Social housing, State aid and procurement show up again in EU Courts' case law (T-397/12)

In its Judgment in Diputación Foral de Bizkaia v Commission, T-397/12, EU:T:2015:291 (only available in ES and FR), the General Court (GC) of the Court of Justice of the European Union (CJEU) has decided a case involving State aid and public procurement for social housing. The issues raised in this case are technically different from those discussed in previous cases and, particularly, in Libert and Others (joined cases C-197/11 & C-203/11, EU:C:2013:288). However, there are some elements worth discussing. 

As a preliminary point, it is worth stressing that the case only concerned violations of State aid rules under Arts 107 and 108 TFEU. However, there was a very significant violation of EU public procurement rules as well--as a result of the direct award of over €150mn worth of works or supplies (depending on how pre-fabricated modular homes are categorised). Nonetheless, given that this was not discussed in the case, the comments are limited to the State aid dimension of the Spanish infringement of EU law.

The claimant, Diputación Foral de Bizkaia (DFB) is a regional authority in Spain and it owns 100% of public corporation Bizkailur SA (Bizkailur), which is dedicated to urban development, particularly for industrial purposes, with the ultimate aim of attracting business to the region. Through Bizkailur, DFB entered into two contracts with Habidite Technologies País Vasco SA (Habidite) for the set-up of a construction module factory in Alonsotegi and the delivery of 1,500 modular homes. 

According to the first contract, DFB and Bizkailur would purchase a land plot and adapt it for industrial use to prepare the setting up of a Habidite factory in Alonsotegi. Under the second contract, the public authorities committed to purchase from Habidite a total of 1,500 homes constructed with modules produced in Alonsotegi in order to sell them as social housing [see the Commission's press release].

The Commission found that the contracts contained illegal state aid because no private player would have accepted to contract on such terms. In the Commission's view, the maximum support that could be granted to the project was of €10.5 mn, but the actual advantage given to Habidite was much larger [see Commission's Decision for details]. Moreover, given that the measures had not been notified before they were granted to Habidite, the aid was unlawful.  DFB challenged the Commission's decision, but the GC has dismissed the appeal. A further appeal before the CJEU seems unlikely, given that the Habidite project was eventually abandoned by DFB due to lack of financial resources.

Some of the arguments submitted by DFB to the GC are so shocking that they deserve some discussion before laughing them off. In particular, I find it ridiculous for DFB to have submitted that no aid existed on the basis of a circular argument ultimately based on its own failure to comply with EU law, which would suffice to trigger a constructive estoppel under Spanish law (as, indeed, later declared by the competent domestic courts; see press release). 

The argument goes as follows: DFB signed a contract with Hadibite through Bizkailur for interests in land and property, which subjected it to Spanish civil rules (ie private law). A fundamental element in the Spanish contract formation rules is the requirement of Art 1258 Civil Code, according to which "Contracts are perfected by mere consent, and since then bind the parties, not just to the performance of the matters expressly agreed therein, but also to all consequences which, according to their nature, are in accordance with good faith, custom and the law" (emphasis as per GC's extracts). The aid given to Hadibite through the contracts was illegal under Arts 107 and 108 TFEU. Hence, the contract was null and void and, ultimately, there was no aid because DFB (through Bizkailur) was not boud to comply with an illegal contract. 

This is a circular and preposterous argument, as it would mean that there would never be illegal and unlawful State aid measures because they would be legally non-existent as a result of the supremacy and direct effect of Arts 107 and 108 TFEU, regardless of the specific (private or public) contract rules of the specific Member State. And, in any case, domestic theories of estoppel could well de-articulate the argument on strictly contractual terms--which would immediately trigger issues of good faith in negotiations and pre-contractual liability for the authorities granting aid, which is also prevented by the effet utile of Arts 107 and 108 TFEU.

Along these lines, and more elegantly, the GC considered that "as to the applicant's argument that there can be no breach of EU law because national law requires a prior notification of the planned aid to the Commission [without which there is no legally binding and unconditional commitment to actually grant the aid], it suffices to state that it cannot be declared that no infringement of EU law existed for the mere fact that [the contracts] also violated national law" (T-397/12, para 36, own translation).

Finally, it is worth mentioning that the Judgment is also interesting for the discussion of the procedural rights of sub-central public authorities in State aid infringement procedures opened against the Member State of which they are part. The GC reiterated the standard position that (given that they are interested parties, but not parties of the procedure) such authorities cannot rely on the rights of defense or try to maintain an open debate with the Commission (paras 53-63).

#CJEU shows excessive deference towards #socialpolicy in #publicprocurement: #socialhousing schemes may not be public contracts (C-197/11)

In its Judgment of 8 May 2013 in Joined Cases C-197/11 & C-203/11 Libert and Others, the Court of Justice of the European Union has quashed the Belgian 'Living in Your Own Region' scheme, whereby the acquisition of land and property in certain parts of the country was restricted on grounds of social policy. Moreover, when a building or land subdivision authorisation was granted, Belgian law imposed 'social obligations' on economic operators, such as subdividers and developers, so that they had to either pay a contribution to the commune (in cash or in kind), or discharge such obligation through certain sale and lease schemes, or any combination thereof. Interestingly, the CJEU has found that this latter part of the 'authorisation + social obligation' scheme, which potentially implies mandatory sales of property to public entities, may not fall under the scope of Directive 2004/18 on public procurement.

In the first part of its Libert Judgment, the CJEU has followed its prior approach against restrictive development schemes in Konle (C-302/97), and has quashed a decree of the Flemish Region of 27 March 2009 on land and real estate policy that linked the transfer of immovable property in certain Flemish communes to the condition that there existed a 'sufficient connection' between the prospective buyer or tenant and the relevant commune--ie that provided for a prior authorisation procedure to determine whether there was such a ‘sufficient connection’ (based on previous residence or on professional, family, social or economic connections with the commune in question) and, in reality, amounted to prohibiting certain persons from purchasing or leasing for more than nine years land or the buildings thereon (see CJEU press release).

It is interesting to see that the Belgian Government had tried to justify the scheme on social policy grounds and, particularly, by the objective of responding to the housing needs of the less affluent local population in the target communes. However, the CJEU has decided to quash the scheme for its lack of proportionality. The Court has rightly considered that none of the conditions used to assess the existence of a 'sufficient connection' directly reflected the socio-economic aspects relating to the objective of protecting exclusively the less affluent local population on the property market--since they could be met not only by the less affluent local population but also by other people with sufficient resources who, consequently, had no specific need for social protection on the property market. Moreover, such social goal could be achieved through other, less interventionist measures, such as housing subsidies specifically designed to assist the less affluent. So far, the case does not depart from what could be expected from the CJEU.

In its second part of the Libert Judgment, the CJEU considered that the mandatory discharge of social contributions by developers and subdividers can be a justified restriction of the fundamental freedoms involved (mainly, free circulation of capital). The Court considered that such a restriction, in so far as its purpose is to guarantee sufficient housing for the low-income or otherwise disadvantaged sections of the local population, may be justified by requirements relating to social housing policy in a Member State as an overriding reason in the public interest (and left it for the referring court to assess whether such an obligation satisfies the principle of proportionality, that is to say, whether it is necessary and appropriate to attain the objective pursued). Again, the CJEU has followed an approach that was to be expected.

The CJEU then engages in an assessment of a part of the social housing scheme that implies tax incentives and subsidy mechanisms for developers from a State aid perspective. However, the CJEU has very limited information and limits itself to refresh the conditions for the exemption of aid, with an express reference to the old 2005 SGEI Decision--now substituted by the 2011/12 'Almunia Package' [for commentary, see Sánchez Graells, 'The Commission’s Modernization Agenda for Procurement and SGEI' in Szyszczak & van de Gronden (eds.), Financing SGEIs: State Aid Reform and Modernisation (TMC Asser Press/Springer Series Legal Issues of Services of General Interest, 2012)]. 

The key issue in this area clearly seems to be how to determine the remit of the 'public service'/ 'social service' obligation, and to find a valid benchmark to ensure that there is no excessive remuneration. In this regard, it is worth stressing that, following Altmark (C-280/00), the Commission is increasingly relying on the conduct of public procurement procedures to exclude the existence of an undue economic advantage for the provide of the 'public service'/ 'social service'. Consequently, the following part of the case becomes all the more relevant.

In that regard, it is key to stress that, in the final part of Libert, the CJEU has addressed whether this authorisation scheme fell within the remit of the EU public procurement rules. The CJEU was asked the following question:
'Should the concept of “public works contracts” in Article 1(2)(b) of Directive 2004/18… be interpreted to mean that it is applicable to a scheme whereby, when a building or land subdivision authorisation is granted in respect of a project of a certain minimum size, it is linked by operation of law to a “social obligation” entailing the development of social housing units, amounting to a certain percentage of the project, which are subsequently to be sold at capped prices to a public institution, or with substitution by it?'
In its (partial) reply to this question, the CJEU heavily relies on the (in)existence of an express written agreement, and considers that
109 [...] it should be borne in mind that, in accordance with Article 1(2)(b) of Directive 2004/18, read in conjunction with Article 1(2)(a) thereof, public works contracts result where four criteria are fulfilled, that is to say, they are contracts for pecuniary interest, concluded in writing, between an economic operator and a contracting authority, which must have as their object either the execution, or both the design and execution, of works related to one of the activities within the meaning of Annex I to that directive or a work, or the realisation, by whatever means, of a work corresponding to the requirements specified by the contracting authority. [...]
111 So far as concerns, in particular, the existence of a contract concluded in writing, it follows from the order for reference that the Constitutional Court is uncertain as to whether that criterion has been met in the present case, inasmuch as the social obligation entailing the development of social housing units is imposed in the absence of an agreement concluded between the housing authorities and the economic operator concerned. According to the order for reference, the social obligation is imposed directly on subdividers and developers by the Flemish Decree and is applicable to them merely because they own the land in relation to which they have applied for the grant of a building or land subdivision authorisation. 
112 In that regard, it should be borne in mind that, in order to establish that some kind of contractual relationship existed between an entity which could be regarded as a contracting authority and a subdivider or developer, the case-law of the Court requires [...] a development agreement to be concluded between the housing authorities and the economic operator in question for the purpose of determining the work to be undertaken by the economic operator and the terms and conditions relating thereto
113 Where such an agreement has been concluded, the fact that the development of social housing units is a requirement imposed directly by national legislation and that the party contracting with the authorities is necessarily the owner of the building land in question does not preclude the existence of a contractual relationship between the authorities and the developer in question (see, to that effect, Case C‑399/98 Ordine degli Architetti and Others [2001] ECR I‑5409, paragraphs 69 and 71). 
114 However, although it is true that Article 4.1.22, first subparagraph, of the Flemish Decree expressly requires an administration agreement to be concluded between the subdivider or developer and the social housing organisation, it is apparent from the order for reference that that agreement does not, in principle, regulate the relationship between the contracting authority and the economic operator concerned. In addition, such an agreement does not appear to concern the development of social housing units, but only the next stage which entails placing them on the market
115 It is therefore for the referring court to determine, in the light of all the applicable legislation and the relevant circumstances of the case in the main proceedings, whether the development of social housing units at issue in the main proceedings is within the framework of a contractual relationship between a contracting authority and an economic operator and whether the criteria referred to in paragraph 109 above have been met. (C-197/11 at paras 109 to 115, emphasis added).
In my opinion, the CJEU leaves the door excessively open to a finding that the scheme is not covered by Directive 2004/18 due to the lack of a 'proper' or 'sufficient' contract. In my view, for the purposes of controlling the award of the rights to divide land, develop property, and then sell it to a public institution in the social housing market, the CJEU should have adopted a more functional approach and indicated that the submission of an authorization followed by its approval (by means of an administration agreement) suffices for the establishment of a contractual relationship between the authority and the developer or subdivider, which would then automatically include the 'social obligation'. 

Otherwise, there seems to be excessive room for strategic behaviour on the part of contracting authorities to avoid compliance with public procurement rules through 'unstructured' documentation of their planning decisions and their economic relationships with developers. Given that only those developers that obtain authorisation will be able to develop and then sell property to public institutions under the 'social housing' scheme, it seems clear that the award of the authorisation implies an economic exchange (or that they are concluded for a pecuniary interest, even if it is deferred) and that the authority will (indirectly, at least) benefit from the development in the execution of its social housing policy. Therefore, the CJEU seems to have adopted a (mild) formalist approach that shows deference towards the implementation of social policies via (quasi)procurement schemes.

The only (implied) safeguard to this approach would be that the CJEU assumed that there would be a procurement procedure when the developments are complete and the property is 'sold at capped prices to a public institution, or with substitution by it', ie in the 'next stage which entails placing them on the market' (para 114). However, that seems highly unlikely, given that the administrative agreement entered into with the developer at the time of granting the authorisation seems to cover that--and, in any case, the contracting authority would probably try to rely on aspects of 'exclusivity' due to the location of the property, or excuse the purchase as a legal obligation, in order to avoid procurement procedures at that stage.

Moreover, in my opinion, the CJEU goes out of its way to provide the referring court with several additional reasons why, even in the presence of a written contract, the scheme may not be covered by Directive 2004/18. As the Court stresses, the scheme may well be below the relevant thresholds (which is a fair remark), or be exempted as part of an in-house scheme or a public-public cooperation scheme (see the European Commission's guidance for further details). These latter considerations are unwarranted by the question referred to the CJEU, which shows no element of collaboration between contracting authorities.  Indeed, the CJEU notes that:
116 [...] on the one hand, the application of Directive 2004/18 to public works contracts is nevertheless subject to the condition that the estimated value of the contract reaches the threshold set out in Article 7(c) of that directive and that, on the other, there are, as is apparent from the settled case-law of the Court, two types of contracts entered into by a public entity that do not fall within the scope of EU public procurement law
117 The first type of contracts are those concluded by a public entity with a person who is legally distinct from that entity [under the in-house exemption] where, at the same time, that entity exercises over the person concerned a control which is similar to that which it exercises over its own departments and where that person carries out the essential part of its activities with the entity or entities which control it (see Case C‑159/11 Ordine degli Ingegneri della Provincia di Lecce and Others [2012] ECR I‑0000, paragraph 32 and the case-law cited). 
118 The second type of contracts are those which establish cooperation between public entities with the aim of ensuring that a public task that they all have to perform is carried out. In those circumstances, the EU rules on public procurement are not applicable in so far as, in addition, such contracts are concluded exclusively by public entities, without the participation of a private party, no private provider of services is placed in a position of advantage vis-à-vis competitors and implementation of that cooperation is governed solely by considerations and requirements relating to the pursuit of objectives in the public interest (see Ordine degli Ingegneri della Provincia di Lecce and Others, paragraphs 34 and 35). (C-197/11 at paras 105 to 119).
 The Court concludes with a tautology:
In the light of all the foregoing considerations, the answer to the eleventh question in Case C‑203/11 is that the development of social housing units which are subsequently to be sold at capped prices to a public social housing institution, or with substitution of that institution for the service provider which developed those units, is covered by the concept of ‘public works contract’ contained in Article 1(2)(b) of Directive 2004/18 where the criteria set out in that provision have been met, a matter which falls to be determined by the referring court (C-197/11 at para 119, emphasis added).
In my opinion, the answer provided by the CJEU to this last question in the Libert case is at the same time too vague and too lenient with the social housing scheme under consideration, and opens a door to a dangerous path of limited or non-application of public procurement rules in relevant areas of social policy and social services, such as social housing. In that regard, it will be important to see how this (emerging?) trend of case law gets squared with the foreseeable future rules applicable to the procurement of social services of general interested, such as those included in the 2011 Proposal for a new Public Procurement Directive (art 74 to 76). 

Definitely, both avenues of development of public procurement law point towards a light-touch regulation of social services / social policy-related procurement, but I am not sure that they are moving in the same direction, since the CJEU seems to be keen to exclude (certain) 'social' contracts from procurement rules, whereas the Commission would like to keep some (restricted) control over them. It will be highly relevant to see how this area develops in the near future, since legal uncertainty is bound to be coupled with intense executive action.