Why do you need to have sustained profits to perform a public contract? A critical view on C-218/11

In its Judgment of 18 October 2012 in case C-218/11 Édukövízig and Hochtief Solutions (anciennement Hochtief Construction), the CJEU ruled on the compatibility with EU public procurement rules of a requirement that tenderers for a given contract furnished proof that their "profit/loss item in the balance sheet should not have been negative for more than one of the last three completed financial years (‘the economic requirement’)". In other words, an economic requirement that tenderers proved that they had sustained profits for most of the the three financial years prior to the award of the contract. The CJEU did not object to the inclusion of the requirement in the tender documentation, with the only caveat that it should not go beyond what is reasonably necessary to ensure capacity to perform the contract to be awarded.

In the case at hand, Hochtief had challenged such an economic requirement on the basis that, due to the different existing legislation applicable to intra-group distribution of dividends in Germany and in Hungary, it was discriminatory against German (and, more generally, non-Hungarian) companies that due to intra-group profit transfer agreements (or for any other reasons) find themselves reporting negative profit/loss balances despite having a sound financial standing--which they could proof by means other than specific extracts of their balance sheets which, however, were not allowed for in the specific tender. More specifically,
"Hochtief Hungary argued that the economic requirement does not allow a non-discriminatory and objective comparison of the candidates to be made, since the rules on annual accounts of companies as regards the payment of dividends within groups of undertakings may vary from one Member State to another. That, in any event, was the case with regard to Hungary and the Federal Republic of Germany. The economic requirement was indirectly discriminatory because it disadvantaged candidates who were unable to fulfil it, or could do so only with difficulty, because they are subject, in the Member State where they are established, to different legislation from that which is applicable in the Member State of the awarding authority." (C-218/11 para 17).
In view of this challenge, the Hungarian referring court essentially asked the CJEU whether EU procurement rules [in particular, Articles 44(2) and 47(1)(b) of Directive 2004/18] must be interpreted as meaning that a contracting authority may fix a minimum level of economic and financial standing with reference to a given item on the balance sheet, even if there may be differences as regards that item between the legislations of the various Member States and, as a result, in the balance sheets of companies, depending on the legislation to which they are subject as regards the preparation of their annual accounts (C-218/11 para 25).

The CJEU has ruled that:
32 [...] a contracting authority may require a minimum level of economic and financial standing by reference to one or more particular aspects of the balance sheet, provided that those aspects are such as to provide information on such standing of an economic operator and that the threshold thus fixed is adapted to the size of the contract concerned in that it constitutes objectively a positive indication of the existence of a sufficient economic and financial basis for the performance of that contract, without, however, going beyond what is reasonably necessary for that purpose. The requirement of a minimum level of economic and financial standing cannot, in principle, be disregarded solely because that level relates to an aspect of the balance sheet regarding which there may be differences between the legislations of the different Member States.
34 [...] as is clear from the order for reference, the divergence of legislation at issue in the case in the main proceedings does not concern the scope of the item of the balance sheet covered by the economic requirement, that is to say the profit/loss recorded in the balance sheet. Both the German and Hungarian legislations provide that that item takes account of the profit or loss of the financial year and the distribution of dividends. However, those legislations differ in that the Hungarian law prohibits the distribution of dividends or the transfer of profits from having the consequence of making that item negative, whereas the German law does not prohibit that, in any event not in the situation of a subsidiary like Hochtief Solutions AG, which is linked to its parent company by a profit transfer agreement. [...]
37 [...] in such a situation, the fact that a subsidiary is unable to meet a minimum level of economic and financial standing defined by reference to a particular aspect of the balance sheet is, in the final analysis, the result, not of a difference in legislation, but of a decision by its parent company which obliges that subsidiary to transfer all its profits systematically to it.
38 In that situation,
that subsidiary has only the option [...] to rely on the economic and financial standing of another entity by producing the undertaking of that entity to make the necessary resources available to it. Clearly, that option is particularly suited to such a situation, since the parent company may thus itself remedy the fact that it has placed its subsidiary in a position in which it cannot meet the minimum capacity level.
39 [...] where an economic operator cannot meet a minimum level of economic and financial standing consisting in a requirement that the profit/loss item in the balance sheet of candidates or tenderers should not be negative for more than one of the last three completed financial years, because of an agreement under which that economic operator systematically transfers its profits to its parent company, that operator has no other option, in order to meet that minimum capacity level, than to rely on the capacities of another entity (C-218/11 paras 32 to 39, emphasis added).
 
The Hochtief Solutions Judgment works well in intra-group situations, where parent companies indeed have the means to supplement the information shown in the balance sheets of their subsidiaries and offer alternative proof of their sound financial standing--and, consequently, can self-protect them from the allegedly discriminatory requirement. Therefore, by restricting the analysis to the very specific circumstances of the case, the CJEU has very conveniently avoided the more general question whether requiring sustained profits as an indicator of financial standing is in accordance with EU procurement rules.

In my view, the CJEU should have gone well beyond the boilerplate answer that "a contracting authority may require a minimum level of economic and financial standing [...] provided that [...] the threshold thus fixed is adapted to the size of the contract concerned in that it constitutes objectively a positive indication of the existence of a sufficient economic and financial basis for the performance of that contract, without, however, going beyond what is reasonably necessary for that purpose" (para 32) and addressed the issue that overall profits are hardly ever (if they can ever be) a requirement that is suficiently linked to the tender and that does not go beyond what is reasonably necessary to ensure capacity to perform the contract to be awarded. In failing to do that, the CJEU has given an appearance of legitimacy to the "profits requirement"--which seems to be completely disproportionate in the majority of the cases because a lack of profits or a "negative profit/loss item" in the balance sheet of an undertaking is ill-prepared to show an actual lack of financial standing--since the negative balance can be due to a large amount and variety of reasons that the contracting authority could be rejecting to take into due consideration on the basis of such a formality.

In my opinion, what is of most concern is that the Hochtief Solutions Judgment opens a very dangerous door to the systematic exclusion of companies reporting negative results in the years immediately preceding the tender, which should clearly be seen as a discriminatory requirement--particularly in the current economic environment, where many firms are struggling to survive and some of them do despite reporting sustained losses, and where their systematic exclusion of tender procedures can result in an undue advantage to larger companies and incumbent public contractors, which will tend to win more and more public contracts (sometimes simply by the fact that they were successful in getting prior contracts awarded and that allowed them to make a positive profit).

Once again, the excesive narrowness of the CJEU's framework for the analysis of public procurement cases seems to have resulted in a good solution to the specific case with potentially very negative effects in the vast majority of public procurement settings. Maybe it would be good for the CJEU to try to estimate these larger impacts and take them into consideration when deciding the case at hand, and to avoid having resort to the very specific circumstances of the case in order to provide more useful general guidance thorugh its replies to the requests for preliminary rulings.