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
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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.
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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.
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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)
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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. 28-36).
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Differences between forecasts and reality
– Treatment until closure stage • GN55 1st 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.
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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.
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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.
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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.
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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.
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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".
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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.
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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.
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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°08-0012-03 on Art. 55(6), point 3.2 about value-for-money
assessment.
• COCOF note n°12-0059-01 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.
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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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Policy
Thank you !
For more information
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