Why call it essential national interest when you mean control? Thoughts on the converging exceptions to the EU procurement rules a propos the Austrian passports case (C-187/16)

csm_Personalausweis_2022de7ea9.jpg

In its Judgment of 20 March 2018 in Commission v Austria (Imprimerie d'État), C-187/16, EU:C:2018:194, the Court of Justice of the European Union (CJEU) assessed the extent to which Austria could rely on claims of national security interest and/or essential national interest to justify the direct award of several contracts for the printing of passports and other secure documents to the former Austrian national printing office (ÖS). In rejecting this possibility, the CJEU followed AG Kokott’s strict approach to the interpretation of derogations of the EU public procurement rules (as discussed here) and, crucially, determined that ‘a Member State which wishes to avail itself of those derogations must establish that the protection of such interests could not have been attained within a competitive tendering procedure as provided for by’ the relevant EU public procurement rules (para 79).

The case is interesting, but hardly novel, in the narrow approach taken by the CJEU in the interpretation of exceptions from competitive tendering under the EU procurement rules (paras 69-96), as well as in relation to the standard of proof required to justify the existence of a ‘certain cross-border interest’ in the tendering of contracts not covered by the EU rules (paras 103-111, which largely follow the recent case of Tecnoedi, see here). However, I think that the case is also interesting for the ‘forward continuity’ and systemic convergence it shows amongst the different exceptions to the EU public procurement rules, which requires an appreciation of the case in the context of the evolution of EU public procurement law. I explore this idea in this post.

It is worth stressing that the case was decided in relation to the third and fourth generation of EU procurement rules, as Directives 92/50/EEC and 2004/18/EC were applicable to the case ratione temporis. Differently from the current Directive 2014/24/EU, both the 1992 and the 2004 version of the EU procurement rules preceded the adoption of Directive 2009/81/EC on defence and security procurement, as well as the development (Dir 92/50) and consolidation (Dir 2004/18) of the in-house providing and public-public cooperation exemptions (as Teckal dates back to 1999 and Commission v Germany (Hamburg waste) dates back to 2009). This is relevant in the interpretation of their exemptions based on security or essential national interests.

‘Forward continuity’ in the treatment of security or essential interest-based exemptions

Dir 92/50 foresaw the possibility for Member States to exempt the direct (or less than fully competitive) award of contracts for the provision of ‘services which are declared secret or the execution of which must be accompanied by special security measures in accordance with the laws, regulations or administrative provisions in force in the Member State concerned or when the protection of the basic interests of that State’s security so requires’ (Art 4(2), emphasis added). Similarly, Dir 2004/18 contained an equivalent exemption for ‘public contracts when they are declared to be secret, when their performance must be accompanied by special security measures in accordance with the laws, regulations or administrative provisions in force in the Member State concerned, or when the protection of the essential interests of that Member State so requires’ (Art 14, emphasis added).

This functionally-equivalent exemption under the 1992 and 2004 versions of the EU public procurement rules could have been used, for example, to justify the direct award of a contract to an entity controlled (or heavily influenced/supervised?) by the contracting authority in order to protect the relevant essential / security national interest through an organic governance relationship rather than through contract. In fact, this seems to be the thrust of the justifications put forward by Austria in the case now decided by the CJEU, given that most of the arguments are (rather implicitly based) on the ‘special relationship’ that Austria has established with ÖS (or rather, kept after ÖS’ privatisation). These exemptions would, in the end, possibly be seen as simple clarification that the existence of the EU public procurement rules did not require the contractualisation (and prior award) of the management of this type of services—provided that the existence of the security/essential national interest existed and the exemption from EU procurement rules passed muster under a (strict) proportionality assessment—although this approach to exemption based on the relationship between the contracting authority and the service provider seems to now be clearly within the functional realm of the in-house and public-public collaboration exemptions, rather than that of defence-related exemptions (see below).

Since its regulation in Dir 92/50 (and to a large extent, Dir 2004/18), the possibility to avoid contractualising (and tendering) the entrustment of the provision of services involving security or essential interests (through contracts or other types of ‘written agreements’, of which domestic administrative law regulates a garden variety) and/or the tendering of such public contracts has since evolved in two meaningful ways. First, Dir 2009/81 has come to establish a clearer instrument for the regulation of procurement involving defence and security interests and I argue that the subjection of a contract not covered by that specific instrument to the general rules of Dir 2014/24 will be largely dependent on a strict analysis similar to that carried out by the CJEU in the case against Austria, as Art 15(2) Dir 2014/24 echoes the wording of the Judgment. This will ensure ‘forward continuity’ in the assessment of these matters under EU procurement law.

Indeed, in relation to the pre-2014 rules, the CJEU has found that a ‘Member State which wishes to avail itself of those derogations must show that such derogation is necessary in order to protect its essential security interests’ (para 78) and that ‘the protection of such interests could not have been attained within a competitive tendering procedure’ (para 79), which assessment needs to take into account that ‘the requirement to impose an obligation of confidentiality does not in itself prevent the use of a competitive tendering procedure for the award of a contract’ (para 89) and that this is compatible with ‘the confidential nature of data can be protected by a duty of secrecy, without it being necessary to contravene public procurement procedures’ (para 90). Moreover, the exemption of a direct award needs to overcome a strict proportionality based on the absence of less intrusive measures, such as the possibility of establishing effective control mechanisms (para 86) and screening the trustworthiness of potential service providers based in a different Member State (para 87).

This is mirrored by the 2014 Directive’s requirement that it ‘shall not apply to public contracts and design contests … to the extent that the protection of the essential security interests of a Member State cannot be guaranteed by less intrusive measures, for instance by imposing requirements aimed at protecting the confidential nature of information which the contracting authority makes available in a contract award procedure as provided for in this Directive’ (Art 15(2) emphases added). This basically comes to ‘consolidate’ or sum up the requirements set by the CJEU in the Judgment in Commission v Austria, which is thus fully aligned with the rules in Dir 2014/24. In that regard, there will be a clear continuity in the analysis of these situations despite the approval of Dir 2009/18 in the intervening period.

Convergence with exemptions based on control of the service provider

Second, and maybe less self-evidently, the interpretation of the exemptions in Dir 92/50 and Dir 2004/18 need to be coordinated with the consolidation of the in-house and public-public cooperation exemptions in the case law of the CJEU to date—which may however experience further transformation in the future, as the rules in Dir 2014/24 start being interpreted by the CJEU.

It seems clear that, as a result of the Teckal and Hamburg doctrines, and even before their ‘recast’ in Art 12 of Dir 2014/24, Member States could have exempted the direct award of contracts for the printing of passports—or any other contracts involving security/essential national interests—not on those grounds, but on the basis of the ‘special’ relationship between the contracting authority and the provider of those ‘sensitive’ services. Where the relationship was one of ‘administrative mutualism’, the direct award could be exempted under the public-public exemption. Where the relationship was one of ‘similar control’ by the contracting authority, the exemption could be justified on the in-house providing doctrine.

In either of the cases, the relationship underlying the exemption requires a certain element of intuitu personae (to put it that way) between the entities participating in the non-tendered (contractual) arrangement. The existence of that ‘special nexus’ would justify a conceptualisation of the decision to award the contract as subjected to organic relationships and administrative governance, rather than contractualised mechanisms based on market-based governance and competition-based checks and balances. Conversely, where the contracting authority decided to contractualise the management of the relationship, and in the absence of special links with the arm’s length provider of the services, the contracting authority had to comply with the EU procurement rules.

The Commission v Austria case is interesting in that, underlying the reasoning of the Court (as well as the analysis of AG Kokott in her Opinion, see here) is an element of dismissiveness of the ‘special relationship’ created between Austria and ÖS. To put it in rather simple and tentative terms, my reading of the Judgment is that the CJEU is reluctant to recognise the exemption of a direct award where the mechanisms set up by the Member State to administer the security/essential national interest implicit in the provision of the services are fungible, in the sense that they could be easily recreated in relation to an alternative provider (or providers).

This is clear in the same paragraphs where the CJEU demonstrates the lack of proportionality of the direct award of the contract for the printing of passports (mainly, paras 80-94), where the Court repeatedly stresses the possibility for the Austrian authorities to have created adequate safeguards through contractual mechanisms aimed at: (i) ensuring the centralised execution of the contract (paras 81-83), (ii) the establishment of effective administrative supervision mechanisms (paras 84-86), (iii) guarantee of supply (para 87), (iv) the screening of the trustworthiness of the provider and confidentiality of sensitive information (paras 88-94).

This is compatible with the fact that, under the in-house and public-public cooperation doctrines, the entrustment of the provision of services to entities lacking that intuitu personae or special nexus—ie those governed by contract rather organic relationships—must comply with EU public procurement rules. This excludes the exemptability of direct awards such as that attempted by Austria, which is implicitly what the CJEU has established here by stressing the replicability with a suitable alternative provider of the ‘control’ or influence/oversight mechanisms that Austria has over ÖS—which would then fail to justify both (or either) exemption under the defence/essential interest doctrine and the in-house/public-public cooperation approach.

In my view, this is welcome as it reflects internal functional convergence across exemptions from compliance with EU public procurement rules on the basis of a distinction between the governance of relationships based on organic/administrative relationships and those based on markets and a competition logic. I think that this is a perspective worthy of further consideration, and it will be interesting to see of the CJEU makes this more explicit in future judgments.

AG Kokott Advocates Restrictive Interpretation of Security-Based Derogations of EU Procurement Law (C-187/16)

csm_Personalausweis_2022de7ea9.jpg

In her Opinion of 20 July 2017 in case Commission v Austria, C-187/16, EU:C:2017:578, AG Kokott assessed the limits of the exemption on security grounds, under Article 346 TFEU and the Rules on Defence and Security Procurement (Directive 2009/81/EC), from the obligation to carry out a tender procedure for the award of a contract for the manufacture of identity and other official documents (such as biometric passports, driving licences or residence permits).

Even if based on previous generations of EU public procurement rules (both the 1992 and the 2004 procurement directives controlling the award of service contracts), the Opinion and future decision by the Court of Justice will be important for the coordination of the 2014 Public Procurement Package and the rules on Defence and Security Procurement.

As AG Kokott aptly put it, the main legal issue in the dispute requires ascertaining whether Member States are justified in directly awarding contracts for the manufacture of such documents to undertakings they 'consider to be particularly trustworthy' (para 2), in particular if they happen to be 'formerly State-owned undertaking[s] which [have] now been privatised' (para 3, which triggers considerations on the limits of the in-house exemption as well, see paras 29 and ), on the basis of the undisputed argument that such documents 'must be manufactured in compliance with particular secrecy and security requirements, as the issue of such documents is an expression of the exercise of fundamental State functions. The documents are used as part of everyday life and the importance of public confidence in their authenticity and veracity is not to be underestimated. Consequently, highest priority is given to security of supply, protection against counterfeiting and responsible handling of these documents, including of data processed in their manufacture, and abuse must be effectively prevented' (para 1)--all of which are ultimately incarnated in the rules of Regulation 2252/2004/EC on standards for security features and biometrics in passports and travel documents issued by Member States (see paras 13-14). Regardless of the peculiarities of the documents, the position taken by the European Commission is that it is 'perfectly possible to organise a public invitation to tender in such a way that only undertakings which [specialise] in the manufacture of documents subject to special security requirements and [are] supervised accordingly could be successful' (para 21). Austria, as the defending Member State in the case, opposes this reasoning and defends its use of the Article 346 TFEU exemption on the basis of the need to ensure the 'protection of essential national security interests. Protection of secret information, safeguarding of the authenticity and veracity of the documents concerned, security of supply and guaranteed protection of sensitive data' (para 20).

On that note, in her Opinion, AG Kokott also stresses that the case will give the Court of Justice an opportunity to go beyond procurement and provide further clarification of the limits of the security-based derogations from EU law that Member States can undertake under Article 346 TFEU (para 4). I am not necessarily convinced that the Court will follow that route, for it tends to avoid making general declarations on the meaning and interpretation of EU law, and it is clearly possible for the Court to take a narrow approach and provide a decision solely for the case at hand, without aiming to establish bright lines on the scope of Article 346 TFEU more generally. In any case, the Court's approach can in itself be interesting.

On the specific issue whether there was an obligation to tender the contract for the manufacturing of the official documents, AG Kokott suggests that the Court of Justice should declare the existence of such an obligation and, therefore, a breach of EU procurement law by Austria. Her main arguments are that:

  • The award of the contracts that gave rise to the dispute was covered by an obligation to launch an EU-wide tender procedure where the relevant value thresholds were exceeded (ie for all but one type of official documents) (paras 30-32).
  • The undeniably sensitive nature of the documents object of the contract does not justify the invocation of a public security exemption compatible with either the specific rules of the procurement directives (based on the fact that their performance requires compliance with special security measures, or on requirements linked to the protection of essential interests of the State), or with Article 346 TFEU more generally (paras 40-45).
    • A derogation from EU law based on the protection of essential national security interests requires Member States 'to offer substantiated evidence to show precisely which national security interests are affected and to what extent compliance with certain obligations under EU law would in practice be contrary to those security interests' (para 48).
    • Where the State shows the existence of a sufficient national interest at stake, the derogation from EU law, being an exception to fundamental internal market freedoms, needs to be interpreted strictly--and this applies to both derogations based on Article 346 TFEU in general, and to any specific derogations under secondary EU law, including the procurement directives (para 53). The test ultimately requires the 'Member State to prove that it is necessary to have recourse to the measures taken by it in order to protect its essential national security interests' (para 54).
    • In the case at hand, neither (i) the need for centralised performance of the printing contracts (paras 56-58), (ii) the need for effective official controls (paras 59-63), or (iii) the need to ensure the trustworthiness of the contractor (paras 64-72), are sufficient to demonstrate the necessity of directly awarding the contract because, in relation with each of the requirements, the Member State had a satisfactory less restrictive alternative measure available.
      • AG Kokott does not consider the need for centralised performance a good enough reason to exclude the tendering of the contract because, even if security justifications based on the easier control or one than several undertakings, and the ensuing reduced risk of access to security arrangements or sensitive materials by unauthorised parties are convincing, because that 'can ultimately only explain why the printing contracts at issue are only ever awarded to a single undertaking (and not to several at the same time). On the other hand, there is no plausible justification, based on the need for centralisation, why it should be necessary, in order to protect essential national security interests, to commission only ever the same undertaking' (para 57).
      • She also dismisses the argument based on the need to carry out special official controls because it is largely based on restrictions self-imposed on Austrian authorities by Austrian legislation (paras 61 and 63) and because, in any case, the need for the official controls does not justify the absolute exclusion of EU procurement rules because it is disproportionate (paras 62 and 63).
      • Finally, and in a very clear manner, AG Kokott dismisses claims based on the need to preserve on-going 'special relationships of trust' between public authorities and specific contractors. As she eloquently puts it: 'it would run flagrantly counter to the basic principle underpinning the European internal market in general and public procurement law in particular if a Member State almost arbitrarily classified a single undertaking — especially its formerly State-owned and now privatised ‘historic’ provider in a certain area — as particularly reliable and trustworthy according to the motto ‘tried and tested’, whilst a priori denying or at least questioning the reliability and trustworthiness of all other undertakings' (para 66, references omitted).
      • To stress the restrictions on the possibility for the Member State to derogate from EU law in order to avoid disclosure of security-related information to foreign undertakings or undertakings controlled by foreign nationals (paras 69-70), AG Kokott highlights the need for such concerns to inform Member State decisions in a 'consistent and systemic manner'. In that regard, AG Kokott dismisses Austria's claim on the basis that 'Austria has not ... taken precautions which could effectively prevent [its formerly State-owned undertaking] falling under the control of foreign shareholders or becoming a subsidiary of a foreign legal person. The Austrian State has neither stipulated, for reasons of security, voting rights in [its formerly State-owned undertaking] in the form of a special share (‘golden share’) nor made the sale of shares in [its formerly State-owned undertaking] subject to any restrictions on security grounds' (para 70, references omitted).

On the whole, I think that AG Kokott's Opinion is well-argued and her arguments are convincing. From the public procurement perspective, it seems clear that in cases where the Member State can resort to less restrictive measures--such as carrying out a tender with high requirements embedded in the relevant selection criteria (including an exceptional obligation to carry out the performance of the contract in the territory of the contracting authority; see para 63 and the cited Judgment of 4 December 1986, Commission v Germany, C-205/84, EU:C:1986:463) and imposing extensive confidentiality obligations--the possibility to exclude compliance with EU law should be excluded.

There are other aspects of the Opinion that seem more open to opposing arguments, such as the need to ensure watertight consistency in the use of derogations based on Article 346 TFEU (where warranted), or some of the (implicit) elements of mutual trust and recognition between Member States in the context of their cooperation in security issues. In my view, it is not likely that the Court of Justice will engage with them in detail. If I were to guess, I would expect a short Judgment in this case, simply stating that Austria's interpretation of the exemptions from the EU public procurement rules was too wide and that, in any case, the direct award of the contract fails a strict proportionality assessment. We will know soon enough.

Direct award of concession contracts to holders of exclusive rights: the puzzle of Art 10(1) Dir 2014/23

I have been exchanging views with colleagues of the University of Turin on the justification, scope and implications of Art 10(1) of the Concessions Directive (2014/23). This is a rather complex provision that has hidden links with a number of equivalent provisions in the Public Sector Directive (2014/24) and the Utilities Directive (2014/25). 

It has taken us some time to clarify these issues--and I am actually not a 100% sure that we have finished with that conversation. Given that the publication where all this debate and analysis will be reflected will take some to be available, I thought it useful to upload here my draft. Comments will be most welcome.

Article 10(1) of the Concessions Directive states: 
This Directive shall not apply to services concessions awarded to a contracting authority or to a contracting entity as referred to in point (a) of Article 7(1) or to an association thereof on the basis of an exclusive right.

This Directive shall not apply to services concessions awarded to an economic operator on the basis of an exclusive right which has been granted in accordance with the TFEU and Union legal acts laying down common rules on access to the market applicable to activities referred to in Annex II.


My views are set out below.


10.1. Concessions awarded on the basis of exclusive rights
The exclusion in Article 10(1) for concessions awarded on the basis of exclusive rights is functionally equivalent to those in Article 11 of the Public Sector Directive and Article 22 of the Utilities Directive for services contracts. As briefly indicated by the European Commission in its factsheet “Concessions: Excluded concessions”, the purpose of this exclusion is to cover “Concessions awarded by (sic, to?) public authorities as well as contracting entities other than public undertakings and private entities enjoying of exclusive rights, both in the ‘classic’ and ‘utilities’ sectors.” However, the drafting of the exclusion for services concessions diverges from those applicable to services contracts in some respects, which aim to accommodate the requirements of both other directives

Firstly, it should be taken into account that Recital (32) of the Concessions Directive indicates that 

In certain cases, a given contracting authority or contracting entity which is a State, regional or local authority or body governed by public law or a given association thereof might be the sole source for a given service, for the provision of which it enjoys an exclusive right pursuant to national laws, regulations or published administrative provisions which are compatible with the TFEU. It should be clarified that in those situations a contracting authority or contracting entity as referred to in this recital or association thereof may award concessions to such bodies without this Directive being applied.”
This results in the exclusion in the first paragraph of Article 10(1) being applied to “services concessions awarded to a contracting authority or to a contracting entity as referred to in point (a) of Article 7(1) or to an association thereof on the basis of an exclusive right”. This drafting deviates from that of Article 11 of the Public Sector Directive and Article 22 of the Utilities Directive for services contracts. Focussing on the drafting of Article 11 of the Public Sector Directive, it is worth stressing that, due to the dual treatment of contracting authorities in the Concessions Directive as ‘proper’ contracting authorities (under Article 6) and as contracting entities by virtue of the activity in which they engage [under Article 7(1)(a)], the first paragraph of Article 10(1) of the Concessions Directive does not only mention contracting authorities, but also contracting entities “as referred to in point (a) of Article 7(1)”. However, this does not extend the personal scope of the exclusion as compared with that in Article 11 of the Public Sector Directive or that in Article 22 of the Utilities Directive. 
 
Still in that comparison, it is worth mentioning that the Concessions Directive does not include the requirement that the exclusive rights of the contracting authorities (proper and improper) are enjoyed “pursuant to a law, regulation or published administrative provision which is compatible with the TFEU”. However, given that the requirement is included in the definition of exclusive right in Article 5(10) of the Concessions Directive (“‘exclusive right’ means a right granted by a competent authority of a Member State by means of any law, regulation or published administrative provision which is compatible with the Treaties…”), this does not actually create a difference in treatment of the exclusion in the Public Sector and the Utilities Directives either.
 
Turning to the exclusion in the second paragraph of Article 10(1) of the Concessions Directive, which makes it inapplicable to services concessions awarded to economic operators that hold exclusive rights “granted in accordance with the TFEU and Union legal acts laying down common rules on access to the market applicable to activities referred to in Annex II”, it seems clear that this is an exclusion that aims to coordinate the Concessions Directive with sectoral regulation adopted in compliance with the existing EU framework.

This seems clear from Recital (33), which foresees that:
It is also appropriate to exclude from the scope of this Directive certain services concessions awarded to economic operators, where they are awarded on the basis of an exclusive right which that operator enjoys under national laws, regulations or published administrative provisions and which has been granted in accordance with the TFEU and Union acts laying down common rules on access to the market applicable to activities referred to in Annex II, since such exclusive right makes it impossible to follow a competitive procedure for the award. By way of derogation and without prejudice to the legal consequences of the general exclusion from the scope of this Directive, concessions as referred to in the second subparagraph of Article 10(1) should be subject to the obligation to publish a concession award notice in view of ensuring basic transparency unless the conditions of such transparency are provided for in sectoral legislation. In order to reinforce transparency, where a Member State grants an exclusive right to an economic operator for the exercise of one of the activities referred to in Annex II, it should inform the Commission thereof.
As briefly indicated by the European Commission in its factsheet “Concessions: Excluded concessions”, the purpose of this exclusion is to cover

Concessions awarded to an economic operator on the basis of an exclusive right
This exclusion applies only to service concessions awarded to economic operators which are active in the ‘utilities’ sector. It is subject to two conditions:
i) The economic operator has a prior exclusive right to provide the services that are the subject of the concession;
ii) This right was granted under a published national law or administrative act in accordance with the Treaty and with EU acts that lay down common rules on access to the market applicable to any of the ‘utilities’ activities (e.g. concessions in the electricity sector covered by Directive 2003/54/EC, modified by Directive 2009/72/EC and gas concessions covered by Directive 2009/73/EC).

Indeed, the coordination with sectoral regulation takes place both at the stage of definition of the contracting entities covered by the Concessions Directive [see Article 7 of the Concessions Directive, and Article 4(3) of the Utilities Directive] and at this stage of exclusion of the concessions awarded to certain types of entities. 

Firstly, Recital (22) of the Concessions Directive offers some clarification in that regard: 
entities which are neither contracting entities pursuant to point (a) of Article 7(1) nor public undertakings are subject to [the Concessions Directive] only to the extent that they exercise one of the activities covered on the basis of such rights. However, they will not be considered to be contracting entities if such rights have been granted by means of a procedure based on objective criteria, in particular pursuant to Union legislation, and for which adequate publicity has been ensured. That legislation should include Directive 2009/73/EC of the European Parliament and of the Council, Directive 2009/72/EC of the European Parliament and of the Council, Directive 97/67/EC of the European Parliament and of the Council, Directive 94/22/EC of the European Parliament and of the Council and Regulation (EC) No 1370/2007 of the European Parliament and of the Council. It should also be clarified that that listing of legislation is not exhaustive and that rights in any form, which have been granted by means of other procedures based on objective criteria and for which adequate publicity has been ensured are not relevant for the purposes of determining the contracting entities covered by this Directive.
This implies that the granting of concessions to these entities will not be covered by the first paragraph of Article 10(1), as the way in which their rights had been granted excludes them from the definition of contracting entity for these purposes.

However, secondly, this situation would result in a more limited possibility to directly award contracts on the basis of exclusive rights under the Concessions Directive than under the Public Sector and the Utilities Directives. It should be borne in mind that Article 32(2)(b)(iii) of the Public Sector Directive allows for the use of the negotiated procedure without prior publication if it is necessary for the protection of exclusive rights, and always provided that no reasonable alternative or substitute exists and the absence of competition is not the result of an artificial narrowing down of the parameters of the procurement. Article 50(c)(iii) of the Utilities Directive contains the same provision regarding the equivalent negotiated procedure without prior call for competition. Hence, under those sets of rules, the direct award of a contract to an economic operator on the basis of an exclusive right is still possible, even if not covered by Article 11 of the Public Sector Directive or Article 22 of the Utilities Directive. With the inclusion of the second paragraph of Article 10(1) Concessions Directive, this possibility is accommodated through an exclusion of the application of the Directive, with the only exception of the reinstatement of transparency obligations similar to those required by Articles 32(2)(b)(iii) of the Public Sector Directive and 50(c)(iii) of the Utilities Directive by means of Article 10(2) of the Concessions Directive.

The ultimate justification for this exclusion is, consequently, of a seemingly double nature. On the one hand, it seems clear that the interest of potential tenderers in obtaining the concession had already been protected by substantially equivalent means at the stage of granting of the exclusive right that triggers the exclusion under the second paragraph of Article 10(1)  of the Concessions Directive and, consequently, there is no need to reopen the competition at this stage. On the other hand, it serves the purpose of creating a functional equivalent to Articles 32(2)(b)(iii) of the Public Sector Directive and 50(c)(iii) of the Utilities Directive in order to allow for the direct award of concession contracts to holders of exclusive rights.

Is Altmark not applicable to ambulance services? Or is San Lorenzo & Croce Verde not very clear? (C-113/13)

In view of the Judgment in San Lorenzo and Croce Verde Cogema, C-113/13, EU:C:2014:2440, the rules applicable to the provision of emergency ambulance services is definitely clear as mud. In the case at hand, the applicants challenged an Italian law whereby emergency ambulance services must be awarded on a preferential basis and by direct award, without any advertising, to certain voluntary bodies (such as the Red Cross). This rule has, ultimately, constitutional protection in Italy, as 'the Italian Republic has incorporated into its constitution the principle of voluntary action by its citizens. Thus, the last paragraph of Article 118 thereof provides that citizens, acting individually or in an association, may participate in activities of public interest with the support of the public authorities, on the basis of the principle of subsidiarity' (para 9).

The applicants' argument was not necessarily of a constitutional level, but rather that freedom of establishment is unduly restricted by a preferential scheme that excludes the tendering out of those ambulance services. They brought forward arguments based on general free movement provisions, public procurement rules and competition rules. The latter are not examined because the CJEU considered that the public procurement analysis makes it unnecessary (para 64).

In my view, if read paragraph by paragraph, the reasoning of the CJEU is accurate and technically precise, but the overall Judgment is too timid in spelling out the conditions for the application of the 'public service exception' under art 106(2) TFEU (or otherwise) tot he direct award of emergency ambulance services to voluntary action associations. I will try to summarise my criticism and doubts as succinctly as possible. This is an area where more considered research is definitely needed.

On the bright side, I think that some positions of the CJEU can be clearly spelled out. 

(1) When fully applicable, both Dir 2004/18 and Dir 2014/24, preclude legislation such as that at issue in the main proceedings which provides that the local authorities are to entrust the provision of urgent and emergency ambulance services on a preferential basis and by direct award, without any advertising, to the voluntary bodies mentioned in the agreement (para 44). However, Dir 2004/18 does not automatically apply to ambulance services (see 2 below) and art 10(h) Dir 2014/24 clearly excludes these contracts from its scope of application (para 8). Hence, this clear position is not that useful in practice.

(2) Where the Directives are not fully applicable (ie where contracts can be tendered under part B services rules under dir 2004/18, or under the special regime for social services under arts 74-77 dir 2014/24), the general principles of transparency and equal treatment flowing from articles 49 TFEU and 56 TFEU would be applicable (para 45) if the contract is of cross-border interest (paras 46-50). In that case, it is also clear that such a preferential scheme would run contrary to the Directives, which are: 'intended to ensure the free movement of services and the opening-up to competition in the Member States which is undistorted and as wide as possible' (para 51). 

(3) Implicitly, then, where the Directives do not apply at all but the contract is still of cross-border interest (ie the new likely situation under art 10(h) dir 2014/24), the award of the contract is 'merely' subjected to the (residual/general) requirements of articles 49 TFEU and 56 TFEU. In that case (not expressly assessed in the San Lorenzo & Croce Verde Judgment), the contracting authority still would need to go through the applicable assessment under the market access test generally applicable to restrictions of freedom of establishment [for two thought provoking attempts to rationalise this test, see E Christodoulidis, 'The European Court of Justice and Total Market Thinking' (2013) 14 German Law Journal 2005; and MS Jansson & H Kalimo, 'De minimis meets “market access”: Transformations in the substance – and the syntax – of EU free movement law?' (2014) 51(2) Common Market Law Review 523].

Hence, there are always concerns and constraints derived from EU law (either general, or the specific rules of public procurement) if the contract is of cross-border interest. Nonetheless, they are of varying degrees of intensity and it looks as if upon the entry into force of Directive 2014/24, the award of service contracts for emergency ambulance services  (either exclusively, or for most of their value if the contracts include other sorts of ambulance services) will exclusively be governed by the general rules on freedom of establishment.

On the shady side, though, once the potential incompatibility with EU public procurement or general free movement law is established (and, really, there seems to be no escape to 1-3 above except if the contract has no cross-border interest whatsoever--and, on that, see the  Ancona issue here), the CJEU will apply a Sodemare-like test because the provision of ambulance services falls within the (very broad) remit of the organisation of healthcare and social security systems (paras 55-59). In that case, then, it will particularly important that "EU law does not detract from the power of the Member States to organise their public health and social security systems" (para 55), but that "it is for the Member States, which have a discretion in the matter, to decide on the degree of protection which they wish to afford to public health and on the way in which that degree of protection is to be achieved" (para 56). So far, so good.

On the dark side, however, and significantly departing from the more developed approach in Altmark for SGEIs (is the CJEU implicitly recognising--without analysis--that ambulance services are per se SSGIs?), the CJEU has created an economically oriented safeguard that leaves too much room for maneuver by ruling that
Having regard to the general principle of EU law on the prohibition of abuse of rights (see, by analogy, judgment in 3M Italia, C‑417/10, EU:C:2012:184, paragraph 33), the application of that legislation cannot be extended to cover the wrongful practices of voluntary associations or their members. Thus, the activities of voluntary associations may be carried out by the workforce only within the limits necessary for their proper functioning. As regards the reimbursement of costs, it must be ensured that profit making, even indirect, cannot be pursued under the cover of a voluntary activity and that volunteers may be reimbursed only for expenditure actually incurred for the activity performed, within the limits laid down in advance by the associations themselves (C-113/13, para 62, emphasis added).
In my view, this is way too timid. Indeed, the CJEU constructs a rather weak safeguard by not focussing at all in the economic efficiency of the voluntary activities (which, even on a non-profit, reimbursement basis can be extremely inefficient) and imposes a sort of 'anti-fraud' test that, in my view, misses the point. In order to ensure compatibility with State aid provisions (which should not have been set aside so quickly in para 64), an efficiency based test like the one existing in the fourth condition of Altmark should have been imposed [for discussion, see A Sanchez Graells, “The Commission’s Modernization Agenda for Procurement and SGEI”, in E Szyszczak & J van de Gronden (eds) Financing SGEIs: State Aid. Reform and Modernisation, Legal Issues of Services of General Interest Series (The Hague, TMC Asser Press / Springer, 2012) 161-181]. 

Indeed, the analysis of the applicability of Art 106(2) TFEU to the case is totally missing and this is strange. It looks like the difference between SGEIs and SSGIs will haunt all of us also under the 2014 Directives and revised guidance from the European Commission is becoming urgently needed, given the implicit vacuum that can exist if Member States maximise the possibilities of direct award under art 10(h) dir 2014/24, but equally under its arts 74-77 (and particularly, the latter).

As briefly mentioned, this is an area where more research is needed. I hope I can convince some colleagues to put together a research project on this soon. Interested contributors, please feel free to contact me at asanchezgraells@gmail.com.

Teaser: Why are ambulance services different, and why is it so complicated to procure them? (C-113/13)

In its Judgment in San Lorenzo and Croce Verde Cogema, C-113/13 (only press release available for now), the CJEU seems to have ruled that emergency ambulance services "may be entrusted on a preferential basis and by direct award to voluntary associations. In order to do so, the system must actually contribute to the pursuit of the objectives of the good of the community and budgetary efficiency". 

Without knowing the details of the full Judgment, it is hard to see the exact space for such direct award and all the caveats implicit in it. However, as a first reaction, it seems clear that this adds yet another layer of complication to the procurement regime applicable to ambulance services under the EU public procurement rules. Recital (28), art 74 and annex XIV of Directive 2014/24 will need to be reconciled with the Judgment in San Lorenzo and Croce Verde Cogema, which may result in some legal uncertainty as to whether direct award is really possible or the simplified regime in art 74 (or even art 77) trump the position of the CJEU.

I will look at this in detail once the full Judgment is available, but the application of EU procurement rules to ambulance services seems to be unnecessarily complicated.

CJEU rejects avoidance of litigation as a valid 'overriding reason in the public interest' justifying a direct award of a concession contract (C-212/12)

In its Judgment of 14 November 2013 in case C-221/12 Belgacom, the CJEU has rejected that the avoidance of litigation can be considered a valid 'overriding reason in the public interest' justifying a direct award of a concession contract. In other terms, the fact that the award of the services concession forms part of a settlement agreement is irrelevant for the purposes of determining compliance with the EU primary law requirements applicable to the award of such contracts.
 
In very clear terms, the CJEU has indicated that
37 [...] since such a concession is of certain cross-border interest, its award, in the absence of any transparency, to an undertaking located in the Member State to which the contracting authority belongs, amounts to a difference in treatment to the detriment of undertakings which might be interested in that concession but which are located in other Member States. In excluding those undertakings, that difference in treatment works primarily to their detriment and therefore amounts to indirect discrimination on grounds of nationality, which is, in principle, prohibited by Articles 49 TFEU and 56 TFEU (see, to that effect, ASM Brescia, paragraphs 59 and 60 and the case-law cited).

38 Such a measure might, exceptionally, be allowed on one of the grounds set out in Article 52 TFEU or justified by overriding reasons in the public interest, in accordance with the Court’s case-law (see, by analogy, Engelmann, paragraphs 51 and 57 and the case-law cited, and Joined Cases C‑357/10 to C‑359/10 Duomo Gpa and Others [2012] ECR I-0000, paragraph 39 and the case-law cited). On this last point, it is clear from a combined reading of paragraphs 51 and 57 of Engelmann that no distinction need be drawn between objective circumstances and overriding reasons in the public interest. Objective circumstances must, ultimately, be accepted as overriding reasons in the public interest.

39 The grounds put forward in the application in the present case, whether considered separately or together, cannot be regarded as being overriding reasons in the public interest.

40 The principle of legal certainty, which is a general principle of European Union law, provides ample justification for observance of the legal effects of an agreement, including – in so far as that principle requires – in the case of an agreement concluded before the Court has ruled on the implications of the primary law on agreements of that kind and which, after the fact, turn out to be contrary to those implications (see, to that effect, ASM Brescia, paragraphs 69 and 70). However, that principle may not be relied on to give an agreement an extended scope which is contrary to the principles of equal treatment and non-discrimination and the obligation of transparency deriving therefrom. It is of no import in that regard that that extended scope may offer a suitable solution for putting an end to a dispute which has arisen between the parties concerned, for reasons outside their control, as to the scope of the agreement by which they are bound
(Case C-221/12 at paras 37-40, emphasis added).
This is a very important finding, as it comes to limit the discretion of contracting authorities to (re)negotiate contract awards and to extend the scope of contracts in order to settle arising legal disputes. It may be seen as a significant restriction of sensible contract and dispute management strategies in the altar of transparency, but the CJEU seems to have opted to err on the cautious side of the balance--which I consider appropriate, given that renegotiations are an area prone to massive manipulation and rule avoidance in public procurement in many Member States.
 
However, the practical effects of the Belgacom Judgment may be relatively limited once the future procurement Directives are adopted, as they will expressly regulate contract modification and set clear limits that will trigger the obligation to retender the contract (see art 72 of the new public sector procurement Directive and art 42 of the new Concessions Directive).

Public sector reform in the UK: A procurement battlefield in the horizon?

With is forthcoming announcement of a new wave of privatisation, the Cabinet Office is envisaging a significant redesign of the public sector and the provision of public services in the UK

In broad strokes, the Ministers are preparing to spin off a significant number of state-owned services into independent companies that will be owned by the Government, private investors (with a share of up to 50%) and workers (up to 25%), and to which the Government will then guarantee contracts for a number of years – with the businesses free to sell their services in the market.

Such a strategy will reshape the UK public sector, but it will also have a very significant impact on competition in services markets (since the Cabinet Office is focusing on IT, personnel and legal functions, which could be provided by existing private suppliers in the markets concerned).

This is a strategy that deserves close scrutiny by the competition watchdog--as anticipated by the OFT in its 2013-14 Annual Plan, where it stresses that it "may focus on IT and local government issues in particular and work with government partners on a range of issues relating to the public sector reform agenda to ensure that government interventions maintain competitive markets. In addition to advocacy and influencing, [the OFT] will consider using the full range of tools at our disposal to tackle any breaches of competition law identified in public service markets." Maintaining competitive neutrality will be a major issue, as indicated by the OECD recently.

Importantly, the public sector reform will need monitoring from the public procurement perspective. Depending on how the privatisation and contracting out strategy is carried out, the Cabinet Office will create a complex scenario by running auctions  to acquire 'minority' stakes in the spin-off companies and (simultaneously?) running (open?) tenders or directly awarding the contracts to the newly created companies. 

If these procedures are not structured and timed in the proper manner, the UK government could easily fall foul of the relevant rules and exceptions to the current EU public procurement Directives--including, to name the most relevant ones, the 'public-public' cooperation exception, the 'in-house' provision exception, and the direct award of contracts on the basis of exclusive rights (which abuse determines the ineffectiveness of the contracts). 

It is worth noting that the current proposals for the reform of the EU procurement rules include some potential changes that could contribute to further legal complication, depending on the final calendar for the transposition of the new EU rules.

Moreover, the rules on State aid to services of general economic interest will also be relevant, particularly once the spin-off companies start competing in the market and incumbents or new entrants raise claims that public participation and public contracts allow them to cross-subsidise activities and compete unfairly for public and private business.

Given the multiple competition, public procurement and State aid implications of the new wave of public sector reform in the UK, this sector deserves close monitoring and will provide a myriad of opportunities for legal and economic analysis and research. Moreover, given that this is not the only strategy for public sector reform (since, at local level, aggregation of demand and pure public-public cooperation schemes are being developed), this promises to be an interesting battlefield.

Tendering for licences and tendering for contracts: Consistency of the approach (AG in case C‑569/10)

AG Cruz Villalon has delivered his Opinion of 20 November 2012 in case C-569/10 European Commission v Poland, which concerns a potential infringement of Art 3 of Directive 94/22/EC of the European Parliament and of the Council of 30 May 1994 on the conditions for granting and using authorisations for the prospection, exploration and production of hydrocarbons. The analysis offered in relation to tendering procedures for mining licences resembles that followed in public procurement cases and, consequently, it is interesting to see to what extent the criteria applicable to both types of tendering are being developed consistently by the EU Courts.

According to Art 3 Dir 94/22, Member States must take ‘the necessary measures to ensure that authorisations [for the exercise of the activities of prospecting, exploring for and producing hydrocarbons] are granted following a procedure in which all interested entities may submit applications’ (emphasis added). This requirement was incorporated in Polish law by means of Article 11(2) of the Geological and Mining Law of 4 February 1994, which provides that: ‘Without prejudice to Article 12(1), the creation of mining usufruct rights covering the prospection, exploration for and exploitation of natural gas, oil and its natural derivatives ... shall be preceded by a competitive tendering procedure' (emphasis added). According to such Art 12(1), however,  ‘[a]n undertaking that has explored and documented mineral deposits belonging to the Treasury and has prepared geological documents to the level of accuracy required for the granting of a concession for production of the mineral, may apply for the grant of mining usufruct rights with priority over other parties’ (emphasis added).

Therefore, Polish law creates two sets of independent authorisations: one for exploration (and preparation of the ensuing geological documentation) and one for production rights and, in general, subjects their granting to a prior tendering procedure (which would be in line with the requirements of Art 3 Dir 94/22). However, the priority given to holders of exploration rights (or to subsequent buyers of the ensuing geographical documentation) to obtain the production concession raised an issue of compatibility with EU Law. The European Commission considered that this would exclude any effective tendering for production rights and that, consequently, the Polish system breached Art 3 Dir 94/22. On its part, Poland considered that the existence of a tendering procedure in respect of the granting of the exploration rights was sufficient, as the procedure for granting the production concession is in the nature of a mere ‘formality’, albeit compulsory, involving only the undertaking to which the initial rights had been granted.

AG Cruz Villalon concurs with the Commission's view. In his Opinion, he submits that:
79. In effect, Article 12 of the Geological and Mining Law gives priority – for a period of two years and over any other person – in seeking the creation of mining usufruct rights to the person who has explored and documented mineral deposits and prepared the relevant geological documentation [...]
82. The Polish Government seeks to justify this outcome by arguing that the exclusive rights to the geological documentation and the priority given to the holder of such rights constitute fair remuneration for the investment made at the earlier prospecting and exploration stage.
83. In my opinion, this argument cannot succeed.
84. Much as it may seem fair that the person who has borne the costs involved in preparing the geological documentation should be remunerated, that investment may in no circumstances be rewarded in such a way as to distort the authorisation procedure to the point of rendering illusory the tendering procedures required under Directive 94/22.
85. That is, or at least may be, what happens if the Polish system is applied. The interplay of priorities and exclusive rights introduced by the Geological and Mining Law may give rise to a situation in which the holder of the exclusive rights to the geological documentation obtains the mining usufruct rights without a genuine competitive tendering procedure being held. In fact, it would not be feasible to follow such a procedure if the priority referred to in Article 12(1) means – as the term ‘priority’ would, on the face of it, suggest – a true preferential right to the creation of the usufruct.
86. It would be a different matter (sic) if the ‘priority’ were taken to mean that the investment in the preparation of the geological documentation constitutes a positive factor to be taken into account in the tendering procedure; a positive factor for evaluation, perhaps, but certainly not to the extent of determining the outcome of the tendering procedure. Giving this factor its proper weight may constitute reasonable remuneration for the investment, without going as far as the case put by the Polish Government.
87. In this regard, we should bear in mind that ownership of exclusive rights to the geological documentation may not be as central to the authorisation process as it is under the Polish system. Ownership of such rights does, of course, demonstrate that the holder has the skills needed to prepare geological documentation. Clearly, however, such skills are not necessarily in themselves sufficient to demonstrate the skills relevant for the purposes of granting an authorisation to exploit mineral resources. It seems to me obvious that, basically, the Polish system attributes too much importance to the position of undertakings whose main capability is the production of geological documentation, with the position of other undertakings which can also demonstrate capability in the area of mining being entirely subordinated to the interests of the former.
88. So, the Polish system of ‘authorisation’ within the meaning of Directive 94/22 comprises two stages (the creation of the mining usufruct rights and the concession itself), the outcome of which may be dictated entirely by the exercise of exclusive rights to the geological documentation that is needed in order to obtain the actual authorisation to exploit the mineral resources. Those exclusive rights are granted to the undertaking that has obtained geological documentation through exploration and investigation which, in accordance with Article 33(1) of the Geological and Mining Law, do not always require a concession and would therefore not be the result of a tendering procedure.
89. Consequently, given that in certain circumstances the Polish legislation allows the authorisation required for the activities of prospecting, exploring for and producing to be granted following a procedure which does not involve a genuine tendering procedure, I am of the opinion that the first part of the second plea and the second part of the first plea in the Commission’s application should be upheld in their entirety (AGO C-569/10 at paras 79-89, emphasis added).
As briefly mentioned, in my view, the AG's reasoning resounds of the arguments that prevent direct awards of construction or other works contracts on the basis of the 'mere' development of a design project under EU public procurement rules [Dirs 2004/18 and 2004/17]. In that regard, where the rights or contracts to be awarded non-competitively at the second stage are worthier than the initial rights or contracts, it seems sensible to require a second round of competition to take place. 

However, I do not agree with the AG's obiter dicta remarks in paragraph 86 of his Opinion, where he considers that "It would be a different matter (sic) if the ‘priority’ were taken to mean that the investment in the preparation of the geological documentation constitutes a positive factor to be taken into account in the tendering procedure; a positive factor for evaluation, perhaps, but certainly not to the extent of determining the outcome of the tendering procedure. Giving this factor its proper weight may constitute reasonable remuneration for the investment, without going as far as the case put by the Polish Government." Such preference in the second round of competition would only allow the incumbent to extract unnecessarily advantageous conditions from the contracting / licensing authority. In that regard, I would suggest that it is of the utmost importance to neutralize any first comer advantages in the second round of competition, at least for evaluation purposes, as I have further developed elsewhere [Sanchez Graells, Public Procurement and the EU Competition Rules (Oxford, hart Publishing, 2011) pp. 333-338]. Otherwise, the system may be compliant with the tendering requirements of Dir 94/22 or Dirs 2004/18 and 2004/17, but not (fully) effective competition will arise in the second round of tendering.

Therefore, I would suggest that the CJEU should follow the AG in its final Judgment in case C-569/10, but dismissed the obiter dicta remarks in paragraph 86. Otherwise, the law on (re)tendering risks being developed in a less than (fully) competition-promoting manner.