Regional Policy Cost-Benefit Analysis of ERDF and CF projects A few issues of relevance for audits JC Blain, Auditor REGIO/C4 JC Lisbon, 19 April 2013

Regional Policy Introduction Presentation of issues considered of interest from a selection of: - questions set to the EC services by the MS authorities; - audit observations made by ECA, EC or national auditors; - problems anticipated by closure.

Regional Policy Irregularity reporting in relation to Art. 55(2) – 1 The funding-gap rate of a revenue-generating project under Art. 55 has not been calculated at MA approval stage.  Questions: Irregularity? To be reported? "Irregularity: any infringement […] which has, or would have, the effect of prejudicing the general budget of the EU by charging an unjustified item of expenditure", Art. 2 R1083/2006.

Regional Policy Irregularity reporting in relation to Art. 55(2) – 2 Art. 55(2) requires that eligible expenditure should take into account the expected generated revenue "where it is objectively possible to estimate the revenue in advance". Art. 55(3) - If objectively not possible to estimate the revenue in advance, the net revenue generated within 5 years of operation completion shall be deducted.  Application limited to some projects (GN §3.2 and Annex II) Art. 55(4) – If some net revenue has not been taken into account under Art. 55(2) & (3), it shall be deducted at the latest on submission on the closure documents.  No derogation to Art. 55(2)

Regional Policy Irregularity reporting in relation to Art. 55(2) – 3 Conclusion Not calculating the funding-gap at project approval stage is an irregularity, except where it is objectively not possible to estimate the revenue in advance. The funding gap should be re-calculated. If already declared expenditure exceeds the calculated maximum, the irregularity has a financial impact. The general rules on irregularity reporting apply (IR Art ).

Regional Policy Differences between forecasts and reality – Treatment until closure stage - GN55 1 st final version (§4.1 and §4.4) : - If MS monitoring reveals important discrepancies between forecast and real/expected revenue, readjust grant. - Maximum 10% variation of the funding gap, then EC aid should be refunded. Both sentences deleted in GN55 revised final version. No obligation to take action in case of differences between forecasts and reality except if: - new source of revenue/ change in tariffs policy -> Art 55(4) - if revenue has been systematically underestimated. However, MS can recalculate the grant rate before end of eligibility period and reallocate the funds.

Regional Policy Non-application of funding-gap rate in all interim payment claims Generally each interim payment claim is based on project eligible expenditure determined by funding-gap rate and incurred eligible cost (r*EC). Allowable not to use the funding-gap rate, e.g. declare all EC incurred at the time of the first interim payment claims, and declare less in the later claims. However, risk of over-declaring expenditure to the Commission.

Regional Policy VAT and total investment cost VAT even if recoverable should be counted in the project total cost which is compared to the EUR 50 million threshold (Art. 39, major projects) and to the EUR 1 million threshold (Art. 55(5)). Recoverable VAT should not be counted in the total investment cost for the determination of the funding gap. Cf. IR1828, Annex XXI, §E.1.2 and H.1. Same approach for project contingency amounts.

Regional Policy Depreciation Reminder - Depreciation should not be included in the operating costs. Not a cash-flow. (GN p.8) Example - If the tariffs (prices for sales, services…) established by the beneficiary cover its operating costs and part of depreciation cost, net revenue is generated.

Regional Policy Land purchase expenditure Art 55(2) defines discounted eligible expenditure although mentioning "eligible expenditure". Art 7(1)(b) R1080/2006: "the purchase of land for an amount exceeding 10% of the total eligible expenditure for the operation concerned" shall not be eligible to the ERDF. Questionable whether Art 7(1)b applies to discounted expenditure. Commission's position: any interpretation is correct. The MS authorities should take their position. Example if non-discounted option – If € 1,000,000 is declared to EC over 3 years for an operation, € 100,000 can be declared for land.

Regional Policy Project identification in the context of financial CBA ▪ The EU may co-finance a small part of a larger project. E.g. roads in a business area project. ▪ Project definition (WD4; Art. 39 R1083 for MP): "series of works, activities or services intended in itself to accomplish an indivisible task of a precise economic or technical nature". ▪ The project should be a self-sufficient unit of analysis. (WD4) ▪ The financial analysis should be carried out on the large project and the resulting co-funding rate should be applied. ▪ Based on Art. 55(2): "Where not all the investment cost is eligible for co-financing, the net revenue shall be allocated pro rata to the eligible and non-eligible part of the investment cost".

Regional Policy Residual value Potential substantial impact on the funding gap. Calculation (CBA Guide, p.38): residual market value of fixed assets, or application of standard accounting economic depreciation formula, or net present value of cash flows in remaining project economic life. WD4 recommends the latter calculation method. If calculation based on market value, replacement costs should not be forgotten. No residual value where Art. 55(3) applies.

Regional Policy Owner and operator are distinct entities EC Legal Service: "in revenue-generating infrastructures, the construction and exploitation phases cannot be seen in isolation one from another but constitute an inseparable whole". "When the owner and the operator are not the same, a consolidated financial analysis needs, in general, to be carried out", GN footnote 4. See also WD4 p.16. "In principle, if a project has more than one operator, the revenue that needs to be considered is that directly paid by the operators through charges", GN footnote 7. Ex. of railway operators.

Regional Policy Consequences of Leipzig-Halle case Judgment of 24/03/11 (T-455/08 & T-443/08) and judgment on appeal of 19/12/12 (C-288/11): the construction of infrastructure to be commercially exploited can fall under State Aid rules. Scope of Art 55 substantially reduced as regards infrastructure projects. Use of analytical grids sent to all MS on 01/08/12 recommended by Commission for project first screening. However, need to carry out a funding-gap analysis under some State Aid rules (e.g. projects submitted individually to DG COMP). COCOF note n° on Art. 55(6), point 3.2 about value-for-money assessment. COCOF note n° on 'Verification of Compliance with S.A. Rules in Infrastructure Cases': projects approved by MA or by EC before 21/11/12 need not be checked for S.A. compliance.

Regional Policy Other mistakes Excluding ineligible costs from total investment costs Tariffs inconsistent with national rules Expected revenue inconsistent with other forecasts (e.g. business plan) Assumptions on operating & maintenance costs not consistent with incremental approach – Cost-savings not taken into account Including contingencies or financing costs in operating costs

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