EUrrest Public Procurement

Refunding subsidies in the event of violations of the national public procurement rules

February 2016

1. Introduction

In two joined Romanian cases, the Advocate General (AG) has concluded that a subsidy must be refunded because of violation of the national public procurement rules. According to the AG, the contracting authorities acted in contradiction with the principle of sound financial management when spending the European funds.

2. Advocate General Bot’s Opinion of 14 January 2016 on Județul Neamț and Județul Bacău versus Ministerul Dezvoltării Regionale și Administrației Publice

Joined cases C-260/14 and C-261/14

3. Policy file and topic

Public procurement
Regional policy and structural funds
Europe-proof EU subsidie

4. Executive Summary

Two local Rumanian public authorities received ERDF financing from the Rumanian Managing Authority (MA). These two local Rumanian public authorities set up an open tendering procedure for the execution of two concrete works: the renovation of an educational centre and the repairing of a main road. The Rumanian MA stated that both tendering procedures were contradictory to the national public procurement legislation. In the first case, this was because the contracting authority used inappropriate technical specifications, and in the second case because of unrecognised professional qualifications.

The Rumanian MA stated that the value of both assignments did not meet the European threshold, as a result of which the European public procurement directive 2004/18 did not apply. Therefore, national public procurement legislation had to be followed.

During its verification of the EDRF funds, the MA established irregularities at both projects with respect to the spending of the funds. According to the MA, both contract authorities acted in contradiction with the national public procurement rules. Subsequently, a financial correction was imposed. The MA reclaimed five percent of the subsidy granted from each of the parties. Subsequently, Neamț and Bacău lodged an appeal against these financial corrections.

5. Legal question

The national judge decided to join the two cases, as both cases yielded the same four requests for a preliminary ruling. These requests are as follows:

  1. The ESIF regulations contain provisions on what to do in the event that irregularities in the spending of funds are identified. Does, apart from violation of the European public procurement rules, violation of the national public procurement rules with respect to projects funded by the ERDF, also constitute an irregularity within the meaning of EU Regulation 2988/95 on the protection of the European Communities financial interests (European budget regulation) or European Regulation 1083/2006 laying down general provisions on the European Regional Development Fund, the European Social Fund and the Cohesion Fund (ESIF regulation)?
    2. If this is the case, in what manner should these irregularities as a result of violation of the national public procurement rules be corrected, by means of administrative measures or by means of an administrative penalty as defined in the European budget regulation?

The AG does not go into the third and fourth requests for a preliminary ruling, because the financial corrections established by the Rumanian authorities qualify as an administrative measure and not as an administrative penalty. Penalties may only be imposed by an MA in the event the failure can be attributed to the party receiving the subsidy; there is no such clause for measures

6. Summary of the judgement

As regards the first request for a preliminary ruling:

The notion of irregularity

The AG concludes that the phrasing of the notion of ‘irregularity’ in the European budget regulation is slightly different from that in the ESIF regulation. The AG refers to the fact that, in 2014 in the Somvao judgment, the Court held that that European regulation lays down general rules relating to checks and penalties in order to protect the European Union’s financial interests from irregularities. Subsequently, the AG recalls that Article 2(7) of the ESIF regulation provides for an adapted version of the notion of ‘irregularity’, for reasons of consistency and legal clarity with regard to the functioning and the specific principles of structural policies.

Definition of the notion of irregularity – sound financial management

According to the AG, a broad, dynamic interpretation of the criterion based on infringement of a provision of EU law is called for also in the light of the scheme of the ESIF regulation. This covers both infringements of EU law sensu stricto and infringements of national law relating to the application of EU law.

The AG argues that the recipient of a subsidy, in so far as the ERDF subsidies make use of funds of the European Union, should act in accordance with the principle of sound financial management. This principle requires that the recipient of a subsidy’s budgetary appropriations should be used in accordance with the principles of economy, efficiency and effectiveness, as ensuing from the ESIF regulations. The AG argues that, in the event of violations of the national public procurement legislation, the European principle of sound financial management is infringed upon.

As regards the second request for a preliminary ruling:

Administrative penalty or administrative measure

The second request is about the exact nature of the financial corrections that are imposed by the MA with respect to the ERDF subsidy for established violations of the national public procurement legislation. Once more, the AG follows the argumentation of the Somvao judgment, which provides that “the obligation [to make restitution for an advantage improperly received by means of an irregular practice] is not a penalty, but simply the consequence of a finding that the conditions required to obtain the advantage derived from the EU rules had not been observed, so that that advantage becomes an advantage wrongly received.” According to the AG, the measures taken in this case should be considered as administrative measure.

The AG does not go into the third and fourth requests for a preliminary ruling, because the financial corrections established by the Rumanian authorities qualify as an administrative measure and not as an administrative penalty

7. Legal value of the judgment by the Advocate General

For each case that is brought before the European Court of Justice, it is assessed whether a so-called Advocate General at the Court should prepare a conclusion before the Court reaches its final decision. AGs will only give advice in the event the Court is of the opinion that the underlying case contains a new legal question. AGs are appointed by the heads of government for a period of six year and are completely independent. AGs are present during the public hearing and will subsequently present to the Court a ‘reasoned conclusion’. The research on which the conclusion is based, is broader than the mere facts of the case and often also deals with general legal principles. However, the conclusions are not binding to the Court, even though they are often followed in practice and are often published together with the judgment.

8. Local and regional relevance

In the Netherlands, a budget of over €1.7 billion is made available for subsidies under the ESIF funds for the period 2014-2020. Subsequently, part of these funds is spent by Dutch local and regional authorities for purposes of the realisation of government projects. National public procurement issues frequently also play a role in this. The responsibility for the execution of the European structural policy explicitly lies with the member states and the local and regional authorities themselves. This situation may just as well occur in the Dutch local and regional practice.

If the Court follows the AG’s advice and legal arguments, this means in practice that violation of the national public procurement rules should also lead to a claim for refund of the European funds granted. As yet, it is not known when the Court will reach its decision. As soon as the judgment is published, we will inform you on this website.

By: Stijn Bijleveld, Europa decentraal