Dear Mr C.,
On 28 April 1999, you lodged a complaint with the European Ombudsman against the European Commission on behalf of "Sistemi Formativi Confindustria"(SFC). You alleged that the Commission, having approved on 15 June 1998 to finance a project to be developed by SFC for the industrial development in South Italy, had not yet paid the first instalment of the project for 40 % of the total costs.
On 6 May 1999, I forwarded your complaint to the President of the European Commission. The Commission sent its opinion on 9 September 1999, which I forwarded to you with an invitation to make observations. On 6 October 1999, I received your observations. In view of the evidence available, I requested a second opinion from the Commission on 9 November 1999. The reply from the institution dated 11 January 2000 was sent to you on 27 January 2000. I received your comments on 22 February 2000. You sent me additional information in several letters dated 23 December 1999, 11 and 31 January 2000, and 11 May 2000.
I am writing now to let you know the result of the inquiries that have been made.

THE COMPLAINT

According to the complainant, the relevant facts were as follows:
On 15 June 1998 the European Commission decided to fund a project to be carried out by SFC with a grant of 12,5 millions Euro. The amounts was to be financed through the European Regional Development Fund (ERDF). The project involved the development of a "BICI - Business Innovation and Co-operative Industries"(1). The contract to carry out the project was signed on 22 January 1999 between the Commission and SFC. As stated in Article 13, paragraph 2 of the contract, a first instalment of 40% of the total amount had to be paid after the signature of the contract. The complainant alleged that the Commission had not yet paid this amount in breach of this contractual obligation.
The complainant referred then to the problems that his firm, SFC, was facing to get the final payment for a previous project also financed by the Commission. He considered that both projects were not related, and thus if the Commission had established any link between the two projects, such relationship should be considered arbitrary and unjustified. In his view, any doubt related to his implementation of a previous project, should not have led to prejudge SFC's capability to carry out a different initiative.
Against this background, the complainant wrote to the Ombudsman claiming that
(i) the delay in the payment by the Commission of 40% of the costs of the project constituted an instance of maladministration;
(ii) and therefore, the Commission should comply with its contractual obligations and pay this amount.

THE INQUIRY

The Commission's opinion
The Commission first explained the legal basis for its financial contribution to the project. The institution pointed out that Article 5, paragraph 2 (c) of Regulation (CEE) n° 2052/88 on the tasks of the Structural Funds allows the Commission to delegate the management of a global grant to appropriate intermediaries designated by the Member State as one of the forms of assistance under the Structural Funds.
In these cases, the granting of financial assistance is implemented through a legislative act (Decision). In line with Article 6, paragraph 2 of Regulation (CEE) n° 4254/88 that lays down the provisions for the European Regional Development Fund (ERDF), the use of the grant is subject to an agreement concluded between the Member State concerned, the Commission and the intermediary.
According to Article 16, paragraph 1 of Regulation (CEE) n° 4253/88, the intermediary is to be designated by the Member State concerned in agreement with the Commission, among those who are capable of providing guarantees of solvency as well as the necessary administrative skills to manage the operations envisaged by the Commission.
The Commission then explained the different contracts between the institution and SFC. All of them had been based on a standard model, which provides that the first instalment should be made available following the signature of the contract.
As regards the Commission's first grant to SFC for 5 million ECUs(2), the institution explained that it involved a project for the promotion of small and medium size enterprises in the region of Mezzogiorno, in Italy. The contract was signed with the beneficiary on 21 May 1992. It foresaw an implementing period between 1 January 1992 and 31 December 1993, which ad to be extended until 31 December 1994 for financial and technical commitments, and to 31 December 1996 for the payments made by the intermediaries. The request for the final payment was forwarded to the Commission on 27 March 1997.
The Commission's financial services (DG XX) carried out two on-site inspections of this project in May 1995 and October 1996. As a result, a number of financial irregularities were identified. The report was passed on to the responsible Commission services (DG XVI) on 30 March 1998, and to the Member State on 6 July 1998. Although the payment of the grant had been requested by DG XVI in September 1997, DG XX blocked the payments since several irregularities have been identified in the course of the on-site missions.
As regards the second project carried out by SFC, the Commission explained that the request for a global grant from the Italian authorities was received on 26 May 1997. It related to a project for the promotion of small and medium size enterprises, with particular emphasis on questions related to technical innovation.
DG XVI handled the request and forwarded it to other Commission's services. DG XX gave its agreement to the project with a single reservations, however, whereby the release of Community funds ought to be dependent on the solution of the outstanding problems related to the SFC first project. The Commission approved the second grant on 15 June 1998.
In order to resolve the deadlock, DG XX organised a hearing jointly with SFC and the Italian authorities on 13 November 1998. As a result of this initiate, a third on-site mission was sent to review the situation. The inspection included also staff from OLAF, and took place on 23-25 June 1999. The report resulting from it, included the suggestion that the money for the first grant should be paid, once certain deductions had been made, and that certain improvements be introduced in the management of the second SFC project.
On the basis of these findings, the Commission concluded that SFC was able to carry out its second initiative, and therefore agreed to released the first part of the grant. At the time of the Commission's opinion, DG XX had given its agreement to the payment, which was then being transferred to the beneficiary.
The complainant's observations
The Ombudsman forwarded the Commission's opinion to the complainant with an invitation to make observations. In his reply, the complainant generally maintained the arguments already stated in his original complaint. He stressed, however, that the delay imposed by the Commission for the payment of the grants was causing enormous damage to SFC.
The complainant stated that despite the Commission's assurances, the instalment for the second grant had not yet arrived to his firm. He wondered why the Commission had only accepted now to release the funds when information about SFC's performance had been available after the last on-site inspection took place in November 1998. Moreover, the recommendations made as a result of these inspections had not been forwarded to the complainant, so he could not known of its contents.
The complainant added in his observations a new claim. In view of the delays in receiving the moneys and the ensuing patrimonial damage, the complainant stressed that his firm would need an additional extension to carry out the project, which had been originally conceived for a period lasting until 31 December 1999. He underlined the importance of having the Commission agree to his requests for a time extension.
In relation to this aspect of the case, the complainant sent several additional letters to the Ombudsman. On 23 December 1999, he forwarded to the Ombudsman a letter from the Commission dated 22 December 1999 in which the institution explained that no extension of the deadline for the accomplishment of the second project could be granted. The Commission argued that any such extension would run counter to the rules governing EC Structural Funds.. The letter also indicated that this decision could be modified in the future in the light of the conclusions of the inquiry being carried out by the Ombudsman. On 11 January 2000 the complainant wrote again to the Ombudsman, stressing in his letter that the failure of the Commission to carry out the payments for the projects was causing an enormous damage to his firm, and that he found unfair the institution's refusal to extend the deadline for the completion of the second project. The complainant also sent another letter to the Ombudsman dated 31 January 2000 in which he recapped all the factual elements and claims made in the complaint.

FURTHER INQUIRIES

In order to seek clarification from the Commission as regards the observations made by the complainant, the Ombudsman wrote to the institution on 9 November 1999. He requested further clarification from the Commission in relation to
(1) the length of time employed by the institution to investigate the potential misuse of EC funds in the region which, in view of the complainant, had been unduly long;
(2) the alleged failure of the Commission to inform the complainant of the recommendations of the report established following its June 1999's on-site mission.
The Ombudsman also asked for further details concerning the payment of both grants.
The Commission's second opinion
The Commission explained in its second opinion that despite the findings made in its inspection of November 1998, some information remained unclear. In particular the institution referred to the expenses incurred for services to enterprises, the tasks accomplished by each participant in the projects, and some details included in a report produced by SFC in June 1999. Furthermore, the Commission pointed out that SFC only completed certain payments related to the first grant on 11 May 1999.
As for the alleged failure of the institution to give a copy of the report to the complainant, the Commission explained that this type of reports resulting from on-site inspections are only passed on to the national authorities. This practice is consistent with the agreement concluded between DG XX and the responsible authorities from Member States. As regards Italy, these reports are transmitted to the Budget and Treasury Ministry. Within the Commission, copies of reports prepared by DG XX are forwarded to DG XVI, OLAF and also to the Court of Auditors.
There is no obligation therefore to send a copy of these type of reports to the project developer or financial intermediary in the Member State. In the case of the projects carried out by SFC, the first report was forwarded to the Italian authorities on 6 July 1998, and the second one on 9 December 1999.
In relation to the details of the payments, the Commission pointed out that for the first grant, having checked and obtained the agreement of the Italian authorities on 11 November 1999, the final payment was made on 29 November 1999. As for the second grant, the payment of the first instalment for 40% of the total amount was made on 24 August 1999, following the endorsement of DG XX.
The complainant's second observations
The complainant considered that it was unfair for the Commission to make use of unclear aspects concerning a project undertaken in 1995-1996 to slow down the payment of a different project submitted in 1998. Moreover, he believed that if there were any relevant problems related to the credentials of SFC, the Commission should not have approved the financing of the second project in June 1998. He referred to the provisions of Art. 21 of Regulation (CEE) num. 2082/93 which states that payments for financial contributions should be made within two months from the receipt of an acceptable request.
As for the explanations offered by the Commission to justify the need for further requests of information, the complainant pointed out that he would have voluntarily handed out these documents and data had he known of the need for such information.
He regretted, however, that the information contained in the report prepared by the Commission's services was given to the national authorities well after the inspections had been carried out.
On 11 May 2000, the complainant requested that the Ombudsman take an urgent position in relation to this complaint, since, in his view, that could be instrumental for a change in the Commission's position.

THE DECISION

1 Commission's lack of due diligence in the payment of the second grant
1.1. The complainant claimed that the Commission , having decided on 15 June 1998 to give financial support to the complainant for the BICI project, had not yet made the first payment of 40% of the total grant. In his view, the Commission was in breach of its contractual obligations since Article 13, paragraph 2 of the contract signed with SFC provides that a first instalment of 40% of the total amount had to be paid following the signature of the contract. Moreover, the complainant considered that the Commission had not complied with existing rules, since as set out in Art. 21 of Regulation (CEE) num. 2082/93, payments for financial contributions have to be made within two months of the receipt of an acceptable request.
This delay in the payment by the Commission of the 40% of the costs of the project constituted, in view of the complainant, an instance of maladministration.
1.2. The Commission justified the delay in the payment on the grounds that its financial services had identified a number of potential irregularities in a previous EC financed project carried out by the complainant. These financial aspects had to be verified before any new payment could be made.
In order to solve the situation, the Commission services organised, first, a hearing with the complainant and the Italian authorities on 13 November 1998. As a result of this initiative, an inspection was sent to review the situation on 23-25 June 1999. On the basis of its findings, the Commission concluded that the problems related to the first grant were being satisfactorily handled, and thus, that SFC was able to properly carry out the second project. The institution had then decided to pay the first instalment of that grant, which took place on 24 August 1999.
1.3. From the formal adoption of the Decision to grant financial assistance for the BICI project (15 June 1998), until the effective payment of the first instalment (24 August 1999) the Commission took more than one year to disburse part of the funds which had been granted.
In order to assess whether the time taken for the Commission to take was unduly long, and therefore whether the institution acted with due diligence, a preliminary evaluation of the applicable rules as well as the circumstances of the case should be made.
1.4. The general rules applicable to payments of advances for this type of grants are contained in Regulation (EEC) No. 2082/93(3), which amended Regulation (CEE) No 4253/88. As set out in its Article 21, par. 1: "Payments of financial assistance shall be made […], as a general rule, within two months from receipt of an acceptable application". The Commission Decision of 15 June 1998 granting the EC assistance for BICI relied on the previous Regulation for the settling of payment-related issues(4). These rules, on the other hand, should inform the individual contract with SFC.
The previous provision lays down the period of two months for payments as a general rule, and therefore a longer period might appear acceptable in the presence of exceptional circumstances. The existence of these particular facts was argued by the Commission in relation to the BICI project, since its services were required to clear out some outstanding financial questions related to the SFC's performance in a previous project.
1.5. The Ombudsman notes that the Commission has a duty to ensure that Community funds are properly employed, in line with the principle of sound financial management. This principle must inform the implementation of any action financed though the Structural Funds(5). Given the concern of the Commission's financial services towards SFC's previous performance, it was reasonable for the institution to verify these aspects before making any new payment, so as to ensure sound financial management.
1.6. Although the verification of these aspects took more than a year, the Ombudsman cannot conclude that the Commission did not act with due diligence. Thus, following the problems concerning the first grant on 30 March 1998, the Commission sought to clarify them through a hearing with the complainant and the Italian authorities held on 13 November 1998, which led to an on-site inspection with different Commission services on 23-25 June 1999, and to the final payment on 24 August 1999.
In view of the complexity of the issues to be dealt with, and the number of different services involved, this length of time taken does not appear to be unduly long, and hence the institution did not appear to act without due diligence.
The Ombudsman has therefore concluded that there appears to be no maladministration as regards this aspect of the case.
2 Payment instalment for the second SFC project
2.1. The complainant had requested that the Commission pay the first instalment of its grant for the BICI project, corresponding to 40% of the total funding.
2.2. The Commission has indicated that, having verified certain outstanding issues concerning the performance of the complainant's firm, the payment was made on 24 August 1999.
2.3. The Ombudsman notes that from the observations transmitted by the complainant the amount has been already paid as requested in the original complaint.
The Ombudsman considers therefore that there appears to be no maladministration as regards this aspect of the case.
3 Extension of the deadline for the completion of the project
3.1. Following the comments made by the Commission in its opinion, the complainant included in his observations a new claim. Because of the delays in receiving the payments and the ensuing patrimonial damage, the complainant asked the Ombudsman to have the Commission grant his requests to postpone the deadline for the completion of the project beyond 31 December 1999.
3.2. Due to the fact that this aspect was not part of the original complaint, and that the institution therefore had no opportunity to comment upon it, the Ombudsman does not consider it appropriate to deal with this new allegation in this context.
3.3. The Ombudsman takes note, however, of the terms of a letter from the Commission to the complainant dated 22 December 1999, forwarded by the complainant on 23 December 1999. The institution explained in that letter that no extension of the deadline for the accomplishment of the second project could be granted since that could run counter to the rules governing EC Structural Funds. Still, the institution suggested that its decision could be modified in the future in the light of the conclusions reached on this case by the Ombudsman.
3.4. As stated in point 1, the Ombudsman has concluded that there has not been any instance of maladministration on the part of the Commission. It is important to underline, however, that on the basis of the available evidence brought to the attention of the Ombudsman in the course of his inquiry, the Ombudsman finds it reasonable that the Commission reaches a fair and equitable decision in relation to the request made by the complainant for an extension to the deadline of the BICI project.
4 Conclusion
On the basis of the European Ombudsman's inquiries into this complaint, there appears to have been no maladministration by the European Commission. The Ombudsman has therefore decided to close the case.
The President of the European Commission will also be informed of this decision.
Yours sincerely,
Jacob SÖDERMAN

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(1) Commission Decision C (1998) 1244, of 15 June 1998.

(2) Decision C(92) 406/4, of 2 March 1992.

(3) Council Regulation (EEC) No 2082/93 of 20 July 1993 amending Regulation (EEC) No 4253/88 laying down provisions for implementing Regulation (EEC) No 2052/88 as regards coordination of the activities of the different Structural Funds between themselves and with the operations of the European Investment Bank and the other existing financial instruments OJ L 193, 31.07.1993 p20 -33.

(4) Article 3 of Decision 1244 of 15 June 1998.

(5) See Article 274 EC: "The Commission shall implement the budget, in accordance with the provisions of the regulations made pursuant to Article 279 […] having regard to the principles of sound financial management".