21. Januar 2008












  Recht und Unrecht  




Competition in the Public Services
and the European Court of Justice:
procurement law, subsidies and the principle of locality

Hans-Werner Krüger, Hamburg /Germany















“In the spirit of opening up public contracts to the widest possible competition, as the Community rules intend”, so the European Court of Justice (ECJ) in his judgment C-26/03, he has acted out some decisions of greater significance for the legal status and the practical freedom of action of the public services. They have several dimensions. First comes the question to what extent the (different) communal laws in the European countries which are principally guaranteed in the European treaties can withstand the enduring attempts of the European Commission and the Court to generalize the principle of competition. This is not only an economic and legal but also a genuine political affair in the sense that the public services include a model for democratic autonomy, public participation and control.

The second question is the range of European treaties and especially directives in the case-law of the ECJ linked with the activities of communities and public or semi-public utilities. The latter has gained growing attention because of its sometimes rigid and offensive interpretation of European law which is not as clear and free of contradictions as the European institutions like to pretend. Nevertheless representatives of the public economy apparently tend to underestimate or even ignore the relevance of the ECJ´s activities.

The applicable judicial fields mainly are the public subsidies, the procurement law with special regards to the public supply and public works contracts and the tender procedures and the not so clearly visible principle of locality. This principle, prominent at least in central European municipal regulations, limits the economic activities of public utilities regardless of their legal form within the borders of the municipalities. On the other side it gives them a rather strong protection against competing private activities. One part of this pattern of independence may be seen in the legal cross-subsidization between services of general interest and services of general economic interest (to adopt the EU terminology) which is constitutive for a self-dependent municipal economy.

The complexity of the EU rules and jurisdictions in the named fields can´t be unfolded here.
The purpose is to identify some problems arising for public services. from the ECJ´s judgments. They include criteria for the character of public services, the rules for contracting (public) authorities, the inclusions versus exemptions for procurement rules and subsidies. Especially the submission of municipal contracts under the public tender procedure which is one of the central aims of EU competition policy may become a crucial role for the further liberalisation of stately economy. It is intertwined with the efforts to foster public private partnerships, that are mostly contracts and concessions, as a less obvious displacement of the commons.

According to Directive 92/50 public service contracts are ”contracts for pecuniary interest concluded in writing between a service provider and a contracting authority”. Service provider is any natural or legal person, including a public body, which offers services. Contracting authorities are the state, regional or local authorities, bodies governed by public law, associations formed by one or more of these authorities or bodies governed by public law. The list is all-inclusive and assumes a pecuniary interest for any kind of service. This later on becomes a dogmatic distinction from the residual rest of public services which so far has not attracted private commercial interests.

According to Directive 93/38 “a public undertaking is one over which the public authority may exercise directly or indirectly a dominant influence by virtue of their ownership of it, their financial participation within, or the rules which govern it. A dominant influence shall be presumed when these authorities hold a majority of the undertaking´s subscribed capital , or control the majority of the votes attaching to shares issued by the undertaking, or can appoint more than half of the members of the undertaking´s administrative, managerial or supervisory board”.

The ECJ has restricted this Directive applying to the question under which conditions a public contract can be made without a public tender in the judgment C-26/03 (City of Halle). This can be done if the public authority uses its own administrative and financial resources. A tender is not mandatory if the other entity is legally distinct from the contracting public authority and if this exercises over the separate entity “a control which is similar to that which it exercises over its own departments and that entity carries out the essential part of its activities with the controlling public authority or authorities”. This appliesalso in the case that the separate entity is wholly owned by public authorities, see the judgment C-107/98 (Teckal).

C-26/03 moreover prescribes that “the relationship between a public authority which is a contracting authority and its own departments is governed by considerations and requirements proper to the pursuit of objectives in the public interest. Any private capital investment in an undertaking, on the other hand, follows considerations proper to private interests and pursues objectives of a different kind”. And, still more important, “the award of a public contract to a semi-public company without calling for tenders would interfere with the objective of free and undistorted competition and the principle of equal treatment of the persons concerned, referred to in Directive 92/50, in particular in that such a procedure would offer a private undertaking with a capital presence in that undertaking an advantage over its competitors”.

That means, if a pecuniary interest in any semi-public company has to be assumed, and this is self-evident, this company is in any case submitted to the public award procedures laid down in the Directive. Public private partnerships so far appear as a gangway to the privatization vessel.
The question of subsidies as for example treated in C-280/00 (Altmark Trans) is also related to the operations of public authorities, but of lower direct relevance for water and wastewater services, because they normally are not subjects of financial compensations for public services. But the question is part of the renewed “Monti Package” originated in 1997 and revised in 2006. Stately granted financial aids, for example deficit compensations which a municipality gives to one of its own enterprises, may come from an economically strong entity, typically from a limited liability company. The subsidy then is considered as stately if the municipality has the ruling influence over the company. The subsidy flow may be arranged under the roof of a non-transparent tax clearing or settlement system or within a public holding. This is detrimental to the Commission´s conviction of market liberty.

One possible exemption from the EU rules for subsidies, cf. EU Treaty Article 87 and others, is the lack of competition. The ECJ has developed a strict interpretation of transnational limitations of market access. It shall already take place when several member states of the EU have opened parts of their public services for private companies. e..g. local traffic, and if one of the companies engaged there feels that it should have the chance to get a contract in a state with non-liberalised municipal services. If this opinion really becomes a general rule, municipal self-organisation will be threatened in a crucial point.

A second exemption is the local limitation of possible market discrimination. At first glance this is no question for water and wastewater services, but EU rules must be seen as a holistic attempt of (de)regulation if there are no explicit special ordinances. The judgment C-458/03 (Parking Brixen) shows the direction of the ECJ´s impetus. The municipality Brixen had converted the special undertaking Stadtwerke Brixen into a legal personality with special autonomy. One of the objectives was the management of car parks at local, national and international level. Aside of the question whether the activity meant a contract or public service concession contract, the Court pointed out that the Stadtwerke Brixen AG had “turned into a market-oriented company”. “This made the municipality´s control tenuous”.

The ECJ noted

  • “the conversion of Stadtwerke Brixen in a company limited by shares (AG, the author)) and the nature of that type of company,

  • the broadening of its objects, the company having started to work in significant new fields, in particular those of the carriage of persons and goods …It must be noted that the company retained the wide range of activities previously carried on by the special undertaking, particularly those of water supply and wastewater treatment…,

  • the obligatory opening of the company, in the short term, to other capital,

  • the expansion of the geographical area of the company´s activities, to the whole of Italy and abroad,

  • the considerable powers conferred on its Administrative Board, with in practice no management control by the municipality”.

This list, transplanted on other cities and administrations, may be considered there as a medal of pride, proving the ability to play a role in expanding markets and to convert lazy public utilities into modern and competing units. The other side of the medal is the ECJ´s conclusion, that the high autonomy given to the company limited by shares substantially limits the chance of control by the municipality.

And seen as a whole: “Articles 43 EC and 49 EC, and the principles of equal treatment, non-discrimination and transparency, are to be interpreted as precluding a public authority from awarding, without putting it out to competition, a public service concession to a company limited by shares resulting from a conversion of a special undertaking of that public authority, (emphasis by the author) a company whose objects have been extended to significant new areas, whose capital must obligatorily be opened in the short term to other capital, the geographical area of whose activities has been extended to the entire country and abroad, and whose Administrative Board possesses very broad management powers which it can exercise independently.”

The ECJ judgments cited here follow a clear line and can be applied as well to limited liability companies without or with private capital involved. The consequences apply to every municipality which has organized parts of their services of general economic interest (in the very broad sense of the EU Commission) in a way that is no truly administrative activity.

The seductive idea that according to the liberalization of the energy supply and the telecommunication services the public services carried by the municipalities generally have gained an enormous chance to enlarge their activities in a material and geographical sense bears o lot of risks. Even the expansion over the geographical limits given by municipal law and the protective functions of cartel law (as it is in Germany) make the water and wastewater services an object of European laws of competition. This not only opens the obligatory access of private companies to formerly public services but also limits the liberty of decision of the public authorities and the (relative) autonomy of their economic entities in a hardly predictable way. If the way has gone once it´s almost impossible to leave it without severe judicial and economic burdens – not to speak of the loss of political credibility and responsibility.

The European Parliament in the session from January 14th 2004 refused the invention of a special sector directive for water and waste services, wanted in fulfillment of the principle of subsidiarity to preserve the right of self-production for the local and regional bodies under the condition that the local operator does not carry the competition outside of the respective area (number 35 of the protocol, emphasis by the author).

The process described here deserves more attention in both directions. Commercialisation is no privilege of private capital. The enemies of public services sometimes can be found within them, due to personal ambition, ideological addiction, ignorance and political carelessness.
Activities to preserve the public services via EU legislation should include

  • strengthening of the European public services and the municipal self-organisation in a special judicial body

  • exemption of public public partnerships (or intercommunal cooperation) from European rules of competition under certain conditions


  2005 by wd team stuttgart      xxl sicherheit