Commission Notice on notion of State aid shows contradictions with EU public procurement rules, in particular concerning aid and contracts for local sgei

The European Commission has published the final version of its much awaited Notice on the notion of State aid as referred to in Article 107(1) TFEU (unofficial version available here). The Notice sets out very detailed guidance on the basis of the existing case law of the Court of Justice of the European Union (CJEU), as well as some 'independent' policy options taken by the Commission of its own motion. One such policies where the Commission is developing its own 'innovative' approach (as part of its State aid control 2.0, or trying to be "big on big and small on small") concerns the interpretation of the requirement of 'effect on trade' as part of Art 107(1) TFEU prohibition and, more specifically, a soft approach to ‘purely local’ State aid measures, particularly for services of general economic interest (SGEIs) (see Notice (2016) paras 190 and ff) .

I criticised this development when it was first proposed in the draft Notice published by the Commission in 2014 [see A Sanchez-Graells, 'Digging itself out of the hole? A critical assessment of the European Commission’s attempt to revitalize State aid enforcement after the crisis' (2016) 4(1) J Antitrust Enforcement 157-187] and submitted that:

 In the [draft Notice] ... the Commission revisits the cases of ‘local SGEIs which do not really seem to affect trade between Member States’ and moves away from considering them as relatively isolated cases towards the creation of a general category of exempted (rectius, not covered) interventions, or a new ‘general exception’ to the application of EU State aid rules [a similar development can be identified in the reinterpretation or redefinition of certain other elements of the notion of State aid, such as selectivity. See Nicolaides (2015)]. Indeed, in [the draft Notice], the Commission takes the view that, in accordance with the CJEU case law, such services can in particular circumstances be regarded as not coming within the scope of Article 107(1) TFEU. In that regard, the Commission recasts three conditions that it considers to emerge from the decisional practice underlying those cases and that allow it to determine that, due to their specific circumstances, certain activities do not affect trade between Member States. Those conditions are that: (i) the aid does not lead to demand or investments being attracted to the region concerned and does not create obstacles to the establishment of undertakings from other Member States; (ii) the goods or services produced by the beneficiary are purely local or have a geographically limited attraction zone; and (iii) there is at most a marginal effect on the markets and on consumers in neighbouring Member States [draft Notice (2014) para 196].
In my view, this approach implicitly indicates that the Commission considers the existing de minimis regimes (both general and for SGEIs) insufficient to cover all ‘purely local interventions’. However, it has not made this explicit and the inadequacy of the existing framework for SGEI support when it comes to purely local interventions remains unclear—in particular in the case of State aid to providers of local healthcare or social services, which can easily be defined as services of general interest (either of an economic or non-economic nature, depending on the case) [see Sauter (2014) 84–109] and, hence, be covered by those sectoral State aid rules. As a result, blurring the boundaries of the notion of State aid at a conceptual level through such an exemption for ‘purely local interventions’ creates uncertainty as to the limits and scope of application of specific State aid regimes (in particular, the rules applicable to SGEI support) and muddles the legal framework applicable to sponsorship of local public services.
Even if the [draft Notice] is still susceptible to change prior to its delayed approval, the Commission has already been using the ‘purely local intervention exemption’ rather generously. Indeed, framing it as an additional effort to clarify to Member States that certain types of economic interventions do not require ex ante assessment despite not being covered by the 2014 GBER, the Commission has recently ‘packaged’ seven of its Decisions and used them to stress that in cases where support is granted to ‘an activity which has a purely local impact’ and which has ‘no – or at most marginal – foreseeable effects on cross-border investments in the sector or the establishment of firms within the EU’s Single Market’, the measure is deemed not to have an effect on trade ‘e.g. where the beneficiary supplies goods or services to a limited area within a Member State and is unlikely to attract customers from other Member States’ [see Commission (2015)]. This can be seen to create an implicit test of ‘significant probability’ of effect on cross-border trade that deviates from the ‘standard’ approach discussed above for ‘purely local State aid interventions’. Those decisions concerned healthcare; sports services; information, advisory and consultancy services to interested individuals, newly created firms and SMEs; as well as the expansion of port facilities. Almost all of them could have been covered by the SGEIs rules (pp. 177-178, emphasis added).

Taking a broader perspective, I also indicated that 'in some specific cases, the lack of clarity in the Commission’s approach to "purely local interventions" ... creates a clash between State aid rules and other tools of EU economic law, such as public procurement law, which I consider an unwelcome development' [Sanchez-Graells (2016) 179].

The final version of the Notice develops the guidance concerning the assessment of State aid measures' effect on trade beyond the content of the draft Notice and, in particular, alters the wording of para 196, which now reads: 'The Commission has in a number of decisions considered, in view of the specific circumstances of the cases, that the measure had a purely local impact and consequently had no effect on trade between Member States. In those cases the Commission ascertained in particular that the beneficiary supplied goods or services to a limited area within a Member State and was unlikely to attract customers from other Member States, and that it could not be foreseen that the measure would have more than a marginal effect on the conditions of cross-border investments or establishment'. This formulation conflates and reorganises the three criteria identified in the draft Notice, to the effect that criteria ii) and iii) of the draft Notice (ie local products or services, and marginal effect on neighbouring markets) are recombined to require that the aid concerns the supply of 'goods or services to a limited area within a Member State and [is] unlikely to attract customers from other Member States', and criterion i) (ie focus on freedom of establishment) is reworded: whereas the draft Notice required that 'the aid does not lead to demand or investments being attracted to the region concerned and does not create obstacles to the establishment of undertakings from other Member States', the Notice now simply indicates that 'it could not be foreseen that the measure would have more than a marginal effect on the conditions of cross-border investments or establishment'. Therefore, even in more clear terms than in the draft Notice, the Notice on the concept of State aid creates the implicit test of ‘significant probability’ of effect on cross-border trade I had criticised.

incompatibility with eu public procurement law

In my view, the test of ‘significant probability’ of effect on cross-border for 'purely local' State aid interventions (in particular for SGEIs) is problematic because, in addition to the messy situation concerning its compatibility with de minimis regimes, it creates an unclear exemption from the prohibition of Art 107(1) TFEU that Member States need to assess on the basis of their own assessment, which can clearly expose the system to strategic behaviour and makes it extremely weak in terms of effective oversight {issues I discuss in detail in Sanchez-Graells (2016)]. Additionally, this approach creates inconsistency, if not incompatibility, with the approach the CJEU has followed towards identifying the existence of cross-border interest for the purposes of EU public procurement law. Given the interaction between these two bodies of EU economic law, particularly in the commissioning or procurement of SGEIs, this is bound to be problematic.

Firstly, because it creates problems of ex post loading of the Commission’s intervention in the area of State aid enforcement, particularly when one considers cases where the Member States may misapply the still emerging 'purely local intervention' exemption by considering that there is no likely (significant) effect on trade and the Commission disagrees with that assessment (either motu proprio, or as a result of complaint). In those cases, the intervention of the Commission also comes too late and reliance on the interpretation of such unclear soft law regarding the coverage of 'purely local interventions' is bound to create legal uncertainty and litigation. And, secondly, because the development of contradictory criteria to determine coverage by different sets of rules of EU economic law that often need to be complied with cumulatively creates significant difficulties.

A comparison of two recent cases regarding minor port investments exemplifies such contradiction. One of the seven Decisions ‘packaged’ by the Commission to complement the 2014 GBER exemption with a light-touch approach to determining the absence of cross-border effects of “purely local” State aid measures involved investment aid for Lauwersoog port. The summary provided by the Commission is as follows: 'The investment project in the port of Lauwersoog consists in a lengthening of the quay in its fishing port, modernising its marina for pleasure boats and constructing a floating platform for recreational fishing. Lauwersoog port is mainly used by small fishing vessels which choose a port mainly in view of its geographical proximity to the relevant fishing grounds. The investment will not lead to a significant increase in the port’s capacities and, in particular, will not increase its capacity to cater for larger ships. Thus, the investment in the fishing port is targeted at a local market and will not have any significant effect on the patterns of trade between Member States in the sense that it would not provide incentives to fishermen from other Member States to use the Port of Lauwersoog rather than fishing ports in other Member States. The parts of the project aimed at recreational activities are also clearly targeted at a local market (the marina only has 60 moorings) and, as such, will not have any negative effect on cross-border trade' (emphasis added). Hence, in view of its purely local impact and the minimal incentives it creates for cross-border trade, the Commission decided that the investment does not constitute aid.

It is worth contrasting the approach in the Lauwersoog port case with that followed in the area of EU public procurement law by the CJEU [C-388/12, EU:C:2013:734, see here], where the direct award of a concession contract for the construction and management of a European Regional Development Fund (ERDF)-supported portuary infrastructure (a slipway) was directly awarded by the Italian Comune di Ancona to the local fishermen cooperative. The Comune di Ancona justified that it needed not comply with general principles of EU law governing the award of concessions contracts on the basis that the contract was not of cross-border interest (ie, fundamentally, that the award of the contract would not have an effect on intra-EU trade) [it must be noted that the case was decided prior to the adoption of Directive 2014/25 on concession contracts; however, general principles remain relevant; see A Sanchez-Graells, 'The Continuing Relevance of the General Principles of EU Public Procurement Law after the Adoption of the 2014 Concessions Directive' (2015) 10(3) European Procurement & Public Private Partnership Law Review 130-139].

The Comune di Ancona considered that the contract was not of cross-border interest (ie in the framework of the Notice on the concept of State aid, there was no significant probability of effect on cross-border trade) because the management of the slipway was 'subject to a number of conditions. These included the obligation to pay the Comune di Ancona an annual charge calculated in such a way as to avoid substantial net revenue being generated for either the concession-granting authority or the concessionaire; a prohibition on modifying the implementation conditions of the operation eligible for funding; a prohibition on engaging in profit-making activity; the obligation to comply with all the applicable EU directives and standards; and the obligation to maintain the public-service function and intended use of the structure at issue. It was also stated that the slipway was to remain, in any event, the property of the Comune di Ancona' [C-388/12, EU:C:2013:734, para 12].

The CJEU rejected the argumentation and subjected the award to the relevant EU public procurement obligations by clearly rejecting that the contract was of no cross-border interest, stressing that 'the Comune di Ancona has not invoked any objective facts capable of explaining the lack of any transparency in the award of the concession. On the contrary, it maintained that the concession was not liable to interest undertakings located in other Member States, in so far as the concession granted to the Pescatori cooperative was designed so as not to be capable of generating substantial net revenue for its beneficiary or an undue advantage for the latter or for the municipality. However, the fact that a concession is not capable of generating substantial net revenue or an undue advantage for an undertaking or for a public body does not, in itself, support the inference that the concession is of no economic interest for undertakings located in Member States other than that of the contracting authority. In the context of an economic strategy to extend part of its activities to another Member State, an undertaking may take the tactical decision to seek the award in that State of a concession despite the fact that that concession is incapable as such of generating sufficient profit, since that opportunity could nevertheless enable the undertaking to establish itself on the market of that State and to make itself known there with a view to preparing its future expansion' (C-388/12, EU:C:2013:734, paras 50-51, emphasis added).

In my view, at least as a matter of principle, the approach of both cases is diametrically opposed. In the public procurement field, there is no de minimis exemption and any potential impact on cross-border trade, even hypothetical, triggers compliance with public procurement principles (and rules) [see A Sanchez-Graells, Public procurement and the EU competition rules, 2nd edn (Oxford, Hart, 2015) 225-26]. On the contrary, in the field of State aid and with the push for the 'purely local intervention exemption', the Commission seems willing to create such (additional) de minimis exemption from the need for Member States to either fit the aid measure within the applicable block exemption regulation (ie, either the 2014 GBER, general de minimis rules, or the SGEI package) or obtain an individual authorisation from the Commission. Overall, this creates internal inconsistencies in areas of EU economic law that require more convergence, particularly if the direct award of the contract results in the presumption that State aid was illegally granted [see A Sanchez-Graells, 'Public Procurement and State Aid: Reopening the Debate?' (2012) 21(6) Public Procurement Law Review 205-12]; and, more generally, creates a problem for the Commission to identify and properly tackle cases where the Member States improperly apply this (still emerging) 'purely local intervention exemption'. Thus, in my view, this is an unwelcome development of EU State aid policy, and one where I would expect litigation soon to emerge.