EU support for productive investments in businesses - greater focus on durability needed

Executive summary

ERDF support for productive investments in businesses

I

Over 75 billion euro from the European Regional Development Fund (ERDF) was earmarked for productive investments in enterprises between 2000 and 2013, and more than 68 billion euro is planned for that purpose in the period 2014 to 2020.

How we conducted our audit

II

The aim of our audit was to assess whether this funding had been managed in a way which ensures durability of outputs and results and to identify the main factors affecting it.

III

We examined 41 completed productive investment projects co-financed by the ERDF between 2000 and 2013 under eight OPs in Austria, the Czech Republic, Germany, Italy and Poland. This included reviewing the OPs underlying the projects audited, as well as project selection, monitoring, reporting and evaluation.

What we found

IV

Overall, we conclude that a majority of the projects audited had durable results. However, in many of the projects audited the results were not or only partially durable which is mainly due to a lack of emphasis on durability in the management of the ERDF support to productive investments between 2000 and 2013.

V

The durability requirements under EU law were met in all regions where the audit took place. The projects audited had, in general, delivered outputs as planned. In most cases, the purchased assets and other outputs still existed and were being used at the time of the audit.

VI

At the time of the audit, a majority of the projects audited were still generating the expected direct results, mostly related to job creation, improved access to finance and loans, increased production and productivity. But, in one fifth of them, the results achieved by the time they were completed did not last. Moreover, in nearly half of the projects audited, it was not possible to comprehensively assess the durability at the end of the durability period, as information was not always available, because it had not always been collected (or at least not consistently) and because relevant documents were not available anymore due to the expiry of the archiving period.

VII

Where results were not durable, there were various reasons for this. While in a few cases, the reasons were clearly beyond the control of the beneficiaries, due to exogenous factors such as the economic crisis or changes in national legislation; other cases were due to management weaknesses. The main reason was the insufficient focus on durability at different levels in the management of EU funds: OPs did not promote durability effectively; selection procedures did not take sufficient account of conditions for attaining good long-term results; monitoring and reporting of results after project end was weak, and the performance indicators used were poor; corrective measures taken in case of failure to achieve targets or to comply with legal durability requirements were applied inconsistently; and the Commission did not place sufficient emphasis on aspects of durability when approving the OPs.

What we recommend

VIII

The regulatory framework has brought improvements in this respect for the 2014-2020 period. Nevertheless, further action is needed in order to attain durability of results in this programme period and improve the design of the relevant programmes with respect to durability in the post-2020 period. We therefore recommend that:

• The Member States should promote the achievement of durable results from ERDF-financed productive investments at the OP programming level, in particular through:
  • more focus on identifying and mitigating risks to the achievement of durable results,
  • better analysis of the needs of different types of businesses, including the need for public funding, in order to avoid deadweight loss.
• During the approval process of OPs, the Commission should pay particular attention to how Member States address durability of outputs and results.
• The Member States should improve their selection procedures and criteria so that the risk of deadweight loss is taken into account and only productive investment projects with the potential for adequate long-lasting results are supported.
• The Member States should conduct appropriate and consistent monitoring and reporting:
  • using pre-defined and relevant indicators for both outputs and results, as well as for measuring long-lasting results at OP level, while keeping the number of indicators manageable;
  • establishing monitoring and reporting procedures to be used at project completion and throughout the durability period, which should be described in the grant agreements;
  • improving the collection and use of relevant data.
• The Commission and the Member States should make sure that ex-post evaluations at OP or EU level look into the different aspects of the durability of results achieved at the end of the durability period and beyond in a more systematic manner. The evaluation results should be used when designing future EU business support schemes.
• The Commission should ensure that Member States apply clear corrective measures including recovery arrangements consistently where projects fail to comply with EU legal durability requirements.
• Where Member States have set binding targets at project level, they should establish clear corrective measures and apply them consistently.

Introduction

Productive investment and business support by the ERDF

EU policy objectives

01

For more than 15 years, enhanced productivity, entrepreneurship, competitiveness, growth and employment and innovation have been at the centre of the Union’s efforts to bring its economy forward. Support for business investment in the European regions has been embedded in two leading EU strategies:

• the Lisbon Strategy of 2000¹, which aimed to make the EU “the most competitive and dynamic knowledge-based economy in the world, capable of sustainable economic growth with more and better jobs and greater social cohesion” and
• the Europe 2020 Strategy², which since 2010 has aimed to boost growth and employment through different flagship initiatives, one of which focused on industrial policy for improving the business environment, targeting SMEs in particular.

ERDF support for businesses

02

The EU’s strategies for European regions are implemented through a combination of national and European Structural funds (since 2014: the European Structural and Investment Funds or ESIF). The most important of these funds, the European Regional Development Fund (ERDF), has provided for direct investments in businesses of different types and sizes.

03

Between 2000 and 2013, the regulations governing the ERDF³ stipulated that the funds should contribute to the financing of productive investment to create and safeguard sustainable jobs by measures which also encourage local and regional development. The Commission defines productive investment as investment in fixed capital or immaterial assets for enterprises, which are to be used for the production of goods and services, thereby contributing to gross capital formation and employment. These measures were primarily – but not exclusively – intended to support SMEs.

04

The scope of the ERDF in the 2014-2020 period is, in principle, confined to support for creating and safeguarding sustainable jobs in SMEs. However, as an exception, large firms can benefit from productive investment provided that this involves cooperating with SMEs and contributes to strengthening research, technological development and innovation or supporting the shift towards a low-carbon economy⁴.

Substantive financial support for productive investment provided by the ERDF

05

Direct support for enterprises and innovation from the ERDF between 2000 and 2020 is planned to amount to almost 143 billion euro. This means that, overall, the private sector has benefited from around one third of the total amount of ERDF funds. Figure 1 shows the allocations to productive investments between 2000 and 2020, and details for each Member State are set out in Annex I. Depending on the Member States and the regions, the ERDF co-financing rates have generally been between 25 % (in relatively wealthy regions) up to 85 % (in poorer regions).

Shared management of ERDF programmes

06

Structural Funds projects are co-financed by the EU budget together with the national or regional authorities. Project funding is subject to rules and conditions laid down partly at EU and partly at Member State level. The management of the funds is thus shared. Within the framework of the management of the ERDF, managing authorities (MA) drew up operational programmes (OPs), managed the implementation of the OPs, set up and operated their management and control systems and submitted annual implementation reports to the Commission. As part of the day-to-day management, these authorities were responsible for selecting projects and for monitoring, implementing, checking and evaluating them⁵.

07

The Commission, for its part, issued guidelines for drawing up OPs, then endorsed these and supervised the setting up and operation of the management and control systems in the Member States. In particular, it monitored the implementation of the OPs, mainly through Member States’ implementation reports and by participating in monitoring committees. In addition, it was able to request specific information (including project selection data from the MAs) at any time up until the final closure of the programmes.

Durability of project results

The concept of durability

08

In this audit, we define durability as the ability of a project to maintain its benefits for a long time after the project has been completed. The main indication that a project has achieved durable outputs and results is a continued flow of net benefits from that project after it has been completed, both during and after the legal durability period (see paragraphs 12 to 15). Co-financed productive investments should generate financial and economic return on costs, increase production, productivity, employment, competitiveness and entrepreneurship, and enhance innovation. The operations supported should also provide long-term benefits to the regions in which they are located.

09

In the context of this audit, outputs should be understood as the deliverables of a project (activities, services, operation of project facilities, knowledge and skills). Results are changes that arise for direct addressees at the end of their participation in an intervention (e.g. increased production, productivity, sales, turnover or exports; enhanced entrepreneurship and competitiveness; new products or services introduced; long-term jobs created or maintained) and also the positive effects of projects for the regions concerned.

10

In some of our previous reports⁶, we have highlighted risks in relation to the durability of EU funded infrastructures, including problems with maintaining project outputs and results. A lack of durability and a lack of attention to this aspect of project management can reduce the effectiveness of public interventions.

11

Ensuring durability requires a robust analysis and strategy at the formulation stage of a programme or project. Important preparatory measures can be taken as early as the planning stage in order to determine what it is that one wishes to achieve and maintain in the long run by financing a specific investment. It requires appropriate monitoring throughout the life-cycle of a project and thereafter. It also requires stable institutions and private-sector beneficiaries which guarantee effective management support for continued operations during the project’s economic life. According to a study by the European Parliament⁷, there has only been limited interest by the public sector in Structural and Cohesion Funds in the issue of durability and, consequently, only incomplete data is available on the durability of results from projects co-financed by the ERDF.

The regulatory framework

12

The EU regulation on the ERDF lays down a legal durability requirement. In general, it requires businesses to keep the project outputs/purchased assets for a period of five years (or three years exceptionally for SMEs⁸ where the Member State concerned had so decided) to avoid recovery of the ERDF co-financing awarded. Given that this legal durability only applies to outputs/purchased assets and that it covers a maximum period of five years, it is different from the concept of durability explained above and used in this audit.

13

Over time, the requirement regarding the length of the durability period has become stricter. During the 2000-2006 period, the managing authorities had to recover the corresponding ERDF co-financing and inform the Commission if a project underwent a substantial modification⁹ within five years of the date of the grant decision. Between 2007 and 2013¹⁰, the legal requirements were similar, but the starting point for counting the five years was moved from the grant decision date to the project completion date. In addition, a penalty was introduced for businesses that had transferred a productive activity within or between Member States.

14

In 2010, the application scope for the durability requirement was reduced to operations comprising investment in infrastructure or productive investments only. In addition, to ease the burden on the beneficiaries in the aftermath of the economic crisis, an exception to these requirements was introduced for the cessation of the productive activity due to a non-fraudulent bankruptcy¹¹.

15

An important innovation regarding the legal durability requirements in the 2014-2020 ESIF is the tightening of the starting point of the durability period by referring to the date of the project final payment or, alternatively, the date set in the State aid decision. In addition, EU co-financing must be repaid if the productive activity is relocated outside the EU within 10 years, except where the beneficiary is an SME¹². The intervention logic for productive investment under the ERDF, including aspects related to durability is detailed in Annex II.

Audit scope and approach

16

The audit, conducted between July 2016 and June 2017, sought to answer the question of whether the ERDF projects for productive investments in enterprises have been managed in a way which ensures durability of outputs and results.

17

In the first part of this report, we analyse the durability of outputs and, in the second part, the durability of results (direct and indirect). We assessed durability at the end of the legal durability period and at the time of the audit. In part three, we identify the main reasons why productive investments lacked durability, as well as good practice we encountered in our audit. In this respect, we examined the roles of the responsible authorities in the Member States and of the Commission. This included reviewing the OPs underlying the projects audited, as well as reviewing project monitoring, reporting and evaluation. In the last part, we analyse potential improvements regarding durability in the 2014-2020 programme period. We also examine changes made in the 2014-2020 ESIF regulations in order to increase the potential for durability of results.

18

We examined 41 completed productive investment projects co-financed by the ERDF under eight OPs in Austria, the Czech Republic, Germany, Italy and Poland implemented between 2000 and 2013 with a durability period ending between 2006 and 2018. All projects had previously been audited by us in the context of the Statement of Assurance for compliance with regulatory requirements. They were selected based on the sample size drawn under the previous audit in the Member States concerned and on their financial size. Most projects corresponded to investments in assets for enterprises from different manufacturing sectors (e.g. steel or stone products, car parts, sanitary equipment, industrial applications), from the energy sector (coal, renewables) and from the tourism sector (hotels). Some of them involved R&D investments. The projects ranged in value from 0.1 to 91.7 million euro. The beneficiaries were usually small to mid-size companies. A list of the audited projects and the OPs through which they were financed is presented in Annex III.

Observations

The outputs from the audited projects were mostly durable

19

For the projects audited, we first checked that all the expected outputs had been delivered as planned. Then we assessed whether they had actually been maintained in their original locations and had not been ceded, either in full or in part, during the legally binding durability period (3 or 5 years), i.e. they could not be sold and the corresponding economic activities could not be relocated inside or outside the EU. We also checked that they had been used on the same production site, except if they were replaced by assets of at least the same market value purchased at the cost of the project beneficiary.

20

In all EU regions where the audit took place, the legal durability conditions applied in the OPs were generally in line with the relevant EU regulations¹³. We did not, in all the audited projects except one, find substantial modifications or changes in the nature of ownership or cessation of the productive activity by the end of the durability period.

21

In the main, at project completion, the projects examined delivered the expected outputs¹⁴. The outputs were, typically, the acquisition of facilities for the manufacturing or production of goods, such as production halls and production lines including machinery and equipment used in different industrial sectors (e.g. in food, chemicals, plastics and metal ware, sanitary equipment, car parts, energy or renewable energy facilities or parts thereof). Businesses in the service or tourism sectors also received grants, e.g. support for print shops and refurbishment or construction of hotels. Box 1 illustrates outputs from three of the audited projects, and details for each project can be found in Annex III.

22

In general, at the end of the legal durability period, the assets existed at the production sites. Assets had not been sold and the firms’ economic activities had not been relocated. In most cases, they had been appropriately maintained and used effectively in line with the needs of the enterprises throughout the durability period (see Figure 2). There was only one case¹⁵ where a facility was not in operation, and this was due to bankruptcy. In three more cases¹⁶, the assets (manufacturing equipment, computers, software programmes) were not in full use or the production lines were not operational due to a lack of maintenance by their owners, a failure to consider business developments in the relevant sector or changes in the relevant energy legislation.

23

Also, at the time of our on-the-spot visits, the assets were still in use in 31 projects. In nine cases¹⁷, they were either not being used at all, being partially used or had been replaced by other equipment after the end of the legal durability period – which for SMEs was often only three years after project end. Such entrepreneurial behaviour may have been prompted by valid reasons, such as replacing machinery or IT systems due to wear or depreciation, or having more state-of-the-art equipment with at least the same trade value, or changes in the relevant energy legislation. For example, in one of the projects¹⁸, the equipment was replaced right after the end of the legal durability period due to its expensive operating costs.

Most of the projects audited created durable results but one fifth did not

24

We first checked whether the projects audited had achieved the expected direct results at project completion. We then analysed the situation at the time of the audit to assess whether these results had been maintained by the project owners for as long as possible so as to generate the maximum possible benefits far beyond project end. While doing this, we also took into consideration the economic situation of the firms in relation to that of the market where their activities are situated and other exogenous factors that might have an impact on the potential benefits. The assessment criteria are explained in detail in Annex IV.

Durability of direct results was good in about half of the projects audited

25

We checked that the projects audited pursued various direct results, such as improving access to finance, increasing production and productivity, creating employment, increasing sales, turnover or exports, diversifying enterprise structures, improving company image, introducing new products or services, and others (e.g. increased cooperation with other institutions in order to enhance innovation and competitiveness) on the basis of the information available at the MAs¹⁹. We assessed the durability of direct results at the end of the durability period and at the time of the audit on the basis of the information collected at the beneficiaries (see Figure 3).

26

By the end of the legal durability period (which, for the projects audited, was between 2006 and 2018²⁰), and based only on the available monitoring information, results existed in full (and throughout the whole durability period) in 14 projects and partially in seven projects (see Figure 3). However, for nearly half of all projects (19), this assessment was not possible because the MAs had not collected the necessary monitoring data (see also paragraphs 73 to 75) or because relevant documents were not available anymore due to the expiry of the archiving period (in the projects under OP Puglia and OP Burgenland).

27

We noted only a few examples where the monitoring allowed for a more thorough collection of data on project results. For instance, the MA in charge of the OP in Poland monitored and assessed the achievement of project results using different financial and performance indicators, such as revenues, the value of goods produced as a result of the project, reduction of emissions, etc²¹. Also, for six other projects in Saxony and Lower Saxony²², the increases in turnover beyond the region and in exports were measured.

28

However, as most MAs focused solely on job creation (one of the main goals for the OPs), they did not collect information about other relevant (economic) benefits which might have been delivered by the projects. Therefore, a comprehensive assessment of the actual achievements of a project and their durability was not always feasible based on the monitoring information alone.

29

At the time of our on-the-spot visits, and also based on additional information provided by beneficiaries and MAs, we found that the direct results were durable in 21 projects, only partially durable in 11 and poor or not durable at all in eight projects²³ (details are included in Annex III).

30

As secondary benefits, the projects enabled the beneficiary companies to restructure or modernise their productive assets, adapt and diversify their product portfolios and enhance their productivity and thus their profitability, thereby ultimately helping them develop their position on the market. Box 2 illustrates an example of a project where the results achieved and their durability was good. Another secondary benefit, according to the beneficiary firms, was an improved image and, as a result, better customer loyalty.

31

In some cases²⁴, the beneficiaries benefited from improved access to finance and loans. This allowed them to be more ambitious in their investments and, ultimately, achieve better results. Additional investments were made using the companies’ own resources alongside the subsidised assets. According to some of the audited beneficiaries, the projects significantly boosted their economic viability in the longer term. In several cases²⁵, generally difficult market conditions or the harsh repercussions of the economic crisis had brought some of the enterprises to the edge of insolvency. In such cases, according to the beneficiaries, the projects had played a key role in allowing them to continue their commercial activities (see examples in Box 3).

However, in about one fifth of the projects audited, the direct results were not durable, and they were only partially durable in about a quarter

32

As already shown in paragraph 29, at the time of our on-the-spot visits, we identified durability problems in 19 projects: in eight projects (one fifth of the projects audited), the results were not durable (sometimes lasting not even until the end of the durability period²⁶ or only until soon thereafter²⁷), and in 11 projects they were only partially durable (see examples in Box 4). Nevertheless, innovative projects (e.g. project 1) in quickly developing markets contain higher risks to durability which do not make them less deserving of EU funding.

33

In three cases²⁸, there were valid reasons for the lack of durability or causes that were beyond the beneficiary’s control, e.g. developments in the markets or in national legislation. In another five cases²⁹, however, the lack of durability was due to management weaknesses or other problems rooted in the companies concerned. In addition, for one project³⁰, it was not possible to assess durability due to a change of ownership at the beneficiary.

34

A common feature of the OPs under which the projects audited were implemented was creating or maintaining jobs in existing and new companies by improving their productivity, profitability and innovation. This indicator was used, and corresponding targets were set, in 29 of the 41 projects examined (see Annex III for more details). For the other 12 projects, information about project results was not complete, or their main aim was to address environmental issues and reconvert old industries, so employment was not a priority in those cases and therefore not measured.

35

As regards job creation, in addition to the durability requirements under EU law, the national provisions (where relevant) required the beneficiary companies, through grant agreements, to create a certain number of new jobs or to maintain existing employment levels. These positions had to be occupied, or at least permanently on offer and advertised, until the end of the durability period.

36

Overall, while not all projects achieved their job targets by their completion dates, the results nevertheless turned out to be relatively satisfactory. As shown in Annex V, by project completion employment had increased by an average of 7.7 % in the 41 audited projects: 66.4 % in SMEs and 3.7 % in larger companies. But due to the economic crisis, most of the companies underwent restructuring processes and we found that the jobs created were often lost after project completion (see also Annex V). For instance, under the OP Poland, in project 41 the beneficiary underwent several restructurations related to the optimisation of the production processes which, in total, resulted in a significant reduction of employment. Under the OP Burgenland, in one project the jobs were not safeguarded after durability period and another beneficiary went bankrupt. By mid-2016, the number of employees had increased by an average of 1 % for SMEs compared to the situation at project end, but had decreased by 6 % for larger companies (see also Annex V).

37

Where grant ceilings had been set by the MAs for each created post, the grants’ cost-efficiency (measured by total investment cost per job created) was likely to be higher. Where beneficiaries exceeded the ceiling they could not receive the grant. Thus the beneficiaries were forced to pay more attention to the size of their investments. However, we found that such ceilings were used only in the two German OPs.

38

As regards the economic prospects of the beneficiary firms analysed, two of them³¹ had ceased to exist. In addition, a total of 19 other firms (see Annex III) were, at the time of our audit, encountering challenges with regard to their future economic health, e.g. debt restructuring or balancing, or falling production³². Finally, in some cases, the companies’ future business prospects depended on the outcome of ongoing research projects and their ability to generate additional capital³³.

Indirect results are difficult to measure and link to funding

39

Only businesses registered and located in a region eligible for ERDF funding can apply for this financial support³⁴. Therefore, productive investments should also generate wider benefits for the region concerned (indirect results). Such benefits could include increased employment, entrepreneurship and competitiveness in the region, as well as improved environmental conditions, enhanced innovation and better business survival rates. With a view to economic cohesion, another important goal is to avoid the relocation of economic activities outside the region of origin. The projects should also have potential spill-over effects, e.g. boosting trade for local suppliers or service-providers that have business relations with the beneficiary firm or helping to increase their skills or knowledge base by providing business advice or networking opportunities.

40

Such indirect results were not specified as a strategic objective in any of the OPs covered by the audit. Furthermore, none of the audited projects included such indirect results as explicit operational objectives. Without such operational objectives or related indicators at project level, it is not possible to aggregate this information in order to measure indirect results at regional level. Without systematic measurement and reporting by the MAs of the spill-over effects for the regions, the causal links between EU-funded investments in the private sector and regional development were difficult to establish.

41

At project level, the achievement and durability of indirect results is inherently difficult to identify. It was, for example, difficult to prove the causal link between the EU projects and their employment effects at regional level. Contributions to Cohesion policy objectives such as innovation, networking and knowledge sharing (see paragraph 4) only featured in the rare cases where projects involved collaboration or networking with higher education institutions.

42

Nonetheless, a number of projects examined did contribute to indirect results. For instance, projects whose direct results were at least to some degree durable (see paragraphs 26 to 31) also generated economic or social benefits for the local communities or the regions in which they were located, including through local suppliers and service providers. Permanent and skilled jobs were created through those investments which also resulted in additional economic activity in the region. Other indirect results were: lower pollution, waste and noise³⁵, greater energy efficiency³⁶, the re-vitalisation of brownfield sites³⁷, and higher turnover beyond the region or increased exports³⁸. Furthermore, in many cases, the regions benefited from higher tax revenues thanks to the investments.

43

However, in the rare cases where contributions to indirect results could be identified, they were not always durable. For instance, the stakeholders in the Puglia region had identified structural weaknesses in, and the generally small size of, the SMEs as a drawback for regional development and employment creation³⁹. To counter this, one of the OP measures made it a pre-condition that project applicants other than large companies had to form consortia with other SMEs in order to apply for ERDF grants, hoping that the consortia would continue to exist after the end of the projects. However, in two of the audited projects, this objective was not achieved due to the relevant partners’ lack of commitment to the project goals and the artificial nature of the consortia (see Box 5).

Programming, selecting and monitoring projects insufficiently focused on durability

44

There may be numerous reasons why durable project results are achieved (or not), and numerous practices that influence their achievement. Such reasons can be identified both at project level and at a strategic (or programme/OP) level.

Promotion of durability in OP programming was weak

45

Our assessment was based on good and bad practices in relation to the promotion of durability in the OPs, including the consideration of relevant risks. We also examined that extent to which the MAs had analysed the needs of business in the corresponding regions as well as the market failures they encountered. Finally we looked at how the legal durability requirements were implemented.

46

Even at the strategic planning level, we identified various weaknesses which might explain why a significant share of the projects audited did not achieve durable/long-lasting results, or did so only partially. When setting up the OPs, the MAs generally took insufficient action to support durability through appropriate policy measures and conditions beyond the legal requirements (see paragraph 12).

Durability has not been a priority in the OPs

47

Until 2013, but most notably in the programme period ending in 2006, there was a lack of emphasis on durability of results in the OPs. While not a legal requirement, none of the audited OPs addressed the need to ascertain whether investment projects were producing durable results. Although the OPs entailed wider economic development objectives, such as increased employment and improved regional competitiveness, they did not emphasise the importance of long term results. Durability had not been an objective in the OPs or in other strategic documents, and there was no dedicated indicator to measure it.

48

Neither the OPs nor other planning documents of the sectoral business support programmes addressed the risks to the achievement of durability of project results, so did not envisage any mitigation measures. Furthermore, the strategic planning documents did not set out precisely either the desired indirect results for the regions or the mechanisms for measuring them (see also paragraphs 40 to 43).

49

The national authorities did not collect statistics about the survival rates of business entities supported with EU funding or about the reasons for non-durable project results. They did not conduct any benchmarking of the success of businesses supported with public money versus those not receiving any support. They therefore lacked important information when designing the various business promotion schemes under the OPs.

50

The Commission’s main aim in providing ERDF co-financing for business support measures was to have an economic impact, the durability of the investments’ results was only a side aspect. Thus, its main concern in relation to durability was satisfying the requirements under EU law. The Commission did not provide the MAs with guidance on project selection and design or with any other support for promoting durability of results.

The needs assessments were weak and the actual need for public funding was not properly identified

51

Durability implies that public funding is used for projects that can best contribute to the OPs’ objectives. Needs assessments contribute to the overall durability by allowing identifying the activities / businesses that are the most relevant to the attainment of the OPs’ objectives as well as the businesses most in need of public funding, those for which no solutions can be found in the market or where market conditions are not conducive to triggering private investments for accompanying their needs (‘market failure’). If the beneficiaries did not have a genuine need for public support but instead would have made the same decisions without aid, there is a greater risk of deadweight loss. Also, less beneficiaries genuinely having a need for public funding would receive them hence the overall durability is reduced.

52

While the OPs audited included some elements of a needs assessment, none of them, or the relevant ex-ante evaluations preceding the OPs, included thorough analyses of the companies’ actual needs (e.g. those of large vs small companies) in the relevant regions in terms of investment support. No detailed surveys, dedicated research or similar preparatory activities were conducted to identify the needs of the most vulnerable sectors before designing the business support measures. In particular, the needs assessments presented in the relevant Austrian, Italian and Polish OPs regarding business support were weak.

53

In several cases (the Saxony and Lower Saxony OPs, and to a certain extent also the Czech and Italian OPs), the initial situation of the businesses in the regions concerned was described relatively comprehensively, including the particular constraints they faced in investing and creating additional employment. Other OPs lacked clear regional plans for mitigating those constraints, e.g. improving access to finance, leveraging private financing, increasing production, turnover, exports or productivity, and introducing new products. Moreover, there were no plans stating how the ERDF would add value in bringing about longer-term change in the business sector, including deeper restructuring processes needed in parallel to economic effects on employment or business competitiveness.

54

Furthermore, the OPs did not clearly identify the companies’ actual need for public funding, or the market failures, in the various regions. As a consequence, sound explanations were lacking as to why certain companies should receive EU funds to invest in their asset bases (e.g. based on the sector, size, business potential or degree of innovation). Except for the Czech central OP, none of the audited OPs provided any justification demonstrating the eligibility of large firms for ERDF co-financing.

55

MAs assumed that practically all firms located in a convergence region, or in an otherwise structurally weak region, were encountering market failures and therefore needed public investment support, which is not necessarily the case. Furthermore, the OPs and investment projects addressed practically no market failures other than (potential) capital constraints or access to loans, whereas SMEs face other disadvantages⁴¹ compared with larger firms.The need for public intervention to combine financial assistance with non-financial support (i.e. diagnostics, advice or access to specialist infrastructure) was neglected.

56

The Commission did not address the risk of deadweight loss in relation to the EU funds when endorsing the audited OPs, for instance by highlighting such risks in the OPs or by providing guidance on how to select relevant projects. Several OPs provided ERDF funds in addition to existing national or regional grant schemes supporting enterprises. Based on long-term experience in the Member States, these grant schemes generally provided for meaningful investments. However, the fact that the EU funds complemented national and private investments did not suggest that they were likely to result in a higher number or quality of competing project applications. Moreover, the EU funding did not foster improved durability of project results beyond the legal requirements (e.g. through the requirement of more efficient controls and reporting or the imposition of stricter conditions), as it was not linked to the pursuit of long-term results.

Focus on legal durability requirements

57

The Member States were also responsible for accurately implementing the EU’s legal durability requirements. The Commission was responsible for monitoring the Member States’ efforts and ensuring compliance with EU law. In the Member States covered by the audit, the rules on the durability of project results were limited to those laid down in EU law (see Annex VI).

58

The Commission and the MAs considered satisfying the legal requirements on durability to be sufficient⁴². Based on this approach, they accepted the OPs in the 2000-2006 and the 2007-2013 programme periods not laying down stricter conditions in order to promote long-term results, such as, where appropriate, extending the durability period beyond the minimum period stipulated in the regulations⁴³.

59

Finally, with few exceptions, the MAs did not insert critical conditions in the grant agreements on achieving long-term results. Most grant agreements merely repeated the requirements under EU law. They did not promote durability issues through more effective conditions, e.g. setting key binding targets on employment and targets concerning production and productivity levels or competitiveness and innovation, which would have to be maintained for fixed minimum periods of time.

Lack of focus on durability in project selection

60

Regarding the selection procedures under the OPs, we analysed the relevance of the projects to the OP’s objectives and we examined the existence and use of criteria that could be linked to durability. We also checked whether other important aspects for the durability of results were taken into account such as innovation or the avoidance of deadweight.

61

The fact that, overall, the audited projects, were consistent with the overarching OP goals is a good indication that the selection procedures allowed for the selection of relevant projects. However, at the selection stage, none of the OPs covered by the audit sufficiently prioritised the achievement of durable results. In particular, the risks to the projects’ long term results and the mitigating actions were rarely indicated in the applications or in the documents on the selection procedures. Also, they frequently did not address risks in relation to deadweight.

62

Although selection criteria usually featured a number of objectives and targets (such as boosting the asset base of the companies, improving the business potential and competitiveness, creating new jobs or saving existing ones), project applications were not rewarded for having the potential to generate long lasting results. Instead, and rather unambitiously, the MAs assessed only their potential to maintain the target values for the legally required 3 or 5 years after project end. The MAs did not assess the projects’ potential long-term economic results at the selection stage.

63

Also, in most cases, innovation was among the main objectives for productive investment in the OPs examined. However, when evaluating the project applications the projects’ degree of innovation was practically disregarded. Often, support was provided to relatively simple industrial processes with a higher risk of being short-lived, thus not generating durable results. We found only eight projects⁴⁴ in total under the Italy, Saxony and Czech Republic OPs where beneficiaries had invested in innovative industrial processes or products. EU practices show that beneficiaries are encouraged to create products that are differentiated, innovative, offering added value, to ensure their projects’ durability. Projects with a strong potential for innovation and competitiveness are more viable.

64

The risk of deadweight loss was not taken into account when selecting the projects, as the MAs did not consider the private entities’ capacity to finance projects themselves or to bear a higher share of the cost.

65

For example, an indication of deadweight loss is where the project promoter has already commenced a project in advance of the grant award, as was the case in six projects audited. In such cases, there is a risk that they would have undertaken the project without the aid or that they had been promised a grant in advance of the project assessment.

66

Another sign of potential deadweight loss is a beneficiary being awarded more than one EU grant within the space of a few years only and this not being taken into account by the selection committee. This was the case in 15 of the 41 audited projects. Various beneficiaries obtained more than one ERDF grant within relatively short periods of time without undergoing affordability checks for each of their requests⁴⁵.

67

Finally, we found that eight of the projects⁴⁶ audited could have been completed on a similar scale and to a similar timeline solely with the firms’ own funds or by resorting to bank loans without benefiting from grants (see Figure 4). This was the case in particular where the companies were part of a corporate group. As a consequence, such use of public funds has reduced the required private investments. Moreover, the higher the co-financing granted, the higher the impact of deadweight loss. Examples of projects that received grants despite not encountering market failures are also shown in Box 6.

Indicators lacking, and project monitoring not focused enough on durability of results

68

Apart from ensuring that the projects were implemented in accordance with their expected scope, budget and timing, it is important that the management and monitoring arrangements focus both on the achievement of the results at project completion and the subsequent durability of these results. Relevant indicators, monitoring and reporting should give assurance not only that the beneficiary firms have complied with the legal durability requirements, but also that they have taken care of the results and, where possible, further developed them.

A lack of indicators

69

In the 2000-2006 OPs, indicators were not defined, or were not defined in a uniform manner. In the subsequent period, however, the Commission did ask the MAs to introduce core indicators for outputs and results. However, none of these referred to long-lasting results. The indicators were selected by the MAs based on their OP strategies and grant types and did not allow for a comparison of achievements across the regions.

70

Some of the output indicators were not sufficiently specific but only rather generally formulated in the relevant documents in relation to the projects from the 2000-2006 and the 2007-2013 programme periods. Result indicators were also generally poorly defined, in that they did not set out what the support programmes aimed to achieve⁴⁷. A lack of relevant, qualitative and quantifiable indicators to measure outputs and results prevented a comprehensive assessment of the project effects (see examples in Box 7). Even where the result indicators addressed the direct and immediate objectives of the projects to some extent, none of them were used to measure the durability of the project results, activities or operations (see also the section below on project monitoring). While it is important to have performance indicators in place, care has to be taken to avoid unnecessarily high numbers of them⁴⁸.

71

In a few cases, the target values for the indicators were unrealistic: in two cases (projects 19 and 22), the job targets were exceeded by around 100 %, and in one case (project 11), the energy savings made were almost three times higher than those forecast in the planning documents. The mid-term evaluation of the Czech OP concluded that the various targets set at OP level were insufficiently ambitious and therefore recommended increasing them by 200 % or more.

Project monitoring not focused enough on durability

72

Despite the lack of indicators, we found that the monitoring of project implementation was generally appropriate. However, it was very output-based and was not harmonised, either in terms of the monitoring and verification of data or with regard to the availability of electronic reporting tools. The project control and monitoring systems in place in the regions covered by the audit helped to ensure that the outputs were delivered by and large as planned on the project completion date and that the grants had been utilised for purchasing the eligible assets.

73

However, the MAs did not effectively monitor project durability in terms of both the legal requirements and other aspects indicating long-lasting results. At project completion, the beneficiaries were required to provide a final report on their spending on the projects (outputs), but not always on the direct results achieved (see Annex VII for the various monitoring requirements in relation to the audited OPs). Also, the MAs had not envisaged how to deal with cases where the results had not yet materialised at project completion and would only show at a later stage.

74

Overall, the monitoring, after project completion, of the legal durability requirements remained limited in scope and varied between OPs. The reporting and monitoring arrangements and the respective duties of the authorities and the beneficiaries after project completion were not always clear or formally specified in administrative documents in all OPs⁴⁹. The MAs did not provide beneficiaries with any guidance or systematic advice concerning the monitoring of durability. Nor did they have IT systems to collect data on the durability, and none of the MAs were able to present robust statistics on compliance with the legal durability requirements. As there was no legal requirement for them to continue doing so, the MAs stopped following up on the evolution of the projects immediately after the end of the legal durability period.

75

The above-mentioned lack of indicators and limited monitoring after project completion prevented the durability of project results from being measured. They were also one reason for the difficulty in identifying the causal links between the EU funds disbursed for private-sector development and the economic effects generated for the businesses and the regions.

Insufficient use of ex-post evaluations

76

We did not find any evaluations of the productive investment programmes that included a specific assessment of the durability of results. Due to the limited scope of the monitoring of the legally required durability, the lack of any IT system to collect the data related to this monitoring and the absence of any long-term monitoring after the end of the durability period no data was available on the durability of the results attained by the ERDF projects, nor on the economic development of the beneficiary firms or the effects the projects had on the regions. This made it impossible to identify lessons learnt and use them systematically for the relevant regional support schemes under the 2014-2020 ESIF.

77

The Commission did not carry out specific audits or evaluations regarding the durability of the ERDF-financed investments. It had to rely mainly on the data reported in the MAs’ annual implementation reports for information on durability and on OP implementation in general. However, most of the data primarily concerned performance in terms of the absorption of the funds. MAs also had to report cases of non-compliance with the legal durability requirements in their annual reports. However, the Commission could not provide any evidence of what action it had taken to follow up on these non-compliance cases.

78

The Commission had incorporated studies on ERDF financial support for large companies and SMEs into its wider ex-post evaluation of 2007-2013 Cohesion policy⁵⁰. While the final reports did not entail direct assessments of the durability of results, they nonetheless contained findings relevant to the objective of attaining long-lasting results from the EU investments in businesses. The most important evaluation findings concerning the two types of businesses were consistent with our audit results and are summarised in Annex VIII. The Commission has not collected statistics on the survival rates of EU-funded businesses at both EU and national level. As a result, it is not yet able to conduct benchmarking between those that receive support and those that do not.

Corrective measures taken in case of failure to achieve targets and comply with durability requirements were not applied consistently

79

We looked at the way in which the MAs applied corrective measures for failing to achieve the targets set or comply with the durability requirements as this also may have an influence on the degree to which durable results were achieved.

80

The MAs envisaged recoveries for failing to achieve the binding targets set in the grant agreement and failing to comply with the legal durability requirements. However, these measures were not applied in a uniform manner. The amount by which projects had to fall short of their targets for corrective measures to be applied varied, and the amounts recoverable also varied depending on the rules established in the OPs.

81

The two German MAs applied recoveries unless all binding targets (for job creation or safeguarding) had been reached at project completion⁵¹. The Czech and Polish MAs were more flexible: they recovered funds only if the actual value achieved was less than 95 % (Czech Republic) or 90 % (Poland) of the binding targets set. The Italian authorities, too, recovered funds from projects which had failed to achieve the target values.

82

However, the amounts to be recovered also differed significantly among the OPs. The German and Czech OPs applied a full recovery. For Italian OPs, however, the recovery was proportionate to the value of the assets and the length of time they had been disused. The Italian MA applied a full recovery only where the non-compliance in question represented a substantial breach of the legal durability requirement, in case of non-achievement of employment objectives or if businesses contributed less to project financing than provided for in grant agreements.

83

Frequently, binding targets or relevant deadlines were renegotiable. Where this was the case, the MAs allowed them to be renegotiated before the end of the durability period, in light of the values likely to be achieved. While this was justifiable in certain cases, e.g. due to changing external factors, there is a risk that, if applied almost as a rule, this will render both the earlier selection of project applications for financing and attaining durable results doubtful.

84

In other cases (e.g. in the Czech regional OP), the grant agreements allowed the transfer of the subsidised assets to a third party before the end of the durability period, provided the MA had endorsed this transfer. According to the MA, such transfers only occurred after a thorough assessment of the firm to which the subsidised assets were transferred. Nevertheless, such a practice created the risk that a company could end up benefiting from a grant without having to pass the usual project selection procedures.

Some improvements were made in the 2014-2020 ESIF regulations to increase the potential for durability of results

85

We assessed to what extent the Commission had used lessons learnt from previous programmes in its 2014-2020 ESIF legislative proposals and if it had identified technical and organisational constraints on the durability of results in business sector projects, as well as examples of good practice, from before 2014. We checked whether the changes in relation to improved durability of EU investments had been reflected in policy documents and in the legal framework for this support sector. Finally we established if the Commission had provided guidance to the regional authorities in using lessons learnt about durability in their ESIF programming.

The regulatory framework has improved …

86

The Commission, in designing the 2014-2020 ESIF legislative proposals, used the lessons learnt from previous productive investment programmes. A number of essential modifications were inserted in the ESIF regulations. The following provisions in the ERDF Regulation and in the Common Provisions Regulation (CPR)⁵² have clarified the regulatory framework in terms of the durability of ESIF-financed operations and are likely to have an impact on enhancing the durability of results:

• Since 2014, the ERDF has, in principle, supported productive investments for SMEs only. SMEs are generally assumed to have greater need of funds and other support, such as business advisory services. Large enterprises may receive grants only for investments in strengthening research, technological development and innovation, or to support the shift towards a low-carbon economy⁵³.
• The starting point of the five-year durability period has been clarified. It is now either the final payment date or, where relevant, the date set in the State aid decision, which was not clear and therefore not applied in a uniform manner by the MAs previously.
• As regards corrective measures for failing to comply with the legal durability requirements, only one of the following three conditions now needs to apply (rather than all three, as was previously the case) in order to trigger a recovery: (a) a cessation or relocation of a productive activity outside the programme area; (b) a change in ownership of an item of infrastructure which gives a firm an undue advantage; or (c) a substantial change affecting its nature, objectives or implementation conditions which would undermine its original objectives.
• The ESIF contribution is to be repaid if the productive investment is relocated outside the EU within 10 years (instead of 5 years) of the final payment, except where the beneficiary is an SME⁵⁴.

87

A recent audit by us⁵⁵ found that the Commission and Member States had generally been successful in developing OPs with a more robust intervention logic, i.e. setting out the aims (specific objectives/results) and how these are expected to be achieved (required funding, actions to be undertaken and expected outputs). New rules have been introduced with the aim of using performance indicators more consistently and comprehensively to measure progress towards long-term results. For each priority axis, the OPs (except for technical assistance axes and OPs dedicated to the SME initiative) must specify a performance framework constituted by a subset of indicators laid down in the OPs⁵⁶, most of them being already pre-defined in the related regulation.

… but there are still gaps

88

A new feature of the 2014-2020 regulatory framework that may impact the performance of EU-financed business support activities is the requirement for OPs to fulfil a set of ‘ex-ante conditionalities’⁵⁷. These are conditions, based on pre-defined criteria established in the CPR, which are necessary prerequisites for the effective and efficient use of EU funding for all ESI funds. When preparing the OPs for the 2014-2020 period, the Member States had to assess whether these conditions were fulfilled.

89

In order to fulfil the requirements related to ex-ante conditionality 3, which deals with enhancing the competitiveness of SMEs, the national authorities had to undertake specific action to promote entrepreneurship, including under the Small Business Act for Europe⁵⁸, prior to being allocated ESI funds to support businesses. Some of these activities are meant to have a positive effect on the organisation of entrepreneurship and, subsequently, on the life expectancy of businesses and their long-term results. However, given that, at the time of the audit, only three years had passed since the beginning of the programme period, their direct impact on the durability of results could not yet be demonstrated⁵⁹.

90

However, a proposal by the Commission for an additional ex-ante condition on the implementation of the late payment directive⁶⁰, which could have had an important impact on the survival rates of SMEs, was not accepted by the legislative authorities.

91

The OPs for the 2014-2020 period are structured in a way which has resulted in a significant increase in the number of performance indicators for outputs and results that need to be monitored. In Special Report No 2/2017⁶¹, we recommended harmonising the definitions of the performance terminology concerning ‘outputs’ and ‘results’.

92

In addition, another ECA report⁶² states that “the vast majority of indicators constitutes the basis for allocating the performance reserve related to output (57 %), financial indicators (33 %) and key implementation steps (9 %)”. Accordingly, the 2014-2020 performance framework remains essentially focused on spending and project outputs, but not on achieving results.

93

When drafting the new regulatory framework, the Commission was unable to use the results from the 2007-2013 ex-post evaluations of ERDF support to businesses (both large and SMEs) as the reports were published only in early 2016. Except for a study by the European Parliament⁶³, which largely focused on legal aspects, we have not been aware of other significant sources (for instance studies or other assessments by the national authorities) that deal with ERDF support for productive investment and were used for the design of the new ESIF regulations. Overall, therefore the regulations for the 2014-2020 programming period were cast without sufficient information derived from evaluation studies.

94

The Commission has not introduced any other specific measures to promote durability in ESIF productive investment projects in the regions. The new legal framework still does not include provisions requiring the MAs to establish monitoring procedures which specifically allow the collection of robust data on durability. Moreover, it has not given MAs or beneficiaries any relevant guidance in this respect for the new programme period.

Conclusions and recommendations

95

Overall, we conclude that, even though a majority of the projects audited generated durable results, between 2000 and 2013 there was not enough emphasis on the durability of results in the management of the ERDF support to productive investments in European businesses. As a consequence, for one fifth of the projects audited, the results were not durable. We found shortcomings in the programming of the OPs and at the selection, monitoring and evaluation stages of the projects audited.

96

The EU legal durability requirements, in particular the beneficiaries’ obligation to maintain purchased assets in their original locations until the end of fixed durability periods of five/three years, were met for all the projects audited. The beneficiary companies had not undergone any substantial modifications or changes in the nature of their ownership, or ceased or relocated their economic activity. In general, the projects audited delivered outputs as planned. The outputs were mostly used until the end of the durability period (see paragraphs 20 to 23).

97

Direct results for the projects audited mostly related to job creation, improved access to finance and loans, increased production and productivity. At the time of our audit, most of the projects audited were still generating the expected direct results. However, for nearly half of the projects audited, we noted that a comprehensive assessment of durability at the end of the durability period was not feasible. As most MAs focused solely on job creation, and the results were not monitored and reported adequately after project completion, relevant information on the extent to which they had been achieved and on their durability was scarce (see paragraphs 26 to 31). For one fifth of the projects, the results achieved at the time they were completed did not last until the end of the durability period, or lasted until only soon thereafter (see paragraphs 32 to 38).

98

Indirect results, such as building up knowledge bases, networking with higher education institutions, increasing local tax revenues and benefiting the regions, were rarely prioritised (see paragraphs 40 to 43).

99

There were numerous reasons for the non-achievement of durability of project results. While in a few cases, the reasons were clearly beyond the beneficiaries’ control (due to exogenous factors such as the economic crisis) or due to management weaknesses, in other cases it was due to insufficient focus on durability at different levels of the management of EU funds.

100

At programme level, the achievement of long-lasting results from productive investments was not promoted effectively in the underlying OPs or in other relevant regional strategic documents. The achievement of long-lasting results was not a priority. The specific needs of the businesses in different sectors and of differing sizes (market failures) were not properly identified. This resulted in risks of deadweight loss in the programmes. The EU’s involvement generally did not ensure better durability of results (see paragraphs 46 to 59).

Recommendation 1 - Promoting durability of the results

1. The Member States should promote the achievement of durable results from ERDF-financed productive investments at the OP programming level, in particular through:
   • more focus on identifying and mitigating risks to the achievement of durable results,
   • better analysis of the needs of different types of businesses, including the need for public funding, in order to avoid deadweight loss.

   Target implementation date: when preparing the OPs for the post-2020 period.

2. During the approval process of OPs, the Commission should pay particular attention to how Member States address durability of outputs and results.

   Target implementation date: during the approval process of individual OPs for the period post-2020.

101

As regards project selection, the selection criteria did not adequately reflect the need for ERDF-financed projects to achieve long-lasting results, introduce innovative industrial processes or to maximise their financial leverage effects. The risk that companies may benefit from EU funding even though they could have carried out their project without such additional funding, or with less funding, was not sufficiently mitigated (see paragraphs 61 to 67).

Recommendation 2 - Taking durability into account in selection procedures

The Member States should improve their selection procedures and criteria so that the risk of deadweight loss is taken into account and only productive investment projects with the potential for adequate long-lasting results are supported.

Target implementation date: when preparing the next selection procedures.

102

The MAs did not pay sufficient attention to measuring durability of results. Not all MAs set appropriate indicators for measuring the performance of the EU co-financed interventions and their results in the longer term. Where relevant indicators were defined, they mostly measured only one aspect of the benefits generated by the projects, it was not mandatory to achieve the targets set, or they were not used in a uniform manner to measure performance. This prevented the authorities from obtaining valuable information on durability of results from the projects and from the programmes as a whole (see paragraphs 69 to 71).

103

While the MAs’ monitoring of project implementation, based on the outputs, was generally appropriate, their monitoring and reporting of results at project completion and over the course of the durability period were mostly poor. This was partly due to weak use of performance indicators, and partly due to the lack of monitoring and reporting procedures or their inconsistent application. There was no follow-up on long-lasting results. No specific ex-post evaluations were commissioned under the OPs covered by our audit. Also the Commission did not carry out specific audits/studies on the durability of the EU-financed investments (see paragraphs 72 to 78).

Recommendation 3 - Emphasising durability in monitoring and reporting

The Member States should conduct appropriate and consistent monitoring and reporting:

• using pre-defined and relevant indicators for both outputs and results, as well as for measuring long-lasting results at OP level, while keeping the number of indicators manageable;
• establishing monitoring and reporting procedures to be used at project completion and throughout the durability period, which should be described in the grant agreements;
• improving the collection and use of relevant data.

Target implementation date: for ongoing projects – as soon as possible; for subsequent projects – when preparing the selection procedures.

Recommendation 4 - Taking durability into account in evaluations

The Commission and the Member States should make sure that ex-post evaluations at OP or EU level look into the different aspects of the durability of results achieved at the end of the durability period and beyond in a more systematic manner. The evaluation results should be used when designing future EU business support schemes.

Target implementation date: for future ex-post evaluations to be carried out.

104

Grant agreements did not systematically provide for corrective measures for not achieving the expected results at project completion and/or at the end of the durability period. Where these were provided for, they were applied inconsistently, with varying degrees of flexibility between OPs (see paragraphs 80 to 84).

Recommendation 5 - Consistently applying clear corrective measures

1. The Commission should ensure that Member States apply clear corrective measures including recovery arrangements consistently where projects fail to comply with EU legal durability requirements.

   Target implementation date: immediately.

2. Where Member States have set binding targets at project level, they should establish clear corrective measures and apply them consistently.

   Target implementation date: as soon as possible, and before the end of 2019.

This Report was adopted by Chamber II, headed by Mrs Iliana IVANOVA, Member of the Court of Auditors, in Luxembourg at its meeting of 7 February 2018.

Abbreviations and glossary

(EU) Added value: The EU added value is the value that an EU action adds to the value that would otherwise have been created by Member States acting alone. In the context of this audit, the EU added value are the benefits resulting from the EU co-financed productive investments, such as enhancing the competitiveness of small and medium-sized enterprises, better identification of local and regional needs and solutions, long-term employment and greater scope for innovation.

Common provisions regulation (CPR): Regulation (EU) No 1303/2013 of the European Parliament and of the Council of 17 December 2013. This Regulation lays down the common rules applicable to the European Regional Development Fund (ERDF), the European Social Fund (ESF), the Cohesion Fund, the European Agricultural Fund for Rural Development (EAFRD) and the European Maritime and Fisheries Fund (EMFF), which operate under a common framework (the 'European Structural and Investment' - 'ESI Funds'). It also lays down the provisions necessary to ensure the effectiveness of the ESI Funds and their coordination with one another and with other Union instruments.

Deadweight loss: Deadweight is an effect occurring when funding is provided to support a beneficiary who would have made the same choice in the absence of aid. In such cases, the outcome cannot be attributed to the policy, and the aid paid to the beneficiary has had no impact. Thus, the share of expenditure which generates deadweight is ineffective by definition, because it does not contribute to the achievement of objectives. In the context of this audit, it is a situation where a subsidised project would have been wholly or partly undertaken without the grant aid.

Direct project results: Changes experienced by those directly addressed by an intervention resulting from their participation (e.g. increased production, productivity, sales, turnover or exports; enhanced entrepreneurship and competitiveness; new products or services introduced; long-term jobs created or maintained).

Durable project results: Long-lasting project results. The main indicator for durability of project results is continued flow of net benefits achieved by the project. For instance, after project completion, during and after the legal durability period, the project should generate an acceptable level of financial and economic return on costs; increase production, productivity, employment, competitiveness and entrepreneurship; and enhance innovation.

European Regional Development Fund (ERDF): The European Regional Development Fund is aimed at reinforcing economic and social cohesion within the European Union by redressing the main regional imbalances through financial support for the creation of infrastructure and productive job-creating investment, mainly for businesses.

European Structural and Investment funds (ESIF): There are five separate funds supporting the delivery of the European Union’s strategy for smart, sustainable and inclusive growth across the EU, as well as the fund-specific missions, with policy frameworks set for the seven-year MFF budgetary period: the European Regional Development Fund (ERDF), the European Social Fund (ESF), the Cohesion Fund (CF), the European Agricultural Fund for Rural Development (EAFRD) and the European Maritime and Fisheries Fund (EMFF).

Europe 2020 Strategy: The Europe 2020 Strategy is the EU’s growth strategy for 2010-2020, to recover from the financial crisis. It is split into five headline targets, covering: employment, research and development, climate/energy, education, social inclusion and poverty reduction.

Indicator: A measurable proxy for an objective, providing useful information for assessing the degree to which an objective is met.

Indirect project results: The positive effects of projects for the regions concerned, e.g. increased employment, competitiveness and entrepreneurship, enhanced innovation, better business survival rates, the correlation between financial support and cooperation with universities/researchers to enhance innovativeness and competition, increased skills or knowledge base, business consultancy and networking with other similar organisations.

Managing authority (MA): A managing authority is a national, regional or local public authority (or any other public or private body) which has been designated by a Member State to manage an operational programme. Its tasks include selecting projects to be funded, monitoring how projects are implemented, and reporting to the Commission on financial aspects and results achieved. The managing authority is also the body that imposes financial corrections on beneficiaries following audits carried out by the Commission, the European Court of Auditors or a relevant authority in a Member State.

Monitoring: A continuing function that uses systematic collection of data on specified indicators to provide management and the main stakeholders of an ongoing development intervention with indications of the extent of progress and achievement of objectives and progress in the use of allocated funds (Source: OECD Development Assistance Committee Glossary).

Operational programme (OP): An OP sets out a Member State’s or a region’s priorities and specific objectives and describes how funding (both EU and national public funding and private co-financing) will be used during a given period (currently seven years) to finance projects. The projects within an OP must contribute to a certain number of objectives. The funding comes from the ERDF. The OP is prepared by the Member State and has to be approved by the Commission before any payments can be made from the EU budget. OPs can only be modified during the programme period if both parties agree.

Programme period: The multi-annual framework within which ERDF expenditure is planned and implemented.

Project outputs: The deliverables of a project.

RES: Renewable energy sources

ROP: Regional Operational Programme

R&D: Research and development

SMEs: Small and Medium-sized Enterprises

Sound financial management: Fair and transparent management of the EU budget in accordance with the financial regulation and, in particular, the principles of economy, efficiency and effectiveness.

TFEU: Treaty on the Functioning of the European Union

Audit Team

The ECA’s special reports set out the results of its audits of EU policies and programmes, or of management-related topics from specific budgetary areas. The ECA selects and designs these audit tasks to be of maximum impact by considering the risks to performance or compliance, the level of income or spending involved, forthcoming developments and political and public interest.

This performance audit was carried out by Audit Chamber II Investment for cohesion, growth and inclusion spending areas, headed by ECA Member Iliana Ivanova. The audit was led by ECA Member Ladislav Balko, supported by Branislav Urbanič, Head of Private Office and Zuzana Franková, Private Office Attaché and audit team member; Gerhard Ross, Director, Myriam Cazzaniga, Principal Manager; Kurt Bungartz, Head of Task; Alessandra Falcinelli and Jolita Korzunienė, Auditors.

Contact

EUROPEAN COURT OF AUDITORS
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LUXEMBOURG

Tel. +352 4398-1
Enquiries: eca.europa.eu/en/Pages/ContactForm.aspx
Website: eca.europa.eu
Twitter: @EUAuditors

More information on the European Union is available on the internet (http://europa.eu).

Luxembourg: Publications Office of the European Union, 2018

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