Clouds in the horizon of Spanish airport operator privatisation?

According to recent press reports (for instance, Reuters or CincoDias), the Spanish government is seeking to privatise 50%+ of the capital of AENA, the Spanish airport operator. This process of privatisation and the strategy apparently devised by the government raise some issues of compatibility with EU Law that, in my view, might be highly relevant--particularly after the recent CJEU Judgment in Essent, where the application of free movement of capital to privatisation processes has been re-energised.

 

According to the most complete account of the government's strategy, up to 60% of AENA's capital would be privatised. A first package of around 30% would be divided between 3 to 5 'core (institutional) investors' and the other 30% would be floated in the (Madrid?) stock exchange.

 

The worrying part of the privatisation strategy lies, in my view, on the conditions of selection and participation of the 'core (institutional) investors'. These would be chosen on the basis of a restricted (tender) procedure, whereby they would be assigned 5-10% capital packages on the basis of the price offered and their commitments to both hold the investment at that level and not to increase it above 10% for the longest possible time period.

 

 

Therefore, the main selection criteria (other than price) will revolve around a 'voluntary' refusal to exercise investment freedom (both in terms of acquiring additional shares and divesting the ones acquired in the privatisation process). This clearly rings a bell of similarity with the Essent case, where an absolute prohibition to dispose of the shares (ie an absolute prohibition on privatisation) was subjected to a proportionality analysis.

 

The Spanish government's intention behind this privatisation strategy is to retain a sort of 'joint' control over AENA despite reducing its shareholding to 40% of the capital, and it (seems to) expect the selected 'core (institutional) investors' to remain faithful and to support the government's airport management strategy. In my view, there seems to be no clear public interest justifying such a strategy, as airport management can (easily) be regulated and there are clear indications of successful privatisation in other EU countries (pertinently enough, the privatisation of the London Luton airport, precisely managed by AENA).

 

Further, even if such a public interest could be fleshed out by the Spanish government, the (contractual) restrictions on the disposition of the investments (or their enlargement) by the 'core (institutional) investors' will now need to be subjected to a proportionality test under the Essent line of authority. In my view, the Spanish government's strategy is unlikely to pass legal muster. Only time will tell if the CJEU will have an opportunity to rule on this one.

"Ne bis in idem" in State aid control? CJEU quashes Deutsche Post decision (C-77/12 P)

In its Judgment of 24 October 2013 in case C-77/12 P Deutsche Post v Commission, the Court of Justice of the EU quashed a Judgment of the General Court (T-421/07) and (indirectly) questioned a decision taken by the European Commission concerning the State aid granted by Germany to Deutsche Post in the 1990s. The Commission had adopted an initial negative decision in 2002 (ultimately quashed by the CJEU in C-399/08 P) and, following a request by the initial complainants to look into the matter in more detail, it decided to extend the scope of the original investigation in a 'follow-up' enquiry carried out in 2007 (while the GC was still considering the legality of the original negative decision).

 

Germany challenged the decision of the European Commission on the general basis that, contrary to its allegations, this 'follow-up' enquiry would alter the legal effects of the initial decision (now annulled) and that such an enforcement strategy would be against the most fundamental principles of due process and good administration.

 

The GC (T-421/07) took no issue with the opening of the 'follow-up' investigation, as it considered that such a decision did not alter the legal standing of the State aid measures under investigation, since they had already been flagged as potentially illegal in the initial decision to open an investigation that the Commission adopted in 1999 (and regardless of the fact that they were not included in the original negative decision of 2002). In even more controversial terms, the GC brushed aside the argument that the annulment of the 2002 negative decision should also be taken into consideration in order to bar any 'follow-up' investigation that ultimately had the same origin. As the CJEU summarises,

In addition, the [General] Court observed in paragraphs 77 and 79 of the contested judgment, that this conclusion is not undermined by the judgment in Deutsche Post / Commission [...]. Indeed, this decision did not rule on the question whether the formal investigation procedure initiated in 1999 in respect of the disputed measures has been closed. The Court further considersed that this decision had the effect of retroactively eliminating the 2002 negative decision, so that "this decision can in no way affect the conclusion that the 2002 [negative] decision had no impact on the existence of any independent legal effects generated by [the contested decision] (C-77/12 P at para 37, own translation from French).

On the basis of those considerations, the GC considered that the 2007 decision to carry out a 'follow-up enquiry' was not open to an annulment action under Article 263(4) TFEU and, consequently, dismissed Deutsche Post's challenge. The CJEU has taken a different view.

 

I find it interesting to stress that the CJEU has argued that:

52 As regards, in particular, the binding legal effects of a decision to initiate the procedure provided for in Article [108], paragraph 2 [TFEU] with respect to a measure running and qualified as new aid, such a decision necessarily changes the legal status of the measure, as well as the legal position of the beneficiaries, particularly in regard to its implementation. After the adoption of such a decision, there is at least a significant doubt about the legality of this measure, which must lead the Member State to suspend the payment, since the opening of the procedure laid down in Article [108], paragraph 2 [TFEU] excludes an immediate decision on the compatibility with the common market that would allow for the regular execution of the measure. Such a decision could be invoked before a national court called upon to draw all the consequences of the violation of Article [108], paragraph 3, last sentence, [TFEU]. Finally, it is likely to lead beneficiaries of the measure to refuse in any event new payments or to provision the necessary funds for any subsequent repayments. The beneficiaries will also be affected in their relations with other agents, which will take into consideration the weakened legal and financial situation of the former (see judgment of 9 October 2001, Italy / Commission, C-400/99, Rec . P. I- 7303, paragraph 59).

53 It should be added that […] such a decision to open an investigation with respect to a measure that the Commission describes as new aid is not simply a preparatory step in that it has independent legal effects, particularly with regard to the suspension of the measure under consideration.

54 In this case, it should be noted that […] in the contested decision, the Commission qualified as new aid the transfer payments made by DB-Telekom and the system of public guarantees. Furthermore, as regards the public pension fund, this institution has expressed its doubts about the extent to which this funding granted an economic advantage to [Deutsche Post]. The Commission also pointed out […] that Germany was under the obligation to suspend the measures challenged by the decision.

55 It follows that the 2007 opening decision is an act that is likely to affect the interests of [Deutsche Post] by altering its legal status and, therefore, it meets all the elements of an act within the meaning of Article [263 TFEU].

56 Contrary to what the Court considered […] that finding is not challenged by the existence of the decision to open an investigation in 1999, by which the Commission opened the procedure laid down in Article [108], paragraph 2 [TFEU] in respect of a series of measures being implemented.

57 Indeed, it is clear that, in any event, the Commission, by its negative decision of 2002, closed the formal investigation procedure in 1999.

58 In this regard, it should be noted that the Commission dealt in its negative decision of 2002, of all the measures challenged by the opening 1999 decision, as argued rightly [Deutsche Post] (C-77/12 P at paras 52-58, own translation from French, emphasis added).

Even if this may not be the end of the story in this particular case, which has been sent back to the GC, I think that the principle established by the CJEU could be read as a sort of 'ne bis in idem' in the area of State aid enforcement. Once a measure has been analysed and the Commission reaches a final decision, then the same measure should not be subjected to additional enquiries and no new findings of incompatibility should be acceptable.

 

In maybe more blunt terms, the Commission has one shot (and only one) at each controversial State aid measure, in order to protect legal certainty and as an (implicit) requirement of the principle of good administration.

 

Overall, I would consider such a general principle a positive development in EU State aid law. It remains to be seen, however, whether this reasoning is only case-specific or the CJEU is willing to flesh out such a general principle in even clearer terms, should the opportunity arise in the future.

Maybe not such a global appraisal of State aid after all: CJEU backtracks from a truly economic approach (C-124/10)

In an interesting recent paper, Pablo Ibáñez Colomo conducts a very detailed statistical overview of State Aid Litigation before EU Courts (2004–2012) [Journal of European Competition Law & Practice (2013) doi: 10.1093/jeclap/lpt057]. One of his relevant findings is that the 'private investor test' and its application by the European Commission was one of the most litigated areas of EU State Aid law in that period and that '[a]nnulments were more likely where the ‘private investor test’ was raised as a ground'.

 

In its Judgment of 24 October 2013 in Joined Cases C-214/12 P, C-215/12 P and C-223/12 P Land Burgenland v Commission, the Court of Justice of the EU has been confronted again with the test--this time in the mirror image of the ‘private vendor test'--and, on this occasion, has upheld the approach taken by the European Commission. In my opinion, there are several passages of the Judgment that bear stressing, particularly because the CJEU is backtracking from a much more economically oriented assessment of State aid that was (at least) suggested in Commission v EDF (C-124/10 P).

 

The case involved the existence of State aid in the privatisation of HYPO Bank Burgenland AG, where the relevant Austrian authorities decided to sell the bank to GRAWE despite the fact that the price it offered (EUR 100.3 million) was significantly lower than the price offered by a competing Austro-Ukrainian consortium (EUR 155 million). As the CJEU explains:

The decision was based, in particular, on a [...] recommendation by HSBC  [which] essentially states that, although on the basis of the proposed purchase price the decision should be made in favour of the Consortium, it was recommended that BB be sold to GRAWE, in view of the other selection criteria, namely the reliability of the purchase price payment, the continued operation of BB while avoiding the use of Ausfallhaftung [ie the Austrian performance guarantee system for public credit institutions], capital increases and transaction security (C-214/12 P at para 9).

Not surprisngly, the Consortium challenged the decision claiming that the Republic of Austria had infringed State aid rules during the privatisation of BB and stressing that, amongst other irregularities, the tender procedure had been unfair, untransparent and discriminatory towards it--which resulted in the sale of BB not to the highest bidder, namely the Consortium, but to GRAWE.

The European Commission found that Austria had indeed granted illegal State aid to GRAWE in the privatisation Bank Burgenland because it failed to meet the requirements of the 'private investor test'. In the Commission's view, a private seller would only reject the highest bid in two circumstances: either where it is obvious that the sale to the highest bidder is not realisable, or where consideration of factors other than the price is justified, subject to the proviso that only those factors which would have been taken into consideration by a private vendor are taken into account.

The key aspect then becomes whether the (likely) avoidance of the use of the Ausfallhaftung that would follow the sale to GRAWE rather than to the Consortium was a valid justification under the second scenario (ie whether it was a risk which avoidance justified the transaction). The Commission clearly considered that according the private investor test excludes risks stemming from potential liability to make payment under a guarantee which has to be classified as State aid, such as Ausfallhaftung. The reasoning was similar to the one followed (or, at least, the one I identified) in Commission v EDF, where the CJEU rejected a similarly formalistic approach followed by the Commission.

 

In that case, the CJEU found that

in view of the objectives underlying [Article 107(1) TFEU] and the private investor test, an economic advantage must – even where it has been granted through fiscal means – be assessed inter alia in the light of the private investor test, if, on conclusion of the global assessment that may be required, it appears that, notwithstanding the fact that the means used were instruments of State power, the Member State concerned conferred that advantage in its capacity as shareholder of the undertaking belonging to it (C-124/10 P, para 92, emphasis added).

 

In essence, this supported the approach followed by the General Court, which had ruled that

the purpose of the private investor test is to establish whether, despite the fact that the State has at its disposal means which are not available to the private investor, the private investor would, in the same circumstances, have taken a comparable investment decision. It follows that neither the nature of the claim, nor the fact that a private investor cannot hold a tax claim, is of any relevance (C-124/10 P, at para. 37, emphasis added).

In that regard, it would seem that in the Burgenland case, the GC and the CJEU should also reject the Commission's argument and, consequently, allow the selling authorities to integrate the total potential costs of the use of the Ausfallhaftung as a valid reduction of the nominal price offered by the Consortium and, dependeing on the result of such an assessment, potentially award the contract to GRAWE, as they effectively did. It would have been expected, as the Austrian authorities claimed, that the nature and origin of potential liabilities would be considered irrelevant and that a gloabl (economic) appraisal of the offers received for the Burgenland Bank would have been considered in line with EU law.

 

However, the CJEU reexamines the interpretation of the 'private investor (rectius, vendor) test' to take into account this issue and rules in the following terms:

46 In their first argument, the Province of Burgenland, the Republic of Austria and GRAWE claim, in essence, that the General Court failed to appreciate, in the light of Ausfallhaftung’s characteristics, both the role of the Province of Burgenland as owner and shareholder of BB and, therefore, the private investor test, such as it emerges from Spain v Commission and Germany v Commission. […]

48 the General Court found, in line with that case-law that, when applying the private investor test, it must be determined whether the measures in question are those which such an investor, who counts on making a profit in the short or long term, could have granted.

49 Finally, […] the General Court found, in its assessment of the facts which cannot be appealed, that Ausfallhaftung was not entered into on normal market conditions, given its characteristics.

50 In those circumstances, the General Court rightly concluded […] that Ausfallhaftung could not be taken into account when assessing the conduct of the Austrian authorities in the light of the private vendor test (sic) and that, consequently, the Commission could not be criticised for having rejected Ausfallhaftung’s relevance when evaluating the offers submitted by the Consortium and by GRAWE.

51 Further, as regards the impact of Commission v EDF, it must be pointed out that that judgment was principally concerned with whether the private investor test was applicable in the circumstances of that case, which was rejected by the Commission in the decision at issue in that case, and not how that test was applied in the particular case (see Commission v EDF judgment, paragraph 75). However, in the present cases, it is undisputed that the Commission applied the private vendor test and the Province of Burgenland, the Republic of Austria and GRAWE are in actual fact challenging the General Court’s approval of the manner in which the Commission applied that test.

52 As regards the application of that test, Commission v EDF confirmed the case-law which emerges, in particular, from Spain v Commission and Germany v Commission, according to which, in order to assess whether the same measure would have been adopted in normal market conditions by a private vendor in a situation as close as possible to that of the State, only the benefits and obligations linked to the situation of the State as shareholder – to the exclusion of those linked to its situation as a public authority – are to be taken into account (see, to that effect, Commission v EDF, paragraph 79).

53 In Commission v EDF judgment, the Court further made it clear that, when carrying out that assessment, the manner in which the advantage is provided and the nature of the manner by which the State intervenes are irrelevant where the Member State concerned conferred that advantage in its capacity as shareholder of the undertaking concerned (see Commission v EDF, paragraphs 91 and 92).

54 […] The General Court examined whether Ausfallhaftung had to be taken into account when implementing the private vendor test and found that a private vendor would not have entered into such a guarantee (sic).

55 The Province of Burgenland, the Republic of Austria and GRAWE do not put forward any argument liable to put that finding into doubt, but claim themselves that Ausfallhaftung is a State aid, as the Commission had moreover found in Decision C(2003) 1329 final.

56 In those circumstances, and since, by granting aid, a Member State pursues, by definition, objectives other than that of making a profit from the resources granted to an undertaking belonging to it, it must be held that those resources are, in principle, granted by the State exercising its prerogatives as a public authority.

57 In so far as the Province of Burgenland, the Republic of Austria claim that, through Ausfallhaftung, the Province of Burgenland was none the less seeking to make profit or, at the very least, attempting to do so in addition to its other objectives, it must be recalled that, if a Member State relies on a test such as the private vendor test, it must, where there is doubt, establish unequivocally and on the basis of objective and verifiable evidence that the measure implemented is to be ascribed to the State acting as shareholder (see, to that effect, Commission v EDF, paragraph 82).

58 That evidence must show clearly that, before or at the same time as conferring the economic advantage, the Member State concerned took the decision to make an investment, by means of the measure actually implemented, in the public undertaking (Commission v EDF, paragraph 84).

59 In that regard, it may be necessary to produce evidence showing that the decision is based on economic evaluations comparable to those which, in the circumstances, a rational private vendor in a situation as close as possible to that of the Member State would have had carried out, before making the investment, in order to determine its future profitability (see, to that effect, Commission v EDF, paragraph 84).

60 It is only in cases where the Member State concerned provides the Commission with the necessary evidence that the onus is on the Commission to carry out a global assessment, taking into account – in addition to the evidence provided by that Member State – all other relevant evidence enabling it to determine whether the Member State took the measure in question in its capacity as shareholder or as a public authority (see, to that effect, Commission v EDF, paragraph 86).

61 However, neither during the administrative procedure nor before the General Court did the Province of Burgenland, the Republic of Austria or GRAWE put forward any evidence showing that the introduction or retention of Ausfallhaftung was based on economic evaluations carried out by the Province of Burgenland for the purposes of establishing its profitability. It follows that the Commission was not required to undertake such a global assessment as regards Ausfallhaftung and that the Burgenland and GRAWE judgments were not vitiated by any errors in that regard (C-214/12 P at paras 46-61, emphasis added).

 

 

I am puzzled by the findings of the CJEU. If it rightly held in Commission v EDF that the fiscal nature of the credit converted into capital was irrelevant for the assessment of the transaction as a whole, why is it now relevant that the potential liability incurred in the use of the Ausfallhaftung by the disappointed Consortium derives from a public law system? Surely, if it was not questioned that 'the General Court [rightly] rejected the Commission’s argument that the private investor test could not be applied to the conversion into capital of a tax claim, since a private investor could never hold a tax claim against an undertaking, but only a civil or commercial claim' (C-124/10 P, at paras 37 and 95), it should not be now relevant that a private investor could have not entered into a guarantee scheme such as the Ausfallhaftung (C-214/12 P at para 54).

 

Moreover, an economic assessment should be carried out regardless of the subjective intentions of the State authority (cfr. C-214/12 P at para 59) and, in any case, it was cristal clear in the Burgenland case that an (independent) economic evaluation was carried out by (HSBC), which clearly indicated that, all factors considered, the rational decision was to enter into the transaction with the lowest bidder. Why is the CJEU now not willing to assess the economic transaction as a whole is something I cannot come to grips with.

 

I guess that this will be an area that, as Ibáñez Colomo's study shows, will continue to occupy a significant amount of cases and, possibly, remain one of the obscure areas of State aid litigation for quite some time.

Planning for US DOD pharmaceutical benefits procurement: A need to think outside the box and a lesson for the EU

The US Department of Defense (DOD) offers health care coverage through its TRICARE program. DOD contracts with managed care support contractors to provide medical services, and separately with a pharmacy benefit manager to provide pharmacy services that include the TRICARE mail-order pharmacy and access to a retail pharmacy network. Its current contract for the management of pharmaceutical benefits expires in the fall of 2014 and DOD has already started planning the next stage of procurement.

 

According to the US Government Accountability Office (GAO) report of 30 September 2013,

During acquisition planning for the upcoming TRICARE pharmacy services contract, DOD solicited feedback from industry through its market research process to align the contract requirements with industry best practices and promote competition. For example, DOD issued requests for information (RFI) in which DOD asked questions about specific market trends, such as ensuring that certain categories of drugs are distributed through the most cost-effective mechanism. DOD also issued an RFI to obtain information on promoting competition, asking industry for opinions on the length of the contract period. DOD officials told [GAO] that responses indicated that potential offerors would prefer a longer contract period because it would allow a new contractor more time to recover any capital investment made in implementing the contract. The request for proposals for the upcoming contract, issued in June 2013, included a contract period of 1 base year and 7 option years. DOD also identified changes to contract requirements in response to legislative changes to the TRICARE pharmacy benefit. For example, the National Defense Authorization Act (NDAA) for fiscal year 2013 required DOD to implement a mail-order pilot for maintenance drugs for beneficiaries who are also enrolled in Medicare Part B. DOD officials incorporated this change in the requirements for the upcoming pharmacy services contract.

At first sight, this looks like a proper exercise of procurement planning and one that is specifically concerned with promoting effective competition in the next stage of pharmaceutical benefits management procurement. However, GAO has very high standards and considers that the exercise carried out by DOD is insufficient and that the Department needs to think outside of the box (of the current structure of benefit management contracts) to see if an even better scenario is achievable. In that regard, GAO considers that

DOD has not conducted an assessment of the appropriateness of its current pharmacy services contract structure that includes an evaluation of the costs and benefits of alternative structures. Alternative structures can include incorporating all pharmacy services into the managed care support contracts—a carve-in structure—or a structure that incorporates certain components of DOD’s pharmacy services, such as the mail-order pharmacy, into the managed care support contracts while maintaining a separate contract for other components. DOD officials told GAO they believe that DOD’s current carve-out contract structure continues to be appropriate, as it affords more control over pharmacy data that allows for detailed data analyses and cost transparency, meets program goals, and has high beneficiary satisfaction. However, there have been significant changes in the pharmacy benefit management market in the past decade, including mergers and companies offering new services that may change the services and options available to DOD. GAO has previously reported that sound acquisition planning includes an assessment of lessons learned to identify improvements. Additionally, GAO has reported that a comparative evaluation of the costs and benefits of alternatives can provide an evidence-based rationale for why an agency has chosen a particular alternative. Without this type of evaluation, DOD cannot effectively demonstrate that it has chosen the most appropriate contract structure in terms of costs to the government and services for beneficiaries.

DOD is now required to conduct an evaluation of the potential costs and benefits of alternative structures for the TRICARE pharmacy services contract, and incorporate such an evaluation into acquisition planning. GAO will report again once this additional exercise is completed.

 

In my view, this case shows how important it is to develop effective and demanding standards of market investigation and procurement planning in order for contracting authorities to reap all the benefits of effective market competition. It may well be that the result of the enquiry shows that current structures are the most efficient. But, even in that case, the additional market research would not have been an sterile exercise. By avoiding path dependency and seeking for alternative modes of provision (ie by actually knowing the markets where they contract from), contracting authorities can obtain true value for money.

 

Hence, this type of mandatory market intelligence should be seen as best practice and, in my opinion, imported into the procurement systems of many European countries (and, definitely, Spain). Only in that way will public procurement really contribute to smart growth and be truly aligned with the Europe 2020 strategy. Hopefully the revision of the domestic procurement systems as a part of the process for the transposition of the soon to be adopted new EU rules on procurement will offer Member States an opportunity to also reflect on these issues and to strengthen their market intelligence requirements and infrastructures.

Neutrality of ownership is not unconditional: CJEU sets red lines for privatisation prohibitions (C-105/12 to C-107/12)

In its Judgment of 22 October 2013 in Joined Cases C-105/12 to C-107/12 Essent and Others, the Court of Justice of the EU has explored the boundaries of Article 345 TFEU--which has, so far, remained (and still is) an obscure provision of the Treaties [see B Akkermans & E Ramaekers, 'Article 345 TFEU (ex Article 295 EC), Its Meanings and Interpretations' (2010) European Law Journal 16(3): 292-314].

 

In Essent, the CJEU was concerned with the compatibility with EU law of an absolute privatisation ban. More specifically, it had to analyse a Dutch rule whereby shares in companies that operate distribution networks of electricity and gas can be transferred only within the circle of public authorities, ie cannot be privatised (for a comment, see here).

 

Advocate General Jaaskinen had considered the absolute ban on privatisation compatible with both Article 345 TFEU and Article 63 TFEU on free movement of capital (see his Opinion, not available in English, here). The CJEU has reached the same conclusions.

 

In my view, one of the most interesting legal points of the Essent Judgment is that Article 345 TFEU does not write Member States a blank check when they regulate their property systems or, put othewise, that the principle of neutrality of ownership enshrined in that provision is not unconditional.

 

Hence, the reasoning of the CJEU should be seen as an exercise to draw some red lines that Member States cannot overstep when designing their property systems and that, fundamentally, boil down to full compliance with the rules on free movement of capital.

29 Article 345 TFEU is an expression of the principle of the neutrality of the Treaties in relation to the rules in Member States governing the system of property ownership.
30 In that regard, it is apparent from the Court’s case-law that the Treaties do not preclude, as a general rule, either the nationalisation of undertakings (see, to that effect, Case 6/64 Costa [1964] ECR 585, at 598) or their privatisation (see, to that effect, Case C‑244/11 Commission v Greece [2012] ECR I‑0000, paragraph 17).
31 It follows that Member States may legitimately pursue an objective of establishing or maintaining a body of rules relating to the public ownership of certain undertakings.
32 […] the prohibition of privatisation, within the meaning of the national legislation at issue in the main proceedings, allows, in essence, the transfer of shares held in a distribution system operator only to the authorities and to legal persons owned, directly or indirectly, by those authorities, since any transfer which has the result that the shares become the property of persons other than such authorities and legal persons is prohibited.
33 It follows that the prohibition of privatisation precludes ownership by any private individual of shares in an electricity or gas distribution system operator active in the Netherlands. Its objective is therefore to maintain a body of rules relating to public ownership in respect of those operators.
34 Such a prohibition falls within the scope of Article 345 TFEU. […]36 However, Article 345 TFEU does not mean that rules governing the system of property ownership current in the Member States are not subject to the fundamental rules of the FEU Treaty, which rules include, inter alia, the prohibition of discrimination, freedom of establishment and the free movement of capital (see, to that effect, Case 182/83 Fearon [1984] ECR 3677, paragraph 7; Case C‑302/97 Konle [1999] ECR I‑3099, paragraph 38; Case C‑452/01 Ospelt and Schlössle Weissenberg [2003] ECR I‑9743, paragraph 24; Case C‑171/08 Commission v Portugal [2010] ECR I‑6817, paragraph 64; Case C‑271/09 Commission v Poland [2011] ECR I‑0000, paragraph 44; and Commission v Greece, paragraph 16).
37 Consequently, the fact that the Kingdom of the Netherlands has established, in the sector of electricity or gas distribution system operators active in its territory, a body of rules relating to public ownership covered by Article 345 TFEU does not mean that that Member State is free to disregard, in that sector, the rules relating to the free movement of capital (see, by analogy, Commission v Poland, paragraph 44 and the case‑law cited).
38 Accordingly, the prohibition of privatisation falls within the scope of Article 63 TFEU and must be examined in the light of that article […] (C-105/12 ti C-107/12 at paras 29-38, emphasis added).

This finding of the CJEU effectively subjects the principle of neutrality of ownership to a proportionality test and, generally, seems to restrict its scope--actually, it seems to me that the Essent Judgment makes Article 345 TFEU less than neutral in that it imposes a justification burden on the ownership systems designed at Member State level.

This may be an opening door for a stricter control of ownership rules in the Member States and, once more, for an implicit redistribution of competences between the EU and the Member States [see the interesting discussion by F Losada Fraga et al, 'Property and European Integration: Dimensions of Article 345 TFEU' (2012) Helsinki Legal Studies Research Paper No. 17]. However, more clarification will be necessary, particularly in cases where the public interest justifications for restrictions of (private) ownership are less clear cut than in the Essent case and that, consequently, will be likely to result in an effective restriction of domestic rules on (public) ownership.

European Procurement Law Series

Allow me some marketing of the European Procurement Law Series that a group of colleagues and I are developing. The latest issue (fifth) on the Award of Contracts in EU Procurements is in print and will be available shortly. In my opinion, it provides an interesting overview of practical issues concerned with the award of public contracts, as the abstract stresses:

The award phase is of crucial importance for the outcome of the competition for the contract and it is therefore not surprising that it has been considered in thousands of public procurement disputes in the Member States of the EU.
The subject of this book has for obvious reasons already received scholarly attention in the many books and articles on EU public procurement law. However, the existing literature has seldom been based on a comparative approach covering a broad range of Member States of the European Union with diversified national approaches to EU public procurement law. The present publication is original in this sense and consequently provides the reader with an insight that cannot be found elsewhere.

Not a gold pot: Free allocation of greenhouse gas emission allowances in Spain (C-566/11)

In its Judgment of 17 October 2013 in Joined cases C-566/11, C-567/11, C-580/11, C-591/11, C-620/11 and C-640/11 Iberdrola and Gas Natural, the Court of Justice of the EU has analysed and upheld a Spanish system whereby the remuneration of electricity production was reduced by an amount equivalent to the value of the emission allowances allocated free of charge to electricity producers in accordance with the 2005-2007 National Allocation Plan.

 

The rationale of the system (which actually manipulates/adjusts downwards the energy prices resulting from the Spanish wholesale electricity market) had been clearly spelled out by the Spanish executive, which clearly indicated that, given the fact that electricity producers opted for the incorporation as an additional production cost of the value of the emission allowances allocated free of charge, those prices needed to be adjusted to prevent an unfair enrichment or double whammy by energy producers.

 

In terms of Royal Decree-Law 3/2006, it was indeed justified to

[take] into account of the value of the [emission allowances] in the formation of prices in the wholesale electricity market is intended to reflect [that integration] by reducing, by equivalent amounts, the remuneration payable to the generating units concerned. Furthermore, the sharp increase in tariff deficit during 2006 makes it advisable to deduct the value of the emission allowances for the purposes of determining the amount of that deficit. The existing risk of high prices in the electricity-generation market, with their immediate and irreversible negative effects on end-consumers, justifies the urgent adoption of the provisions laid down in the present measure and the exceptional nature of those provisions (C-566/11 at para 17).

It is clear to see that, ultimately, the decision was aimed at avoiding a double transfer of resources to energy producers from the general budget and from consumers through tariff deficit compensation charges: first, by allocating emission allowances for free [which could then be immediately traded in the corresponding market or used as collaterial in financial deals; see Martín Baumeister & Sánchez Graells, (2012) "Algunas Reflexiones en Torno a Las Garantías Pignoraticias Sobre Derechos de Emisión de Gases de Efecto Invernadero y Su Ejecución" Revista de Derecho Bancario y Bursátil 127: 191-210] and, secondly, by also compensating higher tariff deficits (inflated) by the integration of the (non-zero, commercial) value of those emission rights in the wholesale energy prices.

 

 

 

However, the Spanish Supreme Court harboured doubts on the compatibility of this mechanism with Directive 2003/87. Indeed, according to the Tribunal Supremo, those measures could have the effect of neutralising the ‘free of charge’ nature of the initial allocation of emission allowances and undermining the very purpose of the scheme established by Directive 2003/87, which is to reduce greenhouse gas emissions by means of an economic incentive mechanism (C-566/11 at para 23).

 

In my view, the analysis that the CJEU carries out in order to analyse this complicated situation must be praised, both for its clarity and brevity:

33 The Spanish electricity producers in question have incorporated, in the selling prices that they offer on the wholesale electricity market, the value of the emission allowances, in the same way as any other production cost, even though those allowances had been allocated to them free of charge.

34 As the referring court explains, that practice is undoubtedly cogent from an economic point of view, in so far as an undertaking’s use of emission allowances allocated to it represents an implied cost, known as an ‘opportunity cost’, which consists in the income that the undertaking has forgone by not selling those allowances on the emission allowances market. However, the combination of that practice with the pricing system on the electricity generation market in Spain results in windfall profits for electricity producers.

 35 It should be noted that the on-the-day electricity trading market in Spain is a ‘marginalist’ market in which all producers whose offers have been accepted receive the same price, that is, the price offered by the operator of the last production unit to be admitted to the system. Since, during the period concerned, that marginal price was determined by the offers from operators of combined gas and steam power plants – technology attracting free emission allowances – the incorporation of the value of the allowances into the selling prices offered is passed on in the overall market price for electricity.

 36 Accordingly, the reduction in remuneration provided for in Ministerial Order ITC/3315/2007 applies not only to undertakings that have received emission allowances free of charge, but also to power plants that do not need allowances, such as hydroelectric and nuclear power plants, as the emission allowance value incorporated in the costs structure is passed on in the price for electricity, which is received by every producer active on the wholesale electricity market in Spain.

 37 Furthermore, as can be seen from the documents before the Court, the rules at issue in the main proceedings take into account factors other than the quantity of allowances allocated: in particular, the type of power plant and its emission factor. The reduction in remuneration for electricity production provided for under those rules is calculated in such a way that it absorbs only the extra charged as a result of the opportunity costs relating to emission allowances being incorporated in the price. This is confirmed by the fact that the levy is not incurred where power plant operators sell allowances allocated free of charge on the secondary market.

 38 Accordingly, the aim of the rules at issue in the main proceedings is not subsequently to impose a fee for the allocation of emission allowances, but to mitigate the effects of the windfall profits accrued through the allocation of emission allowances free of charge on the Spanish electricity market.

 39 It should be noted, in that regard, that the allocation of emission allowances free of charge under Article 10 of Directive 2003/87 was not intended as a way of granting subsidies to the producers concerned, but of reducing the economic impact of the immediate and unilateral introduction by the European Union of an emission allowances market, by preventing a loss of competitiveness in certain production sectors covered by that directive (C-566/11 at paras 33-39, emphasis added).

The CJEU recognises that, somehow, the Spanish price adjustment mechanism anticipates a correction which introduction was necessary in the revision of Directive 2003/87/EC:

insufficient competitive pressure to limit the extent to which the value of emission allowances is passed on in electricity prices has led electricity producers to make windfall profits. As can be seen from recitals 15 and 19 to Directive 2009/29, it is in order to eliminate windfall profits that, with effect from 2013, emission allowances are to be allocated by means of a full auctioning mechanism (C-566/11 at para 40).

 

Moreover, the CJEU stresses what, indeed, is the key to this case and, ultimately, indicates the problem of using 'free market' arguments in regulated industries such as energy production, where (wholesale) markets are actually a mere fiction:

since, on the Spanish electricity generation market, a single price is paid to all producers and the end consumer has no knowledge of the technology used to generate the electricity that he consumes and the tariff for which is set by the State, the extent to which electricity producers may pass on in prices the costs associated with the use of emission allowances has no impact on the reduction of emissions (C-566/11 at para 57, emphasis added).

 

 

Finally, in a very congruent manner, the CJEU has ruled that

Article 10 of Directive 2003/87/EC of the European Parliament and of the Council of 13 October 2003 establishing a scheme for greenhouse gas emission allowance trading within the Community and amending Council Directive 96/61/EC must be interpreted as not precluding application of national legislative measures, such as those at issue in the main proceedings, the purpose and effect of which are to reduce remuneration for electricity production by an amount equal to the increase in such remuneration brought about through the incorporation, in the selling prices offered on the wholesale electricity market, of the value of the emission allowances allocated free of charge( C-566/11 at para 59).

In my view, this a valuable Judgment and one that stresses the new rationality of the allocation scheme implemented by Directive 2009/29. Moreover, it makes clear (indirectly) that Member States must avoid granting unfair advantages and subsidies (ie State aid) to energy producers as a result of the the way they operate their greenhouse gas emission allowances allocation mechanims.

Public procurement and competition: a Swedish perspective

In a recent paper, Robert Moldén offers an interesting overview of a wide array of issues concerned with the intersection of public procurement and competition law from a Swedish perspective (ie, in their treatment by Swedish Courts).**

 

The paper is only available on a subscription basis (http://www.ert.se/content.asp?id=60#) but it offers an interesting summary of several cases where the Swedish courts have attempted an interpretation of the principle of competition that may be relevant (and influential) for the future construction of the soon to be enacted Article 15 of the new EU public sector procurement Directive.

 

It is interesting to note, for example, the Judgment of the Stockholm Administrative Court of Appeal of 2 February 2011 in case 6528-10m where it clearly spelled out that

The main purpose of EU public procurement law is freedom of movement for goods and services and that the area shall be opened for non-distorted competition. Both [the Swedish Public Procurement Act] and the EU Directives aim at public procurement proceedings to be conducted by utilizing existing competition in the best way. The provisions aim both at making use of competition in a given procurement proceeding and developing effective competition (para 4, Moldén's translation at p. 598 of his paper).

 

Robert Moldén extensively quotes some of my thoughts in Public Procurement and the EU Competition Rules (Oxford, Hart Publishing, 2011), particularly as the principle of competition in procurement is concerned--which obviously implies that we see things in a very similar manner. Indeed, I fully subscribe his submission that

The competition principle embodied in the Classical Sector Directive imposes an active obligation to ensure that the way they conduct public procurement proceedings is pro-competitive and not anti-competitive. Swedish administrative courts should therefore not treat the Directive's pro-competition provisions as soft law but as hard law, in the sense that infringements of the principle of competition should be considered as infringements of the Swedish Public Procurement Act, in the same way as infringements of, e.g. the principles of proportionality and equality (p. 602).

 

Despite such commonality of views, I do not think it is biased for me to recommend reading his piece, particularly to any academic or practitioner interested in trying to anticipate the implications of the abovementioned (emerging) general principle of EU public procurement law: ie the principle of competition, as formulated in  Article 15 of the new Directive

Contracting authorities shall treat economic operators equally and without discrimination and shall act in a transparent and proportionate manner. The design of the procurement shall not be made with the intention of excluding it from the scope of this Directive or of artificially narrowing competition. Competition shall be considered to be artificially narrowed where the design of the procurement was made with the intention of unduly favouring or disadvantaging certain economic operators.

 

** I am thankful to Ignacio Herrera Anchustegui for bringing this paper to my attention.

3 more instalments in the Evropaïki Dynamiki saga: one successful appeal (T-638/11)

Today, the General Court has issued three Judgments that add to the 'Evropaïki Dynamiki saga'. In two of them (T-474/10 and T-457/10), the famous challenger of EU Institutions' procurement decisions has lost the appeals and been condemned to bear the costs. Generally, none of this two cases raises signifcantly new issues (although one touches upon a complicated aspect of the prevention of fraud and corruption where a holding company of one of the members of the consortium was involved) and the GC is concerned once (actually, twice) more with the duties to state reasons and the contours of the manifest error of assessment of contracting authorities when they assess tenders and award contracts. However, in a third case (T-638/11 European Dynamics Belgium and Others v EMA), the appellant has been successful.

 

In the 'successful' case, the GC quashes EMA's decision on the basis of the poor explanations provided in the debriefing following the assessment of the tenders from a technical perspective. The GC finds that the reasons provided do not allow participating tenderers to understand the marks obtained for their technical proposals and make them unable to compare their assessment against that of the awardee (since the feedback received was vague and of a general nature).

 

Moreover, and maybe more interestingly, the GC engages in an analysis of the degree of disclosure that contracting authorities must ensure where there have been doubts as to the existence of an abnormally low tender. In the case at hand, the winning consortium had been requested to provide additional explanations and to justify that its tender was not abnormally low. The contracting authority was satisfied with those clarifications and proceeded to award the contract in those (not abnormally low) terms. The appellant sought to have access to those explanations and justifications in order to challenge the decision to finally award the contract to that particular consortium. However, the contracting authority had declined to disclose that information on the basis that it constituted a business secret of the winning tenderer.

The GC threads quite lightly and tries to establish an intermediate solution by stressing that:

In addition, EMA argues that by providing detailed information on compliance with the regulations for the protection of workers and working conditions or about the particular economy of the services offered by the consortium S., it would damage the legitimate commercial interests of the latter. However, to require the contracting authority to disclose the grounds upon which it has decided that an offer should not be considered abnormally low does not require it to disclose detailed information on the technical and financial aspects of the offer, such as the prices offered, the resources available to the contractor or the ways in which the successful bidder proposes to provide the services it offers. In order to provide sufficient motivation for this aspect of the tender, the contracting authority shall state the reasoning which led it to conclude that, on the one hand , given its main financial characteristics, such offer is in compliance with the laws of the country in which the services should be performed for staff salaries, contribution to social security and standards of safety and health at work; and, secondly, that it was verified that the proposed prices integrated all the costs generated by the technical aspects of the successful tender (T-638/11 at para 68, own translation from French).

Therefore, the GC does require some kind of 'high level' explanation as to why the contracting authority has been finally satisfied that the offer retained is not abnormally low, but always provided that it protects the confidentiality of the specific details that should remain under business secrecy. Surely, the test envisaged by the GC is not very clearly delineated and requires some further precision, but it is yet another push for the disclosure of information that may make tenderers reluctant to provide very specific information when they are being investigated for having submitted an apparently abnormally low offer (given that, even at some high level, certain information may still be commercial sensitive). I hope that future case law will offer more specific guidance as to how to strike this difficult balance.

A jigsaw of qualifications or a procurement puzzle?: CJEU launches a depth charge against certification systems (C-94/12)

In its Judgment of 10 October 2013 in case C-94/12 Swm Costruzioni 2 and Mannocchi Luigino, the Court of Justice of the EU has followed the Opinion of AG Jääskinen (which I praised and supported here) and expanded its antiformalistic case law on the interpretation of the rules controlling participation and selection requirements in public procurement covered by the EU Directives. In my view, this Judgment is a (well-aimed?) depth charge against certification systems based on Article 52 of Directive 2004/18.

 

More specifically, the CJEU was presented with a request for a preliminary reference concerning the compatibility with EU law of an Italian provision applicable to all works contracts with a value in excess of 150,000 Euro, whereby undertakings that needed to 'team up' and rely on the abilities of other undertakings in order to tender for public works contracts could only do so on a one-to-one basis (ie main contractors were not allowed to build up a 'jigsaw' of qualifications provided by several subcontractors, but had to rely exclusively on the abilities of one subcontractor that was able to deliver the whole of the performance for that given category of works concerned).

 

Under the controversial Italian rule, "For works contracts, the tenderer may rely on the capacities of only one auxiliary undertaking for each qualification category. The invitation to tender may permit reliance on the capacity of more than one auxiliary undertaking having regard to the value of the contract or the special nature of the services to be provided" (emphasis added).

 

The CJEU rephrased the question referred by the Italian court and understood that, in essence, it had to rule wheter Articles 47(2) and 48(3) of Directive 2004/18 must be interpreted as precluding a national provision which prohibits, as a general rule, economic operators participating in a tendering procedure for a public works contract from relying on the capacities of more than one undertaking for the same qualification/certification category.

 

Interestingly, the CJEU spells out that its analysis is based on the final goal of maximising competition (in particular, by means of facilitating SME participation) and finds that:

33 […] it must be held that Directive 2004/18 permits the combining of the capacities of more than one economic operator for the purpose of satisfying the minimum capacity requirements set by the contracting authority, provided that the candidate or tenderer relying on the capacities of one or more other entities proves to that authority that it will actually have at its disposal the resources of those entities necessary for the execution of the contract.
34 Such an interpretation is consistent with the objective pursued by the directives in this area of attaining the widest possible opening-up of public contracts to competition to the benefit not only of economic operators but also contracting authorities (see, to that effect, Case C‑305/08 CoNISMa [2009] ECR I‑12129, paragraph 37 and the case-law cited). In addition, as the Advocate General noted at points 33 and 37 of his Opinion, that interpretation also facilitates the involvement of small- and medium-sized undertakings in the contracts procurement market, an aim also pursued by Directive 2004/18, as stated in recital 32 thereof.
35 It is true that there may be works with special requirements necessitating a certain capacity which cannot be obtained by combining the capacities of more than one operator, which, individually, would be inadequate. In such circumstances, the contracting authority would be justified in requiring that the minimum capacity level concerned be achieved by a single economic operator or, where appropriate, by relying on a limited number of economic operators, in accordance with the second subparagraph of Article 44(2) of Directive 2004/18, as long as that requirement is related and proportionate to the subject-matter of the contract at issue.
36 However, since those circumstances constitute an exception, Directive 2004/18 precludes that requirement being made a general rule under national law, which is the effect of a provision such as [the controversial Italian provision] (C-94/12, paras 33-36, emphasis added).

 

In my view, the Swm Costruzioni Judgment should be welcome as it concerns the anti-formalistic and possibilistic interpretation of the rules on selection of contractors in Directive 2004/18--which are about to be modernised in the new procurement directive, also as 'teaming up' provisions are concerned (see my recent paper: "Exclusion, Qualitative Selection and Short-listing in the New Public Sector Procurement Directive").

 

Moreover, it is worth noting that the Judgment does (inadvertently? and) implicitly throw a depth charge against national certification systems. Taking the logic behind the Swm Costruzioni Judgment to its logical extremes, those certification systems should only be in place to cover those contracts where objective circumstances justify the need for the contracting authority to make sure that a single undertaking carry out a specific contract.

 

Certification systems, then, should only cover "works with special requirements necessitating a certain capacity which cannot be obtained by combining the capacities of more than one operator" as, otherwise, the whole certification system is completely superficial if the contracting authority must (as indeed it shall) accept any 'jigsaw' of (partial) certifications presented by a group of undertakings (or by an uncapable main contractor that enters into subcontract agreements) in order to prove that they have sufficient (aggregate) economic, technical and financial standing [something I advocated for in Sanchez Graells, Public Procurement and the EU Competition Rules (Oxford, Hart Publishing, 2011) 266-268].

 

Therefore, in my view, the Swm Costruzioni Judgment is actually raising a red flag and stressing that such requirements to be certified or included in the list of pre-approved contractors will ultimately only be compliant with EU law if the specific characteristics of the works to be tendered do justify the need for a single (or very limited number) of undertakings to carry out the project.

 

Now, this will be puzzling in many jurisdictions that strongly rely on certification systems and pre-approved lists of contractors fro all types (and almost all values) of works contracts, but the (implicit) message seems clear. Therefore, procurement authorities may be better off dismantling those existing systems altogether and bracing themselves (ie getting training and staffing themselves properly) for the revolution that the European Single Procurement Document (ESPD, effectively a set of self-declarations) is about to bring upon.

CJEU flexibilises treatment of formally non-compliant bids in public procurement (C-336/12)

In its Judgment of 10 October 2013 in case C-336/12 Manova, the Court of Justice of the EU (CJEU) has  followed its own approach in Slovensko and created some room for the flexible interpretation of the rules on formal compliance of bids submitted in public procurement procedures.

 

In Manova, the contracting authority had requested some of the tenderers to provide financial statements that had not been included in their bids after the deadline for their submission had ellapsed. Given that this decision was challenged on the grounds of a potential breach of the principle of equal treatment, the referring court decided to request a preliminary ruling from the CJEU, which was asked "whether the principle of equal treatment is to be interpreted as precluding a contracting authority from asking a candidate, after the deadline for applying to take part in a tendering procedure, to provide documents describing that candidate’s situation – such as a copy of its published balance sheet – which were called for in the contract notice, but were not included with that candidate’s application".

 

In rather clear terms (although some caveats may have been dispensed with, in my opinion), the CJEU ruled that:

the principle of equal treatment must be interpreted as not precluding a contracting authority from asking a candidate, after the deadline for applying to take part in a tendering procedure, to provide documents describing that candidate’s situation – such as a copy of its published balance sheet – which can be objectively shown to pre-date that deadline, so long as it was not expressly laid down in the contract documents that, unless such documents were provided, the application would be rejected. That request must not unduly favour or disadvantage the candidate or candidates to which it is addressed (C-336/12 at para 42).

In my view, the Manova Judgment must be welcome, both for its functional approach and for its alignment with domestic practices in a significant number of EU Member States--as discussed in Sánchez Graells, A, "Rejection of Abnormally Low and Non-Compliant Tenders in EU Public Procurement: A Comparative View on Selected Jurisdictions", in S Treumer and M Comba (eds), Award of Public Contracts under EU Procurement Law, vol. 5 European Procurement Law Series, (Copenhagen, DJØF, 2013) 267-302. This seems a good step in the direction of avoiding that overly strict formal requirements get in the way of actual good public procurement practices.

Interesting EFTA case on 'expert evaluations' and 'bidding procedures' and State aid (E-9/12)

In its Judgment of 22 July 2013 in case E-9/12 - Iceland v EFTA Surveillance Authority**, the EFTA Court analysed two interesting issues concernig the use of 'bidding procedures' and 'expert evaluations' for State aid purposes--and, more specifically, concerning the sale of public real estate (for general discussion and a review of CJEU case law, see Nicolaides' piece here).

 

Firstly, the EFTA Court analysed whether on-line property listings can be cosidered well-publicised bidding procedures comparable to auctions. This is relevant in light of Decision No 275/99/COL of 17 November 1999 (equivalent to the 1997 Communication on State aid elements in sales of land and buildings by public authorities), whereby

A sale of land … following a sufficiently well-publicised, open and unconditional bidding procedure, comparable to an auction, accepting the best or only bid is by definition at market value and consequently does not contain State aid (para 2.1).

Secondly, the EFTA Court assessed if, where the on-line listings were not sufficiently publicised, a tax evaluation of the properties to be sold constitutes an adequate benchmark (ie an independent expert evaluation) to determine the 'State aid-free' price of transfer of the real estate. That was relevant because the EFTA authority based the existence of State aid in the discrepancies between tax evaluation and price paid for the real estate concerned.

 

In relation to the first issue, ie whether on-line listings can be assimilated to auctions, according to the EFTA Court

67 Pursuant to subparagraph (a) of point 2.1 of the Land Sale Guidelines, an offer is regarded as sufficiently well-publicised when it is repeatedly advertised over two months or more in the national press, estate gazettes or other appropriate publications and through real estate agents addressing a broad range of potential buyers, so that it can come to the notice of all potential buyers.
68 The criterion of an offer being well-publicised must be interpreted such that where two or more properties are offered on sale together, but not necessarily only as one single unit, specific advertisements must be made for the individual properties. A general call for interest cannot suffice, as such a method cannot reasonably be expected to reach all potential buyers of specific properties.
69 As regards the publication format, the wording of the Land Sale Guidelines does not in principle exclude adequate publication on the internet. However, advertisements must be placed in a publication, be it printed or digital, which is appropriate for reaching all potential buyers. The seller’s own website can only exceptionally be regarded as such a publication.
70 In the present case, four of the five buildings in question were specifically advertised solely on KADECO’s website. There is nothing to suggest that this website was appropriate for reaching all potential buyers. It must therefore be held that ESA did not err in finding itself unable to conclude that a sufficiently well-publicised bidding procedure, or a procedure comparable to that, was followed (E-9/12, paras 67-70, emphasis added).  

In my view, the EFTA Court is correct in that mere calls for interest are too far away from auction procedures to be considered sufficient for the purposes of excluding the existence of an economic advantage for the purposes of State aid control. However, the EFTA Court could have ellaborated on the minimum requirements that on-line listings should meet for them to be considered susceptible of reaching 'all potential buyers'. Nonetheless, the restraint of the Court is fully understandable and this basically opens the door for a revision / upgrade of the 1997 guidance to include on-line advertising and bidding methods (both at EFTA and EU level).

 

In relation to the second issue, the EFTA Court found that an evaluation conducted for tax purposes may serve as the adequate criterion to determine the 'State aid-free' price of the real estate, as long as it was deemed to reflect market value. Indeed,

90 Iceland has a system established by law to evaluate the market price of properties. Pursuant to Article 1 of Act No 6/2001, all real property in the country shall be registered in the Real Property Register, operated by Registers Iceland. According to Article 27 of Act No 6/2001, Registers Iceland is obliged to evaluate and register the market price of properties in Iceland.
91 The applicant argues, first, that the purpose of the valuation carried out by Registers Iceland is to determine the likely value of a property for tax purposes, and that the private investor test cannot rely solely on that valuation.
92 It is true that valuation in the context of a tax audit does not necessarily show the market value of land (see, for comparison, Case C-290/07 P Commission v Scott [2010] ECR I-7763, paragraph 97). However, in an email of 13 May 2012, the Icelandic authorities themselves confirmed that, as a matter of Icelandic practice, the valuation for taxation purposes is generally understood to reflect the market rate (E-9/12, paras 90-92, emphasis added).

In my view, this finding is potentially problematic, particularly in countries where the evaluations carried out for registration and/or tax purposes tend to be well below market value and seldomly updated. Therefore, the finding of the EFTA Court needs to be taken with a pinch of salt and read in the very circumstance-specific Icelandic background. This too seems to be an area for development / upgrade of the existing guidance on State aid in the sale of land and property.

 
** I am thankful to Kristjan Birgisson for bringing this case to my attention.

AG Cruz Villalon on access to leniency applications: A stringent test. Really? (C-365/12)

In his Opinion of 3 October 2013 in case C-365/12 EnBW Energie, Advocate General Cruz Villalon has proposed a holistic interpretation of the regulatory schemes relating to access to documents of the institutions and, more specifically, of access to the European Commission's files in the context of its leniency programme. In my view, the holistic approach advocated for still leaves some important issues unresolved and, consequently, the Judgment of the CJEU in this case will be highly relevant.

 

According to AG Cruz Villalon, when access to the file in cartel investigations is concerned,

63. In short, the presumption [that access should be refused] must operate in relation to documents the disclosure of which is either ruled out or – in the case of Regulation No 1/2003, as compared with Regulation No 1049/2001– possible only on certain conditions. In other words, the presumption should be fully effective vis-à-vis parties who, in accordance with Regulation No 1/2003 and Regulation No 773/2004, have no right, in principle, to access the documents in cartel proceedings, as in the case of EnBW here; and this must also be the case vis-à-vis parties who have only a limited right of access or a right which is recognised solely for the purposes of safeguarding the right of defence.

64. That conclusion must carry a qualification, however. The abovementioned presumption ‘does not exclude the possibility of demonstrating that a given document, of which disclosure is sought, is not covered by that presumption or that there is a higher public interest justifying the disclosure of that document under Article 4(2) of Regulation No 1049/2001 (Commission v Technische Glaswerke Ilmenau, paragraph 62)’. Consequently, the fact that Regulation No 1/2003 does not provide for access by persons who are not parties to the proceedings means only that, in the event that such persons request access, their requests must be dealt with in accordance with Regulation No 1049/2001 (as the general legislation in the area of transparency), interpreted in the light of the general presumption that disclosure of the documents may undermine the purpose of the proceedings under Regulation No 1/2003. This presumption does not in any way rule out access pursuant to Regulation No 1049/2001: it merely imposes more stringent conditions on the access granted under that regulation (emphasis added).

In his Opinion, AG Cruz Villalon takes a very different approach, but basically supports a stringent test that would lead to the same restrictive outcome supported by AG Jaaskinen some months ago in C-536/11 Donau Chemie and others, where he considered that: 

in my opinion a legislative rule would be more appropriate that provided absolute protection for the participants in a leniency programme, but which required the interests of other participants to a restrictive practice to be balanced against the interests of the alleged victims. [...] Furthermore, in my view and except for undertakings benefiting from leniency (sic!), participation in and of itself in an unlawful restriction on competition does not constitute a business secret that merits protection by EU law (para 64, emphasis added).

It is worth stressing that such a radical approach (which I criticised) was rejected by the CJEU in the final Donau Chemie Judgment:

as regards the public interest of having effective leniency programmes [...] it should be observed that, given the importance of actions for damages brought before national courts in ensuring the maintenance of effective competition in the European Union (see Courage and Crehan, paragraph 27), the argument that there is a risk that access to evidence contained in a file in competition proceedings which is necessary as a basis for those actions may undermine the effectiveness of a leniency programme in which those documents were disclosed to the competent competition authority cannot justify a refusal to grant access to that evidence (para 46, emphasis added).

AG Cruz Villalon is aware of the position of the CJEU in Donau Chemie and, consequently (but implicilty), seeks to clarify his proposal for a stringent test on access to the file (and, more specifically, to leniency applications) by stressing that:

the effectiveness of leniency programmes can be safeguarded only (sic!) if it is guaranteed that, as a general rule, the documentation provided will be used by the Commission alone. This would, of course, be the ultimate safeguard. However, other safeguards should also be considered that are less extensive but still attractive for those wanting to take advantage of those programmes. In the final analysis, the rationale underlying leniency programmes is a calculation as to the extent of the harm that might arise from an infringement of competition law. Considered in those terms, to guarantee that the information provided to the Commission can be passed on to third parties only if they can adequately prove that they need it in order to bring an action for damages could constitute a sufficient safeguard, particularly considering that the alternative might be a penalty higher than that which might ensue were the action for damages to be successful. Admittedly, it is possible that a safeguard of that kind might result in fewer parties deciding to take advantage of leniency programmes. However, the objective of maximum effectiveness for that mechanism should not be regarded as justification for a complete sacrifice of the rights of those concerned to be compensated and, more generally, for an impairment of their rights to an effective remedy under Article 47 of the Charter of Fundamental Rights of the European Union (para 78, emphasis added).

In my opinion, the carve out that AG Cruz Villalon creates against his own proposal for a general presumption of non-disclosure (which waiver should be subjected to a stringent test) is not terribly consistent in logical terms, but seeks to accomodate the Donau Chemie Judgment. Nonetheless, the safeguard/test is not clearly presented and the AG's Opinion in EnBW Energie does not really clarify this (increasingly?) grey area of EU competition law. In fact, in view of his concern with the protection of the commercial interests of leniency applicants, it seems that he is actually de facto advocating for the strongest (absolute) safeguard presented above (which, in those terms, would basically amount to the absolute protection advocated for by Jaaskinen and rejected by the CJEU in Donau Chemie).

 

Indeed, AG Cruz Villalon weakly criticises the finding of the GC in paras 147-148 of the appealed EnBW Energie Judgment (‘the interests of the undertakings that had participated in the cartel … in non-disclosure of the documents requested cannot be regarded as commercial interests in the true sense of those words. Indeed, [...] the interest which those companies might have in non-disclosure of the documents requested seems to reside not in a concern to maintain their competitive position on the [...] market [...] but, instead, in a desire to avoid actions for damages being brought against them before the national courts’. In any event, that would not constitute ‘an interest deserving of protection, having regard, in particular, to the fact that any individual has the right to claim damages for loss caused to him by conduct which is liable to restrict or distort competition’), by indicating that, in his opinion, 

the possibility that disclosure of the information provided by the undertakings in question might objectively undermine their commercial interests cannot be ruled out. The fact that the information was provided voluntarily and with a view to avoiding or minimising a penalty is, in my opinion, no basis for regarding the commercial interests involved as unworthy of protection. Otherwise, undertakings that have cooperated with the Commission would suffer a further penalty, in addition to whatever penalty is ultimately considered appropriate, in the form of the damage caused to their commercial interests (para 93).

Therefore, in my view, AG Cruz Villalon's EnBW Energie Opinion (because of its different technical approach) does put some pressure on the CJEU to finally and explicitly take a position on the compatibility with EU law of the protection of leniency applications that the European Commission and the National Competition Authorities within the European Competition Network are pursuing (see Resolution of 23 May 2012 on the protection of leniency material in the context of civil damages actions)--beyond the general remarks made in Donau Chemie.

 

Indeed, the CJEU failed to close that door in Donau Chemie by indicating that:

47 By contrast, the fact that such a refusal is liable to prevent those actions from being brought, by giving the undertakings concerned, who may have already benefited from immunity, at the very least partial, from pecuniary penalties, an opportunity also to circumvent their obligation to compensate for the harm resulting from the infringement of Article 101 TFEU, to the detriment of the injured parties, requires that refusal to be based on overriding reasons relating to the protection of the interest relied on and applicable to each document to which access is refused.

48 It is only if there is a risk that a given document may actually undermine the public interest relating to the effectiveness of the national leniency programme that non-disclosure of that document may be justified.

Hence, the debate is alive and kicking (on the CJEU's door) and a more definite answer is needed. Personally, I would support a very clear indication by the CJEU that leniency applications do not merit special treatment and, consequently, need to be disclosed to (credible) potential damages claimants and always under the supervision and within the context of judicial procedures. Otherwise, the leniency policy will kill damages actions and, even if it is very hard to trade-off the advantages and disadvantages of both policies, it seems clear that allowing for private redress and effective compensation is a requirement under EU law (as the CJEU has been so keen to consistently emphasise since Courage).

 

In the end, I would submit that the CJEU should bring his reasoning a step beyond and determine that "giving the undertakings concerned, who may have already benefited from immunity, at the very least partial, from pecuniary penalties, an opportunity also to circumvent their obligation to compensate for the harm resulting from the infringement of Article 101 TFEU, to the detriment of the injured parties" goes beyond the scope of the leniency programme--which advantages need to be contained within the sphere of the administrative effects (or, put otherwise, within the sphere of public enforcement).

 

Otherwise, the Commission and the NCAs will continue in their schizophrenic quest against cartels, where they try to have their cake (numerous leniency applications leading to resounding fines for the rest of the cartelists) and eat it too [by fostering a system for effective (collective) private reddress that, simply, cannot coexist peacefully with (or at least, cannot blossom under) full-blown leniency protection].

UK's Competition Commission findings on private healthcare markets unfair, says UK CAT

The UK's Competition Appeals Tribunal has disapproved the Competition Commission's provisional findings on private healthcare markets published at the end of August 2013 (see CPI press release here). 

 

In its Judgment of 2 October 2013, the UK CAT found that "the Commission’s rules governing the disclosure room were not fit for the purpose of allowing a proper and informed response to be made to the Commission’s provisional findings. Accordingly, the decision was in breach of the Commission’s statutory duty in section 169 of the Enterprise Act 2002 and in breach of the rules of natural justice". In my view, the path through which the UK CAT reaches this decision deserves some attention.

 

Generally, the UK CAT finds no fault in the design of the access to confidential information by means of a data room: "We do not consider that the decision of the Commission, in this case, to protect the Confidential Information by way of a data room instead of one or more of the other ways contemplated in paragraph 9.14 of the CC7 Guidance, to be susceptible of criticism. We accept the Commission’s view that the confidential material in this case was extremely sensitive and, in all the circumstances, the decision to protect the "specified information" in this case by way of a data room is unchallengeable on a judicial review basis." (para 49).

 

However, the UK CAT takes issue with the specific rules on access to the data room that the Commission imposed, which restricted access to the legal and economic advisers of the undertakings concerned and which prevented them from taking copies of the information (and only notes, subjected to scrutinity and redaction by the Commission could be retained). In the UK CAt's view:

62. The short conclusion is that consideration by the Applicants of the Confidential Information is the starting point for examining what fairness requires. It will be the Applicants who will be affected by any adverse decision of the Commission, not their advisers. Implicit in this starting point is the fact that it is for the Applicants to decide how they wish to respond. In cases like the present, doubtless that will involve the retention of an expert legal team, and expert economists and accountants. But, at the end of the day, what the "interested person" (we shall use this term as shorthand to refer to parties like the Applicants, who may be affected a decision, and who are entitled to be consulted on it) chooses to do to respond is a matter for that person, and not for that person’s legal or advisory team, still less for the body whose provisional decision is being responded to. [...]

63. This starting point may be modified and derogated from to take account of the confidential nature of the information in question. We recognise that market investigations involve – as here – considerable amounts of very confidential material, and that if that material is not appropriately safeguarded, confidence in Commission investigations will be eroded and – quite possibly – damage done to the operation of markets because of the market sensitivity of the information involved. But it must always be borne in mind that derogations from the starting point that we have identified must be such as to enable the party affected to respond.

67. A data room operates very differently from a confidentiality ring. Not only is access to the room limited to a defined class of person (in this, data rooms are similar to confidentiality rings), but also the confidential information is retained at a secure location – in the data room. This prevents the sort of accidental disclosure of confidential information that can occur in the case of confidentiality rings.

68. Use of a data room will certainly involve additional inconvenience to an interested party and its advisers. It may well mean more than this: it may mean that the drafting of a response is made materially more difficult. But this additional burden can be justified provided:

(i) the sensitivity of the material in question warrants it; and (ii) the interested person is still – despite the additional difficulties – able to make worthwhile representations [...]

69. This means that where a data room is deployed to protect sensitive information, there must be facilities available in the data room so as to enable a proper and informed (or "worthwhile") response.

After setting this background, the UK CAT considers that the rules governing the Competition Commission were faulty in three main aspects. First, "confining the Advisers to recording in their notes only Own Client Data or information derived solely from Own Client Data and/or from data in the public domain is wrong in principle" (para. 71), despite the fact that, informally, the Commission decided to oversee breaches consisting of the taking of notes concerned with other confidential information and to treat them as further disclosures of evidence (para. 58). Secondly, the UK CAT criticises the fact, that while at the data room, advisors were not provided with means to draft a response to the confidential information they could not take away (para. 72). Finally, the UK CAT considers that "the period of time in which the Advisers were allowed access to the Disclosure Room [ie 2 working days] was unreasonably short" (para. 73).

Interestingly, the UK CAT also expressly dismissed the Commission's argument that the applications against its (process leading to its) provisional findings were premature and rejected the contention that the Commission could cure any shortcomings in the access to confidential information during the remainder of the procedure (or, indeed, even after releasing the provisional findings, as they are still under review and the Commission has until April 2014 to publish its final findings and recommendations). The UK CAT considered that an initial restriction to the amount of information and the conditions for access to that information by counsel of some of the main players involved in the market investigation suffices to taint the procedure with unfairness. However, the UK CAT made no finding as to the appropriate relief and waits for the parties to request a hearing, if needed.

 

In my view, this is a case where 'due process' rights have been upheld to the highest possible level (maybe even to excess), and even in a setting that is not properly leading to the imposition of fines, but more of a regulatory exercise. Instances such as these may become even more common after the EU accedes the EU Convention on Human Rights and, if not properly weighed, may create a significant burden for competition law investigation and enforcement [for general discussion, see my "The EU’s Accession to the ECHR and Due Process Rights in EU Competition Law Matters: Nothing New Under the Sun?"].

 

Therefore, it will be interesting to see whether the Competition Commission's investigation in this sector can proceed after this significant blow by the UK CAT and, if so, whether the UK Competition Commission amends significantly its rules on access to evidence. The knock-on effect of this case on 'proper' competition law investigations in infringement procedures by the new Competition and Markets Authority (or the European Commission, as a spillover and due to the anglosaxon influence in Luxembourg) seems hard to predict, but I would submit that it will not be neutral.