Procurement in a nutshell – Procurement law and State Aid

Earlier this year, the European Commission published its Notice on the notion of State Aid (“the Notice”), which provides guidance on when public spending falls within, and outside, the scope of EU State Aid control.

In the press release announcing the adoption of the Notice, the Commission stated that:

“If public authorities buy goods or services through tenders, which respect EU rules on public procurement, this is in principle sufficient to ensure that the transaction is free of State Aid.”

This represents a departure from the Commission’s previous stance conveyed in its 2012 communication on Services of General Economic Interest and in its draft notice on the notion of State Aid.

These documents set out as the main rule that any public procurement procedure under the procurement Directives involving negotiation could not be assumed to comply with State Aid law.

The main rule now is that the use of procurement procedures will be sufficient to avert capture by the State Aid provisions.

The apparent exclusion of State Aid control in the field of public procurement will be of interest to procurement officers.

As with any rule there are exceptions to it. This update looks at the exceptional circumstances which lead to a departure from this general position.

What is State Aid?

As with the public procurement rules, State Aid rules aim to prevent protectionism.

The measures are designed to eliminate financial aid given by a Member State (including an ‘organ of the State’ such as certain contracting authorities) that favours selected businesses and has the potential to distort competition and affect trade between EU Member States.

Certain cumulative criteria must be satisfied in order for a finding of State Aid to be made:

1. the aid favours certain undertakings, or the production of certain goods;

2. the aid may be directly or indirectly imputed to the State and must have been paid through State resources;

3. a selective economic advantage or benefit is granted, which an undertaking could not have obtained under normal market conditions; and

4. the aid has the potential of affecting competition and trade between Member States.

The interface between procurement law and State Aid

It is useful to outline the relevant interface between the procurement and State Aid rules.

The awarding of a public contract which falls within the scope of the procurement rules has the potential to result in the granting of State Aid since there may be an economic advantage conferred, which the recipient undertaking would not have received under normal market conditions (point 3 above).

The Commission’s general rule is that the award of a public contract will not amount to State Aid provided that it is in compliance with the EU Public Procurement Directive.

The rationale is that procurement law compliance adds objectivity to the contract award and thereby precludes the existence of an unwarranted selective economic advantage or benefit.

The use of an open, transparent and unconditional procedure under procurement rules should ensure a market price for the contract which corresponds to the highest price that a private investor operating in normal competitive conditions would be prepared to pay.

Exceptions to the rule

1. “Specific circumstances that make it impossible to establish a market price”

Examples of this include:

• a direct award, made using the negotiated procedure without prior publication;
• contracts excluded from the public procurement Directives;
• awards made on a basis other than a tender establishing the market price, such as in-house awards; and
• where there has been collusion by tenderers resulting in over-inflated prices.

The above examples do not comprise an exhaustive list of the circumstances falling under this category. This exception effectively allows the Commission to investigate contract awards which arouse suspicion under the State Aid rules despite adherence to the procurement rules.

2. Where only one bid is submitted

The Commission provides further clarification on this point in the Notice, by explaining what CAs can do to ensure that market conditions are established.

Firstly, the procurement procedure used must be unconditional – any specific conditions attached to the tender should be non-discriminatory and closely and objectively related to the subject matter of the contract.

Secondly, obtaining the market price means that in practice significant weight must be put on the price component of the bid. Effectively, the Commission is narrowing the scope of discretion for CAs to fix the award criteria.

What does this mean for contracting authorities?

The Commission’s Notice has provided greater coherence between public procurement and State Aid rules.

CAs are afforded a level of certainty in knowing that generally, following the rules in the public procurement rules will afford a degree of protection against the risk of falling foul of the rules on State Aid.

The overarching concern for CAs, in order to benefit from protection, must be creating genuine competition for public contracts rather than formal adherence to the rules.

Why is this important?

The risks posed by State Aid regulations should be of concern to both CAs and the economic operators from whom they procure.

Where the Commission makes a finding of unlawful State Aid, the economic operator must repay the aid in question, with interest, from the date of the grant.

This could have a serious detrimental impact on the entity with a significant reduction in their cash flow or funds. The State Aid is repaid to the CA.

This might be seen as advantageous, however, the CA must consider reputational damage as well as the wider commercial implications such as its contractor encountering severe financial complications, including the danger of insolvency.

How can I find out more?

If you have any queries on the issues raised or on any aspect of procurement, please contact us via our procurement hotline on 0191 204 4464.