Dear Mr H.,

On 31 July 2001, you made a complaint on behalf of the European Environmental Bureau (EEB) to the European Ombudsman against the European Commission, concerning the Grant Agreement SUF 99/84875.

On 6 September 2001, I forwarded the complaint to the President of the European Commission. The Commission sent its opinion on 12 November 2001. I forwarded it to you with an invitation to make observations, which you sent on 21 December 2001. On 12 March 2002, I sent a proposal for a friendly solution to the Commission. The Commission sent its reply on 3 June 2002. I forwarded it to you with an invitation to make observations, which you sent on 26 July 2002.

I am writing now to let you know the results of the inquiries that have been made.

THE COMPLAINT

The complainant was the Secretary General of the European Environmental Bureau (EEB), a non-profit umbrella organisation aiming to improve EU environmental policies, who lodged the complaint in July 2001 on behalf of the organisation. The EEB is financially mainly dependent on funding from the European Commission (up to 50%) and from government grants. Further, the membership fees contribute with around € 45.000 per year. Its complaint to the Ombudsman related to the Grant Agreement SUF 99/84875 and concerned a dispute it had with the Commission following the Commission's decision to reduce the final payment of its grant for the year 1999 by € 30,787.27.

The background to the complaint was the following:

The complainant explained that the EEB has had a structural financial weakness, namely that it did not have financial reserves. Reserves are necessary to cover for unexpected losses and to ensure that when grants are not forthcoming, the legal obligations the EEB has towards its staff and others can still be fulfilled. In 1996, its auditors encouraged the EEB to set up a working capital/reserve fund. The organisation agreed to work on this on the basis of the income from the membership fees, as other donors such as the Commission, sponsor activities only. Until 1999, the reserve had to be spent on dealing with pending debts. After 1999, money was set aside in a working capital/reserve fund. The EEB thought it had an agreement from the Commission's DG Environment for doing so, but in 2000 it appeared that it could not accept this and reduced its final instalment to the EEB with this amount, i.e. € 30,787.27.

The EEB challenged this decision in meetings and letters with the Commission's DG Environment as well as the Financial Control and Mrs Michaele SCHREYER, Member of the Commission responsible for Budget. These efforts were fruitless as regards the 1999 grant. However, the complainant pointed out that they positively resulted in the Commission adapting the contract for EEB and other NGOs in the same position in 2000, to avoid a similar conflict. Whether it will eliminate the problem remains to be seen according to the complainant.

The EEB could not accept the result of the 1999 dispute as both the amount at stake and the principle was very important to it. It found the Commission's reasoning questionable and unreasonable and it undermined the policy the EEB undertook to follow after 1996 to prevent financial crisis that it had in the past. The complainant remained convinced that the Commission was mis-interpreting its own rules and put forward in summary the following arguments. First, the Commission requires the EEB to have a sound financial management, as stipulated in the Vade-mecum on Grant Management. This includes in the complainant's view and in the view of EEB's auditors, building up a reasonable working capital/reserve fund. Second, the EEB had not used any money from the Commission to set up the reserve nor money that counted for the so called matching funds required to receive the Commission's grant. Only income from EEB's members was used for that purpose. Third, the Commission was sponsoring EEB's activity programme, not the EEB as organisation. The activity programme for 1999 in fact resulted in a loss of € 11,002, which was balanced with membership income originally determined to go into the reserve. As a result, only € 30,787.27 was put into the reserve. Fourth, the Commission called this amount a 'profit', however the EEB is a non-profit organisation. The amount is a non-eligible cost according to Article 10(4) of the General Terms and Conditions Applicable to Grant Agreements of the European Communities (as annexed to the Grant Agreement). The complainant accepted that it was non-eligible for a Commission contribution and that was why it was entirely paid by membership income and not calculated by matching funds. Fifth, the Commission confiscated the entire amount that was aimed for the reserve, and not a proportion of it, related to its contribution to EEB's work. This was not in accordance with the Vade-mecum and violated Article 11(3) of the General Terms and Conditions.

In summary, the complainant alleged that the Commission wrongfully decided to reduce the final payment to the EEB under the Grant Agreement SUF 99/84875 with € 30,787.27. The complainant claimed re-payment of the same amount.

THE INQUIRY

The Commission's opinion

The complaint was forwarded to the Commission for comments. In its opinion, the Commission pointed out that its view did not differ with that of EEB as far as the facts were concerned, but as regards their interpretation.

The Commission stated that the Vade-mecum only serves as a guidance and is not legally binding. Sound financial management should be seen as a prerequisite for receiving Community funding rather than a justification for building up financial reserves. As regards the complainant's argument that neither the Commission's grant nor the matching funds had been used to build up a reserve, the Commission rejected this argument and put forward that under the NGO funding programme, towards running costs and activities (so called activity funding) all incomes and expenditure must be considered. This implies that membership fees cannot be set aside for the creation of a reserve as they must be used to offset expenditure.

Contrary to the complainant's view that the Commission was not sponsoring EEB's organisation as such, the Commission stated that the Grant Agreement (the contract) covered all types of expenditure with only a few exceptions mentioned in the General Terms and Conditions, which is an integral part of the Agreement. In particular, it covers overhead expenditures with no limitation as regards an allowance percentage. The loss referred to was an accounting artefact, as the EEB chose to make a provision for a reserve with money it was not allowed to keep. The money should have been considered as regular incomes under the rules of the Agreement.

The term 'profit' may be misleading as non-profit organisations cannot make a profit. Article 3(4) of the Grant Agreement is clear in that respect: "The beneficiary agrees that the grant may in no circumstances give rise to profits and that it must be restricted to the amount required to balance revenue and expenditure for the operation". Provisions for possible future losses or debts are not considered as eligible costs (Article 10(4) of the General Terms and Conditions) which, according to the Commission means, that the beneficiary does not have any discretion to create provisions with the effect that the revenue available for balancing expenditure is reduced.

The Commission stressed that it had not confiscated the amount of the membership income. Instead the amount had to be used to balance the expenditure of the operation. As a consequence, the grant was limited to the remaining difference between income and expenditure.

The Commission stated that it could understand that the complainant seeks to improve its financial standing as recommended by its auditors. However, the contract concluded in 1999, which was the subject of EEB's complaint, does not provide a suitable legal base for supporting the EEB's claim to set up a reserve. The Commission concluded that the Grant Agreement had to be followed and that it did not allow for any other interpretation than a total recovery of money in excess. The Agreement foresees such a reduction and makes it binding for the beneficiaries.

The complainant's observations

In its observations, the complainant maintained its complaint. It stated that the key issue relating to good administration is whether the Grant Agreement allows for only one interpretation. The complainant was convinced that it gives the Commission the opportunity to allow the building up of a modest working capital/reserve fund. This would be consistent with the general requirement laid down in the Vade-mecum and be consistent with the principles of sound financial management.

It is true that the Vade-mecum is not legally binding but it demonstrates the importance for the Commission that the beneficiary has the capacity to deal with financial risks and losses that may appear. As regards the complainant's second and third argument, it stated that the Grant Agreement uses the word "operation". To EEB this meant the implementation of the work programme it sent the Commission and which forms part of the Agreement. A budget was submitted with that work programme that did not include the income of some € 40,000 expected from membership fees. It was not included as it was to be used for building the reserve after years of repayments of debts. The Commission's DG Environment was aware of this practice which started in 1997 after discussions with that DG. The difference in 1997 and 1998 was that the membership fees were used to deal with outstanding debts, which are recognised by the Commission as non-eligible costs.

As to the arguments about a possible 'profit' on the side of EEB, the complainant stated that the Commission's standpoint implied that an organisation gives up its right to practice sound financial management when entering into an Agreement, as it is obliged to use all its income for expenditure without the opportunity to ensure that the organisation can face any losses. The Commission confirmed that provisions for possible future losses or debts are non-eligible costs, but at the same time deprived the EEB of the possibility of making such a provision in the form of a financial reserve. The complainant stressed that the membership income of approximately € 40,000 was not part of the income side of the budget the Commission approved as part of the Agreement, meaning that there is no reduction of revenue available for the implementation of the work programme. In fact, the amount put in the reserve was very modest and the complainant did not accept the Commission's arguments indicating that the EEB arbitrarily set aside a large sum of money and artificially reduced the revenue available for balancing expenditures. In the complainant's view, the implementation of the 1999 work programme the Commission approved was not affected by the EEB's decision to set aside the membership fees.

Regarding the fact that the Commission recovered the entire amount, and not a proportion of it, the complainant referred to Article 11(3) of the General Terms and Conditions which clearly refers to proportional reduction. The complainant found the Commission's interpretation in this regard inadequate for two reasons. Firstly because the Dutch Environment Ministry, another sponsor of the EEB's work programme, put a question to EEB about the supposed surplus. In case it had been a surplus, the EEB should have repaid some 10% to the Ministry. However, it accepted EEB's explanation. Had it not accepted the explanation two sponsors would have asked for parallel repayment and the EEB would have had to pay back 110% of the supposed surplus. Secondly, while the EEB receives a significant proportion of its financing from the Commission, some other environmental organisations receive a lower percentage of their budget from the Commission, sometimes only 10%, under the same programme. Would it be right for the Commission to recover 100% of the supposed surplus if it had contributed with only 10% thereof?

The complainant concluded that it continued to differ with the Commission's opinion and interpretation. It was not consistent with principles of good administration for the Commission to force organisations it supports to operate without financial reserves.

THE OMBUDSMAN'S EFFORTS TO ACHIEVE A FRIENDLY SOLUTION

The issues in dispute between the Commission and the complainant

After careful consideration of the opinion and observations, the Ombudsman was not satisfied that the Commission had responded adequately to the complainant's claim.

The possibility of a friendly solution

On 12 March 2002, the Ombudsman submitted a proposal for a friendly solution to the Commission. In his letter, the Ombudsman suggested that the Commission should consider re-paying the amount € 30,787.27 to the complainant, or, alternatively, provide the Ombudsman with a coherent and reasonable account of the legal basis for its actions and why it believed that its view of the contractual position was justified.

In its reply of 3 June 2002, the Commission firstly referred to Council Decision 97/872/EC(1), which is the legal basis for the NGO funding programme. As concerns the fact that the budget does not foresee membership fees as an income, the Commission stated that the budget is in any case an indicative estimate drawn up prior to introducing the application. There is no indication that membership fees would not be part of income from 'other sources'. Therefore, any income, foreseen or not, must be taken into account. Article 3(4) of the Grant Agreement states "(...) the grant (...) must be restricted to the amount required to balance revenue and expenditure (...)". As regards the fact that Article 10(4) of the General Terms and Conditions provides that possible future losses or debts are not considered as eligible costs, the Commission referred to Article 11(3) of the General Terms and Conditions, which reads: "The maximum amount of the grant to be paid by the Commission shall be reduced proportionately if examination of the final statement in relation to the total budget as estimated in the agreement reveals that: (...) -total revenue exceeds total expenditure; (...)". As the reserve fund was not foreseen in the budget, not even as a non-eligible provision, it cannot be considered as part of the total expenditure and under no circumstances as eligible expenditure. As concerns the proportional reduction, the Commission referred to Article 3(4) as quoted above and to Article 7(2) of the Grant Agreement. According to the latter, should the provisions of the annexes and those of the Agreement differ, the provisions of the Agreement apply. The consequence is that the grant must be restricted to the amount required to balance revenue and expenditure. The proportionality applies only to eligible expenditure. Accordingly, the grant is limited by three ceilings: it cannot be more than € 580 000 equivalent to 53.73% of the eligible real costs (Article 3(2)) and it is restricted to the amount required to balance revenue and expenditure (Article 3(4)). In addition, the contracts for the years 1997-1998 differ from the contract for 1999. The contractual conditions were therefore not the same. Furthermore, the Commission has now recognised the potential build-up of debts out of non-eligible costs over a longer period of time. For that reason conditions more favourable to the complainant were introduced in the contract for 2000. The Commission concluded that it thought it had provided the Ombudsman with a coherent and reasonable account of the legal basis for its actions and why it believed that its view of the contractual position was justified. The Commission did therefore not see any reason to accept the proposal for a friendly solution.

In its observations of 26 July 2002 on the Commission's reply, the complainant maintained its complaint. It stated that the Commission's interpretation of the contract makes it impossible to foresee provisions for future losses or debts and to practice sound management. The complainant underlined that it had always accepted that such provisions should neither be paid from the EU's contribution, nor from the matching funds for that contribution. EEB therefore found other means, being the membership income. The complainant had not indicated in the budget that the membership fees, which the Commission knew EEB were receiving, were an income in the budget. It was rather clear from the budget that the membership income was not aimed to be used for the programme. The Commission's refusal to accept provisions for possible future losses or debts as non-eligible costs and to consider it instead to be a profit or surplus is contradictory to Article 10(4) of the General Terms and Conditions, which is referring to "costs". It is also logical that this so called non-eligible cost is not mentioned in the budget as the Commission only wanted to receive information on the eligible expenditures/costs. This is further confirmed by Article 3(1) of the Grant Agreement, which states: "The detailed budget of the operation is set out in Annex III, which is an integral part of this agreement, and comprises only costs eligible for Community funding, as defined in Annex II.".

The complainant upheld its position that it is difficult to understand how the Commission can claim the entire amount of what it considers as a surplus when there are other donors who would like to see money returned in case of such a surplus. The complainant was grateful to the Commission for having changed the contract for the year 2000, but stressed that it did not mean that it had to accept an interpretation of the previous contract that it strongly disputed and that costed EEB a lot of money. Concerning the differences between the contracts from 1997-1998 and 1999, they exist but are of no relevance for the case. For all three years the Commission was implementing the same legal framework, i.e. Council Decision 97/872/EC, that was to support activities and administrative costs in the context of the general working programme. The 1999 contract has an Annex with General Terms and Conditions, whereas the previous ones had one on Financial Conditions only. The definition of eligible costs is however similar and the reference to profits is similar (although in 1998 it was not further specified). The complainant stated that, as EEB had not generated any profit or presented a provision for possible future losses or debts as eligible costs, this is irrelevant for the final assessment. The complainant regretted that the Commission did not accept the Ombudsman's proposal for a friendly solution and asked the Ombudsman to maintain his conclusion.

In these circumstances, the Ombudsman considers that a friendly solution has not been achieved.

THE DECISION

1 Reduction of payment - the right to establish a working capital/reserve fund

1.1 The complainant had entered into a Grant Agreement (SUF 99/84875) with the European Commission in 1999. Following recommendations from its auditors and in order to practice sound financial management, the complainant aimed at setting up a working capital/reserve fund using the membership fees. No financial contribution from the Commission or from matching funds was used to set up the reserve. However, the Commission decided to reduce its contribution with the amount put in the reserve in 1999. The complainant alleged that the Commission wrongfully decided to reduce the final payment to the EEB under the Agreement with € 30,787.27. The complainant claimed re-payment of the same amount.

1.2 In its first opinion, the Commission stated that the contract concluded in 1999, which was the subject of EEB's complaint, did not provide a suitable legal base for supporting the EEB's claim to set up a reserve. The Commission concluded that the Grant Agreement had to be followed and that the Agreement did not allow for any other interpretation than a total recovery of money in excess. The Agreement foresees such a reduction and makes it binding for the beneficiaries. In its reply to the proposal for a friendly solution, the Commission maintained its position and referred to the provisions of the Grant Agreement and of the General Terms and Conditions.

1.3 The Ombudsman notes that the dispute is related to an Agreement concluded between EEB and the Commission. According to Article 195 of the EC Treaty, the European Ombudsman is empowered to receive complaints "concerning instances of maladministration in the activities of the Community institutions or bodies". The Ombudsman considers that maladministration occurs when a public body fails to act in accordance with a rule or principle binding upon it. Maladministration may thus also be found when the fulfilment of obligations arising from contracts concluded by the institutions or bodies of the Communities is concerned.

1.4 However, the Ombudsman considers that the scope of the review that he can carry out in such cases is necessarily limited. In particular, the Ombudsman is of the view that he should not seek to determine whether there has been a breach of contract by either party, if the matter is in dispute. This question could be dealt with effectively only by a court of competent jurisdiction, which would have the possibility to hear the arguments of the parties concerning the relevant national law and to evaluate conflicting evidence on any disputed issues of fact.

1.5 The Ombudsman therefore takes the view that in cases concerning contractual disputes it is justified to limit his inquiry to examining whether the Community institution or body has provided him with a coherent and reasonable account of the legal basis for its actions and why it believes that its view of the contractual position is justified. If that is the case, the Ombudsman will conclude that his inquiry has not revealed an instance of maladministration. This conclusion will not affect the right of the parties to have their contractual dispute examined and authoritatively settled by a court of competent jurisdiction.

1.6 The Ombudsman notes that the Commission reduced its grant with the amount the complainant had put in the reserve fund. Since the complainant was acting on instructions from its auditors in order to practice sound financial management, and since no Commission grants or contributions from matching funds were used, the Ombudsman does not find the Commission's action reasonable. The Ombudsman is not convinced that the Commission has provided a coherent and reasonable justification for its actions. The Ombudsman will therefore make a critical remark to the Commission.

2 Conclusion

On the basis of the Ombudsman's inquiries into this complaint, it is necessary to make the following critical remark:

The Ombudsman notes that the Commission reduced its grant with the amount the complainant had put in the reserve fund. Since the complainant was acting on instructions from its auditors in order to practice sound financial management, and since no Commission grants or contributions from matching funds were used, the Ombudsman does not find the Commission's action reasonable. The Ombudsman is not convinced that the Commission has provided a coherent and reasonable justification for its actions.

Given that this aspect of the case concerns procedures relating to specific events in the past and given that it was not possible to achieve a friendly settlement of the matter, the Ombudsman closes the case.

The Ombudsman's conclusion does not prevent the complainant from taking the matter to a competent court.

Yours sincerely,

 

Jacob SÖDERMAN

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(1) Council Decision 97/872/EC of 16 December 1997 on a Community action programme promoting non-governmental organizations primarily active in the field of environmental protection, OJ 1997 L 354/25.