The Non-economic Nature of Certain IT Services for Higher Education

The Non-economic Nature of Certain IT Services for Higher Education - ipad 820272 1920 1

Publicly funded educational services are not economic in nature.

Activities intrinsically linked to public tasks are not economic in nature.

Update on Temporary Framework:

Number of approved and published covid-19 measures, as of 21 August 2020: 262*

Legal basis: Article 107(2)(b): 28; Article 107(3)(b): 220; Article 107(3)(c): 20

Four Member States have implemented 16 or more covid-19 measures each: Belgium, Denmark, Italy & Poland.

– Average number of measures per Member State: 9.4

– Median number of measures per Member State: 12

– Mode number of measures per Member State: 6

* Excludes many amendments to previously notified measures

Introduction

The difference between economic and non-economic activities is hotly debated in the State aid field. The case that is reviewed in this article provides guidance on where to draw the line between economic and non-economic, but also raises a number of other questions.

After receiving a complaint that Hochschul-Informations-System [HIS], a public entity in Germany, benefitted from direct grants and tax exemptions, the Commission opened the formal investigation procedure. The procedure was concluded with decision 2020/391 which found that, if any aid had been granted, it was anyway existing aid.[1] What makes this decision interesting is the reasons for which the Commission had doubts as to whether the measures in question constituted State aid.

HIS was established in 1969 as a non-profit entity. Later on it was acquired by the state and in 2014 it was converted into a cooperative with members being the German Länder and participating German universities and other higher education institutions. Its purpose was the application of information systems in the management of higher education institutions. Since 2014, HIS has been financed by an annual membership fee and revenue from services it provides exclusively to its members.

The purpose of the Commission’s formal investigation was to determine whether HIS was an undertaking, whether it had indeed received grants and benefited from tax exemptions and whether its services could be classified as services of general economic interest. The decision which is reviewed here covers only the period from 1976 to 2013.

Existence of economic activity: Provision of services to public universities

There was no doubt that the grants and tax exemptions involved state resources and were attributed to the state.

The determination whether HIS carried out economic activities was more difficult. The Commission made a distinction between services provided to public universities and those provided to private and foreign universities.

With respect to services provided to public universities, the Commission first recalled the standard reference in the case law on public funding of education. “(110) The Court of Justice has held that the State ‘by establishing and maintaining a system of public education, normally financed from the public purse and not by pupils or their parents, does not intend to become involved in activities for remuneration, but carries out its tasks towards its citizens in the social, cultural, and educational areas’”.

“(111) Accordingly, activities of public universities and research organisations linked to their educational objective constitute a non-economic activity and thus fall outside the ambit of the State aid rules.”

“(112) According to the case law of the Union courts, activities that are intrinsically connected with the exercise of public tasks are considered to be of non-economic nature.” “(113) Examples of such activities include […] the collection of data to be used for public purposes on the basis of a statutory obligation imposed on the undertakings concerned to disclose such data.”

Then the Commission explained that “(114) IT services provided by HIS to German public universities are sufficiently similar to the services at issue in the Compass-Datenbank judgement, and that HIS’ services constituted an essential part of the State’s task in German public tertiary education system for the following reasons.”

“(115) In the Compass-Datenbank judgment [C-138/11], the Court concluded that the service in question, consisting in the maintenance and disclosure of the data, could not be ‘separated from the collection of the data’, as the collection of the data would have been useless without maintaining the data for consultation with the public (paragraph 41 of that judgment).”

“(116) In order to show that the provision of software services had been closely connected with carrying out State’s public task in the field of public tertiary education, HIS’ activities must be related to these tasks ‘by [their] nature, their aim and the rules to which [they are] subject’.”

“(117) The activities of HIS in question, more specifically the provision of tailor-made college software products and related services, satisfy the requirement of being connected, by their nature, their aim and the rules to which they were subject, to carrying out the State’s non-economic activity in the public tertiary education field in a way analogous to the relevant case law.”

“(118) First, the nature of the services provided by HIS are closely related to the State’s role to provide public higher education, as universities cannot be managed without efficient software. The provision of the software services was therefore necessary for the educational tasks of the universities, i.e. the provision of free higher education to the public, which has been an explicit aim of HIS’ creation and operation.”

“(120) The provision of these software services to German public universities was not a mere general service (such as renting real estate property, obtaining legal advice from outside parties, for example) but a service that had to be tailored and adjusted to the universities’ specialised needs […]. This circumstance also supports the realistic assumption that in the absence of HIS’ services, the German public universities or the Länder themselves would have needed to take care of university software development needs. The way HIS was set up and operated was a method of collectively meeting these essential functional needs of the German public universities through the pooling of experience and expertise.”

“(121) Second, it is not necessary, pursuant to the case law of Union courts to show that HIS itself pursued a public task. None of the analogous cases articulated such a requirement [here the Commission cites C-138/11, Compass-Datenbank, paragraph 40]. What is relevant, by contrast, is that the activity to which HIS’ activities are intrinsically linked, constitutes an exercise of the State’s task in the public tertiary education system.”

“(122) The requirement that the activity should be connected to carrying out the State’s non-economic activity in the public tertiary education field ‘by the rules to which it is subject’, as specified by the relevant case law [here the Commission cites T-138/15, TenderNed, paragraph 38, and its own decision in case SA.25745 national website for auctions in insolvency proceedings in Germany],* is also satisfied.”

*It is interesting that the Commission stated in that case that “(32) The mere fact that private operators are already offering the service to publish certain information, when requested by public authorities, does not mean that, if the State carries out the same or a similar activity, this activity automatically has to be considered as ‘economic’ in nature.”

“(123) The case at hand is similar to the TenderNed [T-138/15] case law where the General Court held that for the issue of whether TenderNed’s activities form part of the exercise of public tasks, the question was also articulated as whether the activities, by their nature, aim and the rules to which they were subject, were connected with the exercise of public tasks.”

“(124) In terms of the aim and nature of TenderNed’s activities, the General Court found that the Commission was correct in considering that TenderNed’s activities constituted ‘means’ by which public authorities could fulfil their legal (statutory) obligation to comply with European and national public procurement legislation.”

“(125) The TenderNed judgment provides further elements that indicate that HIS’ supply of software/IT to the German public universities have not been of an economic nature.”

“(126) The TenderNed judgment established inseparability between the service TenderNed provided and the public task at issue in that case even though there were indications that the e-procurement in question merely ‘contribute[d] to the effective operation of the [service] that was connect[ed] with the exercise of public power’ (see recital 90 of the judgment). Similarly to the TenderNed judgment, in the present case there have also been market operators that offered parts of the service that HIS offered. However, as the General Court explained in the TenderNed judgment, the authorities could ‘best manage the entire public procurement process’ with TenderNed’s services […] and that ‘existing commercial platforms did not offer the conditions relating to price, objective quality characteristics, continuity and access to the services provided that would be necessary to fulfil’ the objectives of the authorities […]. This reasoning can be fully applied to the case at hand. As argued by a number of interested parties, no other provider of university software offered the entire range of services that HIS offered. The complainant itself admits that private providers only offer parts of the services required in the college software field.”

I find this paragraph confusing. Until this point, the reader gets the impression that there are only two relevant criteria: that a public task must be performed and that the (otherwise economic) activity in question must be inextricably linked to the public task. Now a third criterion seems to emerge: that the entity that carries out the public task cannot rely entirely or as efficiently on market-based providers. I think the Commission’s interpretation differs slightly from that of the General Court in the TenderNed case. In TenderNed, the Court examined whether certain activities or internet “functionalities” that were also available on the market could be inextricably linked to the exercise of public powers. The Court took into account efficiencies in combining functionalities as one of the features that confirmed the inextricable link, but not as constituting a necessary criterion. In addition, the relevant public authority in the case of TenderNed performed all tasks in-house. However, HIS, despite the fact that it was owned by higher educational establishments, did not seem to function as an in-house operator under the direct control of educational establishments.

“(127) To conclude, HIS’ provision of university software/IT services to German public universities were intrinsically linked to carrying out the non-economic activity of providing public university education, and was therefore not economic.”

Existence of economic activity: Provision of services to other universities

With respect to services provided to German private and foreign universities, the Commission, first, noted that “(128) according to case law, a legal entity can be regarded as an undertaking with respect to only part of its activities, if those activities must be classified as economic activities.”

“(129) Germany argued that HIS’ activity of selling software to private and foreign universities did not constitute State aid, as (a) it fit into the R&D Framework’s concept of ancillary economic activity; (b) these beneficiaries of HIS’ activities are overwhelmingly non-economic actors; and (c) the accounts relating to this activity are kept separated from the accounts relating to HIS’ supply of software to German public universities.” “(130) In addition, Germany argued that in case these activities constituted economic activities, the State aid part that can conceivably be linked to such activities fall under the de minimis threshold established by Regulation (EU) No 1407/2013.”

“(131) The Commission disagrees with the argument that these small-scale sales to private and foreign universities were ancillary and, on that basis, any State financing that could have conceivably supported these activities should not be regarded as State aid, for the following reasons.”

“(132) Germany did not sufficiently demonstrate why the concept of ‘ancillary economic activities’ from the R&D Framework is applicable to the case at hand. Germany did not demonstrate, for example, that the small-scale sales constituted ‘an activity which is directly related to and necessary for the operation of the research organisation or research infrastructure or intrinsically linked to its main non-economic use’ within the meaning of Point 20 of the R&D Framework.”

Indeed, the R&D Framework requires ancillary activities to be “directly related to and necessary for the operation” of the non-economic activities. However, I am not aware of a Commission decision dealing with ancillary activities, which has actually established that the ancillary activity is “directly related and necessary to the operation of the research organisation”. Germany was up to a tough task. Even in theory it is difficult to think how the sale of a good or service on a market can be “necessary” for the non-economic activities of a research organisation.

“(133) As to the relevance of separation of accounts, it is true that the Court of Justice held that a single establishment may carry on a number of activities, both economic and non-economic provided that it keeps separate accounts for the different funds that it receives so as to exclude any risk of cross-subsidisation of its economic activities by means of public funds received for its non-economic activities [here the Commission cites C-74/16, Escuelas Pías, paragraph 51]. However, in the present case, unlike in the case of Escuelas Pías, the public financing related to the entirety of the beneficiary, HIS’ activities. Therefore the fact that separate accounts were maintained for HIS’ sales to German private and foreign universities does not eliminate the economic nature of these sales activities.”

It is not clear to me how the source of funding determines the economic nature of the activities in question.

At any rate, the Commission concluded that, in relation to services provided to foreign and private universities, the grants satisfied all the criteria of Article 107(1) TFEU and therefore it constituted State aid.


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The aid was existing because there was no market when it was granted

The Commission considered the aid to be existing. First, it recalled that according to “(141) to Article 1(b)(v) of Regulation (EU) 2015/1589, an aid measure is existing aid if it can be established that at the time when it was put into effect, it did not constitute State aid, but due to the evolution of the internal market, it has become State aid but was not altered by the Member State.”

In order to determine whether aid is existing “(143) it must be established first that there was no market for the products and services in question when the State started providing funding to HIS.”

“(144) Following the examination of whether there was a market for university electronic data processing (university software), when the measures entered into force in 1976, the Commission examines whether possible subsequent changes might have affected the actual substance of the original measure. Such changes might pertain to the nature of the advantage or the source of financing, the purpose or legal basis of the aid, the beneficiaries or the scope of activities of the beneficiaries) in a way that the existing aid as a whole is transformed into a new aid.”

“(145) The Commission considers that the complainant was not able to prove that a market for HIS’ products, more specifically, electronic data processing/IT products and services for university management existed at the time the measures in question, […] started in 1976. A large majority of the comments from the universities supported the argument advanced by Germany that the market for university management software developed about 12-14 years ago, and that the earliest point in time when a market could have been in existence was in 1993. Several interested parties noted that although suppliers of at least parts of the university management applications had been in existence for some time, even today there is no full-blown market, in the field of electronic data processing/IT products and services for university management. According to them, apart from HIS, there is not a single supplier that can provide the full scope of products and services that HIS offers”.

“(147) The Commission considers that the developments in the field of electronic data processing/IT products and services for university management for the German tertiary education sector does amount to the evolution of the internal market within the meaning of Article 1(b)(v) of the Procedural Regulation […] This conclusion is supported by a number of comments […] that a relevant market has developed at some point during the past one to three decades for at least some partial areas within the field of software services to universities in Germany”.

The aid continued to be existing because it was not altered

The Commission explained that “(148) should the measures have indeed become State aid at some point between 1976 and 2013, it must be examined whether they have undergone any significant alteration that affected their actual substance that gave rise to new aid.”

“(149) According to the judgment Government of Gibraltar v Commission [T-195/01], not every alteration to existing aid should be regarded as changing existing aid into new aid. According to this case, ‘it is only where the alteration affects the actual substance of the original scheme that the latter is transformed into a new aid scheme’. The changes to a scheme are significant if any of its main elements, such as the nature of the financing, its source, its legal basis, the objective pursued or the beneficiaries have changed.”

“(150) The Commission considers that […] [t]he nature of the measures, the source of financing, the legal basis, the objectives of the financing and the range of beneficiaries did not change since the measures had been put into effect for the reasons below.”

i) Nature of financing

“(151) The Commission considers that an increase in the financing does not affect the essence of the scheme if the increase is commensurate with an increase in corresponding costs of carrying out the same activity, as a number of Commission decisions in the broadcasting sector showed”.

One wonders whether the logic and methodology of the concept of public service compensation [PSC] in broadcasting can be applied to an entity that is not under a public service obligation [PSO] as defined in the relevant case law. More importantly, the PSC is directly linked not only to costs but also revenue.

“(153) The Commission considers that the nature of the financing did not change significantly. First, the form of financing remained unchanged: […] Second, the level of financing through the direct grants did not change significantly. Overall, the level of the direct grants increased by about 2,9 times during the period 1976 and 2013. In parallel, student numbers increased much more significantly during the same time-period. […] Price levels in Germany in 2013 were 2,3 times higher than in 1976. Based on this information, the Commission considers that the nature and the level of financing did not change significantly as the number of students increased much more than the level of direct grant financing of HIS’s activities, taking also into account the level of inflation in Germany between 1976 and 2014.”

It is hard to understand how the cost of software for management is affected by the number of students and, even if there is a relationship between the two, why the relationship is proportional. More importantly, the Commission referred to “corresponding costs” in paragraph 151, but switched to “number of students” in paragraph 153 and seemed to ignore any analysis of costs.

ii) Source and manner of financing, legal basis

“(155) The Commission considers that the source, manner and legal basis of the direct grant financing remained the same throughout the time-period: source of the financing was the budget of the federal State and the Länder. The fact that the co-financing by the universities increased in its proportion in the context of the overall financing of the activity (from 35,7 % to 74,1 %) does not constitute a significant alteration of the financing for the following reasons. First, the level of ‘state’ financing, more specifically the State aid portion, nominally remained the same, as it was explained in the previous section. Second, the legal basis in fact provided, from 1976 onward, that the financing can be supplemented by revenues if necessary. Therefore, the Commission disagrees with the complainant’s characterization that the manner of financing ‘constantly changed.’ The relevant language of the Satzung remained identical throughout the years: ‘The owners provide the necessary resources for the execution of the objective as determined by the by-laws to the extent that no private revenues are obtained’.”

iii) Objectives of public financing and supported products/services

“(167) The Commission considers that HIS’ activities also remained the same. The objective of the public funding, the support of universities, especially in the field of electronic data processing/information technology, remained unchanged”.

“(169) With regard to HIS’ products and services over the years, the Commission is satisfied that the overview of the products Germany provided during the formal investigation procedure (see recital 94) as well as the fact that the early version of some of the products were already provided in 1976, sufficiently demonstrated to the Commission that there was a continuous product range provided by HIS GmbH over the years.”

On the basis of the above analysis the Commission concluded that “(171) the measures for the benefit of HIS between 1976 and 2013, insofar as they constituted State aid, constituted existing aid pursuant to Article 1(b)(v) of Regulation (EU) 2015/1589.”


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

https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:32020D0391


Photo by fancycrave1 on Pixabay.

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Über

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 is professor at the University of Maastricht and the University of Nicosia. 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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