Do public procurement rules apply to "concessions" (rectius, licences or authorisations) for betting and gambling services? (C-225/15)

In his Opinion of 16 June 2016 in case Politano’, C-225/15, EU:C:2016:456 (not available in English), Advocate General Wahl had to assess the applicability of Directive 2004/18 on public procurement, and in particular its Art 47 on economic and financial standing requirements, to a public contest for the award of concessions (ie licences or authorisations) for the provision of betting and gambling services.

In his Opinion, and in very streamlined terms, AG Wahl considered that Art 47 Dir 2004/18 was not applicable to the tendering of such 'concessions' for the provision of betting and gambling services for the following reasons:

a concession for the provision of betting services, such as that at issue in the main proceedings, is not a public service contract within the meaning of Article 1, paragraph 2, point d) of Directive 2004/18. Not only is the "service" under analysis not provided on behalf of the contracting authority but, additionally, the economic operators that tender for such concessions are not remunerated by public funds. Also, the concessionaire bears the entire risk associated with the exercise of the activity of collecting and transmitting bets (para 51, own translation from Spanish).

This analysis is correct. However, it is then surprising that AG Wahl embarks on some considerations about the possible applicability of Art 38(1) of Directive 2014/23 on concession contracts to the award of such concessions (rectius, licences or authorisations) for the provision of betting and gambling services (para 52). It seems clear to me that, exactly for the same reasons established in para 51, Dir 2014/23 would not be applicable. Not least because its Art 5(1)(b) defines a services concession in the following terms:

a contract for pecuniary interest concluded in writing by means of which one or more contracting authorities or contracting entities entrust the provision and the management of services other than the execution of works ... to one or more economic operators, the consideration of which consists either solely in the right to exploit the services that are the subject of the contract or in that right together with payment.

Put simply, the fact that 'the "service" under analysis [is] not provided on behalf of the contracting authority' excludes this type of concession (rectius, authorisation or licence) from the scope of application of Dir 2014/23. Consequently, it may have been better for AG Wahl to completely avoid the consideration of Dir 2014/23 (it was clearly not applicable to the facts of the case anyway) and not provide such obiter comments, which can create confusion.

Indeed, this is an area where there is a floating lack of clarity [for general discussion and analysis, see GS Ølykke, 'Is the granting of special and exclusive rights subject to the principles applicable to the award of concessions? Recent developments in case law and their implications for one of the last sanctuaries of protectionism' (2014) 23(1) Public Procurement Law Review 1-20; CJ Wolswinkel, 'From public contracts to limited authorisations and vice versa: Exploring the EU Court’s corollary approach on award procedures' (2015) 24(5) Public Procurement Law Review 137-163; and I Herrera Anchustegui, 'EFTA Court case E-24/13 Casino Admiral AG v Wolfgang Egger: the obligation of transparency and consequences of its breach when awarding service concessions' (2015) 24(1) Public Procurement Law Review NA1-NA9].

It is relevant to note that Art 10(9) Dir 2014/23 explicitly excludes lottery concessions from the coverage of the Directive, but it does not go as far as preempting the coverage of any betting or gambling services in case they are actually structured in the form of a concession [as defined in Art 5(1)(b)]. The creation of this exclusion was controversial because the European Commission had not included it in its original proposal back in 2011.

The following are my comments to the creation of this exclusion in the forthcoming Brussels Commentary on EU Public Procurement Law, M Steinicke & PL Vesterdorf (eds) (Beck, 2016).

01. This exclusion was lacking in the 2011 proposal and was introduced as a result of the Amendments proposed by the European Parliament (see Amendments 19 and 110). The justification provided for this exclusion was as follows: “Gaming has, in addition, been excluded on account of the highly specific nature of the activities concerned and the need to ensure that Member States can continue to exercise oversight in order to pursue aims in the general interest (combating illegal gambling, fraud, and money laundering; preventing addiction). If gaming were subject to the rules of the directive, Member States would be deprived of flexibility and consequently impeded in their ability to act. National lotteries and similar games will therefore be excluded.” The text of the proposed new recital [proposed as (13a) and now numbered as (35)] and article [proposed as Article 8(5a) and now in Article 10(9)] are different than the ones finally adopted. In the final version, it is clear(er) that the exclusive right on the basis of which the concession is granted must comply with EU law and meet certain minimum requirements. Indeed, the proposed Amendment by the European Parliament would have excluded “service concessions for gambling activities involving a financial risk through investing a sum of money in games of chance (that is to say lotteries or betting), awarded to one or more bodies by one or more Member States on the basis of exclusive rights granted pursuant to applicable national laws, regulations or administrative provisions in accordance with the Treaties”. By contrast, Article 10(9) of the Concessions Directive excludes “service concessions for lottery services, which are covered by CPV code 92351100-7, awarded by a Member State to an economic operator on the basis of an exclusive right. For the purpose of this paragraph, the notion of exclusive right does not cover exclusive rights as referred to in Article 7(2). The grant of such an exclusive right shall be subject to publication in the Official Journal of the European Union.” The main differences seem to be the more clearly limited scope of the exemption by reference to the CPV code and the requirement of EU-wide publication of the exclusive right [which is an improper exclusive right as it must not meet the requirements of the definition in Article 5(10)].
02. As briefly indicated by the European Commission in its factsheet “Concessions: Excluded concessions”, the purpose of this exclusion is to cover lottery services and, more precisely
“Concessions for lottery operating services awarded on the basis of a prior exclusive right which has been granted pursuant to applicable national laws, regulations or administrative provisions in accordance with the Treaties are not covered.
However, in other cases, gambling activities are covered by the Directive when they assume the form of concession contracts (e.g. casino concessions). Gambling activities pursued on the basis of authorisations/licences are not covered.”
Under this interpretation, this specific exclusion is also redundant, as it could have been comprised under the more general exclusion of Article 10(1)—except for the cases where the special or exclusive rights are not awarded following transparent procedures based on objective, proportionate and non-discriminatory criteria, which seems to be the area of regulatory competence that Member States want to protect. Indeed, it should be acknowledged that Member States retain almost unlimited discretion to maintain gambling monopolies in their jurisdictions and that, consequently, the ECJ is likely to interpret this exclusion generously [see Case C-203/08 Sporting Exchange (Betfair) [2010] ECR I-04695]. In that regard, it could well be that the European Commission is interpreting the exclusion in an exceedingly restrictive manner because, in fact, EU law imposes very limited constraints on Member States regulation of gambling (on the basis of directly awarded exclusive rights). Hence, the exclusion of lottery services concessions should come as no surprise and the general situation seems to clearly be that, unless Member States reach a common understanding on the way gambling and lotteries should be regulated, this is an area of the internal market where cross-border competition and regulatory harmonisation cannot be realistically expected any time soon.

In view of AG Wahl's Opinion in Politano’, it may be worth stressing that, in my view, public procurement rules (and Dir 2014/23 in particular) will not be relevant for cases involving authorisations/licences for the provision of betting and gambling services (other than if applied by analogy or used as a benchmark to assess the openness, transparency and soundness of the procedure for their allocation under the general rules on freedom of provision of services and freedom of establishment). Mostly, because the provision of those services will not be 'on behalf of the contracting authority'. The only situation where this seems likely to happen involves lottery monopolies, but these benefit from the explicit exclusion in Art 10(9) Dir 2014/23.

Ultimately, and this seems to be a running topic in recent decisions, the irrelevance of Dir 2014/23 is justified because where the State is authorising the provision of specific services and thus regulating that market by means of a specific system of authorisations or licences (which should stop being called concessions for clarity), there is no procurement.

Exclusive rights, State aid and lottery: a winning ticket worth an extended monopoly? (T-58/13)

In its Judgment in Club Hotel Loutraki and Others v Commission, T-58/13, EU:T:2015:1, the General Court (GC) has confirmed the previous Decision of the European Commission and considered that Greece had not granted illegal State aid to Organismos Prognostikon Agonon Podosfairou AE (OPAP) through the simultaneous extension of its existing exclusive right to operate certain games of chance and the granting of a new exclusive right to exploit 35,000 Video Lottery Terminals (‘VLTs’) for a period of 10 years in Greece. 

The key to the analysis conducted by the Commission and now upheld by the GC is that by overpaying for the extension of the existing exclusive right, OPAP has been able to secure a much larger exclusive right to operate VLTs in Greece. As the GC summarises:
10 As regards, first, the Addendum [which extended the existing exclusive rights for the period 2020-2030], the Commission observed that the study provided by the Greek authorities was based on sales projections elaborated by an independent company specialised in the gambling sector. The net present value of the Addendum was calculated on the basis of those projections, which were considered by the Commission to be reliable.
11 Following that calculation, the Commission found that the amount paid by OPAP in exchange for the Addendum, including the levy imposed by the Greek State corresponding to 5% of the gross gaming revenues generated by the games concerned for the period from 13 October 2020 to 12 October 2030 (see paragraph 4 above), was higher than the net present value of the Addendum.
12 As regards, secondly, the VLT Agreement, the Commission also calculated its net present value on the basis of the study commissioned by the Greek authorities.
13 On the basis of that calculation, the Commission stated that the net present value of the VLT Agreement was significantly higher than the amount of EUR 560 million provided for in the VLT Agreement, which would economically advantage OPAP.
14 However, the Commission stated that it was logical for the conformity of the VLT Agreement and the Addendum with Article 107(1) TFEU to be assessed jointly. In that way, the overpayment by OPAP for the Addendum was taken into account in order to assess the conformity of the VLT Agreement with that article. The Commission stated that the overpayment reduced the gap between the net present value of the VLT Agreement and the amount of EUR 560 million owed by OPAP
[...] (T-58/13, paras 10-14, emphasis added).
Even if it is true that the Commission managed to impose an additional payment on VLT revenues to further close the economic gap as an amendment to the State aid scheme, the crucial point remains:
17 [...] Referring to the amendment introduced by the Greek authorities, and taking account of the overpayment for the Addendum, the Commission found, on average, OPAP would pay more than the value of the VLT Agreement.
18 In other words, the Commission took the view that, following the amendments to the initial notification, OPAP would pay the Greek State a higher amount than the cumulated values of the exclusive rights granted by the VLT Agreement and the Addendum (including a reasonable return for OPAP)
(T-58/13, paras 17-18, emphasis added).
Hence, as mentioned, the crucial point for the legality of the (conflated) scheme is still the fact that the overpayment for the extension of an existing exclusive right is used to secure the approval of the underpayment in the granting of a new exclusive right. Moreover, the final finding of the European Commission simply makes no sense, as no market agent would pay a higher price for those exclusive rights than their accumulated value, as this would not be a rational investment decision. Consequently, there are many issues that would require some deeper scrutiny.

More importantly, in my view, the general acceptance of the 'cross-overpayment' amounts to allowing dominant undertakings with exclusive rights to buy their way into an extended monopoly (in a rather evident economic leverage) and, consequently, the case should be criticised--and quashed by the Court of Justice upon appeal (if it gets further appealed). Not least because it follows an emerging trend of improper assessment of two-part State aid measures (in favour of former State companies) that I find worrying and potentially dangerous for a credible and effective State aid control regime (see a previous instance here). The reasoning followed by the Commission and the GC, then, deserves some analysis.

Some of the arguments presented by the applicants have (willfully?) not been properly understood, nor analysed by the GC. Amongst other important arguments, the applicants clearly referred to the problem of the extension of the existing exclusive rights by cross-subsidisation in the following terms (in the words of the GC):
79 The applicants claim first of all that the Commission recognised, in paragraph 37 of the contested decision, that the Addendum and the VLT Agreement refer to distinct markets. Nevertheless, the Commission assessed them jointly. The applicants submit that the existence of an advantage for the purpose of Article 107(1) TFEU must be assessed for each market and not on the basis of joint consideration of similar measures concerning different markets, even though the measures examined concern the same recipient. If it were otherwise, the protection of competition would be incomplete because measures constituting an anti-competitive advantage for the purpose of Article 107(1) TFEU in a given market might escape the prohibition laid down in that provision on the basis of a joint assessment. Conversely, measures which grant no economic advantage in a given market might nevertheless be covered by that provision on the basis of a joint assessment with a measure affecting another market. [...]
81 The applicants claim that the VLT and slot machine market cannot be assessed jointly with the 13 games of chance covered by the Addendum since they have no relation to the market of the 13 games of chance on which OPAP has an absolute legal monopoly. By virtue of that monopoly, OPAP could carry out cross-subsidisation practices allowing OPAP to undercut the applicants’ prices on the VLT and slot machine market, by financing that operation by a price increase on the market for the 13 games of chance. However, the joint assessment of the notified measures does not take into account the possibility of such practices (T-58/13, paras 79 and 81, emphasis added).
To be fair, if the arguments were presented in this way (but this seems open to debate), it takes some digging to see that there are two layers of potential cross-subsidy. The first one, which is the one criticised above, is that the overpayment in one leg of the measure (extension of monopoly) secures State aid compatibility of the other leg of the measure (creation of an additional monopoly over VLTs). The second one concerns the operation of the rights in case they had been assigned to different operators, as it would concern a situation in which both OPAP and third parties had been granted licences for the operation of VLTs. The second argument is, in my view, moot or improperly addressed, as it refers to a hypothetical, counterfactual scenario. However, the first argument should have been enough to quash the Commission's Decision. Nonetheless, the GC decided differently.

In its analysis of the fourth plea submitted by the appellants of the Commission's Decision (the other three are basically procedural, so I am skipping them for now), the GC found that:
94 As regards [...] the applicants’ argument relating to subsidisation practices made possible by OPAP’s monopoly over the 13 games of chance covered by the Addendum, it should be noted, first, that it is based on the assumption that OPAP is free to increase prices at will on those 13 games in order to compensate for lower prices on the VLT market. The applicants accordingly submit that OPAP will not sustain competitive pressures in its pricing policy. That argument is not, however, substantiated. In fact, the applicants do not support or demonstrate that the 13 games in question are not subject to competition from other games of chance.
95 Next, the applicants do not explain why the alleged practices of cross-subsidies between the lower prices on the VLT market and the higher prices on the market of the 13 games covered by the Addendum preclude the two notified measures being jointly assessed. Indeed, if such practices were to exist, they would create a link between the VLTs and the 13 games of chance, which instead supports the two measures being jointly assessed.
96 It follows from all the foregoing that the applicants have not demonstrated the existence of an error of law when the Commission carried out a joint assessment of the VLT Agreement and of the Addendum
(T-58/13, paras 94-96, emphasis added).
This is troubling because the GC inverts the order of the arguments on cross-subsidisation and dismisses them in the wrong way. Firstly, it is hard to see how the GC can rely on a theoretical competitive pressure on OPAP when the situation is that it holds basically exclusive rights on all relevant games of chance in Greece. Secondly, it is unacceptable that the GC buys a justification for the joint analysis of the measures precisely because OPAP engages in cross-subsidisation. If this is not a clear deductive fallacy, there is none. Overall, then, the arguments of the GC are disappointingly thin, or simply incongruous.  Consequently, for all the above, I hope the CJEU will receive better economic advice and will reverse the Hotel Loutraki Judgment. Otherwise, the game will be over for the analysis of two-part or leveraged instances of clear State aid.