Background to the complaint

1. The complainant, a French non-governmental organisation (NGO), signed a grant agreement^[1] with the European Commission on 1 December 2008. The agreement covered a sustainable development project in the agricultural sector in the Democratic Republic of Congo. After the project came to an end in 2013, the auditor designated in the grant agreement reviewed project expenditure. No ineligible costs were identified.

2. In September 2014, however, the EU Delegation in Kinshasa (the Delegation) asked the complainant to produce all documents related to the project for the purpose of a residual error study that other auditors were carrying out for the Commission. The auditors delivered their report in February 2015 concluding that the ineligible costs of the project amounted to EUR 27 173.

3. In September 2015, the Delegation asked the complainant for additional information on the expenses that the auditors had found to be problematic. Upon its own assessment, the Delegation concluded that the ineligible costs amounted to EUR 13 107. That amount, according to the Delegation, corresponded to expenses incurred, not by the beneficiary itself, but by a contractual partner of the beneficiary, namely the Mayor of Butembo.

4. On 16 November 2015, the complainant presented its views on the amount in question. It explained that those expenses were undertaken by the Mayor of Butembo in the framework of a partnership contract signed with the complainant to co-finance the construction of an unloading area in Kitulu market in Butembo.

5. Despite the exchanges between the complainant and the Delegation extending to a period of almost two and a half years, the complainant still considered that the Delegation had not reasoned its finding that there were ineligible costs of EUR 13 107. It also found the Delegation’s responses to be inadequate and delayed. This, the complainant said, demonstrated that the case file had been mishandled. It turned to the Ombudsman on 4 May 2018.

The inquiry

6. The Ombudsman opened an inquiry into the complainant’s substantive and procedural concerns.

7. In the course of the inquiry, the Ombudsman received the Commission’s (Directorate-General of International Cooperation and Development - DG DEVCO) views on the complaint and, subsequently, the comments of the complainant in response to the Commission's reply. The Ombudsman’s inquiry team inspected the Commission's file on this case and produced an inspection report. The complainant submitted its comments on the inspection report.

8. In the course of this inquiry, the complainant informed the Ombudsman that the Commission had offset the contested amount with an amount the complainant should have been paid in another project^[2].

Arguments presented to the Ombudsman

9. The complainant describes the agreement with the Municipality of Butembo (the Municipality) as a public-private partnership for the construction of an unloading area in Kitulu market in Butembo. After several contacts it had with representatives of the Municipality, they concluded a ‘co-financing’ contract. Under this contract, the complainant undertook construction work amounting to 64,000 USD, while the Municipality agreed to employ its own services and expertise in order to deliver work amounting to 26,000 USD. The Municipality issued an invoice to the complainant for this amount of 26,000 USD^[3].

10. The complainant contends that those expenses are eligible as they were the object of ‘co-financing’ between the complainant and the Municipality. The principle of ‘co-financing’ is well-known in the field of EU grants, the complainant says. It refers to an action or a project, which is financed by at least two parties. This is what DG DEVCO’s Practical Guide to Contract Procedures for EU External Actions (PRAG) also stipulates^[4]. In this case, the cost of the action was shared between the complainant and the Mayor of Butembo, and the contributions of both parties should be covered by the grant.

11. The complainant goes on to say that the contribution was not ‘in kind’^[5] as the Municipality did invest in infrastructure that was not available before the co-financing contract was signed^[6]. Finally, the Municipality’s contribution under the contract was indispensable for the project.

12. As regards the procedure followed, the complainant claims that there were considerable delays, that the Delegation never gave an appropriate explanation about the ineligibility of the expenses at issue and that the complainant never received the minutes of a telephone conference that took place with the Delegation’s representatives on 26 November 2015.

13. The Commission, for its part, states that the expenses in question are not eligible for the following reasons: first, only expenses incurred by the complainant and its ‘partners’ under the grant agreement are eligible costs^[7]. Only persons explicitly mentioned in the grant agreement qualify as ‘partners’^[8].

14. Second, the contract between the complainant and the Municipality does not qualify as a ‘co-financing agreement’. The principle of co-financing means that the costs for the project are shared between the Commission and the beneficiary. Consequently, the Commission pays only part of the cost of the action while the beneficiary (or a third party) needs to pay the remaining amount^[9].

15. Third, the amount the complainant paid for that action was zero as indicated in the relevant invoice. In other words, the complainant never made any payment to the Municipality in exchange for the work the Municipality undertook. Moreover, in-kind contributions were not possible under the grant agreement in question.^[10]

16. As regards the audits that were carried out, the Commission states that the first audit was a verification of expenses. By way of contrast, the residual error study is based on a methodology developed following a recommendation by the European Court of Auditors. Its objective is to identify errors that have not been detected in previous verifications.

17. In the course of the Ombudsman’s inquiry, the Commission found a calculation error in the complainant’s favour, with the result that the claimed amount was reduced from EUR 13 107 to EUR 8 511^[11].

18. As regards procedure, the Commission states that it repeatedly provided the complainant with the opportunity to produce evidence to substantiate the eligibility of the expense in question. The complainant failed to do so. Moreover, the Commission explored different avenues through which an expense could in principle be justified (for example, as co-financing or as a contribution in kind). However, in the case at hand, none of the different alternatives applied.

19. The Commission confirmed that there are no minutes of the conference call of 26 November 2015.

20. The Commission refused to waive recovery in view of the principle of proportionality^[12]. Were the Commission to waive recovery it would set a precedent, which would affect its reputation, give the wrong signal to market operators and encourage practices that do not comply with the rules. Regarding the fact that the complainant is an NGO, the Commission said that it needs to ensure equal treatment of beneficiaries irrespective of their status and that, in any case, most grant contracts by DG DEVCO are concluded with NGOs.

21. Finally, the Commission mentioned that, when it launches a call for proposals, it always holds an information session focusing on guidelines for applicants and on the eligibility of costs. In addition, the beneficiary of a grant can always ask questions during the implementation of the action.

The Ombudsman's assessment

22. The Ombudsman appreciates that grant agreements and the related rules may be complex and sometimes confusing. She therefore welcomes the fact that the Commission holds information sessions with a special focus on guidelines for applicants and eligibility of costs. She also emphasises the importance of Commission staff making themselves available to answer beneficiaries’ questions when a project is being implemented.

23. The Ombudsman also welcomes the fact that in the course of her inquiry, the Commission reduced the amount to be recovered, after a calculation error was discovered.

24. Overall in this case, the Ombudsman finds that the Commission has provided reasonable and convincing explanations for its decision to recover the amount^[13] in question. That decision is not only legally sound but also fair. The amount in question should not have been referred to as an ‘expense’ in the first place, as it was incurred by a third party and not the complainant. That third party does not qualify as a partner of the beneficiary under the grant agreement. The grant agreement is clear on that point, namely that only the expenses of the beneficiary and its partners are eligible^[14].

25. Moreover, the grant agreement explicitly excluded ‘in kind’ contributions^[15].

26. As regards ‘co-financing’, this inquiry made clear that the complainant had misunderstood its meaning: ‘co-financing’ refers to cost sharing between the Commission and the beneficiary and not between the beneficiary and a third party.

27. The Ombudsman also notes that the decision to conduct a second audit^[16] was justified. The first auditor, whom the beneficiary itself selected in compliance with its obligations under the grant agreement, conducted a verification of expenses, an exercise of limited scope. The purpose of the second audit, based on a specific methodology, was to identify residual errors.

28. As regards procedure, the Ombudsman’s view is that the Commission tried to be helpful and explain to the complainant, repeatedly, why the amount could not be considered as an eligible expense under any of the existing rules.

29. While it may be regrettable that the exchanges between the two parties extended over a long period, thus prolonging the uncertainty about the recovery order, the Ombudsman finds that that is partially attributable to the complainant’s requests for clarifications. Regarding the fact that there are no minutes of the telephone conference between the complainant and the Delegation, the complainant has not argued convincingly that any such minutes would have altered the Ombudsman’s conclusion in this case.

30. Finally, in the circumstances of the case, the Ombudsman finds the Commission’s refusal to waive recovery in view of the principle of proportionality reasonable.

Conclusion

Based on the inquiry, the Ombudsman closes this case with the following conclusion:

There was no maladministration by the European Commission.

The complainant and the European Commission will be informed of this decision.

 

Emily O'Reilly

European Ombudsman

Strasbourg, 25/09/2019

 

 

[1] Grant agreement DCI-FOOD/2008/164-562 entitled “Support for the sustainable development of agricultural sectors in the North-East of North Kivu Province” (in French “Appui au développement durable des filières agricoles du nord-est de la province du Nord Kivu”)

[2] See Article 102 of Regulation (EU, Euratom) No 966/2012 on the financial rules applicable to the general budget of the Union (2018 version) [https://eur-lex.europa.eu/legal-content/EN/ALL/?uri=celex%3A32012R0966]

[3] That amount was registered in the complainant’s books in two entries, one of EUR 6 939 (USD 9,000) and another of EUR 13,107 (USD 17,000), as the two expenses belonged to two different budget lines. The complainant notes that the auditors regarded the amount of EUR 13,107 as an ineligible expense, while they did not have any objection concerning the amount of EUR 6 939. The complainant claims that this is inconsistent (see footnote 13 below).

[4] «Le bénéficiaire contribue au cofinancement de l'action soit par ses propres ressources (autofinancement) soit par les revenus générés de l'action soit par des contributions [financières ou en nature] fournies par des tiers. [...] Le bénéficiaire doit déclarer le cofinancement effectivement apporté dans le rapport final. À ce stade, le ou les bénéficiaire(s) peuvent remplacer toute contribution planifiée provenant de ses propres ressources par des contributions financières de tiers» [In English: The co-financing may take the form of the beneficiary's own resources (self-financing), income generated by the action and contributions from third parties. [...] The beneficiary has to declare the co-financing actually provided in the final report. The beneficiary(ies) may at that point replace any planned contribution from its own resources by financial contributions from third parties]. It seems that the complainant cites the 2018 version of the PRAG even though the 2007 version was applicable to the grant agreement in question.

[5] According to the complainant, ‘in kind’ contributions are non-pecuniary resources that are put at one’s disposal for free.

[6] The Municipality built certain infrastructure to renovate the markets in question at its own expense. That infrastructure was made available to the complainant.

[7] Article 1.3 of the General Conditions of the Grant Agreement provides that "les partenaires participent 'à la mise en œuvre de l'Action, et les coûts qu´ils encourent sont éligibles au même titre que ceux encourus par le Bénéficiaire". [In English: “the partners participate in the implementation of the Action, and the costs they incur are eligible on the same basis as those incurred by the Beneficiary”].

[8] According to Article 1.3 of the Grant Agreement, “[t]he Beneficiary shall act alone or in partnership with one or more NGOs of other bodies identified in the Description of the Action” [emphasis added]. The beneficiary also needs to conclude a ‘partnership agreement’ with its partners and provide it to the Commission. If the beneficiary concludes an agreement with another party, while the grant agreement is being implemented, that agreement needs to be made available to the Commission. The Commission will verify the eligibility of that party before it can be added to the action as ‘partner’ by means of an addendum to the grant agreement.

[9] The co-financing may come from the beneficiary's own resources (self-financing) or from financial or in-kind contributions from third parties. In other words, a third party may assume the beneficiary’s part in co-financing (or, in other words, make a financial contribution). A contribution in co-financing is, however, not considered a ‘cost’ under the grant agreement.

[10] Article 14.5 of the Grant Agreement states: “[...] any contributions in kind, which must be listed separately at Annex III, do not represent actual expenditure and are not eligible costs. The contributions in kind may not be treated as co-financing by the Beneficiary”.

[11] According to the Commission, the fact that an amount constitutes an ineligible expense does not automatically imply that the same amount is to be recovered. When determining the recovery amount, the maximum amount of the eligible costs, the total amount paid and the EU funding rate also need to be taken into account.

[12] In accordance with Article 91 of the Commission Delegated Regulation (EU) No 1268/2012 of 29

October 2012 on the rules of application of Regulation (EU, Euratom) No 966/2012 of the European

Parliament and of the Council on the financial rules applicable to the general budget of the Union

(OJ L 362, 31.12.2012, p. 1), “[t]he authorising officer may waive recovery of all or part of an established

amount received only in the following cases: ... (c) where recovery is inconsistent with the principle of

proportionality.

... [T]he authorising officer ... shall ... apply the following criteria ...: (a) the facts, having regard to the

gravity of the irregularity giving rise to the establishment of the amount receivable (fraud, repeat offence,

intent, diligence, good faith, manifest error)

... the authorising officer ... may also have to take the following additional criteria into account: ... (b) the

economic and social damage that would be caused were the debt to be recovered in full.”

[13] The Commission clarified that out of the USD 26 000 contributed by the Mayor of Butembo, only the aforementioned amount of EU 13 107 was recorded by the beneficiary as linked to the project and reported in its financial report. That is why the Commission sought to recover that amount.

[14] See Article 1.3 of the General Terms of the Grant Agreement, cited above.

[15] See Article 4.5 of the General Terms of the Grant Agreement. The Commission said that considering an expense as an ‘in kind’ contribution is, in principle, the sole means under which an expense, which neither the beneficiary nor its partners incurred, could be considered eligible under a grant agreement. However, that was not applicable in the case at hand.

[16] According to Article 6.2 of the General Terms of the Grant Agreement, the Commission, the Court of Auditors and the European Anti-fraud Office (OLAF) have the right to conduct a full audit within seven years after the grant is paid to the beneficiary.