Public Procurement, State Aid and Antitrust: Understanding the Intersections. Nathy Dunleavy Barrister-at-Law

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1 Public Procurement, State Aid and Antitrust: Understanding the Intersections Nathy Dunleavy Barrister-at-Law This paper accompanies a lecture (and slides) given at the Extra Mural/LL.M. course in Public Procurement Law at Trinity College Dublin on 23 February I. Introduction 1. The fundamental aims of the EC rules on public procurement, state aid and competition law are aligned. These rules aim at fulfilling broad objectives of the European Community. Article 2 of the EC Treaty lists as a task of the Community, by establishing a common market to promote throughout the Community a high degree of competitiveness and convergence of economic performance. For the purpose of achieving the Article 2 tasks, Article 3 provides that the Community s activities shall include an internal market, characterised by the abolition, as between Member States, of obstacles to the free movement of goods, persons, services and capital (Article 3(1)(c)) and a system ensuring that competition in the internal market is not distorted (Article 3(1)(g)). 1 More generally, the rules on public procurement, state aid and competition aim to promote effective competition, avoid distortions of competition, control the influence of the State in the free market, promote the internal market in the EC and ultimately, drive efficiency and enhance consumer welfare. 2. With that context in mind, this paper will discuss aspects of how the procurement, state aid and competition rules intersect. In line with the nature 1 Note that under the Lisbon Treaty, Articles 2 and 3 are repealed. The references to a system ensuring that competition is not distorted, currently in Article 3, are moved to a protocol. A new Article 2 in the Treaty on European Union states that one of the aims of the Union is to achieve a highly competitive social market economy, aiming at full employment and social progress, and a high level of protection and improvement of the quality of the environment. For discussion of how this shift may adversely affect the promotion and enforcement of competition law, see Riley, The EU Reform Treaty and the Competition Protocol: Undermining EC Competition Law CEPS Policy Brief (September 2007). 1

2 of the course, the aim of the paper is to give an overview of the main issues, rather than presenting one particular argument or perspective. The discussion proceeds under three headings: What entities are subject to the public procurement and competition rules? This is an important threshold question. As it has not been covered in detail elsewhere on the course, a significant portion of the paper deals with the first part of the question what entities are subject to the public procurement rules focusing, in particular, on the meaning of a body governed by public law and the in-house exemption to application of the procurement rules (the Teckal exemption). Contracting authorities will only be subject to the competition rules where they are undertakings and the meaning of this term is also examined. Public procurement and competition law The discussion covers bid rigging in public procurement, considering how collusive tendering can be detected and prevented and what the implications of violating the competition rules are. Consideration is given as to how contracting authorities may themselves breach competition law. The general competition obligations of the directives are also discussed. Public procurement and the state aid rules A short overview of the state aid rules is provided. It is then considered how procurement transactions may give rise to state aid and what features can be used in the procurement to negate state aid concerns. A number of the Commission s recent state aid cases arising from procurement are discussed. The participation of state aid recipients in public procurement is also considered. 2

3 II. What entities are subject to the public procurement and competition rules? 3. In the procurement context, private company service providers will usually be subject to competition law (although they may not be where they are entrusted with the performance of services of general economic interest and can benefit from Article 86(2) 2 ), whereas public entities will only be subject to the competition rules where they are performing economic activities on a market. The scope of application of the public procurement rules is generally determined by the two procurement directives (Directive 2004/18/EC and Directive 2004/17/EC) and their implementing Regulations (in Ireland, S.I. No. 329 of 2006, European Communities (Award of Public Authorities Contracts) Regulations 2006 (the Public Sector Regulations ) and S.I. No. 50 of 2007, European Communities (Award of Contracts by Utilities Undertakings) Regulations 2007 (the Utilities Regulations )). The question whether the public procurement rules apply to an entity is one that regularly arises in litigation. Entities subject to the public procurement rules 3 4. Directive 2004/18/EC applies to contracting authorities, which is defined in Article 1(9) as follows: Contracting authorities means the State, regional or local authorities, bodies governed by public law, associations formed by one or several of such authorities or one or several of such bodies governed by public law. A body governed by public law means any body: (a) established for the specific purpose of meeting needs in the general interest, not having an industrial or commercial character; (b) having legal personality; and (c) financed, for the most part, by the State, regional or local authorities, or other bodies governed by public law; or subject to management supervision by those bodies; or having an administrative, managerial or supervisory board, more than half of whose members are appointed by the 2 There is an argument that public procurement rules should not apply on the basis that the Article 86(2) exemption applies but this point has not been decided (see e.g. Case C-532/03 Commission v Ireland [2007] ECR I-11353, opinion of Advocate General Stix-Hackl, paras ). 3 For a general overview, in the UK context, see Arrowsmith The Entity Coverage of the EC Procurement Directives and UK Regulations: A Review (2004) 13 Public Procurement Law Review 59. See also, Kennedy The Scope of Public Procurement Law (2000) 7 Commercial Law Practitioner 95. 3

4 State, regional or local authorities, or by other bodies governed by public law. 5. Annex III of Directive 2004/18/EC sets out non-exhaustive lists of bodies that are governed by public law, listed both as specific bodies and categories. Irish bodies that are listed include Enterprise Ireland, FÁS, the National Roads Authority and the Legal Aid Board; categories listed include hospitals and similar institutions of a public character, agencies established to carry out particular functions or meet needs in various public sectors and other bodies governed by public law. A recent opinion of Advocate General Mazák suggests that there may only be a presumption that a body listed in Annex III (at least where it falls within a category rather than itself being specifically listed), is a contracting authority and that such an entity could rebut that presumption by demonstrating that it no longer meets the criteria of a body governed by public law Directive 2004/17/EC uses the same definition of contracting authorities. 5 Directive 2004/17/EC also applies to public undertakings which pursue one of the activities referred to in Articles 3 to 7 (energy, water, transport, post). A public undertaking is defined as any undertaking over which the contracting authorities may exercise directly or indirectly a dominant influence by virtue of their ownership of it, their financial participation therein, or the rules which govern it The Irish Regulations use a slightly different definition of a contracting authority, defining it as follows: The State, a local authority or a public authority, or an association comprising one or more local authorities or public authorities, or local authorities and public authorities The concept of a public authority is based on that of a body governed by public law in the Directives and defined in the Public Sector Regulations as follows: 4 See Case C-300/07 Hans & Christophorus Oymanns GbR, Orthopädie Schuhtechnik v AOK Rheinland/Hamburg, Opinion of AG Mazák, 16 December 2008, paras Directive 2004/17/EC, Art. 2(1)(a). 6 Directive 2004/17/EC, Art. 2(1)(b). 7 Regulation 3(1), Public Sector Regulations; Regulation 3(1), Utilities Regulations. 4

5 any body corporate, not having an industrial or commercial character, that is established for a public purpose, and- (a) is financed wholly or substantially by the State, a local or regional authority or another public authority; or (b) is subject to management supervision by such a body, or (c) has an administrative, managerial or supervisory board, more than half of whose members are appointed by the State, a local or regional authority or another public authority, and, in particular, includes any body listed in Annex III to the Public Authorities Contracts Directive. 9. To the extent that the use of body corporate in this definition might give the term public authority a more limited meaning than body governed by public law, the inclusion of all bodies in Annex III effectively means that the Regulations have as wide a scope as the Directive. This is because the last category of bodies listed in the Irish section of Annex III includes all public bodies falling within the Directive s definition of a body governed by public law. 10. The Utilities Regulations apply both to contracting authorities and public undertakings, the definition of the latter following that in Directive 2004/17/EC, essentially an undertaking over which a contracting authority may exercise a dominant influence. The Utilities Regulations also apply to private sector entities engaged in one of the activities covered by Directive 2004/17/EC and which operate under special or exclusive rights. Specific entities to which Directive 2004/17/EC applies are listed in Annexes I to X of the Directive. 11. Article 30 of Directive 2004/17/EC provides that it shall not apply to contracts that would otherwise be covered, where, in the Member State in which it is performed, the specific activity (transport, energy etc.) is directly exposed to competition on markets to which access is not restricted. A Member State may apply to the Commission seeking a Decision that certain activities are not subject to the Directive. A number of successful applications have been made. For example, the Commission issued a Decision that the production and sale 5

6 of electricity in Sweden was not subject to the Directive. 8 That Decision illustrates how the Commission carries out a market analysis in considering whether there is sufficient competition in the market to justify the application of Article 30, focusing on factors such as market concentration, the number of competitors and the extent of customer switching ( an indicator of genuine price competition ). Other Article 30 exemptions granted by the Commission include those in relation to aspects of the postal sector in Italy, Sweden, Denmark and Finland and electricity in Austria, England, Wales and Scotland and Finland. There have also been a number of unsuccessful applications under Article 30, including in respect of the electricity industry in the Czech Republic and Poland The 2004 Directives follow earlier directives in their scope of application so that previous case law (e.g. on the meaning of a body governed by public law ) continues to apply. 13. The approach of the Court of Justice has been to interpret the concept of a contracting authority in broad and functional terms. So, the Court has held that the term the State is to be interpreted in functional terms. In Beentjes, in considering whether a land consolidation committee fell within the meaning of the State for the purposes of the Works Directive, the Court stated: The aim of the directive, which is to ensure the effective attainment of freedom of establishment and freedom to provide services in respect of public works contracts, would be jeopardized if the provisions of the directive were to be held to be inapplicable solely because a public works contract is awarded by a body which, although it was set up to carry out tasks entrusted to it by legislation, is not formally a part of the State administration. Consequently, a body such as that in question here, whose composition and functions are laid down by legislation and which depends on the authorities for the appointment of its members, the observance of the obligations arising out of its measures and the financing of the public works contracts which it is its task to award, must be regarded as falling 8 Commission Decision 2007/706/EC of , OJ 2007 L287/18. 9 For further details of these Decisions, see the Commission s website at 6

7 within the notion of the State even though it is not part of the State administration in formal terms. 10 Body governed by public law 14. Where an entity is not an emanation of the State or a regional or local authority or listed in Annex III, it will only come within the definition of a contracting authority if it is otherwise a body governed by public law. The three conditions that an entity must fulfil to fall within this definition are cumulative 11 : (i) (ii) (iii) the entity was established for the specific purpose of meeting needs in the general interest, not having an industrial or commercial character; it has legal personality and, it is closely dependent on the State, regional or local authorities or other bodies governed by public law. 15. The functional approach adopted in Beentjes also applies to the definition of contracting authority more generally. In considering whether an entity is a body governed by public law, it should be remembered that the aims of the Directives include avoiding the risk of preference being given to national tenderers and the possibility that a body financed or controlled by the State, regional or local authorities or other bodies governed by public law may choose to be guided by considerations other than economic ones. 12 The concept of a body governed by public law should also be interpreted as having a broad meaning It has been acknowledged that the concept of a body governed by public law is not easy to understand. 14 The rationale behind it has been explained by Arrowsmith as follows: 10 Case 31/87 Gebroeders Beentjes BV v The Netherlands [1988] ECR 4635, paras 11 and Case C-44/96 Mannesmann Anlagenbau Austria AG v Strohal Rotationsdruck GesmbH [1998] ECR I-73, para See, e.g., Case C-337/06 Bayerischer Rundfunk v GEWA [2007] ECR I-11173, paras Case C-373/00 Adolf Truly GmbH v Bestattung Wien GmbH [2003] ECR I 1931, para Mannesmann, n 11 above, opinion of Advocate General Léger, para 64. 7

8 [It] excludes entities which, whilst connected with government, are not likely to apply national preferences because they are subject to commercial pressures to purchase efficiently. Most notably this applies to public entities providing goods or services to the market in competition with other firms: applying national preferences increases their costs and makes it more difficult to compete, and this pressure can serve as an alternative to bureaucratic regulation for ensuring non-discriminatory behaviour Established to meet needs in the general interest not of an industrial or commercial character. Meeting the first condition will depend on why the entity was established and what functions it performs. This will involve a factual inquiry into why the entity was established. Its principal purpose must be to meet needs in the general interest. In deciding that question, it is immaterial that such needs are also met or can be met by private undertakings. In general, they should be needs which, for reasons in the general interest, the State chooses to meet itself or over which it wishes to retain a decisive influence A distinction can be drawn between needs in the general interest that have an industrial or commercial character and those that do not. That assessment requires account to be taken of all relevant facts, including the circumstances prevailing when the entity was established, the conditions under which the activity is exercised and the degree of competition that prevails. 17 The fact that the needs are or can be met by private undertakings does not determine how they are categorised. 18 By extension, that an entity faces competition is not itself decisive but to the extent that it faces significant competition, this may indicate the absence of a need in the general interest, not of an industrial or 15 Arrowsmith, The Law of Public and Utilities Procurement, 2 nd ed (London: Sweet and Maxwell, 2005) para For a more general discussion of the concept of a body governed by public law in Community law, see Chiti, The EC Notion of Public Administration: The Case of the Bodies Governed by Public Law [2002] European Public Law See Case C-393/06 Ing. Aigner, Wasser-Wärme-Umwelt, GmbH v Fernwärme Wien GmbH [2008] 2 CMLR 43, para 40; Case C-360/96 Gemeente Arnhem v BFI Holding BV [1998] ECR I-6821, para Ing. Aigner, n 16 above, para BFI, n 16 above, para 53. 8

9 commercial character. 19 Summarising its approach in Korhonen, the Court of Justice stated: If the body operates in normal market conditions, aims to make a profit, and bears the losses associated with the exercise of its activity, it is unlikely that the needs it aims to meet are not of an industrial or commercial nature. In such a case, the application of the Community directives relating to the coordination of procedures for the award of public contracts would not be necessary, moreover, because a body acting for profit and itself bearing the risks associated with its activity will not normally become involved in an award procedure on conditions which are not economically justified In Ing. Aigner, in concluding that an entity providing environmentally friendly district heating in Vienna performed a service in the general interest that did not have an industrial or commercial character, the Court of Justice highlighted the fact that it had a virtual monopoly in the marketplace and that the criterion requiring the existence of significant competition is far from fulfilled. 21 This use of the word criterion suggesting that for an activity to fall outside the definition of a need in the general interest, not of an industrial or commercial character, there is a requirement that it face significant competition; although the converse that where there is an absence of significant competition the entity would fall within the definition does not hold true. 20. Other examples of activities that have been found to be needs in the general interest, not of an industrial and commercial character, include the removal and treatment of household refuse (which for reasons of public health and environmental protection, the State may require to be carried out by public authorities or over which it wishes to retain a decisive influence), 22 funereal undertakers (an activity linked to public policy as the State has a clear interest 19 See BFI, n 16 above, paras 47-49; Cases C 223/99 and C 260/99 Agorà and Excelsior [2001] ECR I 3605, para Case C-18/01 Arkkitehtuuritoimisto Riitta Korhonen Oy v Varkauden Taitotalo Oy [2003] ECR I- 5321, para Ing. Aigner, n 16 above, para BFI, n 16 above, para 52. 9

10 in controlling the issuing of death certificates; and an activity which for public health reasons the State may be justified in controlling) 23, the provision of public recreational and leisure facilities 24 and a body established by a local authority which acquires planning and construction services with a view to promoting the development of industrial or commercial activities on the territory of that local authority by constructing premises to be leased to undertakings (this activity stimulating trade and economic and social development of the local authority) To qualify as a body governed by public law, an entity must have been established with a non-profit making purpose. However, the fact that it has expanded into profit-making activities does not affect its public law status, provided that it continues to attend to the general interest needs which it is specifically required to meet. In this case, the overall proportion of its activities that are now profit making is irrelevant. 26 So, in Ing. Aigner, although most of the activities of the heating company, Fernwärme Wien, were in profit-making areas rather than environmentally friendly heating, it was still to be categorised as a body governed by public law. This had the consequence that all of its contracts, including those related to its profitmaking businesses, were subject to the procurement rules (an approach that can be referred to as contagion theory ). 27 In reaching that conclusion, the Court rejected the argument that a clear separation between the activities carried out to achieve the task of meeting needs in the general interest and activities carried on in competitive conditions could be achieved by using different accounting systems. 28 This somewhat rigid approach to the application of the public procurement rules means that those rules can apply to a wide range of activities carried out in an entirely competitive environment 23 Adolf Truly, n 13 above, para Case C 306/97 Connemara Machine Turf Ltd. v Coillte Teoranta [1998] ECR I Korhonen, n 20 above. 26 Mannesmann, n 11 above, para Its general interest activities were covered by Directive 2004/17/EC. As that Directive only applies to the regulated utility activities at which it is aimed, the remaining activities of Fernwärme Wien were subject to Directive 2004/18/EC. For further discussion of this point, see Kotsonis, Regulation of a Contracting Entity Pursuing Activities Falling in part within the Field of Application of Directive 2004/17 and in part within that of Directive 2004/18: Ing. Aigner (Case C-393/06) (2008) 17 Public Procurement Law Review NA Ing. Aigner, n 16 above, paras

11 by companies that were established with the purpose of meeting general interest needs but whose principal aim may well have changed to making profit. 22. Legal personality. Whether a body has legal personality is a matter of national law State dependency. The third condition requires that the entity be dependant on the State, a regional or local authority or another body governed by public law. This dependency may be financial or based on control (management supervision or the right to appoint a majority of the board). The Court of Justice considered the financial criterion in the University of Cambridge case. It held that the criterion was not an absolute one and that not all payments made by a contracting authority created or reinforced a relationship of dependency. Specifically, only payments which go to finance or support the activities of the body concerned without any specific consideration therefor may be described as public financing. 30 This had the consequence that while awards and grants could be regarded as financing by a contracting authority, money paid to the university for contractual services such as research work, consultancy and organisation of conferences was not covered. The case involved the pre-2004 directives, which, like Directive 2004/18/EC, included a qualification that the entity be financed for the most part by the contracting authority (the Irish Public Sector Regulations use the slightly different language in the definition of a public authority, financed wholly or substantially by the State 31 ). The Court interpreted this to mean more than half. 32 In establishing what proportion of a body s funding is public, all its income, including that from commercial sources, is taken into account. 33 To qualify as public funding, it is not necessary that payments be received directly from the State. It is sufficient if the financing is indirect, as in Bayerischer Rundfunk, where public broadcasting bodies were funded by fees payable by persons who possessed a receiver the compulsory contribution 29 See, e.g., Mannesmann, n 11 above, para Case C-380/98 R. v HM Treasury Ex p. The University of Cambridge [2000] ECR I-8035, para Regulation 3, Public Sector Regulations. 32 University of Cambridge, n 30 above, para University of Cambridge, n 30 above, para

12 was fixed by law and it was not necessary that the State itself appoint a body to collect the fee If the financing criterion is not met, the third condition may alternatively be met if the State has management supervision of the entity or the right to appoint a majority of its board. This criterion seeks to capture entities that are controlled by the State but not necessarily mainly funded by it. In Connemara Machine Turf, the control criterion was fulfilled Coillte Teoranta, a private company, had been set up by the State, entrusted with specific tasks and the State had powers which gave it the possibility of controlling Coillte Teoranta s economic activity. While the State did not have express power to award supply contracts by Coillte Teoranta, the State could have exercised this power, at least indirectly. 35 However, it is doubtful that control over specific contracts is required and in Oymans, Advocate General Mazák considered that a general dependency on a contracting authority, rather than influence over specific contracts, was sufficient Elsewhere, in considering the management supervision criterion, the Court of Justice has held that supervision must give rise to a level of dependency equivalent to where one of the other alternative criteria is fulfilled (i.e. public financing or appointment of more than half of the board). 37 In Adolf Truley, the Court pointed out that the management supervision criterion is not fulfilled by a mere review because this does not enable the public authorities to influence the decisions of the body in question in relation to public contracts. 38 However, the supervision in Adolf Truley went beyond a mere review and there was no difficulty finding that the criterion was fulfilled where the public authorities supervise not only the annual accounts of the body concerned but also its conduct from the point of view of proper accounting, regularity, economy, efficiency and expediency Bayerischer Rundfunk, n 12 above, paras Connemara Machine Turf Ltd., n 24 above, paras Oymanns, n 4 above, para 47 (in any event, the Advocate General had already decided that the entities at issue were for the most part financed by the State). 37 See Case C-237/99 Commission v France [2001] ECR I-939, paras Adolf Truley n 13 above, para Adolf Truley, n 13 above, para

13 The Teckal in-house exception 26. The public procurement directives do not apply when an authority decides to provide services in-house, a decision which it is the prerogative of the contracting authority to take: A public authority which is a contracting authority has the possibility of performing the tasks conferred on it in the public interest by using its own administrative, technical and other resources, without being obliged to call on outside entities not forming part of its own departments. In such a case, there can be no question of a contract for pecuniary interest concluded with an entity legally distinct from the contracting authority. There is therefore no need to apply the Community rules in the field of public procurement The directives also do not apply where there is a contract between the authority and another legal entity, provided that the substance of the arrangement is substantially similar to in-house provision. The parameters of this exception were outlined in the Teckal case, in which the Court of Justice established two conditions for exemption: (i) the authority exercises control over the other entity similar to that which it exercises over its own departments and (ii) at the same time, that entity carries out the essential part of its activities with the controlling local authority or authorities The rationale behind the Teckal exemption is that a public authority should not have to go out to tender simply because it has placed a function or functions that could be carried out internally in the hands of a company which, although a separate entity, was in substance a department of the authority. The exemption, which is to be strictly interpreted, 42 has been the subject of a number of recent cases. 29. Teckal Condition 1 control. The Carbotermo case illustrates how the first Teckal condition is to be interpreted strictly. A municipality awarded a contract, without putting it out to tender, for the supply of fuel and the 40 Case C-26/03 Stadt Halle v Arbeitsgemeinschaft Thermische Restabfall [2005] ECR I-1, paras Case C-108/98 Teckal Srl v Commune di Viano [1998] ECR I-812, para Stadt Halle, n 40 above, para

14 maintenance of heating installations to a company that was the wholly-owned subsidiary of a holding company, in which the municipality held 99.8% of the shares. The remaining shares in the holding company were held by other municipalities. The holding company s constitution allowed for private parties to become shareholders, but any one private investor could only obtain 10% of the shares, and subject to the municipality remaining the majority shareholder (the subsidiary company had similar rules). The question arose whether these arrangements satisfied the Teckal conditions. The Court noted: In order to determine whether the contracting authority exercises a control similar to that which it exercises over its own departments, it is necessary to take account of all the legislative provisions and relevant circumstances. It must follow from that examination that the successful tenderer is subject to a control enabling the contracting authority to influence that company s decisions. It must be a case of a power of decisive influence over both strategic objectives and significant decisions of that company The control requirement was not met. Holding all the shares of the tendering company was not decisive, even if it was an indication of control. Here, the Board of Directors had broad powers for managing the company, which it could exercise independently, with the rights of the municipality limited to those under company law. The fact that the stake was through a holding company also tended to weaken the control of the municipality If a private company owns any part, even a minority, of the entity with which the contracting authority contracts, this is fatal to the availability of the Teckal exemption. The Court of Justice made this clear in Stadt Halle, in which the City of Halle entered into a contract for waste services, without a call for tender, with a company in which the City held 75.1% of the capital, with the remaining 24.9% held by a private company. The Court pointed out that the private interests of the minority investor would pursue objectives of a different kind to public interests and that the disapplication of the procurement rules in this situation would interfere with the objective of free and undistorted 43 C-340/04 Carbotermo and Consorzio Alisei v Comune di Busto Arsizio [2006] ECR I-4137, para 36. A similar statement had been made in Case C-458/03 Parking Brixen GmbH v Gemeinde Brixen [2005] ECR I-8585, para Carbotermo, n 43 above, paras

15 competition and the principle of equal treatment by giving the private investor an advantage over its competitors Although any participation by a private company makes the Teckal exemption unavailable, the mere possibility that there will be future private investment in the relevant entity is not fatal. The Court so held in considering whether the Teckal exemption applied to the award by the town of Mantua, without a tender, of a contract for the maintenance and management of its computer services to a company, ASI. At the time the contract was entered into, the ownership of ASI was entirely in the hands of Mantua and other neighbouring towns, with Mantua effectively having structural and functional control (it had power to appoint board members and an officer to guide and control ASI s activities). In arguing that the control condition in Teckal was not fulfilled, the Commission pointed out that the participation of private partners in ASI was explicitly provided for from the moment of its establishment. Rejecting that argument, the Court said that the focus must be on the situation as it stood at the time the contract was entered into and that the possibility for private investment in the company was not sufficient to conclude that the control condition was not fulfilled. For reasons of legal certainty, it was important to consider the application of the procurement rules in light of the prevailing conditions on the date the contract was awarded. The Court acknowledged that special circumstances e.g. where the private investment was envisioned as part of the award of the contract might dictate a different conclusion but no such special circumstances existed in the case Teckal Condition 2 essential part of its activities. If an entity with which a public authority contracts carries out most of its activities on the market, then it is not similar to an in-house department of the authority and the procurement rules should apply. The Court of Justice emphasised in Carbotermo that the purpose of this second limb of the Teckal test was to ensure that the requirements of the procurement rules did apply to an undertaking active in 45 Stadt Halle, n 40 above, paras See also, Case C-337/05 Commission v Italy, judgment of , paras (award of a contract for the supply of helicopters, without a tender, by the Italian government to a company partly owned by Italy and private investors). 46 Case C-371/05 Commission v Italy, judgment of , paras

16 the market and therefore likely to be in competition with other undertakings. 47 To avail of the exemption, the undertaking s activities have to be devoted principally to the authority and any other activities should be of only marginal significance Shared services. Clearly, where the ownership of the separate entity is shared between a contracting authority and a private investor, Teckal does not apply. But what if ownership and the activities of the entity are shared among a number of public authorities? The Teckal conditions can be satisfied in this situation. This was evident from the language used in Teckal itself, where the Court referred to the separate entity carrying out the essential part of its activities with the controlling local authority or authorities. 49 The Court therefore envisaged the possibility that the exception provided for could apply not only in cases where a single authority controls such a legal person, but also where several authorities do so. 50 In such a case, the second Teckal condition could be met if the essential part of the undertaking s activities were carried out with all those authorities taken together Asemfo further clarified that the procurement rules could be avoided where an undertaking is linked to a multiplicity of authorities. 52 The control limb of Teckal was satisfied both in respect of the Spanish State, which held 99% of the shares in Tragsa (a public undertaking carrying out forestry and related services) and four autonomous public authorities, which together held 1%. The Court held that Tragsa was not a third party vis-à-vis the public authorities as it was required by law to carry out their orders and it could not fix the tariff for services provided for them, so there was no contractual relationship. So, the first Teckal condition was met. 53 The second condition was also met, as where several authorities control an undertaking, the condition may be met if the undertaking carries out the essential part of its activities, not necessarily with any one authority, but with all of the authorities together. Tragsa carried out 47 Carbotermo n 43 above, para Carbotermo n 43 above, para Teckal, n 41 above, para 50 (emphasis added). 50 Carbotermo, n 43 above, para See Carbotermo, n 43 above, para Case C-295/05 Asemfo v Tragsa [2007] 2 CMLR ibid, paras

17 more than 55% of its activities with the four public authorities and nearly 35% with the State. This was sufficient for the second condition to be met The limits of the Teckal exemption, where more than one authority has an interest in the relevant entity, were examined by the English High Court in the RPM case. 55 The London Borough of Brent established a tender process for the award of contracts for insurance services under the UK Public Contract Regulations. It invited tenders for seven different lots and RPM duly submitted its tender. Brent then decided to abandon the contract award procedure for six of the seven lots and awarded the remaining contract to London Authorities Mutual Ltd (LAML), a mutual insurance company of which Brent was a member and of which membership was restricted to London boroughs. LAML had not participated in the tender. It later transpired that RPM s bid had been the most financially advantageous. RPM challenged the failure by Brent to follow the public procurement rules in an action for damages and the question arose whether Brent could avail of the Teckal exemption Having decided that the Teckal exemption did apply in English law, 57 Stanley Burnton LJ confirmed that the fact a contracting authority held, together with other authorities, all the share capital in the company, indicated, without being decisive, that that authority satisfied the control criterion of Teckal. 58 Moreover, it was sufficient if a number of local authorities together exercised the requisite influence over the company and it was unnecessary for one authority to show that it alone had the power of decisive influence over both strategic objectives and significant decisions of the company. 59 However, the judge held on the facts that Teckal did not apply. From his examination of LAML s constituent documents and its management arrangements, the judge 54 ibid, paras Risk Management Partners Ltd v Brent LBC [2008] EWHC 1094 (Admin), [2008] LGR RPM also brought successful judicial review proceedings claiming that Brent s participation in LAML was ultra vires. Those proceedings were the subject of a separate judgment, R (on the application of Risk Management Partners Ltd) v Brent London Borough Council [2008] EWHC 692 (Admin), [2008] LGR 331, also understood to be under appeal. 57 Paras RPM had argued that Teckal was not applicable under the UK Regulations. The judge reached his conclusion as to Teckal s application with considerable hesitation. 58 Para Paras

18 formed a general picture of a business the administration of which was relatively independent. More specifically, that a private company was contracted to manage LAML and the particular procedures in dealing with insurance claims, pointed against the application of the Teckal exemption: Just as in the Stadt Halle case the fact that there was private participation in the ownership of the contractor was inconsistent with the Teckal exemption, and in the Carbotermo case the fact that the public authority's interest was held through a holding company was an indication that the Teckal exemption did not apply, so in my judgment the employment of a private company to manage LAML points against it. Moreover, and perhaps more importantly, there are contractual provisions that point to a degree of independence of decision that is inconsistent with the first condition. I refer in particular to art 11 of the articles of association, and to r 22(1), under which a participating member will normally be excluded from the board s consideration of its insurance claim. Similarly, the terms of the policies are typical of a policy issued by a wholly independent insurer to its insured. They envisage a relationship (including disputes) between Brent and LAML that is inconsistent with the Teckal case. 60 It is understood that the case is under appeal to the Court of Appeal. 38. A much less restrictive application of Teckal in the context of control held by multiple authorities is evident from the Court of Justice judgment in Coditel Brabant, 61 decided after the High Court decision in RPM. The case involved the grant by the municipality of Uccle of a concession for the management of its municipal cable television network to a cooperative society that was made up exclusively of other municipalities. Uccle joined the cooperative society on the same day that it entrusted it with running the cable network. The procurement rules did not apply (as the transaction was a concession) but following Teleaustria, the municipality was bound to comply with the principles of equal treatment and non-discrimination on the grounds of nationality and the obligation of transparency. The issue was whether, having regard to those principles and Articles 12, 43 and 49 of the EC Treaty, Uccle was precluded from awarding the concession without a call for tender or whether the Teckal exemption applied Para Case C-324/07 Coditel Brabant SA v Commune d Uccle, judgment of The application of the Teckal exemption to concessions falling outside the procurement rules had been confirmed in Parking Brixen, n 43 above. 18

19 39. The Court of Justice had little difficulty in finding that, to the extent that control was exercised by all the municipalities, this satisfied the requirement of similar control in Teckal (it was clear that the second Teckal condition was met). The cooperative society was made up entirely of municipalities, it was not open to private members and its decision-making bodies were made up exclusively of representatives of the municipalities. Where sub-sector boards, made up of representatives of only some of the municipalities, exercised control, these delegated powers were strictly limited. The referring court had specifically asked whether it was necessary that control be exercised individually by each authority or whether it can be exercised jointly by them, with decisions being taken by a majority as the case may be. The Court referred back to the finding in Carbotermo and Asemfo that the condition relating to the essential part of the entity s activities could be met by taking account of the activities carried out with all of the authorities and found that it would be consistent with that reasoning to consider the control condition satisfied by taking account of control exercised jointly by the various authorities. The control exercised must be effective, but it is not essential that it be exercised individually. 63 It was apparent that the Court was concerned to preserve flexibility for inter-municipality cooperation and avoid a situation where public authorities would be forced to put out to tender where they would rather cooperate together: [Where] a number of public authorities elect to carry out their public service tasks by having recourse to a municipal concessionaire, it is usually not possible for one of those authorities, unless it has a majority interest in that entity, to exercise decisive control over the decisions of the latter. To require the control exercised by a public authority in such a case to be individual would have the effect of requiring a call for competition in the majority of cases where a public authority seeks to join a grouping composed of other public authorities, such as an inter-municipal cooperative society. Such a result, however, would not be consistent with Community rules on public procurement and concession contracts. Indeed, a public authority has the possibility of performing the public interest tasks conferred on it by using its own administrative, technical and other resources, without being obliged to call on outside entities not forming part of its own departments. 63 Coditel Brabant, n 61 above, para

20 That possibility for public authorities to use their own resources to perform the public interest tasks conferred on them may be exercised in cooperation with other public authorities. It must therefore be recognised that, where a number of public authorities own a concessionaire to which they entrust the performance of one of their public service tasks, the control which those public authorities exercise over that entity may be exercised jointly. As regards collective decision-making bodies, the procedure which is used for adopting decisions such as, inter alia, adoption by majority is of no importance The Court was clearly wary of the consequences of requiring that each public authority be able to exercise individual control over the relevant entity. This would have the effect of subjecting a great deal of inter-municipality cooperation to the procurement rules, which would act as a disincentive for public authorities to cooperate with each other in the first place. However, by finding that the method of collective decision making in jointly controlled entities is irrelevant, the Court is extending the boundaries of the Teckal exemption. In practice, a public authority that holds a minority of the entity could be overruled on all important decisions regarding that entity and still avail of Teckal. However, it is not obvious how such a public authority has a power of decisive influence over both strategic objectives and significant decisions of the entity and it is debateable that, in this case, the entity is functioning like an in-house department of the public authority. 41. The boundaries of Teckal may be pushed even further in a German case that is pending before the Court. 65 It arises out of the decision by four German Landkresie in Lower Saxony to conclude a waste services contract with the Hamburg city cleaning authority, without a tender. The Commission is arguing that the contract should have been subject to the procurement rules. In response, the German government s position appears to be that cooperation between local authorities, as a product of municipal autonomy, is not subject to procurement law, regardless of the legal form it may take. 66 It is unclear how this argument sits with the established position that the procurement rules 64 ibid, paras (case references omitted). 65 Case C-480/06 Commission v Germany (pending). 66 See the summary of the case at OJ 2007 C20/10,

21 apply to all contracts that fulfil the criteria for their application, regardless of the fact that the contract is with another contracting authority. 67 Competition (and state aid) rules only apply to undertakings 42. Article 81(1) prohibits anti-competitive agreements between undertakings, decisions by associations of undertakings and concerted practices (between undertakings 68 ). The term undertaking (also used in Articles 82, 86 and 87) is not defined in the Treaty. The term has been given a wide interpretation by the courts. An undertaking can be a natural or legal person. The concept is not confined to companies or other corporate bodies; it extends to entities including partnerships, trade associations, professional bodies, agricultural cooperatives and sole traders, among others. 43. It is obviously important to establish whether a particular entity is an undertaking within the meaning of the Treaty s competition rules. If not, then it is immune from competition law and Articles 81 and 82 do not apply to its conduct or agreements to which it is party. This issue is particularly relevant with respect to entities linked to the State and which may be contracting authorities under the procurement rules, as there is often doubt about whether these entities are undertakings. 44. The key question in determining if an entity qualifies as an undertaking is whether it is engaged in an economic activity : [The] concept of an undertaking encompasses every entity engaged in an economic activity, regardless of the legal status of the entity and the way in which it is financed To qualify as an economic activity, the entity must be involved in providing goods or services; it is not sufficient that it acts only as a purchaser. 67 See Teckal, n 41 above, para Article 81(1) does not explicitly state that concerted practices have to be between undertakings but this is clear from how Article 81 has been interpreted by the Court of Justice, which has defined a concerted practice as a form of co-ordination between undertakings (see, e.g., Cases 48/69 ICI v Commission ( Dyestuffs ) [1972] ECR 619, [1972] CMLR 557, para 64). 69 Case C-41/90 Höfner & Elser v Macrotron GmbH [1991] ECR I-1979, [1993] 4 CMLR 306, para 21 (emphasis added). 21

22 An economic activity is one which consists in offering goods or services on a given market and which could, at least in principle, be carried on by a private actor in order to make profits Given that almost every activity can, in principle, be carried out by a private actor, it is also relevant to consider whether in fact the activity is carried out in conditions of competition on a market; it is apparent from some of its decisions on the meaning of an undertaking that the Court has placed reliance on this factor An entity can constitute an undertaking for purposes of EC competition law whether or not it is intended to earn profits, 72 as such an entity can still be in competition with profit-making operators. 73 It is also unnecessary that it have legal personality. 74 An entity linked to the State may be deemed to be an undertaking in respect of some of its activities, which are economic in nature, but fall outside the scope of an undertaking in respect of other activities Entities that are linked to the State, including contracting authorities within the meaning of the public procurement rules, can be undertakings if they perform an economic activity. On the other hand, entities are not undertakings when they exercise sovereign or administrative functions that are typically those of a public authority 76 or can be classed as a task in the public interest which forms part of the essential functions of the State. 77 In finding that certain activities were not of an economic nature and that entities were not undertakings, the Community courts have focused in some cases on the fact that the function fulfilled by the activity is a social one or is based on the principle of solidarity (defined by one Advocate General as the inherently 70 Case C-475/99 Ambulanz Glöckner v Landkreis Süswetzplaz [2001] ECR 8089, opinion of Advocate General Jacobs, para 67 (emphasis added). See also, e.g., Case T-155/04 SELEX Sistemi Integrati SpA v Commission [2007] ECR II-4797 (on appeal, Case C-113/07P). 71 See, e.g., the opinion of Advocate General Maduro in Case C-205/03P Federación Española de Empresas de Tecnología Sanitaria (FENIN) v Commission [2006] ECR I-6295, paras Case 209/78 Van Landewyck v Commission [1978] ECR 2111, para See, e.g., Case C-222/04 Ministero dell'economia e delle Finanze v Cassa di Risparmio di Firenze SpA [2006] ECR I-289, para Case C-189/02P Dansk Rørindustri v Commission [2005] ECR I-5425, para Case C-49/07 Motosykletistiki Omospondia Ellados NPID (MOTOE) v Elliniko Dimosio [2008] 5 CMLR 790, para 25. See also, Case T-128/98 Aéroports de Paris v Commission [2000] ECR II-3929, [2001] 4 CMLR 1376, para Case C-364/92 SAT Fluggesellschaft v Eurocontrol [1994] ECR I-43, para Case C-343/95 Cali & Figli v SPEG [1997] ECR I-1547, para

23 uncommercial act of involuntary subsidisation of one social group by another 78 ). This focus has allowed entities operating sickness funds 79 and compulsory work insurance schemes 80 to fall outside the Treaty s competition rules. The courts have also considered the overall nature, aim and rules to which the activities in question are subject, finding, for example, that an entity carrying out air traffic control with the collection of charges was not an undertaking: taken as a whole, its activities were connected with the exercise of powers relating to the control and supervision of air space which are typically those of a public authority and not of an economic nature justifying the application of the Treaty rules of competition. 81 Ultimately, whether an activity has an economic nature will depend on the surrounding circumstances and will be clearer in some cases than in others. Two lists giving examples of entities that have been found to be undertakings and other entities that have fallen outside the reach of competition law are provided in Annex I to this paper. 49. The act of offering goods or services is what is significant in determining whether an activity is of an economic nature; merely purchasing goods or services is not enough to make it an economic activity. This was made clear in the FENIN case. FENIN was an association representing suppliers of medical equipment to Spanish hospitals. It complained to the Commission that a number of public management bodies, which ran the Spanish health system and purchased medical equipment, were abusing their dominant position by systematically making late payments. The Commission dismissed the complaint, holding that the management bodies were not undertakings and so outside the scope of competition law. That finding was upheld by the Court of First Instance 82 and, on appeal, by the Court of Justice Case C-70/95 Sodemare SA v Regione Lombardia [1997] ECR I-3395, opinion of Advocate General Fennelly, para C-264, 306, 354 and 355/01 AOK Bundesverband v Ichthyol-Gesellschaft Cordes, Hermani & Co. [2004] ECR I Case C-218/00 Cisal [2002] ECR I C-364/92 SAT Fluggesellschaft v Eurocontrol [1994] ECR I-43, para Case T-319/99, [2003] ECR II-357, [2003] 5 CMLR Case C-205/03P Federación Española de Empresas de Tecnología Sanitaria (FENIN) v Commission [2006] ECR I

24 50. FENIN argued first that the purchasing activity was itself an economic activity which could be dissociated from the service of free healthcare provision which the management bodies subsequently supplied. This argument was rejected, the Court of Justice noting: [It] is the activity consisting in offering goods and services on a given market that is the characteristic feature of an economic activity. The Court of First Instance rightly deduced that there is no need to dissociate the activity of purchasing goods from the subsequent use to which they are put in order to determine the nature of that purchasing activity, and that the nature of the purchasing activity must be determined according to whether or not the subsequent use of the purchased goods amounts to an economic activity As the Spanish health system was funded from social security and provided free services, it was not engaged in economic activity when it provided those services, so its purchasing activities could not be regarded as economic activity either. FENIN s second argument, made in the alternative, that the provision of medical treatment was itself economic in nature (the Spanish medical system would have charged certain persons for medical treatment), was dismissed outright as being made out of time and so was not addressed by the Court. 52. The Court of Justice s FENIN decision was notable for its brevity and absence of any detailed reasoning. The position adopted is very restrictive and should ensure that a great many contracting authorities are not subject to the competition rules, in particular where they are only engaged in purchasing goods or services and not active in supplying those goods or services on a market. The decision can be contrasted with the earlier approach of the UK Competition Appeal Tribunal (the CAT ) in BetterCare. In that case, the CAT had to consider whether two Northern Irish health trusts were undertakings for purposes of the Competition Act 1998 when they ran residential care homes and contracted out the provision of social care to 84 ibid, paras

25 private companies (they were accused of abusing a dominant position). The CAT concluded that the trusts were undertakings both in the purchasing of services from BetterCare and in the provision of their own statutory homes. The CAT took the view that the definition of economic activity as established by the case law of the Court of Justice was not exhaustive and, referring to the opinion of Advocate General Jacobs in Cisal, 85 it suggested a key consideration was whether the entity was in a position to generate the effects which the competition rules seeks to prevent. 86 It went on to discuss how the competition rules apply not only to suppliers but also to purchasers of goods and services and that where a buyer has significant market power e.g. where it has a monopsony it is capable of abusing a dominant position through its purchasing practices alone. This approach seems to sit better with the wording of the competition rules themselves for example, Article 82 mentions the imposition of unfair purchase or selling prices than the more restrictive approach of FENIN One question that FENIN did not answer is how a contracting authority is to be treated where it purchases goods and then uses them partly for a noneconomic purpose and partly for an economic purpose. An example might be a health authority that purchases medical equipment that is used to treat both public patients (incurring no charge) and private patients (who pay for the service). Does the part-provision of services to the private patients make the authority an undertaking for competition law purposes when it purchases the medical equipment? Does it depend on what proportion of the authority s service provision is economic? The answer to these questions is, at present, unclear ibid, para ibid, para For discussion of FENIN and BetterCare, see, e.g., Skilbeck, The Circumstances in which a Public Body may be regarded as an Undertaking and thus subject to the Competition Act 1998 solely because of its Function as a Purchaser of Particular Goods or Services: Bettercare Group Limited v The Director General Of Fair Trading, (2003) 12 Public Procurement Law Review NA71; Kresiberger, FENIN: Immunity from Competition Law Attack for Public Buyers (2006) 15 Public Procurement Law Review NA214; Munro, Competition Law and Public Procurement: Two Sides of the Same Coin? (2006) 15 Public Procurement Law Review See also Arrowsmith, n 15 above, pp

26 54. Finally, it should be pointed out that the term undertaking is also used in Irish competition law and is actually defined in Section 3(1) of the Competition Act 2002 as a person, being an individual, a body corporate or an unincorporated body of persons engaged for gain in the production, supply or distribution of goods or the provision of a service. The reference to for gain does not require that the entity be profit making. So, a body can be considered an undertaking even if it is a not-for-profit, as long as it administers a charge for the products or services it provides. 89 Despite the apparent difference in the definition of an undertaking raised by the Irish statutory language, the Irish courts have taken a similar approach to the meaning of undertaking in Irish law as the Community courts. 90 Conclusion 55. The question of what entities are subject to the public procurement rules and competition law is somewhat technical and not always clear-cut, as may be evident from the proceeding discussion. 56. A question that arises in considering overlaps between the two sets of rules is whether an entity that fulfils the criteria of a body governed by public law will ever qualify as an undertaking for competition law purposes. In reaching the conclusion that the entity is a public law body, it will have been established that it meets needs in the general interest, not of a commercial or industrial character. It might then be thought unlikely that it engages in economic activity and that therefore, it falls outside the definition of an undertaking. However the courts have not made this leap and have not drawn connections that would justify such a finding. It is also apparent from some of the cases discussed earlier that a body governed by public law may still face some competition, which could tend to indicate that it engages in an economic 89 See the decision of the Irish Supreme Court in Competition Authority v O Regan [2007] 4 IR 737, in which credit unions were held to be undertakings for purposes of the Competition Act 2002, even though they advocated a not-for-profit philosophy. 90 See Competition Authority v O Regan [2007] 4 IR 737 at 760. See also Competition Authority Enforcement Decision 01/08, Alleged anticompetitive conduct by the Health Service Executive relating to the administration of the Community Drugs Schemes ( ) finding that in negotiation with pharmacy bodies about the prices of drugs and purchasing pharmacy services from private undertakings, the HSE was not an undertaking as it did not receive payment from patients for drugs dispensed under the scheme and so was not acting for gain (para 2.31). 26

27 activity and so qualifies as an undertaking. Nevertheless, there are undoubtedly parallels between the two concepts that may be drawn in the future. 27

28 III. Competition law and public procurement 57. This section will examine a number of aspects of the application of competition law to public procurement. First, it will discuss how tenderers may breach the competition rules, focusing on bid rigging and the enforcement of competition law in that context. Second, brief consideration will be given as to how contracting authorities might themselves fall foul of the competition rules. Third, a few comments about competition issues in the public procurement directives more generally will be made. Competition law breaches by tenderers 58. The most common and most serious violations of competition law include price fixing, market allocation, agreed output restrictions and bid rigging. Each of these types of cartel behaviour constitutes a hardcore restriction of competition and agreements that have these practices as their aim will be considered to have an anti-competitive object. This means that there will be a violation of Article 81 without the need to consider the effects of the agreement in the market. Agreements containing hardcore restrictions could, in theory, be exempted under Article 81(3) 91 but in practice, it is difficult to imagine they could ever benefit from this exemption. In Ireland, participation in agreements that breach Article 81 or Section 4 of the Competition Act 2002 (as well as agreements or practices violating Article 82 or Section 5) may give rise to criminal sanctions, including up to five years imprisonment for individuals Cartel behaviour in the public procurement context can usually best be categorised as falling within the bid-rigging (or collusive tendering) rubric. Depending on the features of the cartel, the bid rigging may result in price fixing, market allocations 93 or agreed output restrictions or include elements of 91 Essentially, Article 81(3) exempts an agreement from the Article 81(1) prohibition where its procompetitive effects outweigh its anti-competitive effects (various conditions must be satisfied). 92 See s. 8, Competition Act A market allocation agreement involves two or more competitors agreeing to divide up markets among themselves. This might be done on a geographic basis (e.g. Competitor A takes all jobs in the West of Ireland, Competitor B takes all jobs in Dublin etc.), by product or service type or by customer. In a procurement auction, this may involve the division of different lots among the competitors, for example. 28

29 all of these practices. The main forms of bid rigging in procurement markets can be summarised as follows: 94 Cover Bidding o The competitors have worked out in advance which one of them will win the bid and at what price. The winning bidder submits its bid at that agreed price. The other parties to the agreement submit false bids at a higher price (or include terms which it is known will be unacceptable to the contracting authority). Cover bidding aims to give the impression of genuine competitive bidding, when in fact the bidding process is rigged. Bid Rotation o All parties to the cartel agreement submit bids but take turns being the winning bidder with the lowest price. Bids are rotated on a systematic or rotating basis. The terms of the rotation may vary for example, competitors may take turns winning contracts according to the size of the contract, allocating equal amounts to each conspirator or allocating volumes that correspond to the size or market share of each of the tenderers. Bid suppression o Bid suppression takes place when suppliers agree among themselves to abstain from bidding or to withdraw bids. This ensures that the allocated company wins the bid. 94 In general, see, e.g., U.S. Department of Justice, Price Fixing, Bid Rigging and Market Allocation Schemes: What They Are and What To Look For, available at OECD Report, Public Procurement: The Role of Competition Authorities in Promoting Competition (DAF/COMP(2007)34) ( ), available at OECD Policy Brief, Fighting Cartels in Public Procurement (October 2008), available at Anderson and Kovacic, Competition Policy and International Trade Liberalisation: Essential Complements to Ensure Good Performance in Public Procurement Markets (2009) 18 Public Procurement Law Review 67; Szilagyi, Bidding Markets and Competition Law in the European Union and the United Kingdom: Part 1 [2008] European Competition Law Review

30 60. In addition to the above forms of collusive tendering, a bid-rigging scheme might also feature a sub-contracting element whereby competitors who agree not to bid or to submit a cover bid are awarded subcontracts as compensation from the winning bidder. Detecting bid-rigging 61. Bid-rigging in public procurement tenders, like other cartel behaviour, can be extremely difficult to detect. The best method of detection is undoubtedly the whistleblower. Absent that, contracting authorities themselves and competitors participating in auctions who are not part of the cartel, may be best placed to detect signs of bid-rigging. The following features may be indicative of bidrigging 95 : The same company always wins a particular procurement (more suspicious if one or more companies continually submit unsuccessful bids); The same suppliers submit bids and each seems to take a turn being the winner; Some bids are much higher than published price lists, previous bids by the same firms, or engineering cost estimates; Fewer than the normal number of competitors submit bids; A company appears to be bidding substantially higher on some bids than on other bids, with no apparent cost differences to account for the disparity; Bid prices drop whenever a new or infrequent bidder submits a bid; A successful bidder subcontracts work to competitors that submitted unsuccessful bids on the same project; A company withdraws its successful bid and subsequently is subcontracted work by the new winning contractor; Suppliers meet before tenders are submitted and the contracting authority is not present; 95 For a more detailed discussion of economic tools that can be used to detect bid rigging in procurement markets (focusing in particular on cover bidding in road construction procurement), see Porter and Zona Detection of Bid Rigging in Procurement Auctions (1993) 101 Journal of Political Economy

31 Suppliers that are expected to tender do not; Tenders are similar e.g. identical spelling errors, miscalculations Obviously, the detection of bid-rigging is not a scientific process. If a contracting authority or other bidder detects what they believe to be bidrigging, they should contact the relevant antitrust authority, in Ireland, The Competition Authority. 97 It would be prudent to make a note of any relevant conversations or events and details of the suspicious bids. Preventing bid-rigging 63. There are steps that contracting authorities can take in the design and operation of tenders which may help to minimise the opportunity for tenderers to engage in bid-rigging. These may include the following: Contracting authorities might, where possible, lower barriers to entry by avoiding unnecessarily restrictive pre-qualification criteria (and ensuring that such criteria are proportionate) and taking other measures to lower the cost of participation in tenders (for example, through the use of electronic systems). Such measures may encourage the participation of smaller companies, in particular; Contracting authorities should not release confidential information that could impact on competition (the Court of Justice has stated that to achieve the objective of opening up public procurement to undistorted competition, it is important that the contracting authorities do not release information relating to contract award procedures which could be used to distort competition, whether in an ongoing procurement procedure or in subsequent procedures 98 ); 96 In one U.S. case, a bid-rigging conspiracy was uncovered and successfully prosecuted after a procurement official noticed the same typographical error (an unnecessary word) in the bid letters of two competing companies: Please give us a call us if you have any question (see the OECD Report, n 94 above, p.158). 97 In Sweden, the Swedish Competition Authority has, since 1 September 2007, also taken over responsibility for the supervision of public procurement, which may make cartel enforcement in the procurement context more efficient. 98 Case C-450/06 Varec SA v Belgium [2008] 2 CMLR 24, para

32 Contracting authorities should not release the identities of bidders to each other; A contracting authority should not disclose its own internal estimate for the contract before the award is made; Line item bids, rather than lump sum bids, should be sought, where this is feasible; Where feasible, larger projects could be divided into a few smaller projects and this may also encourage the participation of SMEs. However, it is possible that more frequent bids might actually encourage collusion (if there is a long gap between tenders, it may make it more difficult for a cartel to operate in stability). In addition, while encouraging the participation of SMEs is pro-competitive, the decision to split contracts must comply with the principle of equal treatment and not be indirectly discriminatory; 99 Contracting authorities could require that bidders identify joint venturers, partners and subcontractors upfront (it is noted that under Regulation 25 of the Public Sector Regulations, a contracting authority is entitled to ask each tenderer whether it intends to subcontract any share of the contract that might be awarded to it; there is no mention of whether a contracting authority may ask for the identity of intended sub-contractors); Requiring a certificate of non-collusion Some guidance on tender design suggests that there should be a requirement that bids be free of subcontracting, i.e. that winning bidders should not be allowed to subcontract part of the contract. 101 While this would negate the possibility of compliant cartel members being compensated through the award of a subcontract, it does not fit with the EC public procurement regime. 99 See Donnelly, Secondary Policies in Public Procurement: Using Government Contracts to Promote Social Inclusion and Protect the Environment, paper delivered at Trinity College Dublin ( ), at See Prasifka, Making Competition Work in Public Procurement presentation of , available at at p See, e.g., the OECD Report, n 94 above. 32

33 First, Recital 32 to Directive 2004/18/EC provides that it is advisable to include provisions on subcontracting in order to encourage the participation of SMEs. This provision recognises the important pro-competitive effect that sub-contracting can play. Second, an outright ban on sub-contracting does not appear permissible in Community law, following the Court of Justice decision in the Siemens case. This involved a tender which stipulated that a maximum of 30 per cent of the contract could be subcontracted, with a ban on subcontracting in respect of certain work. Whereas subcontracting might be prohibited where the capacity of subcontractors to carry out the work had not been verified at the time of the contract award, the Court held that contracting authorities could not exclude a firm solely because the firm proposed to rely on the resources of others for performing the contract It is also worth noting that certain market characteristics may facilitate collusion among competitors. Awareness of these characteristics might enhance the ability of a contracting authority to prevent and detect collusive tendering. These characteristics include the following (which also apply outside the procurement context): A concentrated market structure (e.g. there are a small number of suppliers in the market, each of which has a high market share); A high degree of market transparency (a transparent market where, for example, competitors can easily determine what price each is selling at, may facilitate cartel behaviour as it allows deviations from the cartel agreement to be easily detected and punished, thereby providing a disincentive for cartel members to cheat and thereby making the cartel more stable); High barriers to entry; A limited number of alternative suppliers; Homogenous products; 102 Case C-314/01 Siemens AG Österreich and ARGE Telekom & Partner v Hauptverband der österreichischen Sozialversicherungsträger [2004] ECR I-2549, para

34 Limited buyer power; Stable supply and demand conditions; Opportunities for repeated interaction and similar firm characteristics; Active trade associations (while trade associations are perfectly legitimate, they are sometimes used as a cover for cartel activity and to facilitate coordination among competing firms). Implications for bid-riggers who are caught 66. Fines. As indicated earlier, bid-rigging infringes Article 81 and would also violate the equivalent rules in the Member States, as well as other jurisdictions. Where the European Commission carries out an investigation and adopts a decision that Article 81 has been breached, it can issue fines of up to 10% of an undertaking s group-wide annual turnover. 103 The Commission has used its powers to issue ever increasing fines to cartelists and several recent cases have involved bid-rigging, including in procurement markets. For example, in Gas Insulated Switchgear in 2007, eleven companies were fined a total of 750 million for cartel behaviour that included rigging bids in procurement contracts for gas insulated switchgear products. 104 Most of the trade in the cartelised products was in fact carried out through public procurement. 105 The features of the cartel included the allocation of individual projects to designated producers and manipulation of the bidding procedure for those projects to ensure that the winning bidder was successful. 106 In Elevators and Escalators, four companies were fined a total of 992 million for a cartel that included bid-rigging of projects for the installation and maintenance of elevators and escalators in Belgium, Germany, Luxembourg and The Netherlands. The cartel involved cover bidding, whereby the agreed winner would inform the other members of the cartel of its price and they 103 Art. 23(2), Regulation 1/2003 on the implementation of the rules on competition laid down in Articles 81 and 82 of the Treaty, OJ 2003 L1/ Case COMP Gas Insulated Switchgear, Commission decision of (on appeal, Cases T-110/07 etc. Siemens v Commission). 105 ibid, para ibid, para 2. 34

35 would then submit complementary bids that were too high to be accepted. 107 The Commission has imposed cartel fines of more than 8 billion since 2005, with the largest ever fine on one undertaking million - imposed on Saint-Gobain in November 2008 for its participation in the Car Glass cartel In Ireland, the experience of imposing fines for anti-competitive behaviour has been less spectacular. Under Section 8 of the Competition Act, undertakings and individuals in violation of Article 81/Section 4 or Article 82/Section 5 can be fined the greater of 4 million or up to 10% of turnover. The Competition Authority cannot impose fines; these sanctions can only be imposed by the courts. To date, the largest fine issued in Ireland was 30,000 arising out of the Ford Dealers cartel; a fine of 20,000 was issued in respect of the Citroen Dealers case; and fines of up to 15,000 were imposed in relation to the Home Heating case. Elsewhere in Europe, significant recent civil enforcement includes the imposition of fines of over 100 million for bid-rigging in the construction sector in The Netherlands. In the UK, the Office of Fair Trading s investigation into bid-rigging of local council construction contracts worth 3 billion continues. A Statement of Objections was issued to 112 companies in April 2008 and a final decision in the case is expected in Private damages actions. Parties who breach EC competition law can be sued in the national courts of the Member States. Private actions in the EU are under-developed, however there has been a growth in actions in recent years and the Commission is expected to bring forward its plans for promoting private actions (a stated policy goal) in the near future, following a review over the last few years that culminated in the publication of a White Paper in The procedures governing private actions for breaches of Articles 81 and 82 are mostly a matter of national law. In Ireland, it is notable that any aggrieved person can take an action, that exemplary damages are available and that as well as suing an undertaking that has breached the competition 107 Case COMP 38/823 Elevators and Escalators, Commission decision of , paras 161, 191, 315, 316, 349, 443, 447 (on appeal, Cases T /07 Otis SA v Commission). 108 See the Commission press release IP/08/1685 of See further, Tournier and Pheasant, The UK Construction Industry under the Spotlight Again [2008] European Competition Law Review White Paper on Damages Actions for Breach of the EC Antitrust Rules COM(2008) 165 final, Brussels

36 rules, a claimant can also sue its directors, managers and other officers. 111 Other reliefs, including injunctions and declarations, are also provided for Exclusion from future bids. Regulation 53 of the Public Sector Regulations provides for the exclusion from the award of a public contract of persons who have been convicted of corruption, fraud and other offences. Although offences under the Competition Act 2002 (on which see below) are not specifically mentioned, they may well come within the exclusion. Some jurisdictions have adopted specific rules excluding those who have breached competition law from participating in public procurement contracts. For example, in Portugal, pursuant to a new Section 45(3) of the Competition Act 2003, adopted in July 2008, where an undertaking is found to breach Article 4 (the equivalent of Article 81), in addition to imposing fines of up to 10% of turnover, the Competition Authority may withdraw the right of the undertaking to participate in public procurement procedures where the breach of Article 4 itself occurred within the context of a procurement procedure. The ancillary sanction can have a maximum duration of two years from the date of the Competition Authority s decision. In Austria, a conviction for bid-rigging or other cartel conduct may lead to exclusion from future public tenders under the Austrian Federal Procurement Act. 70. Criminal Sanctions. In Ireland breaches of Article 81 and Section 4 of the Competition Act 2002 (and beaches of Article 82 and Section 5) also give rise to criminal penalties. Individuals who engage in impugned practices can receive a prison sentence of up to five years. 113 To date, four individuals have received criminal convictions in Ireland (arising out of the Car Dealers and Home Heating cases), however the sentences have been suspended in each case so that no-one has yet gone to prison for a competition law offence. The two most recent cases in 2008, arising from the Citroen Dealers case, resulted in three-month sentences for two individuals, suspended for two years and five years respectively. Sentencing in two further Citroen Dealers cases is due to take place on 30 April Of pending criminal cases in Ireland, a number 111 See s.14 Competition Act S.14(5) Competition Act S.8 Competition Act

37 have arisen out of alleged bid rigging for contracts in the public procurement context. Eight individuals were charged in November 2008 with alleged bidrigging offences in respect of a tender competition for the supply of domestic waste collection services in County Mayo. A further case is pending against three parties, which involves allegations of bid-rigging of a contract for hedge cutting and vegetation clearance services put out to tender by Iarnród Éireann Other EU Member States that have criminal sanctions for competition offences include the Czech Republic, Cyprus, Estonia, France, Hungary, Romania, Slovakia, Slovenia and the United Kingdom. Austria, Germany and Italy have criminal sanctions for bid-rigging and Belgium has a specific criminal sanction for bid rigging in public procurement, which can lead to up to 6 months imprisonment. Elsewhere, criminal sanctions for anti-competitive conduct exist in the United States (where individuals can be imprisoned for up to ten years; since 2000 more than 150 individuals have been imprisoned; and in 2007, the average sentence for an antitrust offence was 31 months 115 ), Canada, Israel and Japan. New laws that would provide for a maximum jail sentence of ten years for cartel conduct are under consideration in Australia and South Africa. The growing trend of criminalising cartel activity worldwide means that extradition arrangements need to be carefully considered where international cartels are exposed. As the ongoing Norris extradition case in the UK 116 and policy statements emanating from the U.S. Department of Justice 117 show, the US authorities are particularly keen to avail of extradition in criminal antitrust enforcement. The first imprisonment for antitrust offences in the UK occurred in 2008 when three individuals were 114 For further details on these cases, see the Competition Authority s 2008 Annual Report, available at at p Hammond, Recent Developments, Trends, and Milestones In The Antitrust Division s Criminal Enforcement Program ( ), available at Despite a lengthy case that resulted in partial victory in the House of Lords (Norris v Government of the United States of America [2008] UKHL 16, [2008] 1 AC 920) for Mr. Norris, a former CEO of a UK engineering firm wanted in the US on price fixing and obstruction of justice charges (the House of Lords ruling that the former was not an extraditable offence because at the time it was allegedly committed it was not a criminal offence in the UK) the US authorities continue to seek Norris extradition see Norris resumes battle to avoid extradition The Times, See, e.g., Hammond, n 115 above. 37

38 jailed for periods of between 30 and 36 months 118 for participating in the Marine Hose cartel, the activities of which targeted government contracts as well as private purchasers. A remarkable feature of this case was the plea agreements reached between the U.S. Department of Justice and the three individuals, which essentially provided that the U.S. authorities would not seek to bring further criminal charges against the individuals as long as they pleaded guilty to the cartel offence in the UK and did not seek from the English courts sentences lower than those stipulated in the plea agreements. 119 Other potential competition law breaches in public procurement 72. Besides hardcore violations of the competition rules, a tenderer might breach Article 81 where the agreement it reaches with the contracting authority is found to have an anti-competitive object or effect. This could only occur if the undertaking is an undertaking for competition law purposes. An example might be where the duration of the contract is unnecessarily long and results in the foreclosure of competitors. This will depend on the circumstances and economic context of the agreement. In certain cases an agreement of, say, five years might be considered to be anti-competitive but in other circumstances, an agreement of much longer duration may be justified. For example, in the London Underground case, contracts for the management and maintenance of the London tube system were of 30 years duration. 120 This was acceptable and considered to be proportionate in light of the particular complexities involved. Other features of agreements that may cause concern include exclusivity clauses. Again, it should be considered if there is foreclosure of competitors. An agreement that breaches Article 81 is void. Whatever the merits of an argument that an agreement between a winning bidder and a contracting authority breaches Article 81 in a particular case, depending on the circumstances, it may be a useful claim for a litigant challenging the contract award to make. 118 Subsequently lowered by the Court of Appeal to 30 months, 24 months and 20 months, R v Whittle [2008] EWCA Crim See R v Whittle [2008] EWCA Crim Case N264/02 London Underground, Commission decision of

39 73. It is also possible that a tenderer or a contracting authority could abuse a dominant position in breach of Article 82/Section 5 through its conduct in a public procurement context. Again, the contracting authority could only ever breach competition law in this way if it qualifies as an undertaking. The FENIN case, discussed above, involved an allegation of abuse of a dominant position by a contracting authority, through its alleged continuous failures to make payments on time. Other possible breaches might involve the imposition of unreasonable contract terms for example, if a dominant contracting authority reduces prices further after negotiations with bidders or later bargains down winners of a bid. It must be noted that instances in the cases of contracting authorities found to have abused a dominant position are not abundant. An analysis as to whether Articles 81 or 82 or equivalent national rules have been breached will require the relevant markets to be defined. Given the advertising requirements under the procurement rules, it may well be that markets have a wider geographic scope than they may have done previously, which would make it more difficult to show that a contracting authority exerted market power or occupied a dominant position. General competition issues in the procurement rules 74. Competition is a fundamental principle of public procurement 121 and beyond competition law, there are competition requirements built into the public procurement Regulations themselves which, if breached, may result in a breach of the Regulations. For example, Recital 8 of Directive 2004/18/EC provides that pre-tender discussions should not have the effect of precluding competition. While a pre-tender technical dialogue may be used by the contracting authority to seek advice, it should not, for example, result in the conferral of a competitive advantage on one of the bidders. This might occur were a bidder allowed, through the technical dialogue, to have some influence over technical specifications or gain a time advantage in making preparations for the bid. Contracting authorities should be conscience of abiding by the principle of equality of treatment when engaging in a pre-tender phase. 121 See the opinion of Advocate General Stix-Hackl in Case C-247/02 Sintesi SpA v Autorita per la Vigilanza sui Lavori Pubblici [2004] ECR I-9215, para

40 75. The Public Sector Regulations also specifically provide that framework agreements, dynamic purchasing systems and e-auctions shall not be used to prevent, restrict or distort competition (Regulations 33, 36 and 67 respectively). Taking framework agreements, it is conceivable that they could breach Regulation 33 in a number of ways, for example: (i) where the duration of the agreement is excessive (Regulation 33 provides that it may exceed 4 years only exceptionally, justified by factors such as the subject matter of the contract this might include the nature of the product or market, security of supply, the costs of retendering etc.); (ii) (iii) (iv) the product range covered by the framework is excessively wide resulting in the foreclosure of suppliers; the range of users is too wide (again, resulting in foreclosure of suppliers; for example, a framework covering all county councils in Ireland would surely be too wide); breach of the framework agreement itself may distort competition, for example, if mini-competitions are not run competitively According to a recent Northern Irish case a framework agreement that breaches the procurement rules can be set aside (McLaughlin & Harvey Ltd v DFP [2008] NIQB 122). 40

41 IV. Public Procurement and State Aid Overview of the state aid rules 76. The state aid and public procurement rules focus on different ways of controlling State actions in the market state aid on the State s role as investor and procurement on its role as purchaser and the interaction of these rules gives rise to a number of issues. When does the grant of a public contract constitute state aid? Does adherence to the procurement rules negate the possibility that a contract award will result in state aid? How should recipients of state aid be treated in the procurement process? 77. The relevant Treaty articles on state aid are Articles 87-89, which have been included as part of the handout accompanying this paper. In summary, for a transaction to give rise to state aid within the meaning of Article 87, the following cumulative conditions must be met: the transaction is financed directly or indirectly through State resources; it confers an economic advantage to certain undertakings or the production of certain goods; it distorts or threatens to distort competition; and it has an effect on trade between Member States. 78. Before considering these conditions, it should be checked whether the de minimis exception 123 or the General Block Exemption Regulation can be availed of. 124 The key criterion in the assessment of whether there is aid will usually be that of economic advantage. Once this is found and assuming that state resources are used, there will usually be little difficulty in finding a distortion of competition and effect on cross-border trade. An economic advantage is one which the recipient undertaking would not have received 123 This is 200,000 to an undertaking over any period of three years; Commission Regulation (EC) No 1998/2006 of 15 December 2006 on the application of Articles 87 and 88 of the Treaty to de minimis aid, [2006] OJ L 379. However, note the Commission Communication of which makes provision for aid of up to 500,000 to be granted to undertakings that have entered into financial difficulty after 1 July 2008 (the Communication and an amendment of are available at Commission Regulation (EC) No 800/2008 of 6 August 2008 declaring certain categories of aid compatible with the common market in application of Articles 87 and 88 of the Treaty [2008] OJ L 214, granting exemption to 26 types of aid. 41

42 under normal market conditions. This is the co-called market economy investor test. 79. The potential application of the state aid rules to a procurement transaction raises a number of procedural issues. If state aid is present, the Commission must be notified and this triggers a standstill obligation under Article 88(3) of the Treaty, i.e. the procurement contract cannot be implemented until after the Commission approves the transaction. This provision has direct effect so that anyone affected by the payment of unlawful aid can bring an action for damages in the national court. The Commission or national court can recover unlawfully granted aid from the recipient. 80. In cases where there is doubt about the compatibility of a procurement process with the state aid rules, the Member State may make a notification in order to obtain legal certainty. It is preferable to make this notification as early as possible, however if the details of the proposed transaction are not sufficiently clear, the Commission may issue an equivocal decision, to the effect that it cannot be ruled out that the measure would result in state aid. An example is the Clonee/Kells decision, involving a complex negotiated procedure, the outcome of which was uncertain, which meant that state aid could not be ruled out. 125 The awarding authority or Member State must make its own initial assessment as to the necessity of a notification but even if it concludes that a notification is unnecessary, the Commission could still investigate, for example, following complaints by a disgruntled bidder. A number of factors will be relevant to the decision whether to notify, such as whether there is a genuine doubt about the presence of state aid and whether a complaint is likely. The better documented the procurement procedure, the better it can be shown that the outcome will result in a market price and will not give rise to aid. This is particularly so when the negotiated procedure, restricted procedure or competitive dialogue is used. 125 Case N 149/2006 Clonee/Kells, Commission decision of , paras 39, 43 (although the Commission decided that even if there was state aid, it would be compatible with the common market). 42

43 81. If the Commission finds that state aid is present, it will then examine the compatibility of the aid with the common market. 126 State aid that may be considered compatible with the market pursuant to Article 87(3) includes aid to facilitate the development of certain economic activities or certain economic areas and aid to remedy a serious disturbance in the economy of a Member State. This latter exemption has been particularly apt for aid granted during the financial crisis. 82. As to the timetable, once notified, the Commission will carry out a preliminary analysis. Within two months (and if the Member State consents, up to six months), the Commission must decide whether there are doubts as to the compatibility of the measure with the common market. This analysis involves deciding whether there is state aid and if there is, whether it can be exempted under Article 87(2) or 87(3). Where the Commission has doubts, it will launch a formal investigation, which can last up to 18 months. 83. Even if the Commission decides there is no aid, or that any aid is compatible with the common market, the fact that a decision has been made presents a disgruntled bidder with another litigation opportunity (besides litigating under the procurement rules) as it can appeal the Commission s decision to the Court of First Instance under Article 230 of the Treaty. This may be time consuming and risky and might put the project in doubt. Procurement awards as state aid The most obvious way that a procurement award might give rise to state aid is when the amount paid for the contract is excessive. Another possibility is where there was no real need for the procurement in the first place. To the extent that a proper procurement procedure pursuant to the EU directives is followed, this tends to show that no state aid is involved in an award. A showing of proper procurement practice can also be used to support the 126 As well as making a competitive assessment, this includes consideration of whether the aid contravenes other provisions of the Treaty and the general principles of Community law (See Case C- 390/06 Nuova Agricast Srl v Ministero delle Attività Produttive, judgment of , paras 50-51). 127 See, e.g., Baistrocchi, Can the Award of a Public Contract be Deemed to Constitute State Aid [2003] European Competition Law Review 510; Hillger, The Award of a Public Contract as State Aid within the Meaning of Article 87(1) (2003) 12 Public Procurement Law Review

44 argument that when there is an element of state aid in the award, it should be exempted. 85. The BAI case confirmed the parallel application of the public procurement and state aid rules. 128 This case was the first time that the state aid rules were applied to a State s procurement activities. BAI had complained to the Commission about subsidies received by its competitor on UK-Spanish ferry routes by two Spanish authorities. The subsidies, which had social and cultural aims, included an agreement by the authorities to purchase a set number of travel vouchers. After changes to the arrangements the Commission declared it compatible with the common market and BAI brought an Article 230 challenge to that decision. The Court of First Instance held that the agreement could not be excluded in principle from the concept of state aid merely because the parties undertook reciprocal commitments. 129 The Court also found that the social and cultural motivation of the Spanish authorities had no bearing on the finding that the arrangements constituted state aid but these aims could be taken into account by the Commission in considering if state aid was exempted. 130 The Court ultimately concluded that the Commission s decision that the arrangements did not give rise to state aid misinterpreted Article 87 and it annulled the Commission s decision to terminate its state aid review. The case is an example of state aid arising where a public authority contracts for something it does not really need. In theory, this should not occur with contracts that follow from procurement as public procurement functions to satisfy a public sector need, however there may be cases where the need is not in fact real. 86. The Commission had a long-standing practice of presuming that transactions that properly followed the public procurement rules would not give rise to state aid. This is evident from the London Underground case, which involved a Public-Private-Partnership for operation of the London underground. A public company, LUL, would run transport services and the infrastructure would be managed by three private companies, with grants of 30-year leases. 128 Case T-14/96 Bretagne Angleterre Irlande ( BAI ) v Commission [1999] ECR II ibid, para ibid, para

45 As part of the transaction, the three private companies would receive regular payments from LUL over the life of the service contracts. The payments were essentially fixed for the first 7½ period, with renegotiations for the remaining periods. Other elements included a parent company guarantee and provisions specifying payments to be underpinned by LUL under certain circumstances. The Commission, in analyzing whether the scheme gave the operators an economic advantage, used the presumption that a properly run procurement process should not result in the grant of state aid: [When] these types of infrastructure arrangements are concluded after the observance of an open, transparent and non-discriminatory procedure, it is, in principle, presumed that the level of any public sector support can be regarded as representing the market price for the execution of a project. This conclusion should lead to the assumption that, in principle, no State aid is involved The key question then was whether the procurement process had been open, transparent and non-discriminatory. The Commission examined the advertisement of the PPP (which was sufficient for an open tendering process), the methodology for selecting preferred bidders (bidders were chosen on the basis of best value for money) and whether modifications to the contracts after selection of preferred bidders caused discrimination or unequal treatment (the nature of the contract required a flexible approach and the modifications did not change the nature and scope of the PPP beyond what was contemplated in the notices published in the OJEC; any improvements the preferred bidders could achieve in the terms of the contracts were reasonable in this type of novel and complex contract that had been awarded under the negotiated procedure; and ultimately, it was possible for contract modifications to be made without automatically vitiating the presumption that the final price was a market price). The Commission therefore concluded that the tendering process was open, transparent and non-discriminatory. On this basis, the PPP arrangements were considered to reflect a market price and so did not constitute State aid. 88. Even though the negotiated procedure was used in London Underground, the Commission applied the presumption that an open, transparent and non- 131 London Underground, n 120 above, para

46 discriminatory procedure should not result in state aid. However, later cases show that the presumption may not fully apply to the negotiated procedure or the competitive dialogue (understandably, it also may not fully apply to the restricted procedure). In the Clonee/Kells Motorway decision, Ireland notified two PPP road building transactions (the M3 motorway and the Limerick tunnel) that involved certain grants and guarantees for the private partners. For each project, an open, transparent and non-discriminatory procurement process that complied with the EU directives was to be used, with selection under the negotiated procedure. Ireland took the position that as the private companies would be selected through a competitive tender process, they would not receive any economic advantage and therefore, no state aid was involved. The Commission, however, could not rule out the possibility that the schemes would result in the grant of state aid. Its view of the salutary effect of a procurement process in compliance with EU rules was less emphatic than it had been in London Underground: The Commission in general considers that a call for tender can be an appropriate means for establishing the market value of a given good or service. The Commission notes that an open, transparent and nondiscriminatory tender procedure tends to minimize potential advantages to the service providers and thus possible elements of state aid. However, an element of state aid may remain. In the present case, the Irish authorities have opted for a negotiated procedure. As the outcome of this procedure, which is very complex, is not yet known, the Commission considers that it cannot exclude that the financing measures proposed by the Irish authorities may confer an economic advantage to the successful bidder The particular concern expressed by the Commission stemmed from the fact that at the time it considered the project, its details had not been worked out sufficiently so that the possibility of state aid could be ruled out. Nevertheless, the Commission decided that any state aid at issue would be compatible with the common market, persuaded in part by the fact that the Irish government had received numerous requests for bidding documents and that bidding was very competitive. 132 Clonee/Kells, n 125 above, paras (emphasis added). 46

47 90. Other cases involving the negotiated procedure have also given rise to doubts on the state aid front. The Cumbria Broadband case involved a contract for the provision of broadband services in Cumbria and North Lancashire. 133 There was little incentive for companies to invest in broadband services in this remote area given the high costs involved so the contract was to provide public funding to the winning bidder (in effect, compensation for carrying out a public service obligation). The Commission considered that the conditions for state aid were met, one of the advantages to the winning bidder being its ability to commercially exploit the infrastructure that would be built after the contract had expired. The Commission examined whether the Altmark criteria were satisfied (in Altmark, the Court of Justice laid down four conditions which, if satisfied, would show that compensation provided to carry out public service obligations was not state aid 134 ). The Commission noted that the conclusion that the contract gave rise to state aid was not altered by the fact that the service provider would be chosen through a tendering procedure. As the negotiated procedure was to be used, the terms of the eventual agreement were not yet clear, so the second Altmark condition was not fulfilled (the second condition is that the parameters on the basis of which compensation is calculated must have been established in advance in an objective and transparent manner so as to avoid the conferral of an economic advantage). In addition, as the infrastructure would be in the ownership of the service provider after termination of the agreement, it could not be excluded that the compensation awarded to the winning bidder would eventually exceed what was necessary to cover all or part of the costs incurred in discharging its obligations. The Commission did go on to find that the aid was compatible with Article 87(3)(c) of the Treaty Contracting authorities can include particular features in the tender that will tend to negate any state aid concerns, as in the Welsh Networks case. 136 The 133 Case N 282/2003 Cumbria Broadband, Commission decision of A summary of Altmark is included at Annex II to this paper. 135 See also, Case N 307/04 Broadband in Scotland remote and rural areas, Commission decision of , which had a procurement procedure that included a negotiation phase and involved qualitative elements. This was found to give rise to state aid, which was ultimately compatible with the common market. 136 N 46/2007 Welsh Public Sector Network Scheme, Commission decision of

48 Welsh Assembly carried out a procurement process pursuant to the competitive dialogue procedure in Directive 2004/18/EC to select a provider of consolidated network services for the public sector in Wales. Concerned that the complex transaction might give rise to state aid, the UK notified the Commission in advance of making the award. The Commission found that there would be no economic advantage for the winning bidder. It considered that the award was a pure procurement transaction aimed at satisfying a clearly defined public need. The Commission then examined the procurement process. It found that there was a competitive procurement process which employed the criterion of most economically advantageous tender in line with Directive 2004/18/EC, which was suitable for achieving best value for money. In reaching this conclusion, the Commission noted a number of particular mechanisms of the procedure which would ensure cost effectiveness over the entire duration of the contract: (i) (ii) (iii) A benchmarking requirement, involving regular independent reviews of tariffs and service performance; A gain sharing mechanism to cover situations where market prices for networking services would fall during the term of the contract; the difference between the reduced costs to the service provider and the fees paid by the Welsh authorities would be shared between the parties this would prevent increased return for the provider while providing an incentive for it to reduce costs; and Price control for connectivity services through a system of minicompetitions enabling individual authorities to continually test the market. 92. These are features of the type that contracting authorities might consider implementing in complex projects to nullify claims of state aid. A further example, in one of the Scottish Broadband cases, involved the scrutiny of the tender by an independent audit body Case N 117/2005 Aggregated public sector procurement of broadband in Scotland, Commission decision of , para 21. Other ways of showing that the service provider does not gain an 48

49 93. Where state aid is included in the award of a contract, the fact that a proper procurement process has been used can support a finding that the aid is compatible with the common market. The Irish National Broadband Scheme ( NBS ) decision illustrates the point. 138 The scheme involved the selection of a service provider to roll out and operate broadband networks in rural areas of Ireland that would not otherwise be served by broadband. An open tender process following the competitive dialogue procedure would be used to select the service provider. The Irish government would provide aid, the amount of which would be determined during negotiations as part of the competitive dialogue, with the remaining costs being funded by the winning bidder. In concluding that the scheme constituted state aid but was, nonetheless, compatible with the common market (by reference to Article 87(3)(c) in particular aid to facilitate development of certain economic activities and areas), the Commission highlighted the fact that an open tender process in compliance with the procurement rules was being used to select the winning bidder. By requiring bidders to indicate the amount of aid they considered necessary, Ireland s objective was to ensure that the state aid awarded would provide a direct and appropriate investment incentive limited to the amount required for the Preferred Bidder to provide the requested services. 139 The use of a competitive bidding process would minimise the public funding required and so helped ensure that any aid measure would be proportionate in light of the objectives sought. On balance, the overall effect of the state aid was positive. 140 economic advantage might include a comparison with a similar transaction in the private sector (although identifying a sufficiently similar transaction and obtaining data may be problematic) or independent valuation. 138 N 475/2007 Ireland National Broadband Scheme, Commission decision of The contract was awarded to 3 and entered into on 23 December The Irish government are contributing 80 million of the 223 million cost. 139 ibid, para The NBS appeared to involve a public service obligation on the winning bidder there was a requirement to offer connections with specified requirements in specified areas and a wholesale product at an appropriate tariff but the Commission did not carry out an Altmark analysis. Had it done so, it seems that the second condition parameters of compensation to be established in advance would not have been met as the overall budget was to be determined during negotiations. 49

50 State aid recipients as tenderers 94. Should an undertaking that has received state aid be allowed to participate in a public bid? The concern is that such an undertaking would be enabled, through the financial advantage gained from the aid, to undercut other bidders in price and gain an unfair advantage over them. In turn, this would breach the principle of equal treatment. In ARGE, the Court of Justice examined these questions. First, it held that recipients of state aid were not automatically excluded from participating in a public procurement tender. If this were the case, the Court considered that it would have been made explicit in the directives. 141 Second, the Court considered whether the recipient of illegal state aid was barred from participation in a tender. There was no automatic exclusion of recipients of illegal state aid but the Court did point out that: [It] is not excluded that, in certain specific circumstances, Directive 92/50 requires, or at the very least allows, the contracting authorities to take into account the existence of subsidies, and in particular of aid incompatible with the Treaty, in order, where appropriate, to exclude tenderers in receipt of such aid. The Commission correctly states in this connection that a tenderer may be excluded from a selection procedure where the contracting authority considers that it has received aid incompatible with the Treaty and that the obligation to repay illegal aid would threaten its financial well-being, so that that tenderer may be regarded as unable to offer the necessary financial or economic security The reference in this passage to Directive 92/50 is to a provision now found in Article 55 of Directive 2004/18. Article 55 provides that where a tender is abnormally low due to what the contracting authority considers to be the receipt of illegal state aid, the bidder may be excluded but only after a consultation has been carried out. The Court agrees here with the Commission s point that the financial viability of a tenderer may be compromised due to the risk that he will have to repay an illegal state aid. State aid and public procurement in the financial crisis 96. Finally, a quick word about recent developments in the application of the state aid rules and the public procurement rules in the financial crisis. Reflecting the 141 Case C-94/99 ARGE Gewässerschutz [2000] ECR I-11037, paras ibid, paras

51 current economic situation, the Commission has relaxed somewhat the application of the rules on state aid and procurement. The Commission is taking a more lenient approach to the application of state aid rules to banks and financial institutions, exemplified by its approval of various bank bailouts across Europe 143 and its communications on the matter. 144 It has also introduced a scheme for the approval of state aid of up to 500,000 to companies in financial difficulty. Applications from countries including Germany, France and Portugal have already been made under this scheme. 145 In procurement, the Commission has stated that all major public projects in 2009 and 2010 using the restricted procedure can use the accelerated procedure, cutting the timetable from 87 to 30 days (however this statement from the Commission is not legally binding). Although unclear from the Commission s statement, it is understood by many that this also applies to the negotiated procedure. 146 The application of competition rules or at least, merger control rules has also been relaxed in certain cases. In Ireland, for example, the jurisdiction of the Competition Authority to review bank mergers has been removed. 147 In the UK, the government intervened to ensure that the Lloyds TSB/HBOS merger was not subjected to competition review. It will be interesting to see what other measures, if any, are taken that weaken the rules on public procurement, state aid and competition law, and the principles that underpin them, as the economic crisis unfolds. Conclusion 97. The above discussion has reviewed a number of the main issues arising in the interaction between the public procurement rules and the rules on competition and state aids. It would be prudent of all actors in the public procurement process to be aware of the competition and state aid rules and how they can affect tenders for public contracts. The ways in which the rules interact are sometimes subtle (such as the parallels between the concept of an undertaking and a body governed by public law ) and sometimes more Commission Communications of 13 October 2008 and 5 December 2008, available ibid. 145 See the Commission Communications, n 123 above. 146 See the Commission s press release IP/08/2040 of See s.7 of the Credit Institutions (Financial Support) Act

52 blunt (as in the application of the competition rules to bid rigging) but there is much scope for all of the various intersections to develop further in the future. 52

53 Annex I Entities held to be undertakings and entities found not to be undertakings for purposes of the competition rules The following entities have been held not to be undertakings: Eurocontrol, an international organisation founded by a number of Member States, which carried out air traffic control with collection of route charges - tasks in the public interest aimed at contributing to the maintenance and improvement of air navigation safety (C-364/92 SAT Fluggesellschaft v Eurocontrol [1994] ECR I-43); Entities managing social security systems subjecting self-employed persons in non-agricultural occupations to compulsory social protection exclusively social function based on the principle of solidarity (C-159, 160/91 Poucet and Pistre v Assurances Générales de France and Cancava [1993] ECR I-637); A company set up by the public port authority to carry out antipollution surveillance services in the port of Genoa task in the public interest which forms part of the essential functions of the State as regards protection of the environment in maritime areas (C-343/95 Cali & Figli v SPEG [1997] ECR I-1547); Associations of sickness funds, which provided benefits to employees who, according to German law, were obliged to be insured exclusively social function founded on the principle of solidarity; conclusion not altered by the fact the funds engaged in some competition to attract members) (C-264, 306, 354 and 355/01 AOK Bundesverband v Ichthyol-Gesellschaft Cordes, Hermani & Co. [2004] ECR I-2493); Entities providing compulsory insurance for work accidents principle of solidarity (Case C-218/00 Cisal [2002] ECR I-691); A municipal authority granting exclusive concessions to undertakers an administrative public function (Case 30/87 Bodson v Pompes Funèbres des Regions Libèrè SA [1988] ECR 24799); Bodies responsible for the operation of the Spanish national health system nature of purchasing activity dependent on the use to which goods were put (Case C-205/03P Federación Española de Empresas de Tecnología Sanitaria (FENIN) v Commission [2006] ECR I-6295); Non-profit, ELPA, which represented the International Motorcycling Federation in Greece and was vested with certain public powers - its role in the decision-making process of the public authorities could be distinguished from economic activities engaged in by it, such as 53

54 organization and commercialisation of motorcycling events (Case C- 49/07 Motosykletistiki Omospondia Ellados NPID (MOTOE) v Elliniko Dimosio, judgment of ); Irish Dental Council not an association of undertakings (Kenny v Dental Council [2004] IEHC ); The Health Service Executive when negotiating with the representative bodies of the pharmaceutical industry in Ireland to reduce the ex factory price of certain pharmaceutical drugs; and purchasing community pharmacy services from private sector pharmacy undertakings under various schemes for the provision of prescription drugs to the general public. The Competition Authority considered that the HSE was not an undertaking for purposes of Articles 81 or 82 or the Competition Act 2002 (Competition Authority Enforcement Decision 01/08, Alleged anticompetitive conduct by the Health Service Executive relating to the administration of the Community Drugs Schemes ( )). The following entities have been held to be undertakings: Members of the Dutch Bar the fact the profession was regulated did not alter the economic nature of its activities (the case arose out of regulations of the Dutch Bar which prohibited lawyers from practising in full membership with accountants) (Case C-309/99 Wouters [2002] ECR I-1577); Medical specialists were paid by patients for their services and assumed the financial risks of pursuing their activity (Cases C-180/98 to C-184/98 Pavlov [2000] ECR I-6451); A public employment agency employment procurement not necessarily carried out by public entities The fact that employment procurement activities are normally entrusted to public agencies cannot affect the economic nature of such activities. Employment procurement has not always been, and is not necessarily, carried out by public entities. That finding applies in particular to executive recruitment (Case C-41/90 Höfner and Elser v Macrotron GmbH [1991] ECR I-1979, para 22); Customs agents offered, for payment, services including carrying out of customs formalities (Case C-35/96 Italy v Commission [1998] ECR I-3851); A compulsory pension fund it was set up by a collective agreement between organisations representing management and labour in particular sectors and made compulsory by the public authorities. Although non-profit making and pursuing a social objective, it 148 C.f. C-309/99 Wouters; for criticism of the judgment, see Hogan, Regulatory Bodies as Associations of Undertakings (2005) 27 Dublin University Law Journal

55 qualified as an undertaking: the amount of the benefits provided by the fund depended on the financial results of the investments made by it; the fund could grant exemption from affiliation where an employer gave its workers benefits of at least an equivalent level; and the fund was in competition with insurance companies (Case C-67/96 Albany International BV v Stichting Bedrijfspensioenfonds Textielindustrie [1999] ECR I-5751); A healthcare trust the UK Competition Appeal Tribunal found that in purchasing from a private party and providing care home services, a healthcare trust was an undertaking as the trust was in a position to generate the effects which the competition rules seek to prevent. (BetterCare Group Ltd v Director General of Fair Trading [2002] CAT 7, 69 BMLR 102). Note however, that this decision must now be read in light of the subsequent Court of Justice ruling in FENIN, which takes a narrower approach to the concept of an undertaking, where the decisive factor was whether the provision of services was an economic activity. 55

56 Annex II Altmark The scheme of the Treaty recognises that some services are unlikely to be provided to the public without State support because the return available to the market would not justify the expense of providing the service. An example is the provision of communications infrastructure, such as broadband networks, or energy supply, to remote areas. Other examples include public service broadcasting, social housing and transport services. Where private bodies provide these services of general economic interest, the terms under which they operate may give rise to state aid. Article 86(2) of the Treaty recognises that in certain circumstances it will be necessary for the provision of such services to be shielded from the Treaty s rules, in particular the rules on competition and state aid. Article 86(2) provides as follows: Undertakings entrusted with the operation of services of general economic interest or having the character of a revenue-producing monopoly shall be subject to the rules contained in this Treaty, in particular to the rules on competition, in so far as the application of such rules does not obstruct the performance, in law or in fact, of the particular tasks assigned to them. The development of trade must not be affected to such an extent as would be contrary to the interests of the Community. To the extent that the State compensates an undertaking for providing a service of general economic interest, there is no conferral of an economic advantage on the undertaking and so no state aid. 149 But how does one draw the line between compensation and what might amount to an over-payment that does confer an economic advantage? In Altmark, the Court of Justice held that four criteria had to be met for compensation for the provision of public services to fall outside the definition of state aid: 150 (i) the recipient undertaking must actually have public service obligations to discharge, and the obligations must be clearly defined; 149 See Case C-53/00 Ferring v ACOSS [2001] ECR I-9067, paras Case C-280/00 Altmark Trans GmbH v Nahverkehrsgesellschaft Altmark GmbH [2003] ECR I- 7747, paras

57 (ii) (iii) (iv) the parameters on the basis of which the compensation is calculated must be established in advance in an objective and transparent manner; the compensation cannot exceed what is necessary to cover all or part of the costs incurred in the discharge of public service obligations, taking into account the relevant receipts and a reasonable profit for discharging those obligations; where the undertaking is not chosen pursuant to a public procurement procedure which would allow for the selection of the tenderer capable of providing the services at the least cost, the level of compensation needed must be determined on the basis of an analysis of the costs which a typical efficient undertaking with the means to meet the public service requirements, would have incurred in discharging those obligations, taking into account relevant receipts and a reasonable profit. 57