FINANCIAL CORRECTION DECISION No 19

Valga Vallavalitsus [email protected] Puiestee tn 8 31.08.2023 No 11.1-13/23/1100 68203, Valga maakond, Valga linn DECISION FINANCIAL CORRECTION DECISION No 19 Tallinn Project Est-Lat 181 “Renewing and developing Valga-Valka twin town common recreational area“ (Valga-Valka Recreational Area) Beneficiaries: Valga Municipality Government According to the Guidelines to Financial Corrections for the Interreg V-A Estonia-Latvia programme 2014-2020 Chapter 2 and based on the 2014-2020 Structural Assistance Act, adopted by the Parliament of the Republic of Estonia on 13 June 2018, subsection 6 of the paragraph 54 the Managing Authority decides: 5% of the costs of the contract “Pedeli Veskijärve ja Jõekääru järvede setetest ning liigsest taimestikust puhastamine“ of the project partner Valga Municipality Government are ineligible. Circumstances The project partner, Valga Municipality Government carried out public procurement No 246313 “Pedeli Veskijärve ja Jõekääru järvede setetest ning liigsest taimestikust puhastamine“. As a result of the procurement, the project partner has concluded the contract 8-1.10/56 with the provider Osaühing Vändra MP (hereafter Contractor) on 29.04.2022, the cost of the works is €338 675.00 excluding VAT. During the verification of the procurement procedure the violation of the Public Procurement Act was identified as the condition for the performance of the procurement contract established in public procurement No 246313 is not proportional to the subject of the public procurement contract. Pursuant to point 7.1.5 of the Procurement contract, the Contractor undertakes to insure at his own expense the works that are the subject of the contract with total construction risk insurance (CAR) according to the contract cost (€406 410.00), specifying the Contracting Authority as the insured person. The Insurance contract must cover both property damage and liability damage, be Lõkke 4 / 10122 Tallinn / Estonia / + 372 663 8200 / [email protected] / www.rtk.ee/ Reg. code: 70007340 concluded for the given work and work site (the Contractor's general insurance policy is not acceptable) and submitted to the Contracting Authority before starting the work that is the subject of the contract. The technical description states that before starting the work, the Contractor undertakes to sign the CAR contract at his own expense. According to the CAR contract, the insurance must cover all risks arising from the performance of the works. The insurance must include both property damage insurance coverage and liability insurance coverage. The insurance coverage resulting from the CAR contract must start no later than the day the works start. The Contractor undertakes to refrain from actions that lead or may lead to the termination of insurance coverage. In the CAR contract, the beneficiary must be the Contracting Authority. The insurance contract's compensation limit must be at least equal to the contract fee stipulated in the Procurement contract and the deductible must not exceed €2000 (two thousand). The Contractor had to enter into an insurance contract for a specific Work Object and Construction Works as a separate insured object (the Work Object must be indicated on the insurance policy by name/address and the limits of compensation must apply to a specific object of insurance, not to all objects insured by the Contractor as a collection). The Contractor provides the Contracting Authority with the policy(s) certifying the conclusion of the said insurance contract(s) and a copy of the terms and conditions of the Insurance contract(s) at the latest before starting construction work. Upon expiry of the policy(s), the Contractor undertakes to renew it/them immediately and submit the updated policy(s) to the Contracting Authority. No CAR contract has been concluded. The Contractor has concluded liability insurance policy No. 4358030168, the insurance coverage of which includes operational liability. Operational liability insurance coverage includes the obligation to compensate for damage that occurred unexpectedly and unforeseeably within the scope of the insured activity during the insurance period. Compensation also includes the amount spent on legal aid, expertise and court hearings, i.e., legal defence costs, of the insured person during the processing of claims. Only legal defence costs agreed in advance with the insurer are eligible for compensation. The total compensation limit is €42 000, the deductible for each insured event is €600. Insurance period 18.05.2022 to 17.11.2022. Special policy conditions are as follows: This insurance contract applies only to those cases that are not compensated under the protection of a valid property insurance or other insurance policy (for example, comprehensive, road or health insurance) or in a situation where the compensation limit of the property insurance or other insurance policy has been exhausted, or if it is received under a property insurance or other insurance policy recourse of the insurance company that paid out the compensation. The insurance coverage extends to claims arising from loading and lifting work and/or the use of equipment and machinery. The extension of the insurance coverage is only valid if the said damage is caused by the insured person within the scope of the insured activity and the person who used the machine or device had the appropriate qualification and/or training necessary to use the device. Insurance coverage does not extend to traffic insurance losses and claims arising from the participation of a vehicle or machine in road traffic. During the work, reasonable restrictions on traffic and access must be established to ensure safety. The insurance cover does not extend to claims arising from the disregard of restrictions or their failure to establish them. The insurance coverage extends to direct damages caused to a third party from environmental damage and the costs of pollution removal. The insurance coverage extends only to losses arising from an unexpected and unforeseen event that occurred within the scope of the insured activity. Insurance coverage does not apply to claims related to any regular pollution, pollution charges or hazardous waste management. Claims due to non-provision of the service (e.g., a claim for the return of the contract fee), adherence to service deadlines or budget, delays or contractual penalties, due to price changes, lack of coordination are not eligible for compensation. Also, the costs that the insured person has to bear in order to repair or redo the work that was not properly performed, including the costs of the insured person in relation to additional material or working hours, are not reimbursed. During the works, restrictions on the use of the water body to be cleaned must be established. Insurance coverage does not extend to claims that are caused to persons swimming, fishing or otherwise in the danger zone during the works. Partner’s explanation During the verification of the costs the partner has explained that in terms of the Construction Code, it is a facility on which it is possible to conclude total construction risk insurance, but the Construction Code does not regulate the types and conditions of insurance issued by insurers. The Managing Authority’s opinion Pursuant to § 3 of the Public Procurement Act, the Contracting Authority is obliged to follow the general principles of organizing public procurement, including acting in a transparent, controllable, and proportionate manner when organizing the procurement, treating all persons equally and ensuring that all restrictions and criteria set for persons are proportionate, relevant and justified in relation to the purpose of the public procurement. The Contracting Authority must also ensure the effective use of competition, use financial resources economically and efficiently, conclude a procurement contract on the basis of the best possible price-quality ratio, and conduct public procurement within a reasonable time. The Contracting Authority must follow the general principles not only during the public procurement procedure, but also before and after the conclusion of the procurement contract (C. Ginter, N. Parrest, M. A. Simovart. – Juridica 2013/9, lk 659, 661). Point 1 of § 3 of the Public Procurement Act stipulates that the Contracting Authority acts transparently, verifiably, and proportionately upon carrying out public procurement including setting conditions proportional to the scope of the procurement contract when implementing the procurement contract. According to the point 2 of the § 3 of the Public Procurement Act, the Contracting Authority must treat all persons equally and ensures that all restrictions and criteria set for persons are proportionate, relevant, and justified in relation to the purpose of the public procurement. Based on the explanatory letter of the Public Procurement Act, the principle of proportionality, the application of public procurement rules may not go beyond what is reasonably necessary to achieve the goals and general principles of public procurement sought by the rules (EK C-46/15, paragraphs 40-41; C 76/16, paragraph 33). The goal sought by the state procurement rules can be any relevant normative goal, including ensuring the fulfilment of the procurement contract. Adherence to the principle of proportionality requires that the Contracting Authority examines and evaluates the factual circumstances related to the public procurement in order to find out which method of operation is suitable and necessary in a specific case to fulfil the general principles of public procurement (EK C-144/17, p. 38; C-538/07, p. 32). A procurement condition is proportionate if it is appropriate and necessary. A condition is appropriate if it facilitates the achievement of the goal set for it, and necessary if the goal cannot be achieved with another, less burdensome, but at least as effective remedy or condition (M. A. Simovart, D. Koroljov. – Juridica 2016/1, p. 48). Therefore, the applicable limitation of the Contracting Authority must not go beyond what is reasonably necessary to achieve the goal sought in the public procurement (EK C76/16, p. 33; C-218/11, p. 29). The condition cannot be considered necessary if the condition, even in a milder form, would give the procurer sufficient assurance about the implementation of the procurement contract (TlnHKo 3-14-52158, p-d 19-20). Relevant are the conditions presented in the public procurement, which are related to the subject of the procurement contract, including its scope and purpose. The Contracting Authority is prohibited from setting arbitrary conditions in public procurement, i.e., conditions the fulfilment of which the Contracting Authority cannot obviously have a reasonable interest in considering the specifics of the subject of the procurement contract (Tln HKo 3-14-52158, paragraphs 19-20). At the same time, the Contracting Authority must be able to justify that the conditions set in the public procurement are objectively necessary to fulfil the purpose of the procurement contract (TlnHKo 3-14-51805, p. 11). As a condition of the procurement contract, the Contracting Authority has demanded total CAR insurance according to the cost of the procurement contract (€406 410.00), indicating the Contracting Authority as the insured person, but in fact liability insurance was accepted, which has been concluded with a compensation limit of €42 000 and the Contractor himself is indicated as the insured person. The Contractor Authority did not require a CAR contract from the Contractor, nor the conclusion of an insurance contract according to the cost of the procurement contract and that the insured person be the Contracting Authority. The Contracting Authority accepted the Contractor's liability insurance with a total compensation limit of 42 000 euros, the insured person of which was the Contractor himself. Based on the insurer's explanations, considering the subject of the procurement, it was not possible to conclude the CAR insurance required as a condition of the procurement contract from the aspect of property insurance. Thus, the Contracting Authority established a procurement contract condition that was impossible to fulfil. It can be concluded that there were no objective reasons for the Contracting Authority to impose such conditions and therefore the Contracting Authority has required a disproportionate condition. The Contracting Authority does claim that the CAR contract is not issued for the works that are the subject of the procurement, and that the Contracting Authority was not previously aware of the common practice in insurance for such objects (sediment removal), but before starting the procurement procedure, it is the responsibility of the diligent Contracting Authority to clarify what kind of documents are necessary and relevant for the execution of the procurement contract and that the required documents/contracts can also be obtained/signed by the contractor. Thus, the Managing Authority is of the opinion that, the condition does not correspond to the general principles of points 1 and 2 of Article 3 of the Public Procurement Act and is not proportionate considering the subject of the procurement contract. Based on the commented publication of the Public Procurement Act and the practice of the court, one of the prerequisites for the proportionality of the condition is its necessity. The condition is necessary if the bidder's ability to fulfil the procurement contract cannot be proved as convincingly by means of a lighter condition. The Managing Authority is of the opinion that if the Contracting Authority establishes a condition that cannot be fulfilled or which fulfilment in this form the Contracting Authority does not consider necessary, then bidders could also participate in the procurement by establishing a milder condition, i.e., not establishing the condition in question at all and immediately foreseeing the possibility of submitting only liability insurance. Thus, it can be considered that the condition in question was not necessary, since the ability of the bidder to fulfil the procurement contract could be proven just as convincingly even if the condition in question was not imposed. In the current case, it cannot be ruled out that the parties interested in the procurement may have given up participating in the procurement due to an impossible to fulfil contractual condition. As a result, it cannot be assumed that the procurement has been carried out by making effective use of the existing competition and using financial resources economically and expediently. The negative impact of the disproportionate condition on the procurement results cannot be ruled out. In addition, when preparing the offer, bidders must also take into account the costs of fulfilling additional obligations, including insurance, in the cost of the offer. However, if all bidders had known that it is not necessary to submit a CAR contract in reality, the insurance amount does not have to be equal to the contract value, but 10.3% of the procurement contract value is also sufficient, and the insured person can also be the Contractor himself, the costs of the bids and the ranking based on it and the final result of the procurement procedure could have been turned out to be different. According to the point 11 of the European Commission's Decision No C(2019) 3452 p 2.2, in the case of the use of conditions limiting the access of entrepreneurs, either a 10% or 5% financial correction rate must be applied. The European Commission has emphasized that this applies, for example, in cases where the minimum level of competence or capacity required in relation to a particular contract is related to the subject matter of the contract but is not proportionate to it. The Commission's instructions allow to apply a 5% correction rate in the event when more than one bidder submitted bids in the procurement and responded to the conditions set by the Contracting Authority. The European Commission is of the opinion that the damage caused by the violation has already been taken into account (see p. 1.4 of the Decision). In the decisions of the European Court of Justice no. C-383/06–C-385/06, the conclusion was reached that if the procurement rules are violated, this is enough to conclude that the support has not been used economically in terms of the cost considered eligible, thus damaging the competition policy regulated by the European Union and thus also the European Union budget and internal market. Taking into account that four companies submitted bids in the tender, whose bids were recognized as appropriate, and competition was ensured in the tender. Based on the above, it is a violation with a financial impact, which is subject to the European Commission's Decision No C(2019) 3452 p 11. When considering application of the correct rate of this financial correction, the Managing Authority analysed using 10% correction rate. As the competition of the public procurement was ensured then the correction rate 10% is not justified. Thus, in this case the correction rate of 5% applies. The total ineligible costs (EUR): Expenditure Total cost of ERDF Self- Total Ineligible ERDF Ineligible self- budget line the contract support financing ineligible support financing including VAT Infrastructure 406 410.00 345 448.50 60 961.50 20 320.50 17 272.43 3 048.08 and works Argumentations and statements Valga Municipality Government does not agree with a financial correction decision and is of the opinion that there is no basis for reducing the support. At the same time Valga Municipality Government agrees that stipulated condition of the point 7.1.5 of the Procurement contract was impossible to fulfil. As the Managing Authority explained that the condition does not correspond to the general principles of points 1 and 2 of Article 3 of the Public Procurement Act and is not proportionate considering the subject of the procurement contract. According to the point 2.3.3 of the Guidelines to Financial Corrections of the Programme, if Estonian beneficiary or partner is a contracting authority for the purposes of the public procurement, and the estimated value of a service, goods or building works is equal to or in excess of simple procurement threshold has violated the obligation to comply with the general principles of procurement, the financial correction rate of 5, 10, 25 or 100 percent may be applied depending on the severity of the violation by using the financial correction principles according to the European Commission's Decision No C(2019) 3452 (hereinafter the EC Guidelines). According to the point 11 of the EC Guidelines, in the case of the use of conditions for performance of contracts that are not discriminatory on the basis of unjustified national, regional or local preferences, but still restrict access for economic operators is irregularity. According to the EC guidelines, if a disproportionate condition is identified, a correction must be made because the condition could have had a deterrent effect to potential tenderers and may have affected the content and price of the tenders. As the Valga Municipality Government explained in the comments that contractual condition set was not possible to fulfil, the Managing Authority is of the opinion that this condition of the contract was not proportionate (appropriate, necessary and relevant) and therefore could have had a financial impact. When considering application of the correct rate of this financial correction, the Managing Authority already took into account that minimum level competition was ensured, which shows that the impact couldn’t have been extensive. Therefore the smallest correction rate of 5% applies, as it has been foreseen in the EC Guidelines. Legal basis of the financial correction 1. Structural Assistance Act 2014-2020 According to the Article 54 subsection 6 of the Structural Assistance Act 2014-2020 a financial correction decision shall be based on the procedure for making a financial correction decision established in the ETC programme or in the procedure for making a financial correction decision, established on the basis of subsection 7 of the same section, while pursuant to the ETC programme the making of the financial correction decision is based on the procedure established nationally in the states participating in the programme. 2. The Guidelines to Financial Corrections The Guidelines to Financial Corrections for the Estonia – Latvia Programme 2014-2020 establishes a range of corrections of up to 5%, 10%, 25% and 100% that are applied to the expenditure of a contract. They take into account the seriousness of the irregularity and the principle of proportionality. These rates of corrections are applied when it is not possible to quantify precisely the financial implications for the contract in question. 3. The Public Procurement Act of Estonia The Public Procurement Act’s paragraph 3 point 1 states that when carrying out public procurement, the authority or entity acts transparently, verifiably and proportionately and point 2 states that the Contracting Authority must treat all persons equally and ensures that all restrictions and criteria set for persons are proportionate, relevant, and justified in relation to the purpose of the public procurement. 4. The Common Provisions Regulation According to the Article 143(2) of the Regulation No 1303/2013 of the European Parliament and of the Council of 17 December 2013, the Member States shall in the first instance be responsible for investigating irregularities and for making the financial corrections required and pursuing recoveries. In the case of a systemic irregularity, the Member State shall extend its investigation to cover all operations potentially affected. 5. Protection of the European Communities financial interests Article 4(1) of the European Union Council Regulation (EC, Euratom) No 2988/95 on of 18 December 1995 stipulates that any irregularity shall involve withdrawal of the wrongly obtained advantage. Point d) of the Article 5(1) of the same regulation stipulates that intentional irregularities or those caused by negligence may lead to the following administrative penalties: total or partial removal of an advantage granted by Community rules, even if the operator wrongly benefited from only a part of that advantage. According to the Article 160(1) of the Regulation (EU) No 2018/1046 all contracts financed in whole or in part by the budget shall respect the principles of transparency, proportionality, equal treatment and non-discrimination and according to the point 2 of the Article 160 all contracts shall be put out to competition on the broadest possible basis. 6. Programme Manual for the Estonia - Latvia Programme 2014-2020 According to the Estonia - Latvia programme 2014-2020 manual point 5.3.4 each partner organisation is responsible for ensuring that EU and national public procurement rules are respected and that all contracts comply with the basic principles of transparency, non- discrimination and equal treatment as defined in the EC Treaty and the Commission Interpretative Communication on the Community law applicable to contract awards below the EU thresholds. 7. Programme Manual Annex 6. Guidelines to Financial Corrections According to the Programme Manual Annex 6. Guidelines to Financial Corrections Chapter 2.3.3 Financial correction in case of irregularity related to non-compliance with the general rules on procurement when the Estonian partner is a contracting authority for the purposes of the procurement, when Estonian beneficiary or partner is a contracting authority for the purposes of the public procurement, and the estimated value of a service, goods or building works is equal to or in excess of simple procurement threshold has violated the obligation to comply with the general principles of procurement, the financial correction rate of 5, 10, 25 or 100 percent may be applied depending on the severity of the violation by using the financial correction principles according to the EC Guidelines. According to the Programme Manual Annex 6. Guidelines to Financial Corrections Chapter 2.5 Repayment to the Managing Authority, when MA, JS, FC detect an error in expenditure that has already been paid out to the project, the programme can deduct the amount from the next project progress report. In cases where the amount cannot be corrected by deducting it from the next project progress report, LP is required to repay the amount to the programme, as specified in the financial correction decision within 60 calendar days as of the date of entry into force of the financial correction decision in the indicated amount and date. 8. Subsidy Contract Article 1 of the Subsidy Contract stipulates that the partners should also follow the EU and national principles on protection of environment, sustainable development, equal opportunities, non- discrimination. Point 2 of the Article 3 of the Subsidy Contract regulates that the Lead Partner and Project Partner shall implement the project with the requisite care, efficiency, transparency and diligence, in line with best practice in the field concerned and in compliance with this Contract. For this purpose, the Lead Partner and Project Partner shall mobilise all the financial, human and material resources required for full implementation of the project as specified in the approved application. DECISION 1. Based on the 2014-2020 Structural Assistance Act, adopted by the Parliament of the Republic of Estonia on 13 June 2018, and Guidelines to Financial Corrections for the Estonia - Latvia Programme 2014-2020, the Managing Authority decides to apply: 5% of the costs of the contract Pedeli Veskijärve ja Jõekääru järvede setetest ning liigsest taimestikust puhastamine“ of the project partner Valga Municipality Government are ineligible. 2. Financial correction to the Valga Municipality Government is 5% of the contract of the Osaühing Vändra MP, in total ineligible amount is €20 320.50 (including VAT), out of which € 17 272.43 is ERDF support and €3 048.08 is self-financing. The ERDF support €17 272.43 and self-financing €3 048.08 has been reduced by the financial controller. 3. This correction takes into account already reported and certified cost. The ineligible costs are already deducted by financial controller. The ineligible costs of the project partner’s ERDF support to the project must be reduced in the project partner’s budget. Appeal of the decision The present Financial Correction Decision may be appealed in accordance with the Annex 4 to the Programme Manual, which is available on the web-site https://old.estlat.eu/. (signed digitally) Helena Musthallik Acting as Head of the Managing Authority Cooperation Programme Interreg V-A Estonia-Latvia Grants Development Department Külli Kaare 663 1950 [email protected]