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Is it possible for a public authority to grant State aid through a defective procurement procedure? The answer is in the affirmative for a number of reasons. For example, a procedure for the purchasing of goods or services that excludes potential bidders may result in a higher price paid by the procuring authority. Some of the excluded bidders may be willing to supply at a lower price. This confers an undue advantage on the winner and also results in excessive transfer of State resources. Conversely, a procedure for the sale of services or public assets that excludes potential bidders may result in a lower price charged by the selling authority. Some of the excluded bidders may be willing to offer a higher price. This also confers an undue advantage on the winner and also results in transfer of state resources through loss of revenue.
In the former case, the public authority acts as a private buyer, while in the latter case the public authority acts as a private seller or vendor. The behaviour of the hypothetical market operator defines a benchmark against which to assess procurement procedures. But what happens when a public authority acts as a regulator rather than a market operator? What benchmark can be used to determine whether it behaves as public authority should behave? Can a “public operator” benchmark be defined as opposed to that of a “private operator” or “market operator”?
The answer is also in the affirmative for the simple reason that when the State exercises its regulatory powers it must treat equally all those who are regulated and are in the same situation. This normally stems from the purpose of regulation itself, which is to remedy a market failure or achieve a social objective. If regulation is applied unevenly, in a discriminatory manner, it will not constrain or incentivise equally all those that it seeks to regulate and therefore it will not achieve fully its aims. It follows that the appropriate benchmark is the application of the relevant regulation in a non-discriminatory manner by the relevant public authority.
What happens, however, when there is a mixed situation such as when the regulatory act or decision involves the charging of a fee? For example, in order to obtain a licence to practice medicine or to broadcast or to operate a bank, it is normal to pay a fee. In most cases the purpose of the fee is merely to cover the administrative costs of the issuing of the licence. In some regulated industries such as banking or telecommunications, the fee is also intended to contribute towards the costs of the regulatory body. That is, the expenses of the regulator are covered by those it regulates.
The case which is reviewed in this article falls in a third category: a concession to explore and potentially exploit a State asset such as mineral deposits. The fee here can have three purposes: i) to cover administrative costs, ii) to determine who gets the right to prospect for minerals [by assigning that right to the highest bidder] and iii) to generate revenue for the State from the profits that the concession holder can eventually earn from the commercial exploitation of the extracted minerals. A competitive selection would normally ensure that the second and third purposes would be achieved simultaneously. The winner would be the company to offer the highest fee to the concession authority, while the fee would be determined by the amount of the expected future profits. The company that would be the most efficient to extract the minerals and most successful in selling them would presumably be the one that would offer the highest fee.
The question which must be answered at this point in order to understand the reasoning of the Commission is whether Member States are obliged to establish an auctioning process or any other competitive selection method that can maximise revenue. The answer is negative whenever they act as public authorities or regulators in pursuit of public policy objectives. EU case law neither obliges them, nor prevents them from maximising revenue. Two landmark cases are worth recalling here.
The first is the judgment in case C-518/13, Eventech v The Parking Adjudicator, concerning the use of bus lanes in London by black taxis but not mini cabs.
“(47) It must however be stated that that question […] concerns whether the bus lanes policy, by which TfL [Transport for London (the relevant regulator)] pursues the objective laid down by the State legislation, namely to ensure a safe and efficient transport system, must be regarded as conferring on its beneficiaries an economic advantage, for the purposes of Article 107(1) TFEU, which falls within the scope of EU law on State aid and which has an economic value which must be paid for by those beneficiaries.”
“(48) In that regard, […], it must be held that where the State, in order to pursue the realisation of an objective laid down by that State’s legislation, grants a right of privileged access to public infrastructure which is not operated commercially by the public authorities to users of that infrastructure, the State does not necessarily confer an economic advantage for the purposes of Article 107(1) TFEU.”
“(49) Further, it must be stated that the identification of the objective pursued is, in principle, a matter within the prerogative of the competent national public authorities alone and they must have a degree of discretion both as regards whether it is necessary, in order to achieve the regulatory objective pursued, to forgo possible revenue and also as regards how the appropriate criteria for the granting of the right, which must be determined in advance in a transparent and non-discriminatory manner, are to be identified.”
The second case is T-475/04, Bouygues v Commission, concerning the award of licences to telecoms operators.
“(108) Moreover, the Community framework for telecommunications services, […], rests on equality of treatment between operators for the award of licences and the calculation of any fees and leaves the Member States free to choose the procedure for the award of licences, provided that the principles of freedom of competition and equality of treatment are respected. Hence, although the Member States may use public auctions, they may equally opt for a comparative selection procedure, as in the present case, the essential point being that the operators see that they are accorded to the same treatment, in particular as regards fees.”
“(109) To that effect, […] the fees charged to different operators must be equivalent in economic terms. Furthermore, having noted that the setting of fee amounts involves complex economic assessments and that the national authorities could therefore not be required to comply with rigid criteria in that regard, provided that they remain within the limits resulting from Community law, the Court stated that the national court must determine the economic value of the licences concerned, taking account inter alia of the size of the different frequency clusters allocated, the time when each of the operators concerned entered the market and the importance of being able to present a full range of mobile telecommunications systems”.
“(110) Hence, although the right to use the wireless space granted to the operators has an economic value, the amount payable as a fee can constitute State aid only if, all other things being equal, there is a difference between the price paid by each of the operators concerned, it being recalled that, according to the Court of Justice, it is the time when each of the operators concerned entered the market that must be taken into account […] . On the other hand, if the national authorities decide as a general principle that licences will be awarded free of charge, or awarded by means of public auctions or awarded at a standard price, there is no aid element, provided these terms are applied to all the operators concerned without distinction.”
“(111) Consequently, the fact that the State may have waived resources and that this may have created an advantage for the beneficiaries of the reduction in the fee is not sufficient to prove the existence of a State aid incompatible with the common market, given the specific provisions of Community law on telecommunications in the light of common law on State aid. The abandonment of the claim at issue here was inevitable because of the general scheme of the system”.
Three principles may be inferred from these two judgments. First, Member States, when they act as regulators to allocate rights that have economic value, do not have to auction those rights. Second, they may take into account public policy objectives or impose on those to whom they grant the rights certain obligations in line with public policy objectives. Third, they do not need to charge fees or, if they charge any, they may not aim to maximise revenue.
The Commission had to address similar issues in its decision SA.41116 concerning the granting of exploration rights to the Polish company KGHM Polska Miedź. Because of the importance of those issues and the complexity of the analysis of the Commission, this article is long and divided into two parts. Part I provides the background to the case and examines the reasoning of the Commission on whether the Polish authorities were acting as an economic operator or regulator. Part II, which will appear next week, reviews the application to this case of public procurement principles.