EU procurement law: Exclusive rights

The European Community (European Union) Procurement Directive 2004/18/EC does not apply to public service contracts awarded by for instance the State Government to another government body based on an exclusive right.

These monopoly rights have to be compatible with the Treaty establishing the European Community. Therefore we look at some documents concerning public service obligations in the context of services of general economic interest (SGEI) and services of general interest (SGI).

Then we try to clarify other aspects related to exclusive rights.




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Article 18

When one public body awards a contract to another public body on the basis of a legal monopoly right, the Procurement Directive 2004/18/EC does not apply to this public service contract.

This exclusive right must fulfil three criteria:

1. The exclusive right is given by one contracting authority to another contracting authority
2. The monopoly has to be based on a legal act.
3. The exclusive right must be compatible with the EC Treaty.

This is the text of Article 18 of the Procurement Directive, officially Directive 2004/18/EC of the European Parliament and of the Council of 31 March 2004 on the coordination of procedures for the award of public works contracts, public supply contracts and public service contracts (originally published OJEU 30.4.2004 L 134/114, but as always my references are to the latest consolidated version, of 15 September 2008):


Article 18
Service contracts awarded on the basis of an exclusive right

This Directive shall not apply to public service contracts awarded by a contracting authority to another contracting authority or to an association of contracting authorities on the basis of an exclusive right which they enjoy pursuant to a published law, regulation or administrative provision which is compatible with the Treaty.



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Public service contract

What is meant by a public service contract?

Chapter III of the Procurement Directive provides for the procedure applicable to public service contracts. The services are set out in Annex II. The services listed in Annex II A are normally subject to the contract award procedures (Article 20). The application of the Directive is restricted with regard to services listed in Annex II B (Article 21).





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Compatible with the treaty

An exclusive right must be compatible with the Treaty establishing the European Community (TEC).

This brings us close to the fascinating discussion about services of general economic interest (SGEI), provided for in Article 16 TEC (in the Treaty of Lisbon Article 14 of the Treaty on the Functioning of the European Union; TFEU).

If we include services with a more non-economic character, we encounter services of general interst (SGI).

For a discussion of both economic and non-economic services of general interest (public services; public service obligations), you can turn to the Commission’s Communication of 20 November 2007 COM(2007) 725 final Accompanying the Communication on "A single market for 21st century Europe" Services of general interest, including social services of general interest: a new European commitment:

http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=COM:2007:0725:FIN:EN:PDF


As the Commission points out (page 3 to 4):

Services of general interest cover a broad range of activities, from the large network industries such as energy, telecommunications, transport, audiovisual broadcasting and postal services, to education, water supply, waste management, health and social services. These services are essential for the daily life of citizens and enterprises, and reflect Europe's model of society. They play a major role in ensuring social, economic and territorial cohesion throughout the Union and are vital for the sustainable development of the EU in terms of higher levels of employment, social inclusion, economic growth and environmental quality.

Although their scope and organisation vary significantly according to histories and cultures of state intervention, they can be defined as the services, both economic and non-economic, which the public authorities classify as being of general interest and subject to specific public service obligations. This means that it is essentially the responsibility of public authorities, at the relevant level, to decide on the nature and scope of a service of general interest. Public authorities can decide to carry out the services themselves or they can decide to entrust them to other entities, which can be public or private, and can act either for-profit or not for-profit.

At the same time, providers of these services must respect the rules laid down in the EC Treaty and in secondary EU law where these are applicable. Moreover, given their EU dimension, a number of network industries which perform services of general economic interest are now subject to sector-specific EU directives. In partnership with national, regional and local authorities, the EU therefore has a role to play in framing the principles and conditions for the operation of a wide range of services. This shared responsibility is reflected in the Treaty and will be underlined in the Protocol on services of general interest to be annexed to the Treaty of Lisbon.



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Social services

In an accompanying Commission Staff Working Document procurement rules are discussed in relation to social services.

See SEC(2007) 1514 (Brussels, 20.11.2007) Frequently asked questions concerning the application of public procurement rules to social services of general interest Accompanying document to the Communication on "Services of general interest, including social services of general interest: a new European commitment", available here:

http://ec.europa.eu/services_general_interest/docs/sec_2007_1514_en.pdf


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State aid rules

Compatibility with the treaty (TEC) for exclusive rights raises questions about the economic conditions attached to these public service obligations.

From this viewpoint it may be useful to study the Commission Staff Working Document SEC(2007) 1516 (Brussels, 20.11.2007) Frequently asked questions in relation with Commission Decision of 28 November 2005 on the application of Article 86(2) of the EC Treaty to State aid in the form of public service compensation granted to certain undertakings entrusted with the operation of services of general economic interest, and of the Community Framework for State aid in the form of public service compensation, available here:

http://ec.europa.eu/services_general_interest/docs/sec_2007_1516_en.pdf






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Commission Guide on exclusive right

The Commission’s Guide to the Community rules on public procurement of services offered the following brief annotation based on the old Services Directive 92/50/EEC (page 61):


7. Public service contracts made with another government body by reason of an exclusive right held by the latter

The Services Directive does not apply to public service contracts awarded to an entity which is itself a contracting authority, on the basis of an exclusive right which the latter enjoys pursuant to a published law, regulation or administrative provision which is compatible with the Treaty.


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Indicative scope: Contracting authorities

Article 18 of the Procurement Directive is concerned with exclusive rights between two bodies governed by public law. Article 1(9) defines these bodies and refers to the indicative list of such contracting authorities notified by the member states and set out in the recently updated Annex III. Because all contracting authorities must be notified to the Commission, Annex III should include the ones operating on the basis of an exclusive right:

9. ‘Contracting authorities’ means the State, regional or local authorities, bodies governed by public law, associations formed by one or several of such authorities or one or several of such bodies governed by public law.

A ‘body governed by public law’ means any body:

(a) established for the specific purpose of meeting needs in the general interest, not having an industrial or commercial character;

(b) having legal personality; and

(c) financed, for the most part, by the State, regional or local authorities, or other bodies governed by public law; or subject to management supervision by those bodies; or having an administrative, managerial or supervisory board, more than half of whose members are appointed by the State, regional or local authorities, or by other bodies governed by public law.

Non-exhaustive lists of bodies and categories of bodies governed by public law which fulfil the criteria referred to in (a), (b) and (c) of the second subparagraph are set out in Annex III. Member States shall periodically notify the Commission of any changes to their lists of bodies and categories of bodies.


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Implementation and monitoring

Correct and timely implementation of European Community (European Union) law is one of the main obligation of member states. This includes an obligation to communicate to the Commission not only the legal act transposing the Directive, but the main provisions of national law which they adopt in the field covered by the Directive. Article 80 of the Procurement Directive 2004/18/EC sets out the requirements for implementation in the following way:


Article 80
Implementation

1. The Member States shall bring into force the laws, regulations and administrative provisions necessary to comply with this Directive no later than 31 January 2006. They shall forthwith inform the Commission thereof.

When Member States adopt these measures, they shall contain a reference to this Directive or be accompanied by such reference on the occasion of their official publication. The methods of making such reference shall be laid down by Member States.

2. Member States shall communicate to the Commission the text of the main provisions of national law which they adopt in the field covered by this Directive.


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Monitoring

The provisions adopted in the field covered by the Procurement Directive logically extend to the provisions excluding public service contracts between contracting authorities based on an exclusive right. In addition, legal remedies have to be offered:



Article 81
Monitoring mechanisms

In conformity with Council Directive 89/665/EEC of 21 December 1989 on the coordination of the laws, regulations and administrative provisions relating to the application of review procedures to the award of public supply and public works contracts, Member States shall ensure implementation of this Directive by effective, available and transparent mechanisms.

For this purpose they may, among other things, appoint or establish an independent body.


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Private operator with exclusive rights

We can contrast the above granting of an exclusive by one public body to another body governed by public law with the award of an exclusive right to a private operator to carry out a public service activity, as set out in Article 3 of the Procurement Directive:


Article 3
Granting of special or exclusive rights: non-discrimination clause

Where a contracting authority grants special or exclusive rights to carry out a public service activity to an entity other than such a contracting authority, the act by which that right is granted shall provide that, in respect of the supply contracts which it awards to third parties as part of its activities, the entity concerned must comply with the principle of non-discrimination on the basis of nationality.

Negotiated procedure

We take note of Article 31(1)(b) of the Procurement Directive 2004/18/EC, which allows the use of the negotiated procedure when awarding contracts in certain circumstances:

Article 31
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:

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(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;
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Commission Guide on negotiated procedure

The Commission’s Guide to the Community rules on public procurement of services offered the following explanation of the exception allowing the negotiated procedure without issuing a contract notice, based on the old Services Directive 92/50/EEC (page 22 to 23):

3.3.2.2 When, for technical or artistic reasons, or for reasons connected with the protection of exclusive rights, the services may be provided only by a particular service provider

This is a very narrow exception and applies only in those cases where it can be said that to invite tenders or expressions of interest would be abusive because there is only one service provider who can provide the particular service. The safest cases where the exception can be used are those where a particular service provider has the exclusive right to carry out a particular service. However, the exception does not apply if the exclusive right is licensed to other parties or can reasonably be obtained on licence. Thus, for example, a sculptor would have the exclusive right to repair or remake a work of art sculpted by himself, but he would not have the exclusive right to produce photographs of the work if he had already licensed other parties to produce such photographs.

The cases where, in the absence of exclusive rights, technical or artistic reasons justify recourse to a negotiated procedure are very narrow indeed. An example might be found where a local authority had already commissioned a work of art and later decided to commission a second work of art to make a "pair". In such circumstances it would be necessary to show for objective reasons that it could not be envisaged that the second work of art be provided by a different artist.



Ralf Grahn