navigation.skipToContent
When Member States act as regulators they need not maximise revenue from the granting of concessions rights. When Member States act as regulators they must grant concession rights on the basis of procedures which are competitive, transparent, non-discriminatory and unconditional.

Sign up for our free news alert and receive Phedon Nicolaides' e-book State Aid Uncovered 2016 for free

Sign Up For Free


 

Introduction

Is it possible for a public authority to grant State aid through a defective procurement procedure? The answer is in the affirmative for a number of reasons. For example, a procedure for the purchasing of goods or services that excludes potential bidders may result in a higher price paid by the procuring authority. Some of the excluded bidders may be willing to supply at a lower price. This confers an undue advantage on the winner and also results in excessive transfer of State resources. Conversely, a procedure for the sale of services or public assets that excludes potential bidders may result in a lower price charged by the selling authority. Some of the excluded bidders may be willing to offer a higher price. This also confers an undue advantage on the winner and also results in transfer of state resources through loss of revenue.

In the former case, the public authority acts as a private buyer, while in the latter case the public authority acts as a private seller or vendor. The behaviour of the hypothetical market operator defines a benchmark against which to assess procurement procedures. But what happens when a public authority acts as a regulator rather than a market operator? What benchmark can be used to determine whether it behaves as public authority should behave? Can a “public operator” benchmark be defined as opposed to that of a “private operator” or “market operator”?

The answer is also in the affirmative for the simple reason that when the State exercises its regulatory powers it must treat equally all those who are regulated and are in the same situation. This normally stems from the purpose of regulation itself, which is to remedy a market failure or achieve a social objective. If regulation is applied unevenly, in a discriminatory manner, it will not constrain or incentivise equally all those that it seeks to regulate and therefore it will not achieve fully its aims. It follows that the appropriate benchmark is the application of the relevant regulation in a non-discriminatory manner by the relevant public authority.

What happens, however, when there is a mixed situation such as when the regulatory act or decision involves the charging of a fee? For example, in order to obtain a licence to practice medicine or to broadcast or to operate a bank, it is normal to pay a fee. In most cases the purpose of the fee is merely to cover the administrative costs of the issuing of the licence. In some regulated industries such as banking or telecommunications, the fee is also intended to contribute towards the costs of the regulatory body. That is, the expenses of the regulator are covered by those it regulates.

The case which is reviewed in this article falls in a third category: a concession to explore and potentially exploit a State asset such as mineral deposits. The fee here can have three purposes: i) to cover administrative costs, ii) to determine who gets the right to prospect for minerals [by assigning that right to the highest bidder] and iii) to generate revenue for the State from the profits that the concession holder can eventually earn from the commercial exploitation of the extracted minerals. A competitive selection would normally ensure that the second and third purposes would be achieved simultaneously. The winner would be the company to offer the highest fee to the concession authority, while the fee would be determined by the amount of the expected future profits. The company that would be the most efficient to extract the minerals and most successful in selling them would presumably be the one that would offer the highest fee.

The question which must be answered at this point in order to understand the reasoning of the Commission is whether Member States are obliged to establish an auctioning process or any other competitive selection method that can maximise revenue. The answer is negative whenever they act as public authorities or regulators in pursuit of public policy objectives. EU case law neither obliges them, nor prevents them from maximising revenue. Two landmark cases are worth recalling here.

The first is the judgment in case C-518/13, Eventech v The Parking Adjudicator,[1] concerning the use of bus lanes in London by black taxis but not mini cabs.

“(47) It must however be stated that that question […] concerns whether the bus lanes policy, by which TfL [Transport for London (the relevant regulator)] pursues the objective laid down by the State legislation, namely to ensure a safe and efficient transport system, must be regarded as conferring on its beneficiaries an economic advantage, for the purposes of Article 107(1) TFEU, which falls within the scope of EU law on State aid and which has an economic value which must be paid for by those beneficiaries.”

“(48) In that regard, […], it must be held that where the State, in order to pursue the realisation of an objective laid down by that State’s legislation, grants a right of privileged access to public infrastructure which is not operated commercially by the public authorities to users of that infrastructure, the State does not necessarily confer an economic advantage for the purposes of Article 107(1) TFEU.”

“(49) Further, it must be stated that the identification of the objective pursued is, in principle, a matter within the prerogative of the competent national public authorities alone and they must have a degree of discretion both as regards whether it is necessary, in order to achieve the regulatory objective pursued, to forgo possible revenue and also as regards how the appropriate criteria for the granting of the right, which must be determined in advance in a transparent and non-discriminatory manner, are to be identified.”

The second case is T-475/04, Bouygues v Commission,[2] concerning the award of licences to telecoms operators.

“(108) Moreover, the Community framework for telecommunications services, […], rests on equality of treatment between operators for the award of licences and the calculation of any fees and leaves the Member States free to choose the procedure for the award of licences, provided that the principles of freedom of competition and equality of treatment are respected. Hence, although the Member States may use public auctions, they may equally opt for a comparative selection procedure, as in the present case, the essential point being that the operators see that they are accorded to the same treatment, in particular as regards fees.”

“(109) To that effect, […] the fees charged to different operators must be equivalent in economic terms. Furthermore, having noted that the setting of fee amounts involves complex economic assessments and that the national authorities could therefore not be required to comply with rigid criteria in that regard, provided that they remain within the limits resulting from Community law, the Court stated that the national court must determine the economic value of the licences concerned, taking account inter alia of the size of the different frequency clusters allocated, the time when each of the operators concerned entered the market and the importance of being able to present a full range of mobile telecommunications systems”.

“(110) Hence, although the right to use the wireless space granted to the operators has an economic value, the amount payable as a fee can constitute State aid only if, all other things being equal, there is a difference between the price paid by each of the operators concerned, it being recalled that, according to the Court of Justice, it is the time when each of the operators concerned entered the market that must be taken into account […] . On the other hand, if the national authorities decide as a general principle that licences will be awarded free of charge, or awarded by means of public auctions or awarded at a standard price, there is no aid element, provided these terms are applied to all the operators concerned without distinction.”

“(111) Consequently, the fact that the State may have waived resources and that this may have created an advantage for the beneficiaries of the reduction in the fee is not sufficient to prove the existence of a State aid incompatible with the common market, given the specific provisions of Community law on telecommunications in the light of common law on State aid. The abandonment of the claim at issue here was inevitable because of the general scheme of the system”.

Three principles may be inferred from these two judgments. First, Member States, when they act as regulators to allocate rights that have economic value, do not have to auction those rights. Second, they may take into account public policy objectives or impose on those to whom they grant the rights certain obligations in line with public policy objectives. Third, they do not need to charge fees or, if they charge any, they may not aim to maximise revenue.

The Commission had to address similar issues in its decision SA.41116 concerning the granting of exploration rights to the Polish company KGHM Polska Miedź.[3] Because of the importance of those issues and the complexity of the analysis of the Commission, this article is long and divided into two parts. Part I provides the background to the case and examines the reasoning of the Commission on whether the Polish authorities were acting as an economic operator or regulator. Part II, which will appear next week, reviews the application to this case of public procurement principles.

 

 

Part I: Market Operator v Regulator

Background: Administrative and Competitive Procedures

In February 2015, Darley Energy Poland [DEP] complained to the Commission that Poland had granted State aid to KGHM Polska Miedź [KGHM]. KGHM, is one of Poland’s biggest companies, Europe’s second biggest copper producer and the world’s biggest silver mining company. About 32% of its shares are held by the State.

DEP alleged that Poland granted incompatible State aid to KGHM by awarding KGHM a concession for the exploration of potash deposits without a competitive procedure. DEP contended it could make a better offer.

The decision, in paragraphs 16-23, describes the legal framework in Poland for award of exploration and exploitation rights. Exploration and exploitation of mineral deposits in Poland can be conducted only after obtaining a concession. The concession is granted by an administrative decision of the Ministry of Environment. The process of granting a concession is initiated either on the basis of an application by a company or a competitive procedure launched by the Ministry which in this case is also the concession authority.

When a company applies for a concession, the Ministry follows an administrative procedure to perform a comparative assessment of the applications, whenever several applications are submitted. During this administrative procedure each applicant has access to the applications of the other participants and can at any time modify its own application to make it more competitive. The applications for concession are evaluated on the basis of objective criteria.

A concession gives its beneficiary the exclusive right to carry out the exploration of deposits and a priority to obtain the rights for the exploitation of the deposits. A concession fee for exploration is defined according to a formula expressed as unit price per type of mineral, multiplied by the area under concession. A concession fee for exploitation is also defined according to a formula expressed in terms of unit price, the size of the deposit, and the usage ratio.

Award of the Concession to KGHM

In paragraphs 24-33, the decision explains the procedure that was followed to award the concession to KGHM. In November 2012, DEP submitted an application for concession for exploration to the Ministry of Environment. The Ministry subsequently received applications for concession for exploration of the same mineral from three other companies, including KGHM. Because the applications covered partially overlapping areas, the Ministry conducted administrative hearings with the aim of reconciling the conflicting interests. The hearings did not lead to any compromise because none of the applicants modified their applications. The Ministry then compared the competing applications. During this procedure each applicant had access to the applications of other participants. The Ministry did not conduct a competitive tender since the whole procedure was not started with a notice published by the concession authority [i.e. the Ministry], but instead began on the basis of applications by the four companies. In October 2014, the concession authority decided to grant the concession for exploration to KGHM.

In the Polish system the acquisition of exploitation rights does not follow automatically holding a concession for exploration. The holder of an exploitation concession is only given priority over others but, if it chooses to ask for exploitation rights, the concession authority cannot refuse to grant those rights. Naturally, whether the holder of a concession for exploration will want to proceed to exploitation very much depends on the findings at the exploration stage. For this reason, the Commission decided that “(43) the granting of the concession for exploration must be assessed together with the associated priority right for exploitation, as a single measure.”

Existence of State Aid

The decisive issue here was whether Poland conferred an advantage on KGHM. The Commission first explained which principle it would not apply in this case because the measure concerned the regulatory actions of the State. “(47) Economic transactions carried out by public bodies do not confer an advantage on their counterparts, and therefore do not constitute aid, if they are carried out in line with normal market conditions. Compliance with normal market conditions is normally assessed on the basis of the <<market economy operator>> (MEO) test, whose purpose is to determine whether with regard to a certain transaction the State acted as a private operator in a similar situation. The MEO test is, however, not applicable in transactions where the State acts as a public authority rather than as an economic operator.”

But is this a purely regulatory measure [such as checking the credentials of a doctor or a bank] or is it also about placing State assets at the disposal of an undertaking? If it is the latter, the MEOT should be applied. The Commission went on to note that “(48) under Polish law deposits of potassium salt belong to the State and their exploration and exploitation can be conducted only after obtaining the concession from the State. No market operator can grant any such or similar concession, and, therefore, no market operator can be in a similar situation as the State. In addition, according to Polish law, when evaluating applications for the concession, the State must take into account public interest, security, environmental protection and rational management of mineral deposits. These are legitimate considerations which are relevant for a public authority rather than for an economic operator that is ultimately concerned only with profit maximisation and which, furthermore, are not prone to any meaningful quantifiable economic analysis.”

Although this line of reasoning seems to be in conformity with the Eventech and Bouygues cited in the introduction, it is not fully convincing. All the non-economic concerns mentioned above can be taken into account as extra requirements imposed on the eventual concession holder. None of these concerns prevents the relevant public authority from auctioning the rights to the highest bidder. Indeed typical two-stage procurement procedures achieve both aims: public policy objectives and revenue maximisation. The first stage normally checks compliance with the requirements of public policy, while the second stage contains competitive bidding. In this way competitive bidding does not prevent the achievement of the public policy objectives mentioned in the previous paragraph. It is not the same as the allocation of broadcasting spectrum where frequencies should not be assigned to the highest bidder because it is essential to maintain media plurality. But even in such a case, Member States ration frequencies through a combination of auctioning and quantitative limits on the number of frequencies that may be held by the same company. Similar methods are applied to regional allocation of broadband licences.

The Commission also pointed out to the practice in other Member States, but it is doubtful that the practice in other legal systems is relevant to the assessment of the existence of State aid, given that it is the legal system of the country in question that matters. “(49) The granting of concessions for exploration or exploitation of mineral deposits is, due to its regulatory nature, typically performed by the State in Member States of the Union and can be categorised as the exercise of public authority powers. In view of that, and contrary to the view of the Complainant, the Commission takes the view that in granting the concession for exploration, the State acted as a public authority and, consequently, the MEO test is not applicable.”

The implication of this view is that the granting of exploration concessions may not aim to maximise revenue for the State. This is clearly understandable in the case of licensing a doctor or bank. The licence is not tradable [i.e. not transferable] and merely confirms that the doctor or bank fulfils all necessary requirements for safe or sound operations. No State asset is put at the disposal of the doctor or bank. But this is not the case here. And in fact the very next paragraph goes on to admit as much. Nonetheless, it should be also said that the case law does acknowledge that Member States are free to choose whether or not to auction licences or concession rights.

“(50) Nevertheless, the granting of the concession for exploration can have an economic value in that it is associated with the priority right to claim exploitation of the minerals which do have an economic value since those minerals are tradeable, and therefore, the concession for exploration may still entail an economic advantage for the concession holder in the present case. Insofar as the mineral resources of Poland are under ownership of the State Treasury, any undue advantage conferred by the concession for their eventual exploitation is to be regarded as involving State resources within the meaning of Article 107(1) TFEU” [Emphasis added].

KGHM obtained a tradable asset. What then is the meaning of undue advantage when the State is not acting as MEO? In paragraph 51 [which is not quoted here], the Commission rejected the argument of DEP that KGHM obtained an advantage because the concession rights were not awarded on the basis of first come first served. This is right. The Polish authorities took into account the merits of the applications of the other three companies, including that of KGHM. But still it is not obvious how to detect the existence of an undue advantage in a procedure such as that used by Poland.

“(52) Considering that there were four competing applicants and given the outcome of the award procedure, the Complainant has failed to show that a different outcome of the award process could have been more beneficial for Poland. The General Court has already ruled that the public authorities of the Member State may take into consideration, in the absence of a competitive tender, the comparability of the offers received, whether they are binding in national law and the broader fulfilment of other objectives than the mere sales price for the purposes of adjudicating a sale of land, without the choice of a lower bid unduly favouring and granting an undue economic advantage within the meaning of Article 107(1) TFEU to the preferred bidder [case cited: Konsum Nord ekonomisk förening v European Commission, T-244/08, in particular paragraphs 66 to 75]. This conclusion holds true a fortiori in the present case where none of the alternative offers filed by three other applicants were more advantageous than KGHM’s, according to the information available, and KGHM has best met the conditions set out by Poland for the award of this concession” [Emphasis added].

Two comments are in order here. First, the judgment cited in paragraph 52 of the Commission decision merely says that price is not the only criterion for awarding contracts. Quality and compliance with regulatory [in this case spatial zoning] requirements are also relevant. In other words, the question is whether the Polish procedure awarded the concession to what in this case would correspond to the economically most advantageous offer.

Second, the Commission criticises DEP for not showing how a different outcome would be “more beneficial” to Poland, but it does not define explicitly what “more beneficial” would mean. The last sentence of the paragraph mentions that the offer of KGHM “best met the conditions”, i.e. the selection criteria. From this sentence we can infer that no “undue advantage” means that the chosen offer is the one that best meets the selection criteria and this is how a State, acting as a regulator, maximises the benefits it derives from the awarding of rights [because no other applicant could offer a “more beneficial” or better offer]. It finds the company that best serves its policy aims.

In other words, if the State is not to confer an advantage in the meaning of Article 107(1) TFEU when it acts as a regulator it must apply objective criteria and choose the applicant that best meets those criteria.

 

--------------------------------------

[1] The full text of the Commission decision can be accessed at: http://curia.europa.eu/juris/document/document.jsf?text=&docid=161376&pageIndex=0&doclang=EN&mode=lst&dir=&occ=first&part=1&cid=886363.

[2] The full text of the Commission decision can be accessed at: http://curia.europa.eu/juris/document/document.jsf?text=&docid=61878&pageIndex=0&doclang=EN&mode=lst&dir=&occ=first&part=1&cid=886738.

[3] The full text of the Commission decision can be accessed at: 
http://ec.europa.eu/competition/state_aid/cases/268864/268864_1938168_112_2.pdf.

 



Comments

by Phedon Nicolaides, Tuesday, 6 November 2018, 09:21:31

Thank you for your comment. Yes, there must be some difference. I am surprised too that the Commission did not investigate further whether the Polish authorities were acting beyond the boundaries of their regulatory tasks.


by Michael Papadakis, Thursday, 1 November 2018, 15:43:12

Faidon, many thanks for this intriguing "food for thought" piece of analysis as well as the other excellent pieces of state aid case law commentaries. In my view there must be a significant difference between granting a taxi-licence, a doctor licence, or a banking licence and a licence to explore state owned natural resources. The latter is in my view about the sale of a public asset and ought to follow the abolished Communication on the sale of public land and buildings, the relevant section of the Notice on the notion of State aid and all the guidance around privatisations (the Aviation Guidelines of the 1990's and the XIV EC Annual Report on Competition. I have not seen any specific reference to this framework. Very best Michalis Papadakis +447900167276



Click here to comment upon this article

State Aid Uncovered
Opinions by Phedon Nicolaides

Share this now

Follow by Email

About

Phedon Nicolaides

Professor at the College of Europe, Bruges, and at the University of Maastricht, and Academic Director at lexxion training

Search this Blog

Upcoming lexxion trainings with Phedon Nicolaides:

Inhouse Training on State Aid
Choose date & town

Recent Comments