There is an obligation on public authorities to recover unlawful State Aid. The nature of this obligation has been considered by Advocate General Sharpston in an Opinion delivered on 10 October 2017 in Case C-363/16, European Commission v Hellenic Republic. Read more »

For a measure to be classified as aid within the meaning of Article 107(1) TFEU, all the conditions set out in that provision must be fulfilled. First, there must be an intervention by the State or through State resources. Secondly, the intervention must be likely to affect trade between Member States. Thirdly, it must confer an advantage on the recipient by favouring certain undertakings or the production of certain goods. Fourthly, it must distort or threaten to distort competition. The application of Article 107(1) TFEU may entail a verification as to whether an entity should have been regarded as an undertaking, within the meaning of EU competition law. Read more »

Case C-74/16, Congregacion de Escuelas Pias Provincia Betania v Municipality of Getafe , is concerned with whether an exemption for a church school from a municipal tax constituted State Aid.  In an Opinion on 16 February 2017 Advocate General Kokott advises not. The school was pursuant to the church’s educational mission.  It did not constitute commercial provision.  The absence of any economic activity by the church meant that the exemption did not come within TFEU Article 107(1).  She helpfully summarised the test for State Aid as follows, based in particular on the Altmark Trans case:-

“62.    Under Article 107(1) TFEU, ‘save as otherwise provided in the Treaties, any aid granted by a Member State or through State resources in any form whatsoever which distorts or threatens to distort competition by favouring certain undertakings or the production of certain goods shall, in so far as it affects trade between Member States, be incompatible with the internal market’. Read more »

The Supreme Court (Lords Mance, Wilson and Hughes) on 28 November 2016 refused the application for permission to appeal in R (Sky Blue Sports and Leisure Ltd) v Coventry City Council (2016) EWCA Civ 453.  This was because the application does not raise an arguable point of law of general public importance which ought to be considered at this time bearing in mind that the case has already been the subject of judicial decision and reviewed on appeal.

Case C-460/14, brought by the City of Wroclaw in Poland, concerns the award of a public contract for the construction of a ring road in Wroclaw. The project benefited from EU financial assistance. The City stipulated in the tender specifications that the successful tenderer was to perform at least 25% of the works covered by the contract using its own resources. The public authority in Poland competent to verify proper use of the EU funding took the view that that stipulation infringed the principle of fair competition and therefore was inconsistent with Directive 2004/18/EC.  As a consequence, that authority imposed on the City a flat rate correction of 5% of the amount of eligible costs borne by public funds. The City challenged the financial correction before a Polish Administrative Court, which made a reference to the ECJ.

Directive 2004/18 coordinated at EU level national procedures for the award of public contracts above a certain value.  It aimed to ensure the effects of the principles of freedom of movement of goods, freedom of establishment, and freedom to provide services and the principles deriving therefrom, including the principles of equal treatment, non-discrimination and transparency. It also aimed to guarantee the opening-up of public procurement to competition. The Directive contained provisions on subcontracting, in order to encourage the involvement of small and medium-sized undertakings in the public contracts procurement market.  Pursuant to the first paragraph of Article 25 (“Subcontracting”), in the contract documents, the contracting authority might ask or may be required by a Member State to ask the tenderer to indicate in his tender any share of the contract he may intend to subcontract to third parties and any proposed subcontractors. Under Article 26 (“Conditions for performance of contracts”), contracting authorities might lay down special conditions relating to the performance of a contract, provided that these are compatible with EU law and are indicated in the contract notice or in the specifications.

Article 1(1) of Council Regulation No. 2988/95 provides: “For the purposes of protecting the European Union’s financial interests, general rules are hereby adopted relating to homogenous checks and to administrative measures and penalties concerning irregularities with regard to EU law”. Article 1(2) defines “irregularity” as “any infringement of a provision of EU law resulting from an act or omission by an economic operator, which has, or would have, the effect of prejudicing the general budget of the European Union or budgets managed by it, either by reducing or losing revenue accruing from own resources collected directly on behalf of the European Union, or by an unjustified item of expenditure”.  Article 2 provides in particular that administrative checks, measures and penalties shall be introduced in so far as they are necessary to ensure the proper application of EU law. They shall be effective, proportionate and dissuasive so that they provide adequate protection for the European Union’s financial interests.

Regulation No. 1083/2006 lays down general rules governing the Funds, i.e. the European Regional Development Fund, the European Social Fund and the Cohesion Fund, including principles and rules on financial management, monitoring and control on the basis of responsibilities shared between the Member States and the European Commission.

In its Judgment on 14 July 2016 the ECJ held that Directive 2004/18 prohibited a contracting authority such as the City of Wroclaw from stipulating that the successful tenderer for a public works contract was required to perform part of those works, specified in abstract terms as a percentage, using its own resources; and that Article 98 of Regulation 1083/2006, read in conjunction with Article 2(7) of that Regulation, must be interpreted as meaning that the fact that a contracting authority imposed a requirement, in the context of a public works contract relating to a project receiving EU financial aid, that the future contractor perform by means of its own resources at least 25% of those works, in infringement of Directive 2004/18, constitutes an “irregularity” within the meaning of Article 2(7) of that regulation, justifying the need to apply a financial correction under Article 98 thereof, in so far as it cannot be excluded that that infringement had an impact on the budget of the Fund at issue. The amount of that correction must be calculated by taking into account all of the specific circumstances which are relevant in the light of the criteria referred to in the first paragraph of Article 98(2) of that Regulation, namely the nature and gravity of the irregularity and the resulting financial loss to the Fund concerned.

There will be no State Aid by a public authority if a rational private investor might have entered into the transaction on the same terms, having regard to the foreseeability of obtaining a return and leaving aside all social and policy considerations. Where the authority acts in a way that corresponds to normal market conditions, the transaction cannot be regarded as State Aid.  This is the market economy investor principle.

The principle has been considered by the Court of Appeal in R (Sky Blue Sports & Leisure Ltd) v Coventry City Council (2016) EWCA Civ 453.  The Court of Appeal held that a loan of £14.4 million by the City Council was not State Aid.

The loan was to a company that was at the time the City Council’s half-owned subsidiary, which operates the Richoh Arena, which contains the Stadium where Coventry City Football Club and now also Wasps Rugby Club play. A commercial interest rate in accordance with EU Commission guidelines was charged, the loan was in other respects on commercial terms, and there was a realistic prospect of the City Council’s shareholding in the company acquiring significant value. There was no selective advantage for the company.  A private investor in the position of the Council would not have focussed exclusively on the loan to value ratio.

Tomlinson LJ observed that the analysis of risk involved in the application of the market economy investor principle requires public undertakings, like private undertakings, to exercise entrepreneurial skills which, by the very nature of the problem, implies a wide margin of judgment on the part of the investor: paragraphs 11, 16, and 23-29, especially 25.

In R (Orbital Shopping Park Swindon Ltd) v Swindon BC [2016] EWHC 448 (Admin) Patterson J summarised, so far as relevant to the case before her, the statutory scheme with respect to the Community Infrastructure Levy (“the CIL”), charged by a local authority under Section 206(1) of the Planning Act 2008 (“PA 2008”) and the CIL Regulations 2010, as amended, in respect of development in the authority’s area, as follows:-

1. A local authority’s power to charge CIL in respect of development within its area arises when development is commenced in reliance on a planning permission involving chargeable development: Section 208 of PA 2008;
2. The ability to charge CIL is a discretionary one on the part of a charging authority: Section 206 of PA 2008;
3. The CIL Regulations can provide for works of a specified kind not to be treated as development;
4. That is what Regulation 6 of the CIL Regulations is concerned with;
5. Regulation 6(1) sets out expressly which works are not to be treated as development for the purposes of Section 208 of PA 2008;
6. That includes work in respect of an existing building for which planning permission is required only because of Section 55(2) of the Town and Country Planning Act 1990 (“TCPA 1990”);
7. Section 55(2)(a) of TCPA 1990 sets out uses of land or operations which are not to be taken to involve development;
8. Section 55(2)(a)(i) states that works which affect only the interior of the building do not involve development;
9. Section 55(2A) empowers the SoS, by Development Order, to specify or describe circumstances in which Section 55(2) does not apply to operations set out in Section 55(2)(a);
10. The SoS has made the Town and Country Planning (Development Management Procedure) (England) Order 2015;
11. CIL can be imposed only when both the liability and the amount of the liability are clearly defined.

The Council had acted unlawfully by interpreting two separate planning permissions as one. The Claimants had taken advantage of a legislative scheme which permitted it to submit two separate planning applications for each act of operational development that it wished to pursue. There was no manipulation of the system for any ulterior and/illegal motive in splitting the operational works.

Case C-460/14, brought by the City of Wroclaw in Poland, concerns the award of a public contract for the construction of a ring road in Wroclaw.  The project benefited from EU financial assistance. The City stipulated in the tender specifications that the successful tenderer was to perform at least 25% of the works covered by the contract using its own resources. The public authority in Poland competent to verify proper use of the EU funding took the view that that stipulation infringed the principle of fair competition and therefore was inconsistent with Directive 2004/18/EC.  As a consequence, that authority imposed on the City a flat rate correction of 5% of the amount of eligible costs borne by public funds. The City challenged the financial correction before a Polish Administrative Court, which made a reference to the ECJ.  On 17 November 2015 Advocate General Sharpston gave her Opinion.

Directive 2004/18 coordinates at EU level national procedures for the award of public contracts above a certain value.  It aims to ensure the effects of the principles of freedom of movement of goods, freedom of establishment, and freedom to provide services and the principles deriving therefrom, including the principles of equal treatment, non-discrimination and transparency. It also aims to guarantee the opening-up of public procurement to competition. The Directive contains provisions on subcontracting, in order to encourage the involvement of small and medium-sized undertakings in the public contracts procurement market.   Pursuant to the first paragraph of Article 25 (“Subcontracting”), in the contract documents, the contracting authority may ask or may be required by a Member State to ask the tenderer to indicate in his tender any share of the contract he may intend to subcontract to third parties and any proposed subcontractors. Under Article 26 (“Conditions for performance of contracts”), contracting authorities may lay down special conditions relating to the performance of a contract, provided that these are compatible with EU law and are indicated in the contract notice or in the specifications.

Article 1(1) of Council Regulation No. 2988/95 provides: “For the purposes of protecting the European Union’s financial interests, general rules are hereby adopted relating to homogenous checks and to administrative measures and penalties concerning irregularities with regard to EU law.” Article 1(2) defines “irregularity” as “any infringement of a provision of EU law resulting from an act or omission by an economic operator, which has, or would have, the effect of prejudicing the general budget of the European Union or budgets managed by it, either by reducing or losing revenue accruing from own resources collected directly on behalf of the European Union, or by an unjustified item of expenditure”.  Article 2 provides in particular that administrative checks, measures and penalties shall be introduced in so far as they are necessary to ensure the proper application of EU law. They shall be effective, proportionate and dissuasive so that they provide adequate protection for the European Union’s financial interests.

Regulation No. 1083/2006 lays down general rules governing the Funds, i.e. the European Regional Development Fund, the European Social Fund and the Cohesion Fund, including principles and rules on financial management, monitoring and control on the basis of responsibilities shared between the Member States and the European Commission.

Advocate General Sharpston said:-

“30. Directive 2004/18 is designed not only to avoid obstacles to freedom to provide services in the award of public service contracts or public works contracts but also to guarantee the opening-up of public procurement to competition.  Recital 32 in the preamble to that directive states that the possibility of subcontracting is liable to encourage small and medium-sized undertakings to get involved in the public contracts procurement market. Subcontracting enables such undertakings to participate in tendering procedures and to be awarded public contracts regardless of the size of those contracts.  Subcontracting thus contributes to achieving the Directive’s objectives by increasing the number of potential candidates for the award of public contracts.

31.      Accordingly, Article 25 of Directive 2004/18 not only envisages that a tenderer may subcontract part of the contract but also sets no limit in that regard.  Indeed, Directive 2004/18 confirms explicitly that an economic operator may, where appropriate and for a particular contract, rely on the economic, financial, technical and/or professional capacities of other entities, regardless of the legal nature of the links which it has with them.  Consequently, a party may not be eliminated from a procedure for the award of a public service contract solely because it proposes, in order to carry out the contract, to use resources which are not its own but belong to one or more other entities.

32.      That said, contracting authorities do have a legitimate interest in ensuring that the contract will be effectively and properly carried out. Where an economic operator intends to rely on capacities of other economic operators in a tendering procedure, it must therefore establish that it actually will have at its disposal the resources of those operators which it does not itself own and whose participation is necessary to perform the contract.  A tenderer claiming to have at its disposal the technical and economic capacities of third parties on which it intends to rely if it obtains the contract may be excluded by the contracting authority only if it fails to meet that requirement.

33.      The contracting authority may not always be in a position to verify the technical and economic capacities of the subcontractors when examining the tenders and selecting the lowest tenderer. The Court has held that in such cases Directive 2004/18 does not preclude a prohibition or a restriction on subcontracting the performance of essential parts of the contract. Such a prohibition or restriction is justified by the contracting authority’s legitimate interest in ensuring that the public contract will be effectively and properly carried out. Directive 2004/18 does not require a contracting authority to accept performance of essential parts of the public contract by entities whose capacities and qualities it has been unable to assess during the contract award procedure.

34.      In my view, considering the essential role subcontracting plays in promoting the objectives of Directive 2004/18, no other prohibition or restriction is permissible. …

35.      It follows that a stipulation such as that in issue in the main proceedings is clearly not consistent with Directive 2004/18.”

“43. I … conclude that Directive 2004/18 precludes a contracting authority from stipulating in the tender specifications of a public works contract that the successful tenderer is required to perform part of the works covered by that contract, specified in abstract terms as a percentage, using its own resources.”

The further question therefore arose, given that the City’s project benefited from EU financial assistance, whether the infringement of the EU procurement rules constituted an “irregularity” within the meaning of Article 2(7) of Regulation No. 1083/2006, giving rise to an obligation on the part of the Member State concerned to impose a financial correction.  The Advocate General’s view (paragraphs 46-56) was that it did, even if the infringement did not result in any actual quantifiable financial loss to the Funds; and (paragraphs 57-61) that the competent national authorities may apply flat-rate corrections when they identify an infringement of EU public procurement rules, provided that the corrections reflect appropriately the nature and gravity of the various irregularities to which they apply and do not result in disproportionate corrections.

The Supreme Court has, dismissing the appeal, found by a 4-3 majority in R (Rotherham MBC) v Secretary of State for Business (2015) UKSC 6 that decisions made by the SoS concerning the allocation of EU Structural Funding between UK Regions were not unlawful.  Lord Sumption and Lord Neuberger both gave reasoned Judgments for the majority.

Lord Sumption notes that the allocation made by the SoS is amenable to judicial review, but a Court should be cautious about intervening, because it: (i) was a discretionary decision of a kind Courts have traditionally been reluctant to disturb; (ii) involved particularly delicate questions about the distribution of finite domestic and EU resources, in which the legitimacy of the decision-making process depends to a high degree on Ministers’ political accountability; and (iii) has been approved by the EU Commission.  Lord Neuberger agrees that this is “classic territory” where executive decisions should be afforded a wide margin of discretion, but emphasises that the fact that a matter is one for democratic decision does not remove the need for judicial oversight.

CLG has, on 17 November 2014, issued a Consultation, for response by 19 December 2014, on proposed amendments to the Local Authorities (Capital Finance and Accounting) (England) Regulations 2003, as amended, in relation to the use of capital receipts arising from the disposal of council housing assets, to come into force on 1 April 2015.  The purpose of the proposed amendments is stated to be to enable local housing authorities to calculate the “poolable” amount derived from the disposal of assets for the years 2015-2016 and 2016-2017.  The proposed amendments deal directly only with the calculation of allowable debt, the local authority share and the Treasury share.  It is proposed that this calculation will remain unchanged.  It is also proposed that the calculation of the local authority share cap will remain unchanged; and that the calculation of share ratio will remain unchanged; save in the case of a small number of identified authorities which are in the process of transferring their stock.