These questions were recently directed to Austria's Federal Procurement Office by ARGE Gewässerschutz in review proceedings between ARGE and the Federal Ministry of Agriculture and Forestry. ARGE, an association of undertakings and civil engineers, challenged the participation of public sector service providers in the procedure for the award of contracts to analyse water samples from Austrian lakes and rivers. ARGE claimed that because because the public service providers, as semi-public tenderers, received substantial state subsidies that were not linked to specific projects, this necessarily entailed unequal treatment in the determination of the best offer.
Equal treatment of tenderers
The FPO decided to refer four questions arising from the case to the European Court of Justice. These concerned the interpretation of various directives and the freedom to provide services.
Essentially, the ECJ was asked if the principle of equal treatment of all tenderers and candidates in an award procedure is infringed if bodies are able to tender at prices that are substantially below those of their commercially active competitors, owing to the receipt of subsidies of any kind.
The ECJ found that the mere fact that subsidised bodies take part in the award of a public service contract does not amount to a breach of the principle of equal treatment. However, the ECJ decided not to define the conditions in which contracting authorities would be bound, or entitled, to exclude subsidised tenderers.
It is disappointing that the ECJ did not explore the circumstances in which contracting authorities must, or may, take into account the existence of state subsidies.
In most cases, a state subsidy is bound to provide an advantage to a tenderer. It is difficult to see how fair and genuine competition can exist when one potential provider has a state-provided competitive advantage and this is not taken into account in the procurement procedure.
Interestingly, in the ARGE review proceedings the FPO observed that where subsidies are received by tenderers, contracting authorities may be unable to say whether the price offered corresponds to real economic cost. That said, the FPO considered that although it may be true to say that it is against European law for advantaged bodies to bid for public service contracts, the consequences of such a statement would be too far-reaching, since all state bodies possessing separate legal personality would be excluded from providing services for the state.
For its part, ARGE maintained that if the legislature had considered that it was acceptable for state-subsidised bodies to tender, provisions would not have been included in European directives regarding abnormally low tenders and tenders made possible by the grant of aid.
This argument assumes that it naturally follows that a state-subsidised tender can be classified as abnormally low. Although the directives provide that a contracting authority may reject an abnormally low tender, they do not define what one is. Professor Sue Arrowsmith suggests that although an abnormally low tenderer may be in a superior competitive position there may be no commercial justification for rejecting the offer. Indeed, to reject the offer may be contrary to the underlying principle of the legislation, namely, the seeking of the most competitive provider.
In the light of this, there is some difficulty with ARGE's argument that the directives' rules about abnormally low offers are a recognition of the non-acceptance of state-subsidised tenderers. However, there is equal difficulty with the argument that provisions necessarily recognise and accept state-subsidised tenderers. At best, the directives are inconclusive.
Implications of grant aid
With regard to the grant of aid, the directives say a tenderer may only be excluded from a selection procedure where the contracting authority considers that it has received state aid contrary to European law, and where the obligation to repay such state aid would threaten the financial well-being of the tenderer, leaving it unable to offer adequate financial security. Therefore, there would seem to be no commercial justification for rejecting an offer from a tenderer in receipt of lawful state aid where there is no risk of default.
There is a strong argument that it may be contrary to European law for state-subsidised bodies to tender for procurement contracts. However, the implications of this need further consideration.
It would not be sensible or desirable to exclude state-subsided bodies from contracting with the state, but nor is it desirable to allow contracting by state-subsidised bodies to be unregulated by the procurement regime. Until the procurement legislation specifically recognises and addresses the possible competitive advantages of state-subsidised bodies, only subsequent case law will clarify when, and how, state subsidies are to be taken into account in procurement procedures.
In furtherance of the principles of fairness, equality, and transparency underlying the public procurement directives, it is highly desirable that clarification is forthcoming.
Fairness demands clarification
Postscript
ARGE Gewässerschutz vs Bundesministerium für Land und Forstwirtschaft (Case C-94/99). Mark Lane is a senior partner with Masons. This article was co-authored by Tanya Layton.
