Implementing the EU budget through financial instruments: lessons to be learnt from the 2007-2013 programme period

The EU is currently facing serious challenges such as the economic and financial recovery and the management of the refugee crisis. Therefore, the EU decision makers are seeking ways to maximise the effectiveness and efficiency of the available EU budget. Financial instruments are a delivery tool to provide financial support from the EU budget. During the 2007-2013 programme period financial instruments set up under the ERDF and the ESF were used by 25 out of 28 EU Member States. By the end of 2014, around 16 billion € have been paid as contributions from the ERDF and ESF Operational Programmes to these instruments. This represents a significant increase compared to around 1.3 billion in the 2000-2006 programme period and 0.6 billion € in the 1994-1999 programme period allocated to such instruments. During the same period, 2007-2013, the overall contribution from the EU budget to the 21 financial instruments managed directly or indirectly by the Commission was about 5.5 billion €. Through this audit, we examined whether financial instruments were an efficient mechanism to implement the EU budget. Our analysis covers all 1 025 ERDF and ESF financial instruments set up during the 2007-2013 programme period under shared management, as well as six centrally managed financial instruments in these areas. Our audit identified a number of significant issues that limited the efficiency of financial instruments: a) a significant number of ERDF and ESF financial instruments were oversized and by the end of 2014 continued to face significant problems to disburse their capital endowments; b) overall, financial instruments in both shared and central management were not successful in attracting private capital; c) so far, only a limited number of ERDF and ESF financial instruments have been successful in providing revolving financial support; and d) high levels of management costs and fees compared to the actual financial support to final recipients which also appear to be significantly higher than those of centrally‑managed instruments or private‑sector investment funds. At the same time, we also note that improvements were made in the legal framework for the 2014-2020 programme period, but certain issues remain. In our report, we recommend that: a) the Commission’s ex‑ante assessment for centrally managed instruments should systematically include an analysis of the ‘lessons learnt’ to date; b) the Commission should also assess the effect of major socio‑economic changes on the rationale of the instrument and the corresponding contribution required from the EU budget in the context of their respective mid‑term reviews for all centrally managed financial instruments; c) the Commission and the Member States should aim at optimizing the size of specific ERDF and ESF funds to take advantage of the significant economies in the cost of operating funds; d) the Commission should provide in the Financial Regulation a definition for the leverage of financial instruments applicable across all areas of the EU budget, which clearly distinguishes between the leverage of private and national public contributions under the OP and/or of additional private or public capital contributions; e) for ERDF and ESF financial instruments the Commission should ensure at closure that Member States provide complete and reliable data on private contributions on capital endowments; f) for ERDF and ESF financial instruments, the Commission should provide additional guidance to Member States on how best to apply the provisions on preferential treatment to attract more private capital without allocating excessive risks to public contributors to the financial instruments’ endowments; g) for centrally‑ managed financial instruments, the general risk‑sharing principles which may have an impact on the EU budget should be defined in the legislation governing the instrument concerned; h) for all financial instruments funded from the EU budget during the 2014-2020 programme period, the Commission should ensure that only structures which are in line with its own recommendations and actions with regards to tax arrangements are implemented by Member States, the Commission itself and the EIB group; i) the Commission should take appropriate measures to ensure that Member States maintain the revolving nature of the funds during the required eight‑year period after the end of the eligibility period for the 2014-2020 programme period; j) the Commission should provide guidance in respect of the provisions allowing financial instruments to continue to be used into the following programme period; k) the Commission should ensure that Member States report comprehensive information on management costs and fees incurred and paid by March 2017 in view of the upcoming closure of the 2007-2013 programme period; l) the Commission should clarify that the ceilings for management costs and fees need to be applied to the actual capital endowment used by the financial instrument; m) as regards the performance‑based remuneration of fund managers in the 2014-2020 programme period the Commission should make a legislative proposal aiming at a revision of the existing provisions in the CPR to strengthen the incentive effect of these arrangements; n) member States’ managing authorities should make extensive use of the existing performance‑based elements of the remuneration for fund managers when negotiating funding agreements; o) the Commission should carry out a comparative analysis of the implementation costs of grants and repayable financial support, mainly through financial instruments, for the 2014–2020 programme period with a view to establishing their actual levels. Such information would be particularly relevant for preparing legislative proposals for the post-2020 period and determining an adequate level of technical assistance.