EU projects at CERN are facing two exchange rate risks:
- At the proposal stage, the exchange rate used for the budget proposals is indicative and is usually based on the ECB exchange rate.
The project is thus facing an exchange rate risk between the proposal and its actual start (when the final internal exchange rate is set).
Since there is a major gap between the proposal submission and the approval of the project, it is not possible for CERN to fix the exchange rate at that time.
This may result in an approved project that starts with a reduced budget in CHF.
- At the start of the project, the final internal exchange rate is set when the prefinancing is received by CERN. This usually happens before the start date of the project. If the prefinancing is delayed after the start of the project, the exchange rate used is the one published by the ECB at the project’s start date.
As explained in the procedure on Building a H2020 project internal budget, the internal exchange rate is fixed for the full duration of the project, and the budget in CHF will not change. This second exchange rate risk is covered centrally by the portion of overheads kept for this purpose (30% of the overheads reimbursed, i.e. typically 6% of the EC contribution).
NB: Please note that the EC funding mechanism makes it that the exchange rate fluctuation is almost exclusively negative, as demonstrated in the chapter Why does CERN hardly ever gain money on exchange rate differences with EU projects? (Please see below *).
In case of budget shortfall due to the exchange rate variation between the proposal and the prefinancing (the CHF is stronger at the prefinancing), the Departments can use their share of the overheads to increase the project’s budget. (It is understood that any budget gain due to the exchange rate fluctuation will go to the project).
* Why does CERN hardly ever gain money on exchange rate differences with EU projects
Here you will find 2 different scenarios for one EU project.
The EC grant is 1,000€. The project has a duration of 48 months, with 2 reporting periods. The prefinancing is 60% of the grant.
The exchange rate retained at the beginning of the project is 1€ = 1.2600 CHF, same as the prefinancing. The total budget in CHF is therefore 1,260 CHF, spent equally over the 2 periods.
Scenario 1: The CHF weakens throughout the project
|24||1.2850||Costs declared to EC (P1)||490.3|
|48||1.3100||Costs declared to EC (P2)||480.9|
|Total declared to EC||971.2|
|Total payment received||971.2||1'238.5|
|Exchange rate difference||-21.5|
* Prefinancing + Interim payment cannot exceed 85% of the maximum EC contribution
Due to the evolution of the exchange rate at reporting time (months 24 and 48), Cern has declared less € than the maximum EC contribution (971.2 € < 1000 €). Cern will receive 28.8 € less than expected.
The loss is partially compensated as the CHF kept weakening between months 24 and 26, than 48 and 50. However, this if insufficient to compensate the loss between months 0 and 24, then months 0 and 48.
Ultimately, Cern has spent 1260 CHF and received 1238.5 CHF. The exchange rate loss is 21.5 CHF.
Conclusion: As the CHF weakens, Cern will declare less spending to the EC over the years. By the end of the project, the money received will not allow to cover the budget granted at the beginning of the project.
Scenario 2: The CHF strengthens throughout the project
|24||1.2350||Costs declared to EC (P1)||510.1|
|48||1.2100||Costs declared to EC (P2)||520.7|
|Total declared to EC||1'030.8|
|Total payment received||1'000||1'237.5|
|Exchange rate difference||-22.5|
*Prefinancing + Interim payment cannot exceed 85% of the maximum EC contribution
Due to the evolution of the exchange rate at reporting time (months 24 and 48), Cern has declared more € than the maximum EC contribution (1031 > 1000).
However, the EC will not pay more than the maximum contribution. Cern will receive 30.8 € less than actually justified.
Ultimately, Cern has spent 1260 CHF and received 1237.5 CHF. The exchange rate loss is 22.5 CHF.
Conclusion: As the CHF strenghens, CERN will declare more spending to the EC over the years. However, EC's reimbursement will be capped to the maximum contribution. The € received as interim and final payments are also worth less CHF than expected. By the end of the project, the money received will not allow to cover the budget granted at the beginning of the project.
In which case(s) could we have an exchange rate gain ?
There are only a few situations in which we could have an exchange rate gain.
- In the above scenarios, a sudden and significant drop of the CHF between months 24 and 26, then 48 and 50, could result in an exchange rate gain, leaving a very small window of opportunity.
- In scenario 2, a significant underspending may generate an exchange rate gain (whereas it would increase the loss on scenario 1). Again, this is unlikely to happen, as the underspending of a beneficiary of an EU project generally generates a budget redistribution amongst beneficiaries.