ESF Flat rate for indirect costs in the Czech Republic

1. ESF Flat rate for indirect costsin the Czech Republic ESF Management Department Ministry of Labour and Social Affairs

2. Content of the presentation • General background regarding ESF flat rate in the Czech Republic • Definition of indirect costs in CZ ESF OP’s • Outputs of the analysis of ESF OP’s 2004-06 • Features of CZ flat rate system

3. General background • 3 ESF operational programmes in 2007-2013, 3 different managing authorities • Overall ESF coordination in CZ – Ministry of Labour and Social Affairs • Preparation of one common CZ proposal on indirect costs that was submitted to the EC for approval (late August 2008) • The CZ proposal was approved by EC on 8th October 2008 • First calls with indirect costs in Human resources and employment OP launched in July 2008 (after agreement with Ministry of Finance)

4. Definition of indirect costs (1) • CZ decided for the option of exact definition of indirect costs • The other costs, if eligible, are direct • Reasons: • projects differ too much not possible to define a list of direct costs • open list of indirect costs disables to calculate a precise percentage of the flat rate risk that some project might be impossible to implement

5. Definition of indirect costs (2) Basic definition • Costs that are not or cannot be unambiguously associated with a concrete activity of a given project CZ extension of the definition • Costs that could be linked to a concrete activity, but the declaration of this link is complicated, time consuming and disproportional to the size of the expenditure • Costs added to indirect costs for regulatory reasons (e.g. publicity)

6. Definition of indirect costs (3) • Main categories of indirect costs: • Staff not directly connected with the project • Domestic travel expenses • Rent, water, fuels and energy in spaces used for the administration • Depreciations of buildings used for the project • Depreciations of equipment serving for the projects administration • Renting or operational leasing of equipment for the project administration

7. Definition of indirect costs (4) • Publicity expenditures • Costs for consumables and office materials for the administration of the project • Refreshments for project staff and target groups • Cleaning products and tools • Charges for internet, phone, fax, postal charges • Bank charges • Notarial and administrative charges • Tax and legal advice and consultation • Insurance of assets

8. Analysis of projects in 2004-2006 (1) • Sample of 104 projects from two ESF OP’s • Representative sample according to three main criteria • different measures (all measures with grants) • different size (large, medium and small projects) • different beneficiaries (NGO’s, enterprises, others) • Correlation between these three criteria and the flat rate declared was tested

9. Analysis of projects in 2004-2006 (2)

10. Conclusions of the analysis (1) • Negative correlation between the size of the projects and the percentage of the flat rate • Correlation between the flat rate and the type of beneficiary or measure was only secondary – through the size of the project • Over 50 % of the analysed projects had indirect costs above flat rates applied in CZ in 2007-2013. • Nearly 40 % of the analysed projects had indirect costs above 20 % more than allowed by the ESF regulation for 2007-2013 • Almost 73 % of invoices attached to payment claims concerned the indirect cost

11. Conclusions of the analysis (2) • 73 % of the effort and human resources were spent on verifications and controls of invoices that represented roughly only 20 % of the financial allocation and did not have a clear link to the outputs and results of the operations Based on the conclusions above: • Degressive rates are applied – the higher the direct cost, the lower the percentage of the flat rate • Subcontracting over a certain limit in the project leads to reduction of the percentage of the flat rate

12. Limits of indirect costs (1) • Limits approved by the EC are as follows: • Limits used in HRE OP

13. Reduction of flat rate as a reason of high portion of subcontracting Limits of indirect costs (2)

14. Practical implications I • Application for grant projects only • State administration is excluded • Application only when indirect costs where preset in the call for proposals • If continuous call – change of call relevant for all projects in the call from this point

15. Practical implications II • The application of the designated proportion of indirect costs is mandatory for all projects under given call – the beneficiary cannot ask for a different % of the flat rate • Any payment to the beneficiary includes the fixed percentage of indirect costs (advance payments included) • The costs included among indirect cannot be declared as the direct costs of the project • Indirect costs are not proved by any invoices and are not a subject of controls

16. Changes to direct costs • If direct cost are reduced (changed), the indirect cost must be reduced (changed) in the same manner as well in order to preserve the percentage of indirect cost • The percentage is fixed in the Decision of a grant provision and is therefore binding for the entire duration of the project implementation

17. Difficulties and Audit • Difficulties for administrators with detecting what is direct or indirect in the context of specific project • Ex. Publicity in the project where main goal is to inform the public X project on training • It is important how the beneficiary describes the activity in the time sheet • AUDIT • Tax office did not respect given rules and controled indirect cost – we contacted Min. of Finance • EC Audit conducted 2011, 2012 – no findings on indirect costs • Suggestions for additional changes where put on the table (all staff costs, indirect costs for state administration)

18. Thank you for your attention! www.esfcr.cz esf@mpsv.cz ESF Management Department Ministry of Labour and Social Affairs of the Czech Republic