The Puzzle of the State Acting as a Regulator

When the state exercises its regulatory tasks, it does not have to demand fees and therefore it does not forgo potential state resources.

Introduction

A few weeks ago the Commission considered whether the regulatory actions of the state fell within the scope of Article 107(1) TFEU. In decision SA.42028 concerning aid to Yliopiston Apteekki Oy in Finland, the Commission examined whether an exemption from a rule imposing a limit on the maximum number of pharmacies that could be operated by the same person could constitute State aid.[1]

Yliopiston Apteekki Oy is a pharmacy owned by the University of Helsinki [hereinafter UHP]. A complainant alleged that UHP paid a lower licence fee and benefitted from a tax refund.

In Finland there is a system for licencing pharmacies. The Finnish Medicines Agency [FIMEA] may authorise licensed pharmacists to keep up to a maximum of three branches. However, UHP is allowed to keep up to sixteen branches.

Licences to operate a branch pharmacy are granted on payment of a fee to cover administrative costs. In 2015 the fee was EUR 2500 per application. The fee is paid by any pharmacy that applies for a licence to operate a branch.

With respect to the alleged tax refund, the Finnish authorities confirmed that UHP was subject to the same taxation as any other pharmacy. However, until 1 January 2017, Finland used to refund the corporation tax and pharmacy fee paid by UHP to the University of Helsinki which owns UHP.

Finland claimed that it acted as a regulator aiming to protect public health. UHP was allowed to operate up to sixteen branches because it was required to provide practical training to students of pharmacology, to develop pharmaceutical services and to produce rare medications.

With respect to the refund of taxes, Finland explained that UHP and the University of Helsinki maintained distinct legal structures, despite the fact that UHP was owned by the University. The assets and revenues of UHP were managed by the University of Helsinki Funds, which was separate from the University of Helsinki. The refund of corporation tax and pharmacy fee paid by UHP was provided to the University of Helsinki, and not to UHP or the University of Helsinki Funds. The University of Helsinki was not an undertaking and the refund supported its non-economic activities.

Existence of State aid

With respect to the licences, the Commission considered that there was no loss of state resources. The Commission first noted that “(32) granting special or exclusive rights without adequate remuneration in line with market rates can constitute foregoing of State revenues (as well as the granting of an advantage). At the same time, when the State acts as a regulator, it can decide legitimately not to maximise the revenues which could otherwise have been achieved, without falling under the scope of State aid rules. [At this point the decision cited the judgments in Eventech v The Parking Adjudicator, Case C-518/13, paragraphs 47-48; Bouygues and Bouygues Télécome v Commission, Case C-431/07 P, paragraph 110.] In doing so, however, the State must “act in a genuinely regulatory capacity” [at this point it cited the opinion of General Advocate Wahl in the Eventech case, paragraph 32]”.

It continued that “(33) when issuing licences to UHP as well as to private pharmacies, Finland regulates and limits access to the Finnish pharmacy market. It is clear that Finland does not commercially exploit its position as regulator by “selling” licences to operate a (branch) pharmacy at market price. Rather, the licences are granted to both UHP and private pharmacies alike, without demanding a consideration corresponding to the economic value of the licences. The regulating authority FIMEA merely charges a uniform fee to cover the costs it incurs in processing licence applications. Whether the State would receive the licence fees from UHP or from any other company would not make a difference for the State budget. In addition, despite the fact that a licensed pharmacist may keep up to maximum three branch pharmacies, the overall number of (branch) pharmacy licences that can be granted country-wide in Finland is not limited; rather, licences can be granted as long as the conditions set out in Section 52 of the Medicines Act are fulfilled.”

The meaning and implications of the last sentence of this paragraph are not obvious.

The Commission went on to explain that “(34) it must be assessed whether the decision of the Finnish authorities not to charge UHP for its exclusive right is inherently linked with the policy objective behind that exclusive right. In this regard, the European Court of Justice observed that “the identification of the objective pursued is, in principle, a matter within the prerogative of the competent national public authorities alone. 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 excerpt is from the Eventech judgment, paragraph 49.]

It is important to note that in the Eventech case which concerned the use of dedicated bus lanes by London black cabs, the responsible authority, Transport for London, did not charge any fee to any taxi company. Mini cabs [i.e. not black cabs] were simply not allowed to use bus lanes. In London there was no differentiated fee system as in Finland. Therefore, the question that arises is whether there can be differentiated fees which are set “in advance in a transparent and non-discriminatory manner”. In principle, the answer must be in the affirmative as long as the fee is linked to the achievement of the regulatory objective defined by the Member State concerned. As I will argue below, in Finland there was no precise link between the level of the fee and the regulatory objectives.

Then the Commission examined whether Finland applied transparent and non-discriminatory criteria. “(35) First, the Commission notes that the objectives and tasks of the branch pharmacy system were laid down in the Medicines Act and in the works preceding it, so that the criteria were therefore established in a transparent manner.” “(36) Second, the Commission recalls that the overarching objective of the Medicines Act is to protect public health, in particular to maintain and promote the safety of medicinal products and their use and appropriate use of pharmaceuticals. UHP has certain specific tasks, laid down in Section 42(1) of the Medicines Act, pursuant to which UHP has to provide practical training in connection with pharmacy teaching and to conduct research on pharmaceutical services. Additionally, UHP has the obligation to manufacture certain rare pharmaceutical preparations, as mentioned in the rationale for the Medicines Act. As the judgment of Finland’s Supreme Administrative Court confirmed, when processing an application by UHP to open a branch pharmacy, FIMEA needs to consider whether that branch actually contributes to the fulfilment of UHP’s specific tasks.” “(37) Third, the CJEU had already the opportunity to declare that a logical connection exists between the objectives of the Medicines Act, the special tasks of UHP and the pharmacy right of UHP. According to the CJEU, a system like the current one is required to carry out the special tasks of UHP, as far as its branch pharmacies participate in the realisation of the special tasks [at this point the decision cites the judgment in case Susisalo, C-84/11, paragraph 41-42, which concerned the interpretation of Article 49 of the Treaty on the right of free establishment].” “(38) Concretely, […] all UHP branches provided practical training to pharmacy students […]; (ii) […] UHP pharmacists also get involved in teaching activities within the University of Pharmacy and that UHP has also financed and participated in the organisation of research and advanced studies in pharmacy and related disciplines; (iii) […], UHP is the sole producer of a number of rare medicines in Finland; it manufactures certain life-saving pharmaceutical products that are not manufactured by the industry and would not be available from other sources.” “(39) In this context, the Commission considers that the Finnish authorities could reasonably take the view that charging UHP for the right to maintain up to thirteen branches more than private pharmacies might jeopardise the achievement of the objective, at least in part, since it might deter UHP from opening or maintaining branch pharmacies.”

The conclusion of the Commission in paragraph 39 of its decision is tenuous and disputable. It is tenuous because it does not follow from the objectives of the Finnish licensing system. The fee is linked to the administrative cost of the regulator who presumably has to ensure that each new pharmacy is properly equipped and staffed to meet public health standards. UHP had to meet those standards too. The Commission’s conclusion is also disputable because whether the payment of a fee of EUR 2500 would discourage the opening of a new branch is an empirical issue. The decision is not clear as to whether the fee of EUR 2500 is per branch or application. If it is per application for multiple branches, then a fee of EUR 2500 is unlikely to be a financial deterrent. But even if the fee was paid per branch, it is rather improbable that a small amount as EUR 2500 would reverse the business case in favour of opening a new branch.

Then the Commission argued that UHP and other pharmacies were not in the same legal and factual situation, something that justified different treatment. “(40) Fourth, given that UHP is subject to specific obligations laid down in the law, this differentiates it from the private pharmacies operating in Finland. UHP can thus not be said to be in a comparable legal and factual situation with private pharmacies in Finland, which are not subject to such obligations. This conclusion is in line with the findings of the Court of Justice in its judgment in Case C-84/11 [this is the Susisalo case cited earlier]”. “(42) It follows that the system as such does not seek through its objective and general structure to create an advantage through State resources. … The higher number of licences that UHP has is inherent to the system which aims at achieving a public policy objective, and cannot be considered to involve State resources.”

Indeed, it is true that UHP was under different legal obligations than other pharmacies with respect to training, research and production of rare medicines. However, are the legal obligations of pharmacies the right framework of comparison? Or, is the licensing system and the corresponding payment of an administrative fee the right framework? Since the fee was an administrative charge for checking regulatory compliance, which was prerequisite for awarding an operating licence, I would say that UHP and all other pharmacies were in exactly the same situation. We do not know for sure what the right framework of comparison is because neither the Finnish authorities, nor the Commission established a link between exemption from payment of the fee and the obligations of UHP. Simply linking an exemption to differences in some other, probably unrelated, legal obligations is not enough. I agree that the higher number of UHP’s branches is inherent, for example, in the achievement of its obligation to train pharmacology students, but the exemption from fees is not. Each branch has to be certified by the regulator. Of course, there can also be economies of scale in regulatory checks, so that the cost of checks of two branches of the same pharmacy are less than twice the cost of two branches each belonging to a different pharmacy. But the Finnish authorities did not appear to have advanced any argument to that effect, nor did the Commission indicate that it considered such an argument.

Immediately afterwards the decision stated that “(43) by granting more than three licences to UHP, the State does not forego state resources. In fact the same applicable fees for the additional thirteen licences as for the up to three licences granted to private pharmacies have been applied. Thus if it had granted those licences to the latter, no higher fees could have been obtained by the Finnish State.” This is an irrelevant and hypothetical argument. If Finland would allow private pharmacies to operate up to sixteen branches no discrimination would exist. The relevant issue is that they are not allowed to operate more than three branches and no one knows what Finland would have done had they been permitted to operate more than three branches.

Lastly, with regard to the tax reimbursement mechanism, the Commission concluded that since the refund was provided to the University which was not an undertaking, that the University and UHP maintained separate accounts, and that there was no cross-subsidisation of UHP by the University, there was no advantage for UHP.

The overall conclusion of the Commission was that there was no loss of revenue from the licensing system and no advantage from the refund of taxes to the University of Helsinki. Therefore, no S tate aid was involved in these two measures.

——————————————————-

[1] The full text of the Commission decision can be accessed here:

http://ec.europa.eu/competition/state_aid/cases/271830/271830_1941545_17_3.pdf.

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About

Phedon Nicolaides

Dr. Nicolaides was educated in the United States, the Netherlands and the United Kingdom. He has a PhD in Economics and a PhD in Law. He presently holds positions at the College of Europe and the University of Maastricht. He has published extensively on European integration, competition policy and State aid. He is also on the editorial boards of several journals. Dr. Nicolaides has organised seminars and workshops in many different Member States, and has acted as consultant to several public authorities.

Comments

  1. by José Antonio Rodríguez Miguez

    It is really a very controversial case, that shows again the complexity of the notion of State Aid and the alternative versus cumulative question about the difference inter state aid and/of public resources. I will read the Decisión again. Thanks again, Prof. Nicolaides, for showing us this very interesting cases.

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