European Ombudsman
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Mr President,
On 3 December 1999, I wrote to you in order to inform you that I had decided to open an own-initiative inquiry into the problem of late payment by the European Commission and asked you to submit an opinion. I also informed you that I intended to provide for the possibility of some public participation in the inquiry procedure.
On 15 December 1999, I wrote to a number of representative organisations inviting them to submit observations on this inquiry. My letter of 3 December 1999 to you was also (as was further correspondence between myself and the Commission) made available to the public on my website, and interested third parties were invited to let me have their views concerning this issue.
A considerable number of comments from third parties was received by me in reply to this invitation to submit observations.
On 27 March 2000, the Commission sent me its provisional opinion in which it referred to a study prepared by Grant Thornton and the forthcoming report of an ad hoc group set up by the Commission. On 17 May 2000, I requested you to consider making both documents publicly available. In its reply of 3 July 2000, the Commission informed me that it agreed with my request and that the report of the ad hoc group would be transmitted to me with the Commission's definitive opinion.
On 19 October 2000, the Commission sent me its definitive opinion.
In late November and early December 2000, I wrote to all the representative organisations that I had already informed of the inquiry on 15 December 1999 in order to invite them to submit comments on the Commission's definitive opinion by 31 January 2001 at the latest. Similar letters were also sent to all the other persons and bodies that had made submissions in the course of this inquiry. In reply to this invitation, comments were received from three parties.
I am writing now to let you know the results of my inquiry.
The Commission has identified late payment of its creditors as a persistent problem. In May 1991, the Commission set an overall time-limit of 60 days for payment to be made following receipt of an invoice. This period is composed of 40 days for the authorising officer to validate and order the payment and 20 days for approval by financial control and for the accounting department to check and execute the payment(1).
In June 1995, the Commission set a target that 95 % of payments should be made within 60 days and that in principle, payment should never take more than 90 days. Furthermore, authorising officers were instructed to inform the beneficiary of the payment within 25 days if there was a risk that the 60 day time-limit would be exceeded for any reason(2).
The Commission returned to the issue of late payment in a communication dated 27 March 1996(3). However, a further communication dated 10 June 1997 acknowledged that the situation had not improved. It also announced that, from 1 October 1997, the Commission would pay interest in cases where the 60 day time-limit was exceeded. The 60 day period is suspended if the Commission considers that the creditor has not produced the necessary documents, or that further checks are necessary. Furthermore, interest is only payable in the case of a contractual relationship where the contractor provides a clearly-identifiable service(4).
From the beginning of his first mandate, the European Ombudsman has received complaints concerning late payment by the Commission. The complaints have concerned not only fees and expenses but other contractual payments, as well as grants and subsidies. The number of complaints, as well as other cases brought to the Ombudsman's attention by Members of the European Parliament, indicated that there was a widespread perception that late payment by the Commission remained a significant problem.
Recital 7 of Directive 2000/35/EC of the European Parliament and the Council of 29 June 2000 on combating late payment in commercial transactions(5) describes the negative effects of late payment as follows:
"Heavy administrative and financial burdens are placed on businesses, particularly small and medium-sized ones, as a result of excessive payment periods and late payment. Moreover, these problems are a major cause of insolvencies threatening the survival of businesses and result in numerous job losses."
These considerations also apply to the Commission. In addition, late payment by the Commission damages its reputation and, more generally, harms relations between citizens and the Union's institutions and bodies. These points apply not only to commercial transactions, but also to the payment of grants and subsidies(6).
The Ombudsman noted that since October 1997 the Commission was prepared to pay interest to creditors when the 60 day time-limit was exceeded, subject to certain conditions. This measure surely reduced the consequences of late payment for many contractors. However, some smaller businesses may not be able to survive cash-flow problems caused by late payment, whilst others may be able to do so only by borrowing at a higher rate of interest than that which is paid by the Commission. The Ombudsman also noted that the payment of interest transfers the financial burden of late payment from contractors to the Community budget and hence to taxpayers. It was not obvious, therefore, that the provision for interest created any incentive for the different Commission services to make payments in due time.
In general, therefore, it seemed that whilst interest can reduce - but not eliminate - the adverse consequences of late payment, it did nothing to identify or tackle the underlying cause or causes.
The Ombudsman therefore decided to open an own-initiative inquiry into the problem of late payment by the Commission.
He requested the Commission to inform him of the steps which it had taken to identify and deal with the causes of delay in making payments to contractors and to the beneficiaries of grants and subsidies. The Ombudsman also pointed out that it would be useful if the Commission could present an analysis of the continuing causes of the problem of late payment, together with an analysis of possible ways in which the problem could be dealt with. Finally, the Ombudsman requested the Commission to inform him of the procedures for redress open to contractors in case of a dispute with the Commission about the adequacy of the contractor's performance, or of the documentation supplied by the contractor. The Ombudsman also requested that the Commission state whether it considers that the procedures for redress are sufficiently rapid and effective and whether improvements could be envisaged.
In reply to his invitation to make submissions regarding his decision to open an own-initiative inquiry, the Ombudsman received a considerable number of comments from third parties. The action undertaken by the Ombudsman was universally applauded, and many of the third parties who wrote supplied examples of cases where late payment by the Commission had caused problems. Some of the third parties pointed out that they considered legally binding rules to be necessary in order to combat the problem.
In its provisional opinion, the Commission informed the Ombudsman that an outside study had been commissioned and that Grant Thornton, a firm of chartered accountants, had submitted a report in September 1998.
The study is available on the Ombudsman's website (http://www.ombudsman.europa.eu). The main recommendations made by the consultants may be summarised as follows:
The Commission also pointed out that in December 1999, an ad hoc group had been set up within the Commission with the following remit:
"In the light of the recommendations made by Grant Thornton in their study on the Commission's payment delays, the group's objectives will be:
The Commission took the view that the group's findings, combined with the recommendations of the Grant Thornton study, should prompt an internal reorganisation according to a single set of guidelines. One of the measures would be the appointment in each Directorate-General of a "payment delays Officer" who would report regularly to the Director-General on the situation regarding payment delays. This person would also be responsible for dealing in the first instance with any complaints about excessive payment delays.
In its definitive opinion, the Commission referred to the Memorandum "Guidelines concerning Commission Payment Times" that had been approved by the Commission at its meeting of 19 July 2000. This document is also available on the Ombudsman's website.
The Commission made the following comments regarding the issue of late payment:
The Commission had considered the problem of payment times on several occasions.
In May 1991 it set itself the rule that payments should be made within 60 days of receiving an invoice (or any other equivalent request for payment).
In 1995 it decided that the target was to execute 95 % of payments within 60 days and that in principle no operation should take longer than 90 days. The Commission also instructed authorising departments to inform the beneficiary within 25 days if for any reason payment was likely to take longer than 60 days. Directors-General were asked to check their payment times on a monthly basis to ensure that they were achieving the target times.
In June 1997 the Commission decided to amend its contract policy to include a clause formalising the requirement that payments be made within 60 days and providing for the possibility of interest being paid, at the creditor's request, where the payment period is exceeded, except where it has been suspended by the Commission.
In April 2000 the Commission included in the action plan contained in the White Paper on Reform a statement that "It is Commission policy that all valid invoices should be submitted within 60 days. For a variety of reasons, this timeframe is respected for only 60 % of the current payments. The objective of the Reform is to raise this to 95 % by 2002".
Finally in July 2000 the Commission included in its proposal for the recasting of the Financial Regulation (Article 77) the principle of time limits for payments and interest for late payment. The details will be specified in the implementing rules.
Two studies have been made aimed at identifying and dealing with the causes of delay in making payments, one by Grant Thornton and the other by an ad hoc group within the Commission.
The settlement of a payment request often consisted of a reimbursement of expenditure procedure that requires thorough examination and numerous supporting documents. It was now proposed to simplify the financial clauses in contracts and to reduce the number of supporting documents by setting standard amounts for certain categories of expenditure such as travel expenses.
Many payments depended upon the approval of a technical report or of a cost statement. This gave rise to complaints about late payment because it was not clear enough in the contracts what was the starting point for the payment time of 60 days and what the obligations for providing information were of the two parties.
It was now proposed:
- to incorporate separate concepts in the contracts for "time allowed for approving the report" and for the "payment time" (for the invoice) and to specify in contracts that the Commission departments must react quickly if the technical report is not satisfactory or the payment request not eligible; time limits for approving different types of reports have been set, after which payment requests are receivable unless the time allowed for approval in the contract has been suspended by the Commission by means of a formal message to the contractor;
- to ensure that the technical annexes to the contracts setting out what the contractor is to deliver to the Commission at each stage of the project are drawn up with precision and can be checked by both parties;
- to lay down in the contracts the particulars to be contained in the requests for payment.
The Commission's IT tools and procedures needed improvement. The Commission had set deadlines for the installation of tools that
- would allow services to monitor more rigorously their payment times;
- would provide services with a common system for recording and monitoring invoices.
It had also instructed its services to simplify the rules for the reimbursement of experts' meeting expenses and to improve the tools available to help authorising services manage the whole cycle of reimbursements. Further decentralisation to the operating DGs was aimed for.
DG Budget would take steps to advance the start of the financial year and reduce the time needed to take over commitments from the previous financial year.
All the above measures were of an administrative nature. The only measure requiring the intervention of the Community legislator was the proposal in the recasting of the Financial Regulation to fix payment times and the rights of creditors to interest in the case of late payment.
In the event of a difference over the quality of the contractors' services, they could in the first place contact the managers and afterwards present their claims to the Director-General. The contractors had also the possibility of informing the Commissioner responsible or even the President of the Commission. These different possibilities thus allowed contractors to have their claims examined at the highest level in the Institution. Finally, they could take legal action in the courts which the contracts state as being competent to decide on any disputes.
Three observations from third parties were received by the Ombudsman. Two of these welcomed the steps taken by the Commission. One of them pointed out, however, that it considered the implementation process for the proposed remedies to be lengthy and asked the Commission to consider setting up complaint and dispute settlement procedures. The same party also proposed that a joint working group should be set up by the Commission and the consulting industry in order to discuss possible measures to simplify procedures. Finally, it was suggested that a simplification of the invoicing procedures, in particular those relating to reimbursable costs - for instance by resorting more to lump sum budgets - would lead to an alleviation of the administrative burden of processing invoices both for the Commission and the contractor. The remaining third party expressed doubts regarding the steps taken by the Commission, claiming that it had not been informed when payments due to it had been delayed or suspended.
1.1 The European Ombudsman opened an own-initiative inquiry into the problem of late payment by the European Commission. This step was taken since an increasing number of complaints in which this issue was raised and a consideration of the damaging effect of late payment notably on small- and medium sized firms led the Ombudsman to believe that an in-depth inquiry into this issue was appropriate and necessary. In the Ombudsman's view it was clear that there was maladministration where an administration, as a rule, did not manage to make payments on time. This view was supported by a considerable number of interested third parties who made observations.
1.2 The Ombudsman considered that it was desirable to let the public participate in this inquiry as far as possible. Representative organisations were thus informed of the inquiry that had been started. Furthermore, all the main documents exchanged between the Ombudsman and the Commission during this procedure was made available on the Ombudsman's website and third parties were invited to submit their observations to the Ombudsman.
1.3 The Commission presented a detailed opinion and supporting documents in which it acknowledged the problem and described the steps it had already taken or was in the process of taking in order to remedy it.
1.4 The most important of these steps would appear to consist in a simplification, clarification and general improvement of the Commission's procedures, aimed at ensuring that payments are made as quickly as possible.
1.5 The Ombudsman takes the view that the steps proposed or already undertaken by the Commission, if properly implemented, are likely to represent a considerable progress towards combating the problem of late payment by the Commission. The Ombudsman therefore considers that his own-initiative inquiry has produced a satisfactory result.
1.6 The Ombudsman acknowledges that the views expressed by one of the third parties who made comments on the Commission's were rather more critical. However, the Ombudsman notes that no other citizen or body has expressed similar views. The critical views of the party concerned furthermore seemed to relate to a specific case (which is being looked at by the Ombudsman in the context of a separate inquiry). However, as the Ombudsman indicated at the very beginning of this procedure, the present inquiry was meant to focus on the general problem of late payment without dealing with individual cases. The Ombudsman furthermore expects that the Commission will take into account the comments made by third parties regarding its definitive opinion in order to improve, where necessary, the measures already taken or to be taken. Finally, it has to be taken into account that it will inevitably take some time for the Commission's reforms to bear full fruit. The Ombudsman therefore takes the view that it is justified to close the present own-initiative inquiry, given that the measures taken and to be taken by the Commission go in the right direction and look likely to tackle the problem of late payment. If however it should prove in the future that notwithstanding these measures late payment by the Commission continues to pose serious problems, the Ombudsman would consider re-opening his inquiry.
On the basis of the European Ombudsman's inquiries into this complaint, it appears that the European Commission has taken steps to tackle the problem of late payment that appear to be satisfactory. The Ombudsman's inquiries have thus revealed no maladministration in dealing with this initiative. The Ombudsman therefore closes the case.
Yours sincerely,
Jacob SÖDERMAN
(1) SEC(91) 1172.
(2) SEC (95) 1122.
(3) SEC (96) 564.
(4) SEC (97) 1205.
(5) OJ 2000 L 2000, p. 35.
(6) See the European Parliament Resolution on the damage caused by the Commission as a result of late payment, 1998 OJ C 34/379.
