Altmark and Public Procurement: Definition and Award of Contracts

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Introduction

Ever since the Court of Justice ruled on Altmark ten years ago there has been a growing literature on the specific conditions that have to be satisfied so that public assistance to a provider of services of general economic interest [SGEI] does not constitute state aid. In this context, the relationship between the Altmark criteria and the public procurement rules of the EU have been the subject of considerable discussion and speculation in the literature.

The purpose of this posting is to compare the latest and the first Commission decision that examined whether the current rules on SGEI and in particular those that refer to public procurement are correctly implemented.

Commission Decision 2013/435 on state aid implemented by France in favour of Société Nationale Maritime Corse-Méditerranée [SA.22843]

On 2 May 2013 the Commission took an important decision concerning state aid for services of general economic interest. The services in question concerned maritime transport between mainland France and Corsica.[1] Although the aim of this posting is to examine the link between SGEI rules and public procurement it is worth digressing briefly to consider the views of the Commission on another issue that vexes Member States: The proper definition of the SGEI or public service obligation [PSO] which corresponds to the 1st Altmark criterion.

1st Atlmark

The primary issue at hand was whether the French authorities had defined correctly the SGEI or whether the undertaking on which a PSO was imposed, i.e. Société Nationale Maritime Corse-Méditerranée [SNCM], merely had its operating costs subsidised by the state under the pretext that it provided an essential service. In order to give an answer to this question, the Commission had to determine whether there was a gap in the market which warranted state intervention.

This is a perennial problem and a headache for public authorities that impose PSO. There is no SGEI which is not at all provided by the market. In other words, every SGEI provider offers a service that has some characteristics or is offered in some geographic markets which are supplied by the market and is made available to some consumers who are also served by the market. So how can it be shown that the market underprovides in order to justify state intervention?

The Commission examined whether the scope of the public service as defined by the public service delegation contract was necessary and proportionate to a “real public service need”, manifested by shortage of regular transport services in a situation of free competition.

The Commission considered that the scope of the public service remit as defined by a public service contract had to be necessary and proportionate to a real public service need, as demonstrated by the “lack of regular transport services under normal market conditions”. [para 136]

The Commission accepted that it would be legitimate, in circumstances where transport demand showed a marked seasonality, to include services for both peak and off-peak periods within the public service remit. On the basis of these considerations, the Commission made a distinction between “basic” and “additional” services. Additional services were also offered by other market operators. The approach of the Commission was that additional services could be included in the public service remit if it could be determined that they were “essential to the basic service, on the grounds of a set of technical and economic considerations.” [para 139] In certain circumstances, extending the scope of the public service may be justified in the presence of well-established complementary technical or economic efficiency considerations (synergies).

After thorough market analysis the Commission concluded that the operation of the additional services did not seem to be indispensable to the basic service. There was no technical complementarity between the basic service and the additional service.

The Commission stated “that Member States may not impose specific public service obligations for services that are already provided or can be provided satisfactorily in conditions (price, objective quality features, continuity and access to the service) that are compatible with the public interest, as defined by the State, by companies operating under normal market conditions.” [para 166]

Although it rejected the claim that the additional services were not adequately provided by the market [in fact there was substitutability between the additional services and other services provided by market operators], the Commission accepted that the basic services could indeed be classified as SGEI because they ensured “a minimum territorial continuity” between mainland France and Corsica. There was clearly under-provision by the market during the winter months of low tourism. But then the Commission made a statement that seemed to contradict the basic logic of defining SGEI as the service which is not adequately supplied by the market.

The Commission considered “that the shortage of private initiative on each line in relation to a clearly identified need for transport during the off-peak periods of the year alone is sufficient to justify the inclusion of the basic service within the scope of the public service for the whole year for all these lines.” [para 147]

This reasoning is not satisfactory because the Commission failed to explain whether it identified any complementarities or synergies between the basic services in the winter months and the basic services in the summer months. Since the market provided substitutable services in the summer months it appears that it cannot be claimed that shipping companies had to operate throughout the year in order to cover high fixed costs.

4th Altmark

The contract to SNCM was awarded following a negotiated procedure. The only bid that was in competition with that of SNCM was not evaluated on its own merits (award criteria), but on the basis of one selection criterion, which in this case was the tenderer’s ability to operate from a certain date. The procedure therefore did not allow the Corsican Transport Board to compare several offers and to select the most economically advantageous.

The Commission considered that the fact that “two bids were actually submitted was not sufficient to guarantee effective competition, insofar as the competing bid was not able to provide a credible alternative. [para 173]

More critically, the Commission observed that SNCM had a significant competitive advantage as the incumbent operator that already had ships adapted to the requirements of the specifications of the public service delegation contract. In addition, the very short time set between the date of awarding the public service delegation contract (finally awarded on 7 June 2007) and the date of commencement of services (1 July 2007) was likely to prove a significant barrier to entry for new entrants.

For these reasons, the Commission rejected the French position that the award of the contract to SNCM satisfied the 4th Altmark criterion.

SA.33054: UK Post Office Compensation for net costs incurred to keep a non-commercially viable network

This case was the first to be assessed by the Commission on the basis of the 2012 rules.[2] The reason for referring to this case is the approach of the Commission to the way by which the UK assigned PSO to the Post Office. Although the Altmark criteria did not apply in this case, the 4th Altmark and the requirement for use of public procurement procedures in 2012 Framework are very similar.

But before proceeding to examine the provisions of the Framework with respect to assignment of PSO, it is worth commenting on another unusual aspect of this case. The Post Office received two kinds of public funds: a loan to cover its working capital needs and a grant to cover the deficit between the costs and revenue of the postal network.

The loan for its working capital [i.e. daily operating expenses] was found not to constitute state aid because its terms and rate of interest were comparable to those on the market for similar loans. The Commission accepted that under these conditions the Post Office enjoyed no abnormal advantage. It is possible therefore for a public authority to grant state aid to an SGEI provider and at the same time act as a private investor on other financial transactions.

The grant was given to the Post Office precisely in order to compensate it for the extra net costs of operating the postal network in the UK. For the purposes of this posting, what is of particular interest is the appraisal of the Commission of compliance with the 4th Altmark criterion or with the various requirements of the SGEI Framework and more specifically with section 2.6 on conformity with EU public procurement rules.[3]

The assignment of the PSO to the Post Office did not follow any competitive procedure. Instead it followed a “negotiated procedure”. In relation to the 4th Altmark criterion, the Commission observed that the negotiated procedure was not an acceptable procurement procedure in the meaning of that criterion. “The Commission considers that the fourth criterion is not met. The Network SGEI was not awarded as a result of an open public procurement procedure but following a negotiated procedure without prior publication. According to paragraph 66 of the Communication from the Commission on the application of the European Union State aid rules to compensation granted for the provision of services of general economic interest5, „the negotiated procedure without publication of a contract notice cannot ensure that the procedure leads to the selection of the tenderer capable of providing those services at the least cost to the community.“ [para 41] In addition, the UK authorities did not provide any evidence showing that the costs incurred by the Post Office corresponded to the cost of a well-run undertaking. For these reasons the grant was classified as state aid.

In relation to the compatibility assessment, the Commission first recalled the relevant requirement of the SGEI Framework. Section 2.6 provides as follows:

“19. Aid will be considered compatible with the internal market on the basis of Article 106(2) of the Treaty only where the responsible authority, when entrusting the provision of the service to the undertaking in question, has complied or commits to comply with the applicable Union rules in the area of public procurement. This includes any requirements of transparency, equal treatment and non-discrimination resulting directly from the Treaty and, where applicable, secondary Union law. Aid that does not comply with such rules and requirements is considered to affect the development of trade to an extent that would be contrary to the interests of the Union within the meaning of Article 106(2) of the Treaty.”

Section 2.6 seems to require some kind of competitive selection. Because, however, the Post Office was “the only operator whose network and contractual relationships actually satisfy the requirements for the provision of the network SGEI, as described in the entrustment. In these circumstances, the Commission considers that the negotiated procedure without prior publication, which is followed to entrust the Post Office with the network SGEI, is justified under Article 31(1)(b) of Directive 2004/18 and therefore can be considered compliant with EU public procurement rules.”

Directive 2004/18 on the coordination of procedures for the award of public works contracts, public supply contracts and public service contracts stipulates in Article 31:[4]

“Cases justifying use of the negotiated procedure without publication of a contract notice.

Contracting authorities may award public contracts by a negotiated procedure without prior publication of a contract notice in the following cases:

(1) for public works contracts, public supply contracts and public service contracts:

(b) when, for technical or artistic reasons, or for reasons connected with the protection of exclusive rights, the contract may be awarded only to a particular economic operator;”

Conclusions

These two cases allow us to draw the following important conclusions concerning the definition of SGEI/PSO [1st Altmark] and the award of service/concession contracts [4th Altmark].

First, in both the application of the 1st Altmark and the conditions of the SGEI Decision & Framework, public authorities must show that the SGEI/PSO they define are not fully or adequately supplied by the market according to criteria such as price, quality or frequency.

Second, some services well provided by the market may also be included in the SGEI/PSO definition if they are complementary with and support the supply of services not provided to an adequate extent by the market. For example, the market does not provide child-caring facilities from 6:00 to 8:00 and from 17:00 to 19:00. Although the market offers adequate facilities during the rest of the day, working parents may need to drop off their children well in advance of the time they go to work and collect them after they leave work themselves. It may not make much economic sense to separate services which are seamless [looking after a child at 7.55 is the same as at 8.05], so a PSO may cover both normal and extra hours. However, the net extra costs of the PSO will be only the costs caused by the extra hours.

Third, the 4th Altmark criterion is not satisfied by procurement procedures that appear to be open and competitive but do not result in actual competition between credible bids.

Fourth, incumbent operators of network monopolies may be able to escape from the stringency of the obligation of Member States to carry out competitive selection of SGEI providers if it can be shown that no one else could establish a rival network. Then a negotiated procedure would suffice.

——————————————–

[1] The Decision was published in the Official Journal on 17 August 2013. It can be accessed at:

http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2013:220:0020:0045:EN:PDF

[2] The Commission Decision on the UK Post Office can be accessed at:

http://ec.europa.eu/competition/state_aid/cases/243441/243441_1314203_66_2.pdf

[3] The SGEI Framework can be accessed at:

http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:C:2012:008:0015:01:EN:HTML

[4] The Directive can be accessed at:

http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:32004L0018:EN:HTML

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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.

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