someprojects gaining an unfair advantage.All committee members who have been involved in the development of a project shoulddeclare 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 MCneeds to play a role: Regular disagreement with assessment conclusions means that theprogramme assessment criteria are wrong, the assessments are being performed poorly orSC decisions are not being made in accordance with the criteria decided by the MonitoringCommittee. In each of these cases, the MC together with the MA needs to take action andadjust the programme.

These actions are mentioned here (with apologies to the many well-functioning SCs)becausethey are essential for the financial management of the programme. The approval of poorlyprepared projects is a major factor in programme under-performance and the SteeringCommittee 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 astrong assessment of project financial plans and information on the impact on programmefinances of approving different projects (fundamentally whether there is enough money) inorder to make these decisions.

In case a current INTERREG III programme continues in the new period with no changes tothe participating MS, the programmes MC can take decisions on both current and futureprogrammes 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 forensuring the effective implementation of the agreed programme strategy to pre-determinedquality standards. It therefore takes the lead in establishing systems and procedures andensuring that they are maintained though many MAs prefer to assign daily operation of thesesystems to the JTS. The indicative list of MA responsibilities below is based on theregulations for the new period but does not differ substantially from the current period. Themain responsibilities are:


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Maintaining standards

Ensuring that projects are approved, delivered and monitored in accordance withagreed criteriaOn-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 controllersEnsuring that project partners are aware of the terms under which grants are awardedand that they have sufficient capacity to fulfil these conditions ( ImplementingRegulation 13.1)

Ensuring compliance with information and publicity requirements

Maintaining standards

Ensuring that projects are approved, delivered and monitored in accordance withagreed criteria

On-the-spot checks on at least a sample of projects

Ensuring project accounting standards, maintenance of the project audit trail and thatpayments have been certified correctly by the designated first level controllersEnsuring that project partners are aware of the terms under which grants are awardedand that they have sufficient capacity to fulfil these conditions (ImplementingRegulation 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 decisionsDrawing 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 opposedto the national programmes is worth mentioning. Under the Territorial Cooperation Objective

the MA is not responsible for ensuring compliance with national and Community rulesregarding project expenditure

5because different national rules are in place in each country.

This task becomes instead the responsibility of the first level controllers in each country. TheMAs responsibility in this respect is limited to ensuring that the agreed checks have beencarried out by the designated body.

Ensuring is a key word in the MA responsibilities as defined in the regulations: The MA doesnot carry out many of these tasks itself but instead delegates them to another body. Mostoften it is the JTS that takes on these responsibilities.

5 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 audittrail. Put simply this means keeping records to show how every EURO of programmemoney has been spent. In most cases this is simply a matter of storing the invoices issuedfor 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 controllerscan always know where to check if they have questions. These documents have to be keptuntil three years after the formal closure of the programme (in theory until 31.01.2019 forthe new programmes), as it is still possible for European audit bodies to carry out checksuntil then.

There are, however, some costs for which it is not possible to show an individual projectinvoice 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 meansthat they provide reliable proof of how the money was spent and different programmes andcountries 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 showingthat attempts have been made to find the cheapest suppliers. See section 7.1.3 for moredetails of documents required to secure the audit trail.

Generally speaking, original documents are needed for the audit trail. In the newprogramme 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, thespending it covers will be rejected. The basic rule is: If you cant prove it, it neverhappened!

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 inproject 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 allcommunication down to the project level and in processing the reporting informationreceived from the projects. The MA tends to specialize in more formal communicationsupwards 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 andprovides guidelines and support during project development as well as often carrying out atleast part of the assessment of project applications. It also generally plays a strong role inmonitoring project implementation and spending, and recommending changes based on theresults. As such its staff need considerable financial expertise and there is a need forprogramme level discussion of the advice they will give and the systems they will use. It isimportant to note that the MA retains responsibility for checking that, for example, thefinancial control of projects has been completed satisfactorily even if this work is carried outby another body. This is the reason why the systems established by the programme playsuch a vital role: They define the MAs requirements and allow it to rely on declarations fromother bodies that these requirements have been fulfilled.

6ERDF Regulation, 14.1


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According to the regulations the JTS is not meant to provide support to the CA since the CAwould normally be working on payment claims prepared by the JTS. However, if the CAissues a request for information, the JTS is of course required to provide all necessaryinformation 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 orCertifying Authority as it will be known in the new period. There is no significant change infunction between the PA and the CA so for ease of reference we refer always to the CAbelow.

As can be seen from the figure below, the CA plays a key role in payment procedures andalso acts as a final control body before claims are made to the Commission. The maintasks 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 andpayment requests to the Commission as well as clarifies the nature and quality of theinformation these requests are based on

Managing programme funds and transactions with the Commission

Draws up claims to the CommissionMaintains computerized accounting records of expenditure declared to theCommission and payments receivedReceives funds from the Commission and makes payments to LPKeeps a separate programme bank account for ERDF

Recovering incorrectly paid funds

Recovers funds unduly paid to beneficiaries / project partners (together with LeadPartners and Member States)

The CA administers the programme bank accounts (generally one for project payments andone for TA) and is often responsible for ensuring programme liquidity (that there areenough funds in the account to make payments). It gathers project claims for payment fromthe MA and compiles these into claims to the Commission generally two or three times ayear. As a result, many CAs also play a role in drawing up spending forecasts and managingthe N+2 situation.

The accounting records it keeps will cover the claims made, amounts received from theCommission and payments actually made to projects. Separate records held by the MA willrecord 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 systemsagree 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 hasto 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 MAresponsibility for certification stops and where the CAs starts. It is clear that the CA has asupervisory 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 onensuring that reliable systems and procedures are in place and that programme documents

7Implementing Regulation, 20


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1. Project Lead Partner

6. CA

5. Commission

4. CA

3. MA and/or JTS

2. First level control

bodies

Basic Territorial Cooperation programme payment procedures and bodies responsible

6. Makes payment to project

5. Approves valid claims andtransfers money to CA

2. Certify that expenditure claimedcomplies with relevant rules andregulations

3. Confirms that certification andreports are satisfactory4. Certifies programme claim based on MA /

JTS information

1. Draws up project report and claim payment


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The paper highlights some good practice in carrying out this role. It suggests that the CAshould 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 surethat agreed procedures are in use and that the expenditure declared can be reconciled withother records. Some of these checks can be limited based on positive outcomes of othersystems 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 expendituredeclared by the MA (and any intermediate bodies). In order to do this it must developsufficient 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 onfinancial control in INTERREG. This regulation will no longer apply in the new period but allof the checks it describes will continuejust with different names.

All project expenditure needs to be checked to make sure that it has really been spent oncarrying out project activities and that none of the relevant rules have been broken. After ithas been checked, it is officially approved or certified. This process is called First LevelControl or Article 4 checks (after the article in the regulation which describes what needs tobe done).

As outlined above, the CA needs to check that everything has been done properly beforeaccepting project claims and actually paying the money to them. These are the Article 9checks.

Finally, an independent outsider is sometimes asked to check a sample of this controlwork. This process is called Second Level Control or Article 10 checks. You can find a lotmore 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 programmesleading to considerable confusion in some cases. The new regulations make theterminology clear: Control is first level control and audit is second level control (see the boxabove for definitions of these terms). Control is carried out by a controller, audits by anauditor.

2.3.7 Intermediate Bodies

In addition to the main management bodies described above, the regulations allow forIntermediate 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 orcertifying authority, or which carries out duties on behalf of such an authority vis--visbeneficiaries implementing operations.

8

The number and tasks of the IBs established by programmes in the current period (andparticularly the cross-border programmes) has varied enormously but four main groups canbe identified:

8General Regulation (EC) 1083/2006, 2 (6)


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Many Member States making the transition from PHARE9

to INTERREG have kept thestructures used to implement PHARE. Rather than redesigning the whole programmestructure halfway through implementation, PHARE management bodies have taken overthe same role in INTERREG on the new Member State side of the border. This has led tothe 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 notcentralised at one MA / JTS. These bodies are generally concerned mostly with projectdevelopment and can be particularly valuable in large programme areas. Sometimes awhole 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) aresometimes given responsibility for selecting and monitoring projects under that theme.

Programme efficiency. Language and administrative barriers have often meant that it issimply 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 programmestructures and as a result the added value of some of these bodies is being seriouslyquestioned. There have been two main complaints. Firstly, true cooperation is expected fromprojects and should therefore also be a requirement for programme bodies: One basiccondition for this is that management should be entrusted to single bodies working for allparticipating Member States. The second problem has been one of coordination. In too manycases, IBs have pulled in different directions developing their own interpretations ofprogramme strategy and using different standards. Perhaps more importantly, they have notbeen properly integrated into the main management systems and procedures and in theworst cases this means that it is not possible to get a collected picture of programme statusand that errors enter the programmes monitoring and accounting systems. Sub-PayingAuthoritieshave a particularlybad reputation in this respect and it is unlikely that they will beallowed in future territorial cooperation programmes.

These problems are addressed in the new regulations. As explained previously, they proposethat each programme should have only one single MA and CA and a Joint TechnicalSecretariat. Although still allowed, Intermediate Bodies should be seen as the exception andwill only be approved if their added value can be convincingly demonstrated. A likely exampleof IBs that will be accepted is the use of sub-JTSs or Contact Points to achieve bettercoverage of the programme area, as they have been a valuable addition in many existingprogrammes. IBs that duplicate key management functions on either side of a border are, onthe other hand, extremely unlikely to be approved. Two questions therefore need to be askedabout 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 andcontrol systems?

The second of these questions is also covered in the new regulations, which contain strictrequirements for defining the role and organisation of IBs in relation to other programmestructures:

The Member State may designate one or more intermediate bodies to carry out some or all ofthe 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 performedby 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.10General Regulation 1083/2006, 59.2


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The provisions of this regulation concerning the Managing Authority and Certifying Authorityshall apply to that intermediate body.

11

There are a number of key points here. Firstly, the main programme bodies retain fullresponsibility for all of the actions of IBs. Secondly, the relationship must be described andwill 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 theinformation to be provided according to Article 21 of the same regulation. This requires a fullwritten 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 anextensive procedure. In programmes where there have previously been many IBs,management bodies should ask themselves whether these bodies could not effectively beincorporated into the programme in a less formal way (e.g. through participation oncommittees and working groups).

2.3.8 Audit Authority

The Audit Authority is the last of the compulsory programme management bodies. It iscovered in detail in the chapter on Certification of payment and financial control but weprovide some basics here.

The Audit Authority is based in the same country as the MA but in Territorial Cooperationprogrammes it will generally be assisted by a Group of Auditors with one representative fromeach 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 theindependent check of a programmes management systems as laid out in the Description ofSystems and Procedures. The AA must approve the proposed structures if they are to beaccepted by the Commission. During implementation the AA is responsible for organisingsecond level control. In particular, the AA should verify the effective functioning of programmemanagement 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 arepresentative random statistical sample. In some programmes the actual audit visits toprojects are sub-contracted to an external company. In others they are carried out by the AAand the members of the Group of Auditors. At programme closure it is also the AA that isresponsible for drawing up the Winding up declaration. This is a document confirming thatthe necessary checks have been carried out and all corrective actions required have beencompleted. It is used by the Commission to make the decision to close the programme andmake the final payment.

Some of this terminology is new but this way of working is actually in place in mostprogrammes already. The main reason for including the AA as part of the formalmanagement structure is to ensure that it is set up at programme start and that second levelcontrol work is not delayed as it has been in many cases in the current period

12.

11Implementing Regulation, 1212 See Implementing Regulation, 23 for the information that needs to be provided about the AA at

programme start-up.


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These points need to be stressed because of experiences from some current programmes. Insome cases, roles have not been adequately defined and this has led to unnecessaryconflicts about who should be doing what. In other cases, management bodies have not beenwilling to delegate powers and this has led to unnecessary delays due to the need to seekapproval for even minor decisions. Both situations have seriously impacted programmeperformance. Certainly, the relationship between programme bodies is a trust-buildingprocess and new structures should expect some tensions. This is why it is so essential toinvest 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 Procedures3. 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 makea 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 adevelopment strategy with a coherent set of priorities to be carried out with the aid of aFund,

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 andthe 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 havebeen chosen. The priorities should be further specified in overall goals and quantifiedindicators on implementation, results and impact to measure the progress towardsachieving the goals.Breakdown of the spheres of assistance by category i.e. description of the type ofactions that will be funded under each priority. This has important implications for theeligibility of project applications.Joint programme financial tables (i.e. no breakdown by Member State). The first tableshould show the ERDF contribution split by programme year. The second tableshould 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 andresponsibilities (see below), the monitoring and evaluation system and the MonitoringCommittee, procedures for financial flows, information and publicity activities.Information on the electronic monitoring system for exchange of digital data betweenthe programme and the Commission.

An indicative list of any major projects expected to be submitted under theprogramme. It is very unlikely, however, that most Territorial Cooperationprogrammes will carry out this kind of project (generally over 50 million andrequiring special procedures and Commission approval) they are best run undernational programmes.

Certainly, the emphasis of the OP is on programme content and strategy but it also containsbasic information on management structures, the responsibilities of the bodies involved and

13General Regulation (EC) 1083/2006, 2 (1)


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Responsibilities and bodies in Territorial Cooperation management structures

Main responsibilities definedin OP and national letters ofagreement with the

programme

Main responsibilities definedin OP and Rules ofProcedure

Main responsibilities definedin OP, Art 5 declaration(description of systems andprocedures), subsidycontract and approvedapplication

The full content to be included in the description covers four articles of the ImplementingRegulation ( 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 theirdepartments, 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 verificationpurposes in Article13 [MA administrative and on-the-spot checks], and the procedures bywhich payments to beneficiaries are authorised, executed and entered in the accounts

The procedures by which statements of expenditure are drawn up, certified and submittedto 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 operationalprogramme

The system for keeping the detailed accounting records of operations and informationreferred to in Article14(1) under the operational programme.14

14Implementing Regulation, 22

MemberStates

EuropeanCommission

MonitoringCommitte

ManagingAuthority

IntermediateBodies

CertifyingAuthority

ProjectLead

Partners

Project

Partners

JointTechnicalSecretariat

AuditAuthority

Respons

ibilityand

liability

Main responsibilities aredefined in OP, descriptionof systems and proceduresand letters of agreement

Main responsibilities defined in projectpartnership agreement and approved

application


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When completed this document is submitted to the Audit Authority which will audit thesystems in place to ensure that programme staff are familiar with what needs to be donealthough where systems and procedures are essentially the same in the new period as theyhave been in the past, this systems check will be less detailed. The AA needs to complete itschecks in time for the approved document to be submitted to the Commission within twelvemonths of programme approval.

Preparing this description can be a major task but in addition to setting out the procedures tobe used, it has a number of benefits. First and foremost it provides all programmestakeholders (especially staff) and the Commission with an accepted version of how theprogramme will be run. Lack of security about roles and responsibilities has been a significantproblem in some programmes so far and is often stated as a major factor in high staffturnovers. Secondly, it provides confidence in the standards being applied and reduces therisk of systemic faults (problems that are assessed as affecting large parts of the programmeand can lead to major cuts in Commission funding). Finally, it aids cooperation and serves asa reference point in cases of disputes about programme implementation.

The description of systems and procedures will perhaps be the most important documentfrom a financial management perspective, as it contains the first detailed description offinancial 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 upbetween the national or regional authorities assigned responsibility for programmeimplementation in each participating Member State and the Managing Authority (on behalf ofother programme bodies). They are reciprocal agreements defining both MS requirementsfrom the programme and the programmes requirements from the MSs. Much of the contentis standard and defines the relationship between the programme and the MSs and the bodiesappointed 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 proceduresfor paying MS contributions to the TA budget. In general, these agreements attempt toharmonise programme procedures with particular national requirements.

In turn the MSs commit to fulfilling their obligations in the recovery of funds incorrectly paidout and providing the information required for the MA, CA and AA to carry out their duties. Inthe new period this will refer particularly to the timely identification of approved controllersand 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 iscovered in detail in the project section of the handbook but is mentioned here to emphasisethat the process of delegation must extend right down to the project partners. The subsidycontract (or grant offer letter) between the MA and the project LP ensures that finalbeneficiaries (project partners) are required to meet the standards of, and supply adequateinformation for, programme management and control. In the new period subsidy contractsshould also address failures of project implementation and the risk of projects losing funds ifthey are responsiblefor programme de-commitment.

In the new period a Lead Partner will be responsible for laying down the arrangements for itsrelations with all the partners participating in the operation. The agreement will take form of apartnership 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 liablefor all of the expenditure they incur and that any funds incorrectly paid out will be recoveredfrom the partner concerned.


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Some key principles

Territorial Cooperation programming, including the set up of financial management andcontrol systems, is based on a number of key principles. Proposals for systems andprocedures 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 nationalbasis but rather on behalf of and for the benefit of the whole programme area.

Proportionality: Expenditure on financial management and control should be limited inrelation to the funds available to the programme. Programmes need to find cost effectivesolutions that can still deliver the necessary quality.

Subsidiarity:Functions should not be centralised but should instead be carried out by acompetent body at the most appropriate level.

Transparency: Information on all systems, procedures and requirements should be freelyavailable along with evidence that these systems, procedures and requirements are beingconsistently applied.

Additionality: Programme funding shall not replace national, regional and/or local funding.Programme funding shall not be used to fund activities that participating organisationshave a statutory requirement to carry out.

Some other keys to success:

Simplicity:Reduce burdens on projects and programme bodies, speed up processes andavoid mistakes by removing complexity and unnecessary detail. Introducing new rules israrely 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 beidentified 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 programmesadministrative rules. For the latter, there may be opportunities to relax requirements anddeadlines 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 regularlySet up good formal and informal communication mechanisms

Have clearly defined responsibilitiesIdentify, monitor and adjust the programmes objectives and address all factorsthreateningtheir achievementRecognise and respect the challenges of working with different cultures, in differentlanguages and with physical distance


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No matter how well responsibilities are defined and how good the programmesdocumentation is, no programme can succeed if the different bodies involved do not worktogether.

Many programme functions involve the close working of at least three or four of theprogramme bodies. One good example where there have been problems in the current

programmes is creating an accurate annual spending forecast. This involves collection ofreliable figures from the projects, analysis and adjustment of this data by the MA or JTSbefore the PA sends the forecast to the Commission. If, as has happened, anotherprogramme body steps in during this process and grants extensions to large numbers ofprojects, all previous work will have been wasted. It is therefore crucial to clearly identify thedivision of financial responsibilities between the bodies in the joint structure, to identify theprogrammes goals in terms of financial performance and agree on the measures that willachieve 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 differentlanguages 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 rapidproblem-solving. Investing a little time in this type of meeting may be the single most effectiveway of tackling internal programme difficulties.

Regular communications between the MA, JTS and CA should be established as a priority. Inthe current programmes physical distance has sometimes prevented this and this has led tothe 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 formalagreements or memoranda of understanding not only between MA and each participatingcountry 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 effectivelyif briefing on the nature