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            ERDF and ESF: Government publishes new National Procurement Requirements

            The Government has published new compliance rules for procurements carried out by recipients of ERDF and ESF grants in England. Although the UK Government only published the new rules in August 2019, these will be retrospectively applied to breaches identified on or after 14 May 2019. 

            Date: 23/08/2019

            In recent years procurement in ERDF and ESF projects has been an area of compliance which has been rigorously scrutinised by auditors and the source of a high proportion of irregularities (recovery of funds), therefore those involved in applying for or delivering projects should review their processes to ensure compliance. 

            In August 2019, the Government announced that it had updated the European Structural and Investment Funds National Procurement Requirements to include a schedule of breaches and penalties drawn from European Commission's Decision of 14 May 2019. The updated consequences of non-compliance are set out in chapter 3 of the ESIF National Procurement Requirements.

            The Commission Decision of 14 May 2019 is a guide which can be used by (national) Managing Authorities when determining corrections for non-compliance the public procurement rules. The Decision notes that the Commission may make financial corrections in order to exclude expenditure that is in breach of applicable law from EU funding, which in practice means repayment of a proportion of grant relating to a particular contract. Although the Commission itself only ever reviews a small number of projects, they expect Managing Authorities to apply the same strict compliance requirements.

            As a result, the Managing Authority in England, the Ministry for Housing, Communities and Local Government ("MHCLG") exercises similar authority when it receives recommendations to recover funding from its audit teams (the so-called external "Article 127" auditors and the internal "Article 125" compliance team).

            The updated financial correction guidelines specify particular breaches and associated recovery percentages as against the grant value within particular procured contracts, including:

            • time limits for receipt of tenders or expressions of interest: if restricted to 5 days or less (100% penalty), with lower prescribed penalties where the time limits were longer;
            • insufficient audit trail for the fair award of the contract (25% penalty);
            • refusing access to the relevant documentation (100% penalty); and
            • modifications of the contract elements e.g. any increase in price exceeding 50% of the value of the original contract(25% of the initial contract plus 100% of the modification);

            The Commission's updated financial correction guidelines reduce the level of penalty for some irregularities including:

            • lack of justification for not subdividing a contract into lots (5%);
            • insufficient time for potential tenderers to receive documentation (10%);
            • lack of publication on OJEU of extended time limits for tenders as long as notice has been posted elsewhere (5%); and
            • use of criteria which limits competition i.e. trademarks, standards (10%).

            In applying these penalties, the Commission and the Managing Authority do have some discretion. Irregularities in public procurement are to be analysed in accordance with the objective of protecting the financial interests of the Union and the compliance with Union law (in particular the principles of transparency, non-discrimination, equal treatment, proportionality and legal certainty).  As a result, the Commission is clear that financial corrections can only be applied if the irregularity in question has or could have a financial impact on the Union budget.

            It is important to note that the corrections apply to all breaches of procurement procedure identified after 14 May 2019 by both contracting and non-contracting authorities, irrespective of the date the contract was let.

            It is therefore recommended that recipients of ESIF support review their procedures in light of this new guidance. The updated financial correction guidance will be used in ESIF audits carried out by the Managing Authority, the Audit Authority, DG Regio and Emploi Audit Service and the European Court of Auditors.  Hence the updated guidance will enter the source material against which any disputes on clawback will be referenced.

            This update to the ESIF National Procurement Requirements follows the recent guidance on the ERDF prohibition on undertakings in difficulty published on 29 November 2018.

             


            DWF's specialist Public Sector law team has extensive experience of advising on ERDF and ESF matters, including providing expert State aid opinions, designing compliant procurement processes and successfully defending projects in front of the European Court of Auditors.  Please get in touch if we can be of assistance.

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