Examining Brexit Through the GPA’s Lens: What Next for UK Public Procurement Reform?

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Dr Pedro Telles and I have just published 'Examining Brexit Through the GPA’s Lens: What Next for UK Public Procurement Reform?' (2017) 47(1) Public Contract Law Journal 1-33 and, thanks to the permission of the American Bar Association, made it available through SSRN https://ssrn.com/abstract=3076543. This is the abstract:

The United Kingdom has formally started the process of leaving the European Union (so called Brexit). This has immersed the UK Government and EU Institutions in a two-year period of negotiations to disentangle the UK from EU law by the end of March 2019, and to devise a new legal framework for UK-EU trade afterwards. The UK will thereafter be adjusting its trading arrangements with the rest of the world. In this context, public procurement regulation is broadly seen as an area where a UK ‘unshackled by EU law’ would be able to turn to a lighter-touch and more commercially-oriented regulatory regime. There are indications that the UK would simultaneously attempt to create a particularly close relationship with the US, although recent changes in US international trade policy may pose some questions on that trade strategy. Overall, then, Brexit has created a scenario where UK public procurement law and policy may be significantly altered.

The extent to which this is a real possibility crucially depends on the framework for the future trading relationship between the UK and the EU. Whereas ”EU-derived law” will not restrict the UK’s freedom to regulate public procurement, the conclusion of a closely-knit EU-UK trade agreement covering procurement could thus well result in the country’s continued full compliance with EU rules. Nonetheless, this is not necessarily a guaranteed scenario and, barring specific requirements in future free trade agreements between the UK and the EU or third countries, including the US, the World Trade Organisation Government Procurement Agreement (GPA) seems to be the only regulatory constraint with which future UK public procurement reform needs to conform. However, the position of the UK under the GPA is far from clear. We posit that the UK will face a GPA accession process and GPA members may see Brexit as an opportunity to obtain new concessions from the UK and the EU, which could be both in terms of scope of coverage or regulatory conformity. Further, given the current trend of creating GPA plus procurement chapters in free trade agreements, such as the US-Korea FTA, the GPA regulatory baseline will gain even more importance as a benchmark for any future reform of public procurement regulation in the UK, even beyond the strict scope of coverage of the GPA. Given the diversity of GPA-compliant procurement systems (such as the EU’s and the US’), though, the extent to which the GPA imposes significant restrictions on UK public procurement reform is unclear. However, we argue that bearing in mind the current detailed regulation in the UK might itself limit deregulation due to the need to comply with the international law principle of good faith as included in the 1969 Vienna Convention on the Law of Treaties and, to a certain extent, the United Nations Convention Anti-Corruption. 

The aim of this paper is to try to disentangle the multi-layered complexities of Brexit and to explore the issues that Brexit has created in the area of international public procurement regulation, both from the perspective of ‘internal’ EU law-related issues and with regard to broader ‘external’ issues of international trade regulation, as well as to assess the GPA baseline regulatory requirements, and to reflect on the impact these may have on post-Brexit public procurement reform in the UK.

CJEU consolidates push for overcompliance with EU public procurement rules in the provision of public services (C-446/14)

In its Judgment of 18 February 2016 in Germany v Commission (Zweckverband Tierkörperbeseitigung), C-446/14 P, EU:C:2016:97 (only in German and French), the Court of Justice of the European Union (CJEU) has supported the approach of the General Court (GC) in the assessment of the Altmark (C-280/00, EU:C:2003:415) conditions for the analysis of State aid regarding a system of financial support for a service of general economic interest (SGEI) consisting in the maintenance of reserve animal disposal capacity in the case of epizootic in a public abattoir in the state of Rhineland-Palatinate in Germany.

This appeal was against the GC's Judgment in T-295/12 (EU:T:2014:675, which is discussed by P Nicolaides here), but the analysis of the CJEU was highly relevant for the pending appeal against the GC Judgment in T-309/12 (EU:T:2014:676, discussed here), which has now been abandoned by the appellant (the abattoir, now in liquidation). The intricacies of the case are quite complex, and points of detail are too specific to discuss now. However, there are some general issues to note in view of the CJEU's Germany v Commission (Zweckverband Tierkörperbeseitigung) Judgment. 

From the outset, it must be stressed that the CJEU is following the GC in a trend that may well be modifying the scope of the Altmark test in a way that pushes for overcompliance with the EU public procurement rules as the only effective way in which Member States can achieve legal certainty in the way they organise their SGEIs. This requires to take a long view on some of the arguments in the case.

The CJEU has generally been very clear that 'the four conditions set out in Altmark ... are distinct from one another, each pursuing its own finality' (para 31, own translation from French). In particular, it stressed that the first condition requires 'that the recipient undertaking must actually be required to discharge public service obligations and those obligations must be clearly defined for such compensation to escape the classification as State aid' (para 26, own translation from French), while the fourth condition determines that 'when the choice of the undertaking which is to discharge public service obligations, in a specific case, is not in the framework of a public procurement procedure, the level of compensation needed must be determined based on an analysis of the costs which a typical, well run, undertaking would have incurred in discharging those obligations, taking into account the relevant receipts and a reasonable profit for discharging those obligations' (para 29, own translation from French). In that regard, these would seem to require separate, independent assessments of each of the Altmark conditions.

In contrast, in the challenged decision, the GC had determined that
as part of the review of the question whether the fourth Altmark criterion ... is satisfied, there is certainly room to take into consideration the nature of the service in question and the circumstances of the case, and it is therefore possible that this criterion, which requires a comparison of the costs and revenues directly related to the provision of the SGEI, can not be applied strictly to the present case (see, that effect, case BUPA ea / Commission (T-289/03, EU:T:2008:29) paragraph 246). Indeed, the Court has already held that ... although the conditions set out in Altmark ... concern without distinction all sectors of the economy, their implementation must take into account the specificity of a certain sector and, given the particular nature of the SGEI mission in specific sectors, it should be flexible in the application of the Altmark judgment ... in relation to the spirit and purpose that led to the establishment of said conditions, so that they are suitable to the particular facts of the case (see case of 7 November 2012 CBI / Commission, T-137/10 (EU:T:2012:584) paragraphs 85 and 86, and the cases cited) (T-295/12, para 131, own translation from French).
This was criticised by Germany as a conflation of the first and fourth Altmark conditions, particularly because the analysis supported by these general remarks implied dismissing the existence of an SGEI in the specific case in Rhineland-Palatinate, and a general consideration of the costs incurred by undertakings active in the same sector in other German states that, however, may have been subjected to different public service obligations or where no SGEI may have existed at all (T-275/12, para 130). In Germany's submission, this would have led the GC to a tautological conclusion. 

The CJEU dismisses the argument on the following basis:
... the Court cannot be criticized for having reached a tautological conclusion that would have linked the lack of satisfaction of that fourth condition to a finding of lack of qualification of maintaining a reserve capacity as a service of general economic interest [first condition]. Indeed, as is clear from paragraph 130 of the judgment, the Court, first, discussed the situation in which the maintenance of a reserve capacity in case of an outbreak could have validly received such qualification [of SGEI] and on the other hand, felt that, given the obligations of the competent public authorities in all German states to eliminate the largest quantity of substances ... received during an outbreak [regardless of the way they organised the discharge of that public obligation, and regardless of whether they defined an equivalent SGEI], it was necessary to take into account the existing situation in other German states to determine the necessary level of compensation on the basis of an analysis of the costs which a typical undertaking, well run and adequately equipped, would have incurred in meeting the public service requirements (C-446/14 P, para 35, own translation from French).
Thus, the general conclusion of the CJEU is that the GC did not err in law by conflating the different conditions established in Altmark

I disagree with the CJEU because, even if the conditions 'are distinct from one another, each pursuing its own finality', the logic in their application to a same set of factual circumstances requires that, once the scope of the economic activity that the Member State claims is an SGEI is properly established for the purposes of the judicial review (and regardless of whether the first condition is upheld or not in terms of whether those obligations are clearly defined), the analysis of the fourth condition (ie either procurement of that 'alleged' SGEI or analysis of the costs of a notional well-run undertaking providing that 'alleged' SGEI) needs to remain within that context.

Otherwise, the assessment of the notional, well-run undertaking's cost structure outside of the remit of the 'alleged' SGEI under dispute comes to basically neutralise the second alternative test in the fourth condition of Altmark by allowing the Commission and the GC (and ultimately the CJEU) to find any other comparator they deem to be sufficiently close to that economic activity, which nullifies the economic concept of the notional, well-run competitor. Immediately, this pushes Member States to try to avoid in this types of assessment, which can only be done by resorting to (certain types of) public procurement procedures under the first test in the fourth Altmark condition [for discussion, see 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]

This may well be cornering Member States in an impossible situation where, regardless of the way they conceive and delineate an SGEI [which they have exclusive competence to do, under Art 14 TFEU and Protocol No (26) therewith, and, currently, reminded in the provisions of Article 1(4) of Directive 2014/24], an assessment of the fourth Altmark condition only allows them to operate with sufficient legal certainty if they contract out the provision of that service in a way that complies with the EU public procurement rules (and not all of them, at that). This is certainly not a desirable outcome and, once more, the developments supported by the CJEU require a fundamental rethinking of the coordination of State aid and public procurement rules, in particular in the area of SGEIs [for discussion, particularly in the setting of procurement challenges, see A Sanchez-Graells, 'Enforcement of State Aid Rules for Services of General Economic Interest before Public Procurement Review Bodies and Courts' (2014) 10(1) Competition Law Review 3-34].

GC pushes for overcompliance with EU public procurement rules in the provision of public services (T-309/12)

In its Judgment in Zweckverband Tierkörperbeseitigung v Commission, T-309/12, EU:T:2014:676, the GC has assessed the compatibility with EU State aid rules of a system of financial support to the maintenance of reserve animal disposal capacity in the case of epizootic. It is a very long and complicated Judgment and its reading is not easy, as the only available versions are in French and German. However, it is a case that should not go unnoticed. In my view, it raises two very fundamental questions where the position of the GC (and the Commission) is at least highly contentious and it will be good to see if a further appeal to the CJEU opens a door to some clarification in this area of EU economic law.
 
The first contentious issue is the economic or non-economic character of the activity at stake. In para 86 of the Judgment [and relying by analogy on the reasoning in FENIN, C-205/03, EU:C:2006:453 at para 26 and in Mitteldeutsche Flughafen and Flughafen Leipzig-Halle v Commission, C-288/11 P, EU:C:2012:821 at para 44 (but quoting its own argument in T-443/08 at para 95, which the CJEU later endorsed)] the GC concludes that "even if it is true that the applicant was required to maintain a reserve capacity in the event of an epidemic (rectius, epizootic), it does not mean that the implementation of this obligation by the applicant was related to the exercise of the prerogatives of public power" (emphasis added). In my view, and for reasons that I still need to articulate fully, this does not make good sense. However, this is a point I would like to reserve for the near future.
 
The second contentious issue is that, in the overall assessment of the GC, the fact that the arrangement between the affected German lander (and a multiplicity of regional and local authorities) and the public undertaking providing the reserve animal disposal capacity in the case of epizootic was covered by exceptions to the EU public procurement rules (either under the Teckal in-house exception or the Hamburg public-public cooperation exception, which is not entirely clear in the case) did not have any effect on the application of the Altmark criteria to the case. I know that this is an issue riddled with nuances and jargon stemming from public procurement rules, but I will try to disentangle it in a way that shows the difficulty created by the GC finding, as I see it.
 
Under the Altmark criteria (4th condition), compliance with applicable public procurement rules is a requirement for State aid granted to the provider of services of economic interest (acknowledgely, an issue related with the first point) to be compatible with Articles 107(1) and 106(2) SGEI (rectius, for State aid not to exist due to the lack of economic advantage) [for discussion, see A Sánchez Graells (2013), "The Commission’s Modernization Agenda for Procurement and SGEI" in E  Szyszczak & J van de Gronden (eds.), Financing SGEIs: State Aid Reform and Modernisation, Series Legal Issues of Services of General Interest (TMC Asser Press/Springer) 161-181]. In the absence of procurement procedures for the selection of the provider, the level of economic support needs to be "determined on the basis of an analysis of the costs which a typical undertaking, well run and adequately provided with [material means] so as to be able to meet the necessary public service requirements, would have incurred in discharging those obligations, taking into account the relevant receipts and a reasonable profit for discharging the obligations". This is a fiendish exercise and, generally speaking, procurement is a much easier road. Hence, structurally, there is a clear pressure on public authorities to resort to procurement procedures in order to be on the safe side re compliance with State aid rules.
 
At the same time, however, it should be highlighted that public authorities have no obligation to resort to the market in order to discharge their (public service) missions and they are fundamentally free to either cooperate with other public authorities (Hamburg) or entrust the execution of those activities in-house (Teckal). This is an area where the clash between EU Institutions and Member States has been evident and the recently approved Directive 2014/24 tries to provide a compromise solution in Art 12 by recognising that in those cases a public procurement procedure is not required (and allowing for the instrumental entities used to even carry out market activities up to a 20% of their average total turnover). 
 
In my view, the fact that public procurement rules allow for the avoidance of public tenders in the award of public contracts [including those for the provision of public services (broadly defined)] to public undertakings or other contracting authorities, creates a difficulty from a State aid/procurement interaction perspective. The basic difficulty derives from the fact that a perfectly legal decision to keep certain activities within the public sector creates very significant difficulties for the funding of that activity as soon as there is any (potential) interaction with the market--which, at least under the new rules in Art 12 of Dir 2014/24, is also a perfectly legal situation. This is a structural problem of coordination of both sets of rules that comes to put pressure on the viability of keeping the Altmark criteria untouched.
 
Indeed, following the general reasoning of the GC in Zweckverband Tierkörperbeseitigung, the absence of a procurement procedure (despite the fact that it was not required) excludes the possibility to benefit from the presumption set out in the 4th Altmark condition and creates a significant risk of breach of EU State aid rules. From the perspective of the consistency of the procurement system and the effectiveness of the general consensus that the procurement rules "should [not] deal with the liberalisation of services of general economic interest, reserved to public or private entities, or with the privatisation of public entities providing services" [Rec (6) Dir 2014/24] , this is problematic. The increased risks of infringement of State aid rules brings a very important limitation on the contracting authorities' actual freedom to resort to schemes covered by Art 12 of Directive 2014/24 and creates a clear incentive for overcompliance with public procurement rules.
 
Regardless of the benefits that more compliance with procurement rules and public tenders could bring about, the clear limits that EU constitutional rules (and the principle of neutrality of ownership in Art 345 TFEU in particular) create need to be respected and duly acknowldeged. Hence the difficulty in coordinating all these sets of provisions in a manner that is respectful with both the split of competences between Member States and the EU, and the effectiveness of EU State aid rules.
 
In my view, the CJEU should use the opportunity to clarify these complicated issues in case the GC's Zweckverband Tierkörperbeseitigung Judgment is further appealed. In the meantime, there are lots of issues that require further thought and, in particular, how to exactly reach the adequate balance in the coordination of both sets of rules.