EU funding

November 19th, 2015 by James Goudie KC

Case C-460/14, brought by the City of Wroclaw in Poland, concerns the award of a public contract for the construction of a ring road in Wroclaw.  The project benefited from EU financial assistance. The City stipulated in the tender specifications that the successful tenderer was to perform at least 25% of the works covered by the contract using its own resources. The public authority in Poland competent to verify proper use of the EU funding took the view that that stipulation infringed the principle of fair competition and therefore was inconsistent with Directive 2004/18/EC.  As a consequence, that authority imposed on the City a flat rate correction of 5% of the amount of eligible costs borne by public funds. The City challenged the financial correction before a Polish Administrative Court, which made a reference to the ECJ.  On 17 November 2015 Advocate General Sharpston gave her Opinion.

Directive 2004/18 coordinates at EU level national procedures for the award of public contracts above a certain value.  It aims to ensure the effects of the principles of freedom of movement of goods, freedom of establishment, and freedom to provide services and the principles deriving therefrom, including the principles of equal treatment, non-discrimination and transparency. It also aims to guarantee the opening-up of public procurement to competition. The Directive contains provisions on subcontracting, in order to encourage the involvement of small and medium-sized undertakings in the public contracts procurement market.   Pursuant to the first paragraph of Article 25 (“Subcontracting”), in the contract documents, the contracting authority may ask or may be required by a Member State to ask the tenderer to indicate in his tender any share of the contract he may intend to subcontract to third parties and any proposed subcontractors. Under Article 26 (“Conditions for performance of contracts”), contracting authorities may lay down special conditions relating to the performance of a contract, provided that these are compatible with EU law and are indicated in the contract notice or in the specifications.

Article 1(1) of Council Regulation No. 2988/95 provides: “For the purposes of protecting the European Union’s financial interests, general rules are hereby adopted relating to homogenous checks and to administrative measures and penalties concerning irregularities with regard to EU law.” Article 1(2) defines “irregularity” as “any infringement of a provision of EU law resulting from an act or omission by an economic operator, which has, or would have, the effect of prejudicing the general budget of the European Union or budgets managed by it, either by reducing or losing revenue accruing from own resources collected directly on behalf of the European Union, or by an unjustified item of expenditure”.  Article 2 provides in particular that administrative checks, measures and penalties shall be introduced in so far as they are necessary to ensure the proper application of EU law. They shall be effective, proportionate and dissuasive so that they provide adequate protection for the European Union’s financial interests.

Regulation No. 1083/2006 lays down general rules governing the Funds, i.e. the European Regional Development Fund, the European Social Fund and the Cohesion Fund, including principles and rules on financial management, monitoring and control on the basis of responsibilities shared between the Member States and the European Commission.

Advocate General Sharpston said:-

“30. Directive 2004/18 is designed not only to avoid obstacles to freedom to provide services in the award of public service contracts or public works contracts but also to guarantee the opening-up of public procurement to competition.  Recital 32 in the preamble to that directive states that the possibility of subcontracting is liable to encourage small and medium-sized undertakings to get involved in the public contracts procurement market. Subcontracting enables such undertakings to participate in tendering procedures and to be awarded public contracts regardless of the size of those contracts.  Subcontracting thus contributes to achieving the Directive’s objectives by increasing the number of potential candidates for the award of public contracts.

31.      Accordingly, Article 25 of Directive 2004/18 not only envisages that a tenderer may subcontract part of the contract but also sets no limit in that regard.  Indeed, Directive 2004/18 confirms explicitly that an economic operator may, where appropriate and for a particular contract, rely on the economic, financial, technical and/or professional capacities of other entities, regardless of the legal nature of the links which it has with them.  Consequently, a party may not be eliminated from a procedure for the award of a public service contract solely because it proposes, in order to carry out the contract, to use resources which are not its own but belong to one or more other entities.

32.      That said, contracting authorities do have a legitimate interest in ensuring that the contract will be effectively and properly carried out. Where an economic operator intends to rely on capacities of other economic operators in a tendering procedure, it must therefore establish that it actually will have at its disposal the resources of those operators which it does not itself own and whose participation is necessary to perform the contract.  A tenderer claiming to have at its disposal the technical and economic capacities of third parties on which it intends to rely if it obtains the contract may be excluded by the contracting authority only if it fails to meet that requirement.

33.      The contracting authority may not always be in a position to verify the technical and economic capacities of the subcontractors when examining the tenders and selecting the lowest tenderer. The Court has held that in such cases Directive 2004/18 does not preclude a prohibition or a restriction on subcontracting the performance of essential parts of the contract. Such a prohibition or restriction is justified by the contracting authority’s legitimate interest in ensuring that the public contract will be effectively and properly carried out. Directive 2004/18 does not require a contracting authority to accept performance of essential parts of the public contract by entities whose capacities and qualities it has been unable to assess during the contract award procedure.

34.      In my view, considering the essential role subcontracting plays in promoting the objectives of Directive 2004/18, no other prohibition or restriction is permissible. …

35.      It follows that a stipulation such as that in issue in the main proceedings is clearly not consistent with Directive 2004/18.”

“43. I … conclude that Directive 2004/18 precludes a contracting authority from stipulating in the tender specifications of a public works contract that the successful tenderer is required to perform part of the works covered by that contract, specified in abstract terms as a percentage, using its own resources.”

The further question therefore arose, given that the City’s project benefited from EU financial assistance, whether the infringement of the EU procurement rules constituted an “irregularity” within the meaning of Article 2(7) of Regulation No. 1083/2006, giving rise to an obligation on the part of the Member State concerned to impose a financial correction.  The Advocate General’s view (paragraphs 46-56) was that it did, even if the infringement did not result in any actual quantifiable financial loss to the Funds; and (paragraphs 57-61) that the competent national authorities may apply flat-rate corrections when they identify an infringement of EU public procurement rules, provided that the corrections reflect appropriately the nature and gravity of the various irregularities to which they apply and do not result in disproportionate corrections.

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