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Public services and competition law

This entry was added to http://www.reckon.co.uk/headlines-franckblog on 5 May 2005.

I have come across quite a bit of controversy recently about the interactions between competition law and public services, and the impact of competition law on the role of the State.

This article tries to recapitulate the basics of what the law is and whether it imposes any surprising restrictions on State action, and discusses whether the guidelines produced by the UK competition authorities on this topic are successful at explaining it.

The article addresses three questions:

The treatment of public services is an important aspect of many complaints by businesses about anti-competitive conduct and regulations. Reckon's Unfair competition guide provides further information about the protection provided to businesses by UK competition law (including Article 82 and the Competition Act 1998), enforcement procedures, and Reckon's services to victims of anti-competitive practices.

What is the law?

The relevant EC Treaty provisions are:

All these rules are limited in two ways.

First, the person or persons that are party to the agreement, that follow the practice or conduct, or that are favoured by the aid must be classified as "undertakings" in order for competition law to apply (I do not discuss here the case of aid caught by Article 87 only because it may favour "the production of certain goods"). The question of what constitutes an "undertaking" is discussed below.

Second, there must be a potential effect on trade between EC member states. I do not consider this aspect any further as this test is notoriously easy to satisfy, and the Article 81 and Article 82 provisions are often mirrored in domestic law (e.g. the UK Competition Act 1998) leading to their applicability irrespective on effects on cross-border trade.

Is EC competition law applicable? Fenin and the definition of undertaking

The main recent judgment on the question of whether a public service provider is acting as an undertaking is the Fenin case.

In Fenin, the CFI found that a Spanish health service organisation should not be deemed to act as an undertaking simply because it was purchasing large quantities of goods or services from competitive markets. Instead, the test was whether the purpose of the purchasing was to offer goods and services in a market. In other words, acting as an undertaking is characterised by a purpose to offer things, i.e. to promote one's services actively, like a commercial organisation, and not merely deliver services that are defined in another way than through the interactions between supplier and customer (e.g. social services defined by law).

Other economic transactions in pursuance of such a commercial purpose are regulated by competition law, but the same economic transactions if undertaken to meet another purpose — such as meeting "social" rights of citizens defined by law as opposing to offering them the option of consuming such services — are not.

Some in the UK have sought to portray Fenin as a rebuttal of the UK CAT findings in Bettercare II (see Fenin for background). There is some tension between the underlying reasoning of the two cases (if only because the UK reasoning is given in so much more detail than the CFI one) but no real conflict in my view. In Bettercare II, a social care provider organised itself into a "purchasing" division procuring care places from a range of providers, including independent enterprises, and a "provision" division which was operating some care homes in the area. By adopting this structure (whether by choice or by Government imposition does not matter) it turned at least part of its activities into those of an undertaking, thus subjecting them to the requirements of UK competition law (in this context an Article 82-like prohibition of abuse). There are also further arguments in the CAT judgment about the nature of transactions between the authority and consumers (people being cared for) which suggests that there may also be an element of offering goods and services in a market at that downstream level. (In the end this case was abandoned irrespective of the findings about the scope of applicability of competition law.)

Is there State aid? Altmark and Article 87

Where EC competition law is applicable, i.e. where the public service in question is delivered by someone (public or private) acting as an undertaking, then an important first question is whether the way in which the State oversees or organises the public service conflicts with the Article 87 prohibition on State aid.

The definition of what constitute State aid in the context of an undertaking providing public services with some financial support from the State was clarified in the Altmark case, which essentially confirmed that there was a "market purchaser" test for the State which sat alongside the established "market investor" and "market lender" test, as follows:

A finding that there is State aid is not the end of the road: the European Commission can, and routinely does, allow some State aid if they meet the objectives set out in Article 87, and/or if they are justified by Article 86, to which I now turn.

Is there a public service or fiscal monopoly purpose? Article 86(2)

First, a note on terminology. Article 86(2) refers to "services of general economic interest" and "revenue-producing monopolies". The first phrase appears to mean a public service or service of general interest which is of an economic nature, i.e. is provided by an undertaking — which is a precondition for any application of Article 86 anyway. The second phrase is a rather inelegant English rendering of the French "monopole fiscal", which besides wasting words rather fails to convey the idea that the revenues must be produced for the State and not for any odd private monopoly! (But a private franchisee can act as a fiscal monopoly if the revenues it produces are for the State.)

In the context of the present discussion we see little reason not to use the plainer "public service" and "fiscal monopoly" terminology (recognising that these phrases only have the meaning that the case law has given or will give them anyway).

Article 86 is in three parts:

As I understand it, this provides for an additional justification or "defence" against claims of infringement of competition law. Two ingredients are required for a successful justification through Article 86(2) of something that would otherwise be prohibited by the Treaty:

(Even if these conditions are satisfied, there is a theoretical risk that the Commission would determine that the effect on trade is contrary to the interests of the Community — although this does not seem much of a constraint in practice.)

Is State aid justified? Article 86(2) applied to Article 87

DG Competition published in 2004 (in the wake of Altmark) a draft "framework" (PDF, 5 pages) on the application of the Article 86(2) justification to State aid in the form of public service compensation that does not meet the Altmark test (otherwise it is not State aid and there is nothing to apply Article 86 to).

Besides the natural requirements such as for there to be a clear act of "entrustment" of the undertaking with the operation of a public service, this document seeks to allow aid that is set as the minimum amount necessary to enable the selected undertaking to deliver its public service duties. This seems a direct application of Article 86.

There are therefore two separate ways in which the State can lawfully provide financial support to public services under the Treaty:

A UK passenger rail franchise with State subsidy is a potential example of the Altmark way. In such a case, if the State had failed to act like a market purchaser then it is unlikely that Article 86 would come to the rescue on the State aid front since at least some of these services could realistically be operated with less subsidy (e.g. with higher fares or lower profits for the operator). (The question of State aid to the railway sector as a whole affecting competition with e.g. car manufacturing is a different one, probably covered by specific transport provisions, and not discussed here.)

I cannot immediately think of an example of State aid to a UK public service that is unambiguously justified by Article 86(2). Perhaps this is the basis on which the State covers losses of nationalised providers like the Post Office or (in the old days) British Rail? Or are there routinely arrangements by which public services are provided by piggy-backing on an existing commercial monopoly and a non-Altmark-compliant reimbursement of estimated incremental costs is made?

Article 86(2) applied to Article 81 and Article 82

Besides State aid, another main area of application of Article 86(2) is as a justification for conduct or agreements that would otherwise be prohibited by Article 81 or Article 82.

The case law on this area is fairly scarce (particularly so in respect of fiscal monopoly purposes). As there has been no shortage of competition cases involving activities that are likely to be considered as "services of general economic interest" or fiscal monopolies (e.g. in the postal sector) this might be taken to confirm the stringency of the requirement that any deviation from the usual rules must be necessary to achieve the relevant public service or fiscal monopoly purpose.

Then again, the lack of litigation or decisions does not necessarily mean all that much. Perhaps the law has been complied with in this area with no fuss and no need for intervention by the European Commission or the courts.

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Is the law surprising?

A few words now on whether EC competition law on public services actually corresponds with the political comments that it attracts.

A common assumption — by those who praise the effect of the EC Treaty in this area as well as those who criticise it — is that EC competition law makes little allowance for State intervention in public services, and that the competition rules tend to push public services towards more competition, commercialisation and self-financing.

That is not quite what I see in either of the parallel tracks that enable State funding of public services.

Altmark recognises the legitimacy of State intervention in the form of purchasing. Provided that the thing being purchased is a proper activity of the State — and the Treaty places little constraint on the national decision of what is proper — then the only requirement is that the purchasing should be like that of a market purchaser. In other words, if the public service can be defined by a concession contract of some sort then the rule is a ban on giving favours to particular suppliers (and in particular to national suppliers). This is a real restriction, but also surely a core EU requirement that all signatory States accept as a condition of continued membership.

If the public service is not defined by a concession contract placed by the State acting as a market purchaser, so that State aid is likely to occur, then Article 86(2) permits that aid insofar as it is necessary to meet the objectives which again are defined nationally, and are only to review for manifest error by EC institutions. The requirements of Article 86 are demanding, and restrict State action by a strict proportionality principle (whereas under, for example, pre-EC English law, anything short of Wednesbury unreasonableness would probably have been allowable). So again Europe places an onerous restriction on State intervention, requiring its purpose to be precisely defined and its necessity to meet these purposes to be established. But again this proportionality is a core effect of the Treaty on administrative law, not an expression of any ultra-liberal pro-competition ideology. A Government that does not want its actions restricted by proportionality considerations should not remain a party to the EU Treaties.

Looking beyond the question of funding, Article 86 also permits acts that would infringe Article 81 or Article 82 if they are necessary to meet the (nationally-defined) public service or fiscal monopoly purposes — for example one might conceive of otherwise exploitative excessive pricing being permitted if it is to raise funds for a fiscal monopoly. Again, this seems to me to be nothing to be surprised about given the basic nature of the EC Treaties.

As an aside, the proposed constitutional treaty appears to make no material changes in respect of the subject matter of this article. This has exercised some strands of opinion in France who would apparently like to see European-level obligations to provide public services so that future French governments would be unable to cut them back, leading to claims that the proposed constitution should be rejected on those grounds as it fails to "progress" beyond the free trade, non-discrimination and proportionality ideas that have always been at the heart of the European (Economic) Community. This is almost the exact opposite of the strand of opposition to the constitution which criticises it for persisting in giving powers to ministers to make European policies without the safeguards of accountability and parliamentary oversight that would apply to corresponding national measures.

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Do the UK competition law guidelines help?

The UK competition authorities, led by the Office of Fair Trading (OFT), have produced a number of guidelines on their understanding of the competition law that they enforce, and their typical approach to enforcement.

Do these guidelines help UK public service providers and public bodies understand and comply with competition law insofar as it affects them?

OFT guidelines on Article 86(2)

The most relevant guideline is the OFT document entitled "Services of general economic interest exclusion" (PDF, 20 pages) which was last updated in December 2004.

This guideline relates to the UK Competition Act 1998 as well as EC competition law. The UK statute largely mirrors the EC competition law prohibitions, but the Competition Act 1998 uses a somewhat different wording for the Article 86(2) provision. Paragraph 4 of Schedule 3 of the Competition Act 1998 reads:

"Neither the Chapter I prohibition nor the Chapter II prohibition applies to an undertaking entrusted with the operation of services of general economic interest or having the character of a revenue-producing monopoly in so far as the prohibition would obstruct the performance, in law or in fact, of the particular tasks assigned to that undertaking."

Taken on its own, this text is not particularly clear. Do the two occurrences of "the prohibition" refer to the same prohibition? In either case, is "the prohibition" is to be construed as referring to a rule (as in "the Article 82 prohibition") or to its application to a specific agreement or conduct, i.e. is there a general exclusion from the prohibition(s) for some kinds of undertakings or just a justification for certain acts?

Section 60 of the Competition Act 1998 provides that it should be interpreted in line with EC law, in this case Article 86. This clarifies the meaning of the text: it must be the case that Paragraph 4 only disapplies the competition prohibition law on a case-by-case basis.

The title of Schedule 3 of the Competition Act 1998 is "General Exclusions". I do not think that this is a good description of the provisions of Paragraph 4 (whereas it is a good description for much of the rest of Schedule 3, e.g. the — now repealed — exclusion for vertical agreements), and it is therefore unfortunate that the word exclusion should have been carried through to the title of the OFT guidelines on Paragraph 4 and Article 86(2).

The real problem is that the "exclusion" language (in my view, error of interpretation) of the provision as an exclusion goes beyond the title and is reflected in the content of the OFT guideline.

Thus, part 3 of the OFT guideline "Extent to which restrictions on competition benefit from the exclusion" (another bad title since some categories of infringements of competition law, e.g. exploitative pricing abuses, are not captured by the phrase "restrictions on competition") appears predicated on the idea that there are activities to which competition law is not applicable as a result of the exclusion, and the thrust of the discussion is to explain how the OFT will determine whether a particular activity falls within that category or not.

The OFT's approach has two main problems:

Neither of these problems arise with the understanding outlined above of Article 86(2) as a form of objective justification for actions that might otherwise risk infringing competition law, which applies at the level of the specific agreement or conduct under review (not of economic activities) and do not require a prior admission of guilt if the justification fails.

Part 4 of the OFT guidelines, which discuss fiscal monopolies, also illustrates the problems with the "exclusion" interpretation. The OFT claims that that "in order to benefit from the exclusion as a revenue-producing monopoly, an undertaking must have as its principal objective the raising of revenue for the state" (paragraph 4.2) This seems to be the result of an attempt at characterising fiscal monopolies at the level of activities by introducing a "principal objective" test, with no supporting authority or detail of its meaning.

In fact, there is no need to invent a false "principal objective" rule if one recognises that the application of the Article 86(2) requires only that the relevant public service or fiscal monopoly purposes be identified, and then an assessment of whether the conduct or agreement under review is necessary to meet these purposes. There is no need to decide whether such purposes are "principal" or "secondary" to the organisations that implement them, all that matters is whether the purposes exist (including the "entrustment" question) and whether they make the agreement or conduct under review necessary.

This point is in fact exemplified by the case law quoted in the OFT guideline, which relates to the application of Article 86(2) to Article 31. In these cases, the European Commission found that the fiscal monopoly purposes in question did not in fact justify the restrictions on free trade imposed by the French and Italian Governments because there were other ways of raising the fiscal revenue in question which would be less restrictive of free trade — a standard application of the proportionality principle at the heart of Article 86(2) which provides no information on the scope of its application.

On the basis of its "principal objective" test, the OFT opines that "it is unlikely that there are any revenue producing monopolies in the United Kingdom at this time" (paragraph 4.4). Well, I disagree. Camelot, the operator of the National Lottery, seems to me to be an undertaking with fiscal monopoly purposes. And at the interaction with public services, is GNER, a train operator that has agreed to pay over £1 billion to Government in exchange for special rights to run East Coast Main Line train services, not entrusted with the operation of a fiscal monopoly? That the Government will probably choose to spend that money on Altmark-type subsidies to other train operators should not detract from the fiscal monopoly nature of the way in which it is raised in the first place.

I would agree with the OFT that it is unlikely that these purposes would justify anti-competitive conduct that would otherwise be prohibited by UK or EC competition law. But why do the guidelines fail to recognise that there is no contradiction in thinking that there are lots of public services and fiscal monopolies about, and that their conduct, and particularly their ability to act anti-competitively, is controlled by competition law insofar as this does not impede their ability to meet the public interest purposes that have been given to them? In fact, in many cases, effective competition will be an important instrument in the effective delivery of public services and fiscal monopolies, and anti-competitive conduct would operate against their objectives, and would not be justified.

The parliamentary debates on Paragraph 4 of Schedule 3 of the Competition Act 1998 may be worth a read for those interested in the history of these UK provisions. The first link below is for minutes of relevant committee hearings, and the second link points to Hansard for the debate on the floor of the Commons (in both cases, the link is to the first of a series of linked HTML pages):

http://www.publications.parliament.uk/pstand/g/st980609/pm/80609s01.htm
http://www.publications.parliament.uk/prd/vo980708/debtext/80708-46.htm

Railway sector draft guidelines

Most of the sector-specific competition law guidelines (energy, water etc.) just refer to this OFT document and sometimes add some minor comments of their own. There is however one notable and recent exception.

The draft guidelines on the application of competition law to the railway sector (PDF, 66 pages) state at paragraph 3.21 that:

"This case [Altmark] is significant in respect of the extent to which transport services provided by obligation of a public service contract, can be classified as services of general economic interest. No undertaking in the rail sector has yet argued to the OFT or ORR that it satisfies the criteria for it to be considered as performing a service of general economic interest. Nonetheless, any consideration made by ORR of a complaint relating to a passenger service will take into account whether the service is a specified part of the franchise agreement and, if so, the nature of the obligation placed on the franchisee."

As discussed above, Altmark sets a test to define State aid under Article 87(1). If there is State support and if the Altmark criteria are not met, then State aid is (probably) involved, requiring notification to the European Commission. In that case, Article 86(2) may, or may not, provide a justification for the aid. In the case of UK rail franchise, there is frequently State support, but the Altmark criteria are probably met, so there is no State aid.

But this application of Altmark is not of any particular relevance to UK competition law, the Article 81 and Article 82 prohibitions or the Article 86 justification, which are the subject matter of the guidelines. And what the Altmark judgment has to says about whether particular things count as public service purposes is neither new nor, in my view, significant.

So it is unclear how the reference to Altmark in the draft guidelines should be interpreted.

As a result, there is a risk that these draft guidelines (if left unchanged) might be taken to mean that the competition authorities will apply competition law to the rail sector without considering the Article 86(2) justification, at least until someone complains about it. If so, they would be wrong, and falling into a similar trap as the OFT guidelines discussed above of ignoring Article 86 altogether by trying to implement it as an exclusion rather than as a more limited, but nevertheless potentially important, justification for certain acts that would otherwise be prohibited.

It should not be left to undertakings that are entrusted with the operation of public services or fiscal monopolies to explain the role of Article 86 to the authorities after they have been subjected to a costly (and potentially unnecessary) infringement procedure.

The consultation period on these draft guidelines closed on Monday 20 June 2005.

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Entry added by Franck Latrémolière on 5 May 2005

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Last changed by Franck at 8:03 AM on Friday 20 April 2007.

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Reckon Open "Public services and competition law | viewpoint: Franck" 2007-04-20T08:03:13