10-13.

The EIT disagrees with the conclusion of the Court of Auditors, as no ‘overpayment’ or irregular payment was made for the reimbursement of indirect costs of Knowledge and Innovation Communities (KICs) under the 2014 grant agreements.

The EIT is part of the Horizon 2020 framework programme and has to apply the rules of the Horizon 2020 Rules for Participation and Dissemination starting from 1 January 2014. Article 57(2) of the Horizon 2020 Rules for Participation and Dissemination provides explicitly for the following transitional measure: ‘this Regulation shall not affect the continuation or modification including the total or partial termination, of the actions concerned, until their closure, or until the award of financial assistance by the Commission or funding bodies under Decision No 1982/2006/EC or any other legislation applying to that assistance on 31 December 2013, which shall continue to apply to the actions concerned until their closure’. The EIT qualifies as ‘funding body’ and the EIT Regulation qualifies as ‘any other legislation’ in application of this particular provision. The legislation applicable to the EIT financial assistance on 31 December 2013, the EIT Financial Rules, explicitly allowed the use of a 40 % flat rate for reporting indirect costs by higher education institutions, research organisations, non-profit public bodies and SMEs. Therefore, the use of the flat rate of 40 % by these bodies was legal and regular under the 2014 grant agreements. Consequently, the EIT does not accept the conclusion of the Court of Auditors, as no overpayment was made. While the EIT indeed notified the KICs in October 2013 of potential changes in the rules for reporting indirect costs under Horizon 2020, this notification happened before the Horizon 2020 Rules for Participation and Dissemination, including the above mentioned transitional measures in Article 57, were adopted by the European Parliament and the Council on 11 December 2013. Based on the transitional measures adopted, the EIT did not need to disallow the use of a 40 % flat rate for reporting indirect costs by higher education institutions, research organisations, non-profit public bodies and SMEs.

In order to provide the relevant context, it is important to recall the process how the 2014 grant agreements were established. The 2014 EIT-KIC grant agreements were based on the 2014 Business Plans of KICs that were prepared by the Knowledge and Innovation Communities during 2013. The annual call for the 2014 Business Plans was launched by the EIT by sending the Business Plan guidance to the KICs in April 2013. In line with the guidance provided by EIT, KICs developed in consultation with their partnership and submitted their 2014 Business Plans to the EIT by 30 September 2013. Following the evaluation of the 2014 Business Plans by the EIT, supported with external experts, the EIT Governing Board decided on the 2014 funding allocation to KICs on 5 December 2013. Based on this decision of the Governing Board, KICs amended their Business Plans in January 2014 in order to align them with the funds allocated. The grants were awarded by the EIT Director and the grant agreements were signed in February 2014. In line with the principle of legal certainty, funding rules shall not be changed after a call for proposal has been launched.

Therefore, and in line with the transitional arrangements provided by the Horizon 2020 Rules for Participation and Dissemination, the entry into force of the new Regulation on the Horizon 2020 Rules for Participation and Dissemination should not have affected the continuation of the actions concerned (i.e. the 2014 Business Plans of the KICs, which were established and assessed by the EIT in 2013) until the award of financial assistance by the EIT. This award should have been carried out under the legislation applicable on 31 December 2013.

The EIT was indeed not part of the Seventh Framework Programme for research, technological development and demonstration activities (FP7). However, the EIT is part of Horizon 2020 and the majority of KIC Partners are beneficiaries under both FP7 and other Horizon 2020 programmes, too. Therefore, it is coherent to apply the same 40 % flat rate to the transition from the pre-H2020 EIT financial assistance to Horizon 2020 as from FP7 to Horizon 2020.

Besides, it is important to recall that calls for proposals under FP7 were launched by DG Research and Innovation until as late as December 2013 and grant agreements resulting from those calls were signed until as late as October 2014. Many of those grant agreements are still running in 2016 and follow the rules of the FP7 legal framework based on the same transitional provisions of the Horizon 2020 Rules for Participation and Dissemination. The EIT did not provide preferential treatment to its beneficiaries (KIC Partners) affected by the 40 % flat rate in the 2014 grant agreements.

14.

As reported in the EIT Consolidated Annual Activity Report for 2015, the residual error rate of 2015 grant transactions, made under the 2014 grant agreements, after ex ante and ex post controls is 1,46 %.

15.

For the reasons described in the replies to paragraphs 10 to 14, the error rate of 2015 grant transactions, as calculated by the EIT, is 1,46 %.

18.

The EIT had obtained audit certificates from independent auditors on the costs of KIC complementary activities by 31 March 2015 in order to ensure that the EIT financial contribution did not exceed the 25 % ceiling over the years 2010-2014. On the basis of the audited figures, the funding percentages for the period 2010-2014 are as follows: Climate KIC — 16 %, KIC InnoEnergy — 19 % and EIT Digital — 21 %.

As the percentages are well below the 25 % ceiling set out in the EIT-KIC Framework Partnership Agreements, the EIT has obtained assurance on compliance with the applicable legal basis.

Nevertheless, the Commission and the EIT accepted the recommendation of the Court’s Special Report 4/2016 to propose an amendment to the EIT legal basis removing the 25 % funding condition in order to alleviate the operational and financial reporting burden on the KIC Partners. Until such an amendment is adopted, the EIT will implement the currently applicable legal basis.

19.

The EIT applies the audit certificate methodology devised by DG Research and Innovation for the Horizon 2020 framework programme starting from the 2014 grant agreements. The revised methodology includes more detailed instructions and agreed upon procedures as well as 63 standard factual findings covering all cost categories.

Furthermore, the EIT has developed a comprehensive grant assurance strategy that is built on both ex ante and ex post verification, including the CFS, in order to ensure the legality and regularity of transactions.

20.

The EIT interprets the applicable legal basis differently. Recital (16) of the EIT Founding Regulation provides an explanation of Article 5(d) of said Regulation as follows: ‘Therefore, it is expected that industry, the finance and service sectors will contribute significantly to the budget of the EIT and, in particular, to the budget of the KICs. The KICs should aim at maximising the share of contributions from the private sector.’

In this light, the EIT is of the opinion that the EIT shall primarily mobilise funds from public and private sources via its Knowledge and Innovation Communities. Therefore, the EIT interprets the quoted article as including the budget of KICs when the EIT budget is referred to. In this light, the EIT has been successful in mobilising funding from other public and private sources via its Knowledge and Innovation Communities. The share of funding from sources other than the EIT to the budget of the three first wave KICs concerns for the most part the complementary activities declared by the KICs and was 84 % (Climate-KIC), 81 % (KIC InnoEnergy) and 79 % (EIT Digital), respectively, in the period 2010-2014.

21.

The amount of 26,6 million euro unspent by KICs from the 2014 grant agreements became known to the EIT when KICs claimed the actual amount of 187,2 million euro in March 2015. At that time, it was not possible anymore to cancel the unused appropriations entered for year 2014, which only then could have been re-entered during the next three years.

As a direct consequence of the lessons learnt in the framework of the 2014 grant agreements, the EIT carried out a budget review and the KICs were requested to revise their 2015 Business Plans and Budgets in October 2015 and they submitted amended Business Plans and Budgets in November 2015. As a result of the reduction in KIC Budgets, the EIT could decommit unspent amounts, which have then been cancelled and re-entered in the estimate of revenue and expenditure for 2016. This shows that, in close collaboration with the KICs, the EIT management of the budget has significantly improved.

In this context, the recommendations of the Court of Auditors in Special Report 4/2016 are relevant. EIT-KIC grant agreements signed before the start of the activities and covering a longer period than the calendar year should improve the absorption of available funds by the KICs.

22.

The total amount reported by the Court consists of planned carry-overs that was necessary due to the nature of activities such as services going beyond year-end and meetings held in December 2015 for which invoices were only received in January 2016. These planned carry-overs do not indicate weaknesses in the budgetary management of the EIT but are a standard budget management tool.

23.

The EIT requested the Commission to re-launch the process leading to full financial autonomy. The Commission set out the roadmap and timetable of the process in May 2016. According to the indicative timetable, the Commission will complete its financial autonomy assessment report in December 2016-January 2017.

24.

Due to the annual nature of the EIT’s budget, and the fact that the EU budget is generally not adopted before mid-December, grant agreements for a given year cannot be signed before 1 January of that particular year. The EIT committed itself to decrease the gap between the starting date of the action as defined in the KICs’ Business Plans and the date of signature of the grant agreements. As a result of this effort, the 2014 grant agreements were signed with the three KICs in February 2014.

As regards the amendments of grant agreements signed in March 2014, it is important to note that significant uncertainties surrounded the EIT’s 2014 annual budget due to the ongoing negotiations related to the 2014-2020 Multiannual Financial Framework and Horizon 2020. Therefore, the EIT Governing Board took a prudent approach and decided in September 2013 to allocate only 180 million euro, as a first tranche, for the 2014 grant agreements. After the 2014 annual budget had been confirmed, the EIT awarded further grants totalling 38,5 million euro, as a second tranche, to the three KICs in March 2014.

25.

The education activities covered by lump sums and actual costs can be distinguished in the EIT Digital Masters Programme. The lump sum tuition fees cover the costs of the universities related to the participation of students in technical courses. On the other hand, the activities reported based on actual costs relate to the EIT Digital specific learning outcomes and provide added value for students compared to the standard masters programmes offered by the participating universities.

The EIT accepts that it should move towards a single lump sum model for financing KICs’ masters programmes in order to simplify the cost reporting, once sufficient statistical data is available to establish such a single lump sum in line with the provisions of Article 124(2) of the EU Financial Regulation.

26.

The EIT is of the opinion that bonuses, as variable components of the basic remuneration of KIC management staff, comply with all relevant rules and regulations, in particular section 1.1.3 of Horizon 2020 Annotated Model Grant Agreement which defines the eligibility conditions for variable components paid by beneficiaries. More precisely, the variable complements were authorised by the employment contracts, they were determined on the basis of objective conditions, which were documented by the KIC Legal Entity and verified by EIT. The net amount actually paid to employees depends on the applicable withholding tax rate and the employees’ individual tax situation. On the basis of a tax rate of ca. 40 %-50 % of the gross amount reported by the Court of Auditors, the net amount was on average around 6 000-7 000 euro per person.

While the practice of reimbursing bonuses, as variable and performance-based components of remuneration, may be unusual, the objectives pursued by KICs as business-driven organisations, such as aiming for financial sustainability, are also unusual and cannot be found in other programmes. The use of variable elements as part of the basic remuneration can provide a strong incentive for good performance and ensure that value for money is achieved. In fact, performance-based remuneration of KIC management staff is considered most appropriate in a business-driven model. Furthermore, it is important to note that the EIT contribution to salaries paid to KIC management staff, including bonuses will be kept below the ceiling established by the EIT in 2016 grant agreements.

Finally, the EIT is of the opinion that Recommendation No 3 of the Court of Auditors’ Special Report 4/2016 is relevant in this context. According to the Court of Auditors, ‘the EIT should seek greater autonomy and make use of the flexibility in Horizon 2020’s legal basis. In particular, it should adopt specific rules tailored to the needs of the KIC partners.’ This is exactly what the EIT has done when accepting the performance-based remuneration system introduced by the KIC Legal Entity in question.

As regards the public relations services procured by another KIC Partner, a renowned public university, it is important to note that the subcontractor providing the public relations services had been selected in a competitive tendering process carried out in full compliance with the procurement rules of the KIC Partner. Therefore, the EIT is of the opinion that best value for money has been ensured and the principles of sound financial management have been complied with. The audit conclusion on sound financial management is unclear, as no comparable benchmark prices have been provided by the Court for the services procured by the KIC Partner.

27.

The subcontractor was identified and contracted by the Framework Contractor in line with the provisions of the Commission Framework Contract. It provided specialist services such as developing a concept outline for INNOVEIT, designing an attractive and coherent programme and morderating/facilitating the three-day event.

According to the information received from the Framework Contractor, they have been working with the subcontractor in question on the organisation of several events for various directorates-general of the Commission in recent years. The standard rates charged by the subcontractor for those events were 2 500 euro and 900 euro for senior and junior consultants, respectively. In fact, the subcontractor applied a 10 % reduction in the case of INNOVEIT. The Framework Contractor, who cooperates with other moderators as well, assured the EIT that the rates charged are competitive in view of the market prices of such services.

The price of 2 250 euro for a senior consultant is considered thus as a market rate reflecting both the high level of skills and competences needed to deliver the tasks requested and the type of work delivered which was mainly conceptual (and not logistical related to the conference organisation). Finally, it is important to note that the Memorandum of Understanding signed between DG EAC and EIT related to the procurement of this Framework Contract stipulates that the EIT could not take part in the interinstitutional call for tenders and then procure the same goods or services by other means. The EIT therefore had to use the Commission Framework Contract for the organisation of the INNOVEIT events.