Funding of in-house entities, CPBs and risks of state aid, some thoughts re Aanbestedingskalender (T-138/15)


In its Judgment of 28 September 2017, Aanbestedingskalender & Others v Commission, T-138/15, EU:T:2017:675, the General Court (GC) rejected a complaint against a previous Commission decision (SA.34646) that the Netherlands had not breached EU State aid rules by funding TenderNed--an in-house e-procurement platform run by PIANOo, the tendering expertise centre for the Dutch government. The complaint derived from the fact that, prior to the creation of TenderNed, private providers of e-procurement services had been offering their services to Dutch contracting authorities. The creation of TenderNed and the offering of services free of charge to contracting authorities by this in-house entity logically killed the e-procurement services industry (or a part of it), which triggered the complaint. The circumstances of the case raise some issues that would be common to any intervention by a Member State that in-sourced (or nationalised) previously outsourced services, but the legal challenge was limited to State aid considerations.

In a nutshell, the GC decided that the Netherlands was not in breach of EU State aid law because TenderNed is not an undertaking, in the sense that it is not engaged in an economic activity because its services are closely linked to the exercise of public powers by the Dutch State and the Dutch contracting authorities that use this service. The State aid aspects of the Judgment are insightfully discussed in more detail by Prof Nicolaides.

Reading the case, one of the statements by the GC that caught my attention was that "e-procurement was a service of general interest, and not an inherent economic activity, which could be commercially exploited so long as the State did not offer that service itself" (para 108). In this post, I offer some thoughts on the potential implications of this finding for the funding of in-house entities and of central purchasing bodies (CPBs), in particular if the EU Courts were to take further steps down the road of considering the exercise of the procurement function non-economic and/or a service of general economic interest (SGEI)--and, in so doing, I pick up on some of the issues discussed in more detail in A Sanchez-Graells & I Herrera Anchustegui, 'Impact of Public Procurement Aggregation on Competition: Risks, Rationale and Justification for the Rules in Directive 2014/24', in R Fernández Acevedo y P Valcárcel Fernández (eds), Centralización de compras públicas (Madrid, Civitas, 2016) 129-163.

The consideration of e-procurement as an SGEI

In its Judgment, the GC arrived to the position that e-procurement is an SGEI on the basis of the following:

... the claim that, because commercial platforms offer services similar to those of TenderNed, the Commission should have concluded that TenderNed’s activities are economic in nature, does not take into consideration the developments that have taken place in the e-procurement market.

In that respect, it must be noted that that market had developed before Directives 2014/24 and 2014/25 were adopted and imposed an obligation on the Member States to implement e-procurement in those States. The fact that that obligation was decided upon at EU level implies that it was considered important to put in place mechanisms which would ensure greater effectiveness and transparency in public procurement. As the Slovak Republic indicated in its statement in intervention, the trend in the development of public procurement systems in Europe is towards e-procurement. The fact that Directives 2014/24 and 2014/25 were adopted is indicative of the intention to harmonise public procurement within the European Union, through actions by the Member States, so that it is carried out electronically throughout the European Union.

In addition, the Netherlands authorities stated ... that the existing commercial platforms did not offer the conditions relating to price, objective quality characteristics, continuity and access to the services provided that would be necessary to fulfil the general interest objectives established by those authorities.

Thus, in the light of those developments in public procurement rules, driven by public interest considerations, the Commission was entitled to state ... that e-procurement was a service of general interest, and not an inherent economic activity, which could be commercially exploited so long as the State did not offer that service itself (T-138/15, paras 105-108, emphases added).

In my view, this part of the Aanbestedingskalender Judgment is particularly weak because the arguments of EU harmonisation and unsatisfactory private supply can hardly be considered determinative of the nature of SGEI of a given service. The 2014 Public Procurement Package imposes an obligation to carry out e-procurement, but that does not make this an SGEI, as the competence to establish what an SGEI lies with the Member States (see Art 14 and Protocol No 26 TFEU). Moreover, if private provision is unsatisfactory, the Member State could opt to regulate minimum standards mandatory for all private (or public) providers. The Member State could also have established a framework agreement or other mechanism for the provision of the services by a non-in-house entity, or created public service obligations linked to the provision of e-procurement services. Thus, the conclusion that the evolution of the regulation of e-procurement at EU level implies its treatment as an SGEI is far from justified.

The original reasoning of the European Commission is equally unconvincing

Such services might have previously been needed because of the complexity of legislation, the lack of user-friendliness of analogue or digital tools offered by the government services, or because companies find it more convenient to outsource such activities. However, the State does not forego the right to carry out an activity that it deems necessary to ensure its public bodies comply with their statutory obligations by acting at a point in time when private operators – perhaps due to lack of prior action by the State – have already taken the initiative to offer services to the same end. Ensuring public authorities comply with their statutory obligations by channelling public procurement may be an economic activity for the complainants. It is not, however, an inherent economic activity, but rather a service of general interest, which can be commercially exploited only so long as the State fails to offer that service itself (SA.34646, para 68, reference omitted and emphasis added).

This fails to properly characterise the nature of the activities, which I think are better understood as the provision of the IT services and infrastructure necessary to carry out e-procurement, rather than as a public power of channelling procurement to an electronic platform (which is what the 2014 Public Procurement Package has done, or tried to do).

Moreover, this is functionally contrary to the position taken in the 2016 Notice on the notion of State aid, which explicitly establishes that '[t]he decision of a public authority not to allow third parties to provide a certain service (for example, because it wishes to provide the service in-house) does not rule out the existence of an economic activity. In spite of such market closure, an economic activity can exist where other operators would be willing and able to provide the service in the market concerned. More generally, the fact that a particular service is provided in-house has no relevance for the economic nature of the activity' (para 14). In this case, it seems clear that the creation and funding of TenderNed is functionally equivalent to the reservation of activity (which contracting authority would pay a private provider for the services it can get for free from TenderNed?) and it is obvious that there are third parties willing to provide those services (the complainants). Consequently, the position reached in the case at hand does not make much sense.

The functional incompatibility is even larger when contrasted with a different passage of the same Notice on notion of State aid, which foresees that

The fact that the authorities assign a public service to an in-house provider (even if they were free to entrust that service to third parties) does not as such exclude a possible distortion of competition. However, a possible distortion of competition is excluded if the following cumulative conditions are met: (a) a service is subject to a legal monopoly (established in compliance with EU law); (b) the legal monopoly not only excludes competition on the market, but also for the market, in that it excludes any possible competition to become the exclusive provider of the service in question; (c) the service is not in competition with other services; and (d) if the service provider is active in another (geographical or product) market that is open to competition, cross-subsidisation has to be excluded. This requires that separate accounts are used, costs and revenues are allocated in an appropriate way and public funding provided for the service subject to the legal monopoly cannot benefit other activities (para 188, references omitted).

In the TenderNed case, it was clear that 'while contracting authorities and special sector entities may ultimately be obliged to publish their offers via TenderNed, they are not prohibited from using other platforms like those of the complainants in parallel. Likewise, the Dutch authorities have emphasised that private e-procurement platforms can export TenderNed notifications on their own portal as well as import their notices to TenderNed. Commercial operators are, in other words, free to develop a differentiated offer of public procurement-related services in terms of quality or added value' (SA.34646, para 69, reference omitted and emphasis added). Therefore, the existence of a situation with potential anticompetitive effects derived from the public funding of TenderNed would hve required careful analysis, but for the finding that its activities are covered by the public power exemption (ie are non-economic, and thus TenderNed is not an undertaking; and not so much for their potential classification as an SGEI).

In my view, these functional inconsistencies are problematic. The simple reasoning that because EU procurement law mandates (or encourages) a specific form or modality of procurement, this means that it is an SGEI or a non-economic activity (which is also unclear in the reasoning highlighted above) is tricky and potentially problematic. In a case such as TenderNed, and even if TenderNed does not offer services to private buyers and does not receive any payments from contracting authorities and is centrally funded by the Dutch government, this is problematic because it has the impact of wiping out an entire industry (or category of services within an industry). And, in other cases where the entity considered to be carrying out an SGEI offers other types of non-SGEI services to the public or private sector, because of the potential additional distortions of competition in those neighbouring markets. The latter case would concern in-house and CPB if they were to be classed as SGEIs.

The consideration of in-house provision and/or CPB activities as SGEIs

Together with e-procurement, two other main areas of reform in the 2014 Public Procurement Package concerned the expansion of the in-house exemption (Art 12) and the more detailed and expansive regulation of the activities of central purchasing bodies (CPBs, Art 37). In both cases, the fact that contracting authorities assign contracts directly to these entities raises important risks of distortions of competition where there is private provision for the relevant works, goods or services. Thus, the award of public contracts under the exemptions foreseen in Arts 12 and 37 of Directive 2014/24/EU generates risks of State aid (see G S Ølykke, 'Commission Notice on the notion of state aid as referred to in article 107(1) TFEU - is the conduct of a public procurement procedure sufficient to eliminate the risk of granting state aid?' (2016) 25(5) Public Procurement Law Review 197-212), and the continued stream of revenue derived from reserved or directly awarded public business can put the undertaking in a favourable position when competing with other entities for private or non-in-house public business.

One potential defence against claims of violation of EU competition law and/or State aid law by in-house entities or CPBs would thus concern the possibility of classifying their activities as SGEIs (regarding CPBs, this is a claim Ignacio Herrera and I dispelled in the article referred to above, and similar arguments apply for in-house entities). And, if the thrust of the approach in the Aanbestedingskalender Judgment was to be followed, the European Commission and national competition authorities could be tempted to consider that in-house provision or CPB activities are SGEIs, solely on the basis that these are activities promoted or facilitated in the 2014 Public Procurement Package and, concerning CPBs, in subsequent Commission policy. However, in my view, this would be a wrong justification for the classification of those activities as SGEIs.

What would be the implications?

The main implication of classing an activity as an SGEI is that it both (i) allows the Member State to shield the entity providing the SGEI from compliance with competition rules "in so far as the application of such rules does not obstruct the performance, in law or in fact, of the particular tasks assigned to them" (Art 106(2) TFEU, and (ii) Member States have increased freedom for the funding of SGEIs than for the granting of other types of State aid [see generally, A Sanchez-Graells, 'The Commission’s Modernization Agenda for Procurement and SGEI', in E Szyszczak & J van de Gronden (eds) Financing Services of General Economic Interest: Reform and Modernization, Legal Issues of Services of General Interest Series (The Hague, TMC Asser Press / Springer, 2012) 161-181]. A fundamental element in this extended discretion for the funding of SGEIs is that an EU-compliant procurement exercise excludes the existence of State aid under the so-called Altmark fourt condition. This has been developed in some more detail in the 2016 Notice on the concept of State aid (paras 89 and ff), but it still assumes that an EU-compliant procurement is, for these purposes, one where there is a public tender and an element of competition--a position that the 2013 Guide to the application of the European Union rules on state aid, public procurement and the internal market to services of general economic interest, and in particular to social services of general interest does not completely clarify.

Therefore, the conundrum that a broad classification of in-house or CPB activities as SGEIs would create is that, in a setting where the direct award of contracts (however lucrative or benefitial) to in-house entities or CPBs is compliant with the rules in Directive 2014/24/EU (Art 12, Art 37(1), Art 37(4)) despite not having involved any element of competition, and where the conditions of those contracts cannot be tested against EU State aid rules because a very broad understanding of the public power exclusion of the classification of an activity as economic, and therefore of the in-house entity or CPB as an undertaking for the purposes of Art 107(1) TFEU, there may be no rule capable of controlling the channelling of public funds to these entities, regardless of the distortions in the market that their activities would create--which would also be excluded from assessment under the core competition rules of Arts 101 and 102 TFEU precisely for the same reason of the entities not being classed as undertakings due to the non-economic nature of their activities.

On the whole, then, I think that the greatest threat that results from the thrust of the Aanbestedingskalender Judgment is that too broad an understanding of what procurement activities imply the exercise of public powers, and an overlapping consideration of procurement activities as SGEI would lead to a complete exclusion of the applicability of all EU competition law mechanisms in this large sector of the economy. This would be an expansion of the problems derived from the FENIN-Selex doctrine, and one which I think requires urgent reconsideration by competition enforcers and, in particular, the European Commission [for in-depth discussion of the shortcomings of the FENIN-Selex doctrine, see A Sanchez-Graells, Public procurement and the EU competition rules, 2nd edn (Hart, 2015) ch 4].