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)

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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.

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.

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.