Why exclusive rights place (Moldovan) municipal enterprises under the public procurement regime
Imagine that there are undertakings (within the meaning of the Law on Competition) which are exclusive rights beneficiaries. The exclusive rights in a certain area (ex. waste management) provide the owner with an insured clientele and lack of competition guaranteed by law. The beneficiary becomes a natural monopolist on the relevant market (Article 10 (5) Law on Competition). The exclusive right is granted by public authorities, usually for services of general economic interest, where the ultimate beneficiary is the consumer. Lack of control on their procurements leads to a surge in tariffs for consumers, that is why the Law on Public Procurement(LPP) sets special rules for them.
B. Exclusive rights and public procurement
Article 2 of the LPP, entitled "Coverage of the Law" in para. (7) pinpoints that contracting authorities which grant to a legal entity, that is not a contracting authority, exclusive rights to provide a public service, are required to impose compliance with the principle of non-discrimination on the legal entity when it awards contracts for procurement of goods to third parties. The obligation to comply is valid even when the contracting authority has NOT expressly stipulated this obligation in the issued authorization.
In other words, if the Local authority (Municipality of Chisinau) has granted to a Municipal Enterprise the exclusive right to: certain public transport routes, waste management services, the former, when carrying out procurements, is obliged to observe the principle of non-discrimination and all that derives from it. This implies contract notice publication, conducting a competitive selection procedure, awarding based on objective award criteria, etc. The EU Court of Justice (CJEU), over the last 30 years, has deducted an abundance of rules from the principle of non-discrimination, embodied in the current text of the Directive 2014/24.
The intention of the legislator in art. 2 (7) of the LPP is to put pressure on the beneficiary of the exclusive right to spend money efficiently and transparently as a trade-off for the lack of competition and incentive to be competitive. Beneficiaries have the obligation to deliver a public service, and lack of cost control would increase the tariff for the final consumer (the passenger in public transport). Furthermore, because this provision is located in art. 2 LPP determining the "Coverage of the Law," I consider that procurements conducted by an exclusive right beneficiary may be the subject of administrative review from the National Complaint Settlement Agency
C. Who are the beneficiaries of exclusive rights
Exclusive or special rights are granted for what the Law on Competitiondefines as services of general economic interest (SGEI), i.e. those services that would not had been satisfactorily performed under normal market conditions, therefore they are immunized with special or exclusive rights. These are public transport services, housing management, waste management, public lighting, etc. In Moldova, these exclusive rights are usually granted by Local Authorities (to Municipal Enterprises (ME)) or by the Government (State Enterprises).
It would be interesting to see, whether Municipalities, when they are granting exclusive rights, are complying with criterion number 4 established by the CJEU in Altmark(C-280/00, §88-93) and incorporated in the Competition Council’s Regulation on State aid granted to beneficiaries providing services of general economic interest, i.e. whether when choosing the enterprise, to be invested with the obligation to provide the SGEI, is conducted via a public procurement procedure - I doubt it.
D. Is a Municipal Enterprise a contracting authority?
The Law on Public Procurement(LPP) in Article 13 (1) and (2) stipulates that the contracting authority (CA) is a legal person governed by public law, namely, the entity which cumulatively(Case C-44/96 Mannesmann,paragraph 21), meets three conditions:
a) is established for the specific purpose of meeting needs in the general interest, not having an industrial or commercial character;
b) has legal personality;
c) its activity:
(i) is financed with public moneyor
(ii) its management is subject to control by public authorities or other legal entities governed by public law; or
(iii) its administrative, managerial or supervisory board, is formed more than 50% of members that are appointed by the mentioned entities (ii).
Government Decree No. 387/1994(see paragraphs 10 and 14) and the Law on State Enterprise and Municipal Enterprise no. 246/2017(see Article 1 (2)) points out that the Municipal Enterprise (ME) is a legal entity that carries out entrepreneurial activity, meaning, it has the purpose of obtaining profits.
If the ME has a commercial purpose (to make profit) it means that the first condition of art. 13 (2) letter (a) of the LPP is not met? And ME is not a contracting authority?
E. Rules developed by the Court of Justice of the EU
The purpose of the Law on Public Procurement is to avoid the risk of favouring a tenderer when a procurement contract is awarded by a contracting authority andthe possibility that a body financed or controlled by the State to be guided by considerations other than economic ones (C-470/99 Universale-Bau, p. 52).
Interpreting the same provision in art. 13 (2) letter (a) of the LPP, the CJEU has developed the functional approachconcept. The latter assumes that the analysis needs to be focused on the activity of the entity rather than on its form of organization.
The Luxembourg Court has held that there may be needs of general interest having industrial or commercial nature and needs of general interest not having an industrial or commercial character (C-360/96, BFI Holding BV, p. 36). Which means that not all the needs of general interest are automatically presumed not having an industrial or commercial character. Thus, even if they are of a non-industrial or commercial character, these needs can also be provided by private sector entities (for example public transport, waste management services, etc.), therefore the fact that there is competition is not enough to exclude the possibility for a body financed or controlled by the State to choose to be guided by considerations other than economic considerations.
At the same time, the existence of significant competition, and in particular the fact that the entity concerned is faced with competition in the marketplace, may be indicative of the absence of a need in the general interest, not having an industrial or commercial character (C-360/96, BFI Holding BV, p. 49). Per a contrario, the lack of competition shows that the entity meets a need of general interest with a non-industrial or commercial character, and the first condition is therefore satisfied (C-393/06, Ing. Aigner, p. 41-46).
The Court highlights another criterion, - who bears the risk of insolvency associated with such an activity (C-18/01, Riitta Korhonen, p. 51). If the State bears the full risk, it is a determining criterion that the activity in question is not of an industrial or commercial character.
The existence or not of exclusive rights requires the analysis of both factual and legal context. If the ME is a de factoor de jurebeneficiary of an exclusive right then that entity may be considered a natural monopolist on the relevant market and is therefore shielded from any competition. Moreover, the financial risks of this activity are borne by the state, in our case by the Municipalities. Accordingly, if we apply the criteria laid down by the CJEU, such an ME should be considered as an entity set up to meet needs of general interest, without industrial or commercial character, thus, the first condition complied (from art. 13 (2) lett. (a) of LPP).
Considering the above, if we apply the CJEU's line of thinking and the existence of exclusive rights, ME can be considered as contracting authorities.
However, MEs qualifying as contracting authorities and operating in the energy, water, transport and postal services sectors are exempted from the Law on Public Procurement(see article 5 (1) lett. (a)). For these cases non-existent procurement rules shall “apply” until the legislator will decide to incorporate the Directive 25/2014. Until then, the rule ”I buy what I want from whom I want” shall be enforced, or "contractual freedom" in the realm of public funds.
For procurements in these sectors, we have an international treaty to observe, the WTO Agreement on Government Procurement (GPA),where Annex 3 specifies that this Agreement applies to public entities providing services in the energy, water, transport, ports and airports sectors that make purchases above 400,000 SDR. The GPA does not explain what amounts to a ”public entity”, but we can deduct that it is a legal entity founded by a public authority, such as the Municipalities.
G. The case of the municipal enterprises subordinated to the Chisinau Municipality
Law on Public Procurement at art. 13 (5) provides that any other entity that is not a contracting authority can be qualified as a contracting authority based on the decision of the competent management bodies.
In this context, the Municipality of Chisinau through the City Council (CC) Decision no.5/13 of 30.05.2013 obliged all subordinated MEs to conduct the procurements in strict conformity with the 2007 law on public procurement in force at that time.
The reference to the old law does not make CC's Decision "outdated". The CC Decision, which obliges all MEs to apply the old Law on Public Procurement, cannot be considered "totally out of date" or meanwhile "the socio-economic conditions have changed substantially" so that it became inapplicable. The intention of the CC was and is to subject the ME procurements to the rigid regime of the Law on Public Procurement, regardless of whether it is Law no. 96 or no. 131.
Let's imagine that the Law on Public Procurementwould stipulate in art. 19 a reason of exclusion referring to the oldLaw on competition, would it mean that this rule has lost its legal power? And we will not enforce the coercive provisions of the new Law on Competition? I really doubt it.
An interpretation in the spirit of the intended effects of CC's Decision no.5/13 of 30.05.2013 brings the procurements of the MEs, based on art. 13 (5) of the LPP, in the realm of the new Law on Public Procurement.
The CJEU logic suggests that a Municipal Enterprise benefiting from exclusive rights is a contracting authority. Article 5 (1) letter (a) of the LPP may throw this contracting authority out of it. This once again demonstrates the urgent need to incorporate as soon as possible the 2014/25 Directive – procurements in the utilities sector, which would make this discussion obsolete.
Nevertheless, the procurements of Municipal Enterprises subordinated to the Chisinau Municipality may be "covered by the law", pursuant to art. 13 (5) of the LPP, and the reference to an old law, does not devalue the will of the City Council up to – desuetude.