ScotGov loses over £50m of public money after Euro fund irregularities

And the Herald on Sunday understands that it expects to lose out on a further £12m because of the issues over agreed joint funding of major projects.

They Scottish Government has had to make up the gap from the lost money.

Ministers had been warned by auditors that with funds having been suspended, the EC could impose a maximum penalty of up to 25 per cent of the programme - which amounted to just over £200m The Scottish Government has registered financial penalties of £0.9m in 2022/23 in connection with the fund issues.

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The Scottish Government had hoped the issues resulting in the funding suspension would be resolved in the summer of 2019.

It is understood that the problems were only resolved in October, last year when the suspension was finally lifted.

Scotland has been a major beneficiary of European Structural and Investment Funds (ESIF) since 1975 with £820 million allocated for the period between 2007 and 2013.

Scotland was also allocated over £800m over the seven years to 2020 from the Euro funds which require national co-financing from either public or private sources. The agreed money has been used to improve the health service, digital connectivity, increase employment opportunities, make Scottish businesses more competitive, tackle poverty and inequality, improve transport links and environmental protection and build a sustainable, low-carbon Scotland.

The nation was also allowed €465 million (£404m) from the European Social Fund (ESF) which provides cash for projects aimed at creating and supporting jobs, including training to unemployed people with the aim of alleviating poverty.

And there was a further €477m (£415m) under the European Regional Development Fund (ERDF) which aims to transfer money from richer regions, and invest in the infrastructure and services of underdeveloped regions.

One of the approved projects involved a £37.3m ERDF contribution request to ensure the Scottish Government can effectively respond to the crisis in the NHS caused by the Covid pandemic.

To access the full amount of EU funds available, projects must be created and allocated a budget and money must be spent and claimed back within a set timescale.

According to a Scottish Government audit, while the funds remain operational with access to funding available until June 2024 a different methodology for reclaiming costs was agreed with the European Union following the suspension.

It means that the Scottish Government would lose £12m of public money because it is not able to reclaim back from Europe the full amount that was agreed to give to projects. That's on top of £36m that has been written off to date.

One audit states: "The Scottish Government recognises the risks around the receipt, checking, claiming and disbursement of EU funds. A number of mitigating actions have been introduced to ensure the Scottish Government maximises the receipt of income."

John O'Connell, chief executive of the TaxPayers' Alliance said: "Taxpayers will be shocked at the woeful mismanagement of precious funds.

"Scotland's finances are already in tatters, and Scots know that when Holyrood try to plug the gap, more likely than not they'll be reaching into household budgets.

"Ministers must get a grip of the books and ensure that this does not happen again."

Audit details have further revealed that Scots ministers made a provision of £14 million to reflect a "permanent loss of grant to the Scottish Government which it cannot now recover" during the last Euro funding cycle that ended in 2013 after a previous suspension.

The Highlands and Islands were one of the UK's top three per capita beneficiaries of the latest seven year cycle of structural funding - with only Cornwall and west Wales and the valleys getting a greater share.

There were over 200 operations funded through the latest structural funding programme and included funding for mobile masts to extend 4G coverage in the Highland & Islands, the provision of Skills Development Scotland apprenticeships, transforming vacant urban land into green spaces through a Green Infrastructure Fund, and the building of low carbon travel infrastructure such as Electric Vehicle charging points.

Logos were distributed to those who benefitted from funding as part of publicity requirements.

One of the most expensive projects was to support an investment fund for small businesses called the SME Holding Fund to help finance their growth and export opportunities with over £40m coming from the ERDF. With further support from the public and private sector, some £250m was to be made available for businesses over a three year period to December 2018.

It also supported Scotland's Youth Employment Initiative to help young people, particularly those not in employment, education or training, into work and cut unemployment.

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Funds were also given to colleges and universities to provide upskilling in specific sectors, including food & drink, life sciences and renewable energy.

According to official audit details the EC had concerns about spending being "valid" after "weaknesses in the nature and extent of verification checks performed by the Scottish Government" were identified by EC officials.

With the ESF, the application of a 40 per cent flat rate in grant claims for staff costs was seen as a "misinterpretation" of EC regulations and the related spending had to be withdrawn.

But payments continued and ministers agreed to resume reimubursement themselves, according to an official audit document.

It says the latest problems stem from issues which surfaced eight years ago and in August, 2015 the the EC suspended more than £45m earmarked for Scotland under the social fund over "irregularities" in spending.

Some £41.4m was due to go to projects in the Lowlands and Uplands and about £4.8m for the Highlands and Islands.

At that time ministers blamed "technical issues" and said they were working to comply with EU regulations.

The EU said then that the Scottish Government had done too little to resolve concerns about its accounting, seven months after the problems were first reported.

The EC said that issues that arose in December, 2014, related to problems in the "management and control system".

A control report from 2014 found "irregularities concerning expenditure in several operations".

After several months of discussion, the EC said there was "insufficient assurance" that enough was being done to rectify the problems and suspended payments.

Funds suspended dated back to a previous funding cycle from 2007 to 2013.

Auditors said the European Commission's action was in response to concerns and errors reported by the Scottish Government's Internal Audit Directorate which highlighted issues with the "robustness of information retained by some grant recipients about how structural funds were spent".

The Scottish government said the problems arose due to some public bodies failing to comply with audit obligations.

Ministers work with partners such as the Scottish Funding Council, Skills Development Scotland, Scottish Enterprise, Zero Waste Scotland, Transport Scotland, Scottish Natural Heritage, Glasgow City Council and Highlands and Islands Enterprise to convert the ESF & ERDF budgets allocated to them into projects.

The Scottish Government said then that some projects had been "unable to adequately account for all the funding they received and spent" which led to the "interruptions and suspensions".

It said payments were not being frozen and projects had already been paid by the Scottish government.

But it was understood that the European Commission would not repay the Scottish government for funds paid out in 2014 until auditors were satisfied that all funds could be accounted for.

By September, 2016, the Scottish Government was told that the suspensions were lifted. But that involved cutting its declared spending, used to calculate what it gets from the EU by €36 million (£30m).

Audit details for 2015/16 revealed that ministers made a provision of £14 million to reflect a "permanent loss of grant to the Scottish Government which it cannot now recover".

Ministers were then warned by auditors of the "risks relating to the management and control of European funding which, for the foreseeable future, will continue to be an important income-stream for the Scottish Government".

The next year's audit found that after the closure of the 2007 to 2013 programme of Euro funding it was identified that the Scottish Government overpaid project sponsors a total of £16m as a "result of errors identified by Internal Audit".

Auditors said at the time that there remained "uncertainty" over whether the money would be recovered.

A 2017/18 audit analysis highlighted had warned of the issues over interruptions in Euro funding saying it was an "early indication that the control environment is not working as it should and may lead to payment errors in the future".

But in February 2019, the EC notified the Scottish Government that the ESF had been placed in 'pre-suspension' as a result of "serious deficiencies" in the management and control system 'mirroring' previous problems.

The EC, which gave ministers nine months to resolve the issues, again stopped making payments, while the Scottish Government could not make claims, until the irregularities were identified and resolved.

Auditors then warned ministers that they would face a financial penalty if the programme was placed in full suspension.

But in November 2019, the European Commission placed the ESF programme in full suspension after the Scottish Government were unable to resolve the issues.

And in January 2020, the EC also placed the ERDF programme into suspension.

Penalties over Euro fund irregularities are rare.

But in 2002, a European Commission investigation found “serious and systematic” irregularities in Dutch job-creation projects paid for from the European Social Fund and ordered the country to repay €157m (£137m) it received.

Although there were no accusations of fraud, the former Dutch public employment service was found guilty of numerous irregularities between 1994-96 when it managed financial aid from the fund.

The investigation revealed that expenditure and training hours declared had been “substantially” increased compared to spending and hours actually incurred.

The government agency also failed to keep the proper paperwork and that 45 job-creation projects paid for from the fund in the mid-1990s were executed carelessly.

A European Commission source said that following audits in 2017 and 2018, it concluded that deficiencies existed in the management and control system for payment verification of the Scottish managing authority for the ESF.

Following the assessment of "corrective measure" put in place by the Scottish managing authority by the Commission auditors, the suspension for the ESF was lifted in October 2022.

They said ERDF programme suspension was lifted in February, 2021, after which it resumed the payment of the pending payment claim.

A Scottish Government spokesperson said: “These European Structural and Investment Funds have been crucial in supporting sustainable and inclusive growth in communities across Scotland. The funds help people improve skills, get better jobs and increase social and economic cohesion between regions, and Scottish Ministers deeply regret that we are losing access to them as a result of Brexit.

“The loss in costs has been anticipated since 2020 and, in agreement with Audit Scotland, provision has been made by Scottish Government for an estimated amount to be written off each year to ensure our communities can continue to benefit from these funds until they close in 2025.”

The Scottish Government said the penalty imposed was  a "technical, self-correction penalty which is applied to many member states by the European Commission for errors in reimbursement declarations".

A Scottish Government source said the final amount of the loss will not be known until after the ESF programme closes in March 2025.