sou · GWB338d2 · 2009-01-01 00:00:00 — In order to counteract any kind of dis- crimination of private property owners who do not have the possibility of transferring costs but who nevertheless have to follow the rent level of public housing companies, the of Appeal stipulated in the case that rent tri- bunals shall not consider the rents for apartments owned by public housing companies if the rents are essentially lower than the prime costs of the building:15 When setting the rental level of new productions within the public utility sector, the automatic acceptance of what is to constitute own costs (i.e. prime costs) solely on the basis of the housing enterprises own classification (after it has distributed the costs incurred also on other parts of its housing stock) appears [] to be commensurable with a correct setting of rents. [] the main- tenance of the trust in the utility value system would require that no essential deviation from own costs for the material in question occurs when the rent is set [for the municipal housing enterprise]. Otherwise, in many cases private landlord without recourse to cost redistribution would be discriminated against and they would have no opportunity to evaluate the economic conditions for their activities.16 13.Thus, with the ruling in the case, the of Appeal reinterpreted Sect. 55 of the Tenancy Act in such a way that the rental level within the public utility sector can only be used as a basis for the determination of utility value if that level is acceptable according to certain basic conditions: 15Memorandum PM 4, pp. 10, 11. 16Expert Opinion of Per on the case fastiget AB v et al., 6 referring to the judgment of the of Appeal (case SÖH 250/1998) at pp. 6 et seq. (1)the concept own costs should be interpreted objectively – it is the costs actually incurred for constructing that , calculated in accordance with generally accepted economic assessment and the rent required to cover such costs; and (2)the public utility sectors rent for a particular object should be set aside as utility value, if it has been kept housing stock or with the help of municipal subsidies. The deviation from own costs, however, has to be down by means of profit transfer from the older essential.17 3.Compatibility of the rent setting system with Art. 81 EC 14.After having outlined the most important features of the Swedish rent setting system insofar as they are of relevance to this analysis, I will, in the following, examine the compati- bility of the Swedish rent setting system with EC Compe- tition law. I will start by assessing the rules pertaining to the conduct of individual undertakings before moving on to the rules on government intervention. 81(1) EC reads: The following shall be prohibited as incompatible with the common market: all agreements between undertakings, decisions by asso- ciations of undertakings and concerted practices which may affect trade between Member States and which have as their object of effect the prevention, restriction or distortion of competition within the common market, and in particular those which: (a)directly or indirectly fix purchase or selling prices or any other trading conditions; (b)limit or control production, markets, technical development, or investment; (c)share markets or sources of supply; (d)apply dissimilar conditions to equivalent transactions which other trading parties, thereby placing them at a competitive disadvantage; (e)make the conclusion of contracts subject to the acceptance by other parties of supplementary obligations which, by their nature or according to commercial usage, have no connec- tion with the subject of such contracts. 17 Expert Opinion of Per on the case fastiget AB v et al., p. 81(2) EC lays out the legal consequence in the case of a violation of Art. 81(1) EC: the agreement is automatically (partially or entirely) void. Art. 81(3) EC lists a number of exemption provisions from the prohibition of Art. 81(1) EC. 17.As it is the objective of this report to determine the compati- bility of the Swedish rent setting system with the rules on , the first question to be answered is whether the public housing companies qualify as undertakings pursuant to Art. 81 EC. 18.The term undertaking is not defined in the . However, the Community Courts have given concrete guidance in their jurisprudence as to what can be considered an under- taking. For instance, in the case Höfner and v , the ECJ stated: the concept of an undertaking encompasses every entity engaged in an economic activity regardless of the legal status of the entity and the way in which it is financed.18 19.On the other hand, the ECJ ruled in the case v Algemene Raad that the com- petition rules in the Treaty: do not apply to activity which, by its nature, its aim and the rules to which it is subject does not belong to the sphere of economic activity [] or which is connected with the exercise of the powers of a public authority.19 It is thus important that the undertaking in question engages in an economic activity, regardless of its legal status as e.g. state-owned entity or public authority. 20.In the case and Others,20 the Court ruled that any activity consisting in providing goods or services in a given market by an undertaking, independently of the statute of the 18Case C-41/90 Höfner and v [1991] ECR I-1979, para. 19Case C-309/99 v Algemene Raad [2002] ECR I-1577, para. 20Joined Cases C-180/98 to C-184/98 and Others v Stichting Pensionsfonds Medische Specialisten [2000] ECR I-6451. latter and of its type of financing21 has to be regarded as eco- nomic activity in the context of competition law. In the Höfner case22, the ECJ qualified this further and stated that public authorities can be engaged in activities of economic nature, de- pending on the particular function under which they act. Thus, an authority can act in the exercise of official authority23 in which case it would not be considered as an undertaking but might at other times act as a commercial entity, which would then qualify it as an undertaking for the purpose of Art. 81 EC.24 Also, the fact that an organisation lacks a profit-motive does not disqualify it as an undertaking provided that it is carrying on some commercial or economic activity.25 21.When applying these principles to the case at issue, it is necessary to determine the exact conditions under which the public housing companies operate in the Swedish housing market. According to the Swedish Municipal Housing Pro- vision Act, municipalities are obliged to provide housing so as to create the conditions for all inhabitants of a municipality to live in good housing. Through a division of responsibility between the and the municipalities, the State establishes and maintains a general system of rules whereas the municipalities are responsible for the supply of local housing. As the law does not provide any precise rules as to how the State mandate has to be realised, most municipalities have chosen to carry out their role through public housing companies. The housing companies are charged with the construction, allocation and management of housing for all income groups as well as with the development of disadvantaged neighbourhoods by offering housing to people with social or financial difficulties26 21Ibid, paras 74 and 75. 22Case C-41/90 Höfner and v [1991] ECR I-1979. 23The exercise of official authority was defined in the Calì e Figli case which states that an entity acts in the exercise of official authority where the activity in question is a task in the public interest which forms part of the essential functions of the State and where that activity is connected by its nature, its aim and the rules to which it is subject with the exercise of powers [ ] which are typically those of a public authority (Case C-343/95 Calì e Figli [1997] ECR I-1547, para. 24Whish, Competition , 5th edition, (2003) , p. 25Whish, Competition , 5th edition, (2003) , p. 81 with reference to ample case law. 26Among the groups of persons over-represented as of public housing companies are low-income groups, immigrants from less developed countries and recipients of social welfare. (Memorandum PM 4, p. to counteract segregation.27 Thus, they pursue a double objec- tive of providing good quality housing at reasonable cost to normal income as well as to economically weak and vulnerable groups, thereby performing a social integration function.28 Last but not least, housing companies also have to ensure effective protection of tenancy rights and have to restrain rent levels through the system of utility value and prime costs, as ex- plained above. 22.Considering the social role that the public housing companies play, it could be argued that the provision of housing by the public housing companies does not constitute an economic activity. However, the following arguments prove the contrary. (1)Public housing companies are allowed to earn a certain profit and to pay out dividends to the municipality which owns them. Although these dividends are limited to a fixed percentage they nevertheless allow a distribution of profit to the municipalities. (2)Secondly, public housing companies make investments on the housing market the result of which determines the profit earned and the dividend which will be paid out to the municipalities. (3)Public housing companies are in direct competition with private housing companies in the, for our purposes, rele- vant market of the provision of rental housing for all in- come groups. Thus, the activity of providing housing for rent can be carried out by both private and public housing companies which indicates the existence of an economic activity.29 (4)Although disadvantaged persons are the target group for public housing companies, their also include persons who earn a normal income and are socially integrated, i.e. 27Memorandum PM 4, pp. 2 et seq. 28Response by the to the complaint from of , p. 29See also Annexes to the on Interest in Union (SEC(2006) 516, p. 15) where the Commission stated: non-profit- making entities may compete with profit-making undertakings and may, therefore, con- stitute undertakings within the meaning of Art. 87 of the . (5)The ECJ in its case law generally regards an activity as not being economic in nature but rather as an exercise of official authority if the service rendered is characterised by the principle of solidarity, being the inherently un- commercial act of involuntary subsidisation of one social group by another,30 i.e. the richer subsidising the poorer. This feature, which arguably characterises many other European housing policies, is not inherent in the Swedish housing policy. (6)Commission concluded in one of its cases relating to social housing in that the provision of social housing indeed constitutes an economic activity: [the municipalities] offer cheaper housing conditions, through rents and construction loans, to certain con- sumers and are doing so in competition with other opera- tors in the housing market. They are therefore perfor- ming an economic activity.31 In comparison, the Swedish public housing companies perform a fortiori an econo- mic activity as they are not only concerned with social housing but also provide housing to normal income groups. 23.It can therefore be concluded that the renting of apartments under the conditions stipulated by the Swedish legislation constitutes an economic activity. Therefore, public housing companies, even if they operate on a non-profit basis and in spite of the fact that they also fulfil a social role, constitute undertakings pursuant to Art. 81 EC. b.Agreements, decisions and concerted practices 24.The policy of Art. 81 EC is to prohibit cooperation between independent undertakings which prevents, restricts or distorts competition. Art. 81(1) EC therefore prohibits joint and not individual conduct.32 The reference to agreements between undertakings, decisions by associations of undertakings and 30Case C-70/95 Sodemare v Regione [1997] ECR I-3395. 31State aid N 209/2001 – , p. 32Individual conduct engaged in by undertakings is covered by Art. 82 EC as will be explained later. concerted practices thus requires some element of collusion between independent undertakings.33 Whereas the term agree- ment refers to a concurrence of will between the parties, no matter whether it is legally binding or enforceable, in writing or oral, the concept decisions by associations of undertakings refers to the situation where members of an association, parti- cularly a trade association, may be tempted to collude together and to coordinate their action. The concept has been interpreted broadly to catch conduct designed to coordinate the conduct of members contrary to Art. 81(1) EC,34 whether engaged in through resolutions of the association, recommendations, the operation of certification schemes, or through the associations constitution itself.35 25.Finally, if the type of cooperation or collusion between the parties falls short of an agreement it may still constitute a concerted practice. The term concerted practice has been defined by the ECJ as: coordination between undertakings which, without having reached the stage where an agreement so called, has been concluded, knowingly substitutes practical cooperation between them for the risks of competition.36 26.It now remains to determine whether the conduct of the public housing companies on the Swedish housing market qualifies as an agreement or a concerted practice pursuant to Art. 81(1) EC. The question which needs to be answered is whether it is possible to assume some kind of collusion between public housing companies when setting the rents of their apart- ments and thereby directly or indirectly fix trading conditions according to Art. 81(1)(a) EC. As indicated above, Art. 81(1) requires that the parties determine their market policy in co- operation, for example through direct or indirect conduct but not independently. Art. 81(1) EC is aimed at explicit collusion, whatever form it takes.37 33Jones, Sufrin, , 2nd edition, (2004) , p. 34Case 96/82 NV v Commission [1983] ECR 3369. 35Jones, Sufrin, , 2nd edition, (2004) , p. 36Cases 48, 49, 51-7/69 ICI v Commission [1972] ECR 619, paras 64 and 65. 37Jones, Sufrin, , 2nd edition, (2004) , p. 27.In the case at issue, it seems clear, based on the information made available to me, that the public housing companies did not enter into an explicit agreement regarding the setting of rents. It would therefore have to be assessed whether the con- duct of the housing companies involves some other kind of coordination or collusion. 28.Yet, when assessing the rules and laws pertaining to the rent setting system, it seems difficult from the outset to assume some kind of independent conduct on the part of the public housing companies when setting their rents. As explained earlier, the rents charged by the public housing companies are firstly deter- mined through collective negotiations with organi- sations. The total rent arrived at through negotiations, however, not only has to cover the prime costs of the but also, according to Sect. 55 of the Tenancy Act, has to be in relation to the utility value of other, equivalent, flats owned by public housing companies in the same municipality. The latter can be ascertained by any rent tribunal in case of a dispute. Thus, the rent levels are restrained under public law and cannot essen- tially38 exceed or undercut the prime costs of the particular . The conduct of the public housing companies in setting the rents is therefore entirely determined by the condi- tions set by the Swedish Tenancy Act and the jurisprudence of the of Appeal and not the result of an agreement or any wider form of cooperation among them. 29.It could still be argued, for the sake of completeness, that although the rent setting is regulated by law, there may still be some room for independent conduct and hence some kind of collusion among the companies beyond the requirements set up by legislation. The ECJ has made clear in its jurisprudence that State regulation does not release undertakings from liability of their actions in the small scope for independent market con- duct that remains.39 It seems difficult to argue, though, in which way the public housing companies could still act independently 38See the ruling in the case above. 39Joined Cases 240/82 etc. Stichting Sigarettenindustrie and Others v Commission [1985] ECR 3831, paras 36 and 40. Cases C-359/95 and 379/95P Commission and v . [1997] ECR I-6265. See Case C-198/01 Consorzio Industrie Fiammiferi () v Autorità Garante della Concorrenza e del Mercato [2003] ECR I-8055 for an example where the undertakings under scrutiny retained some room for autonomous decision-making power and were therefore held liable pursuant to Art. 81 (1) EC. as the prime cost principles forbids any kind of leeway on the setting of rents. This has been reinforced and further narrowed down by the of Appeal in its ruling as explained earlier. Thus, the Swedish legislation precludes the public housing companies from engaging in autonomous con- duct. Therefore, they do not fall within the scope of Art. 81(1) EC.40 30.However, the legislation itself could be contrary to competition rules and more specifically to the rules on unlawful govern- ment intervention pursuant to Art. 81 in conjunction with Art. 10, 3(g) EC. Thus, the Swedish government could be held liable for an infringement of the rules. This will be assessed in the following section. 4.Compatibility of the rent setting system with Art. 81 in combination with Art. 10, 3(g) EC Art. 10 EC states the principle of Community loyalty: Member States shall take all appropriate measures, whether general or particular, to ensure fulfillment of the obligations arising out of this Treaty or resulting from action taken by the institutions of the Community. They shall facilitate the achievement of the Community's tasks. They shall abstain from any measure which could jeopardise the attainment of the objectives of this Treaty. 3(1)(g) EC provides that one of the activities of the Community shall be to institute a system ensuring that com- petition in the internal market is not distorted. in combination with Art. 81 EC, these provisions impose a duty on Member States not to adopt or maintain in force measures which could deprive the competition provisions of their effec- tiveness. 33.With the combination of these provisions, the ECJ sought to find a mechanism with which it could impose responsibility on Member States for unlawful government intervention, as Art. 81 EC is primarily directed to undertakings. 40 Or, as the ECJ stated in the case: the law thus continues to constitute [] a justification which shields the undertakings concerned from all the consequences of an infringement of Articles 81 EC and 82 EC and does so vis-à-vis both public authorities and other economic operators. (Ibid, para. absence of such combined effect, the effet utile of Art. 81 EC would be seriously undermined if Member States could act as the agent of cartels that distort competition. The case law of the ECJ has therefore sought to achieve a balance to identify those infringements for which Member States can be held liable. A good example in this respect is the case which clearly sets out the different elements of these norms: The Court has consistently held, however, that Articles [81] and [82] of the Treaty, in conjunction with Article [10], require the Member States not to introduce or maintain in force measures, even of a legislative nature, which may render ineffective the competition rules applicable to undertakings. Such would be the case, the Court has held, if a were to require or favour the adoption of agreements, decisions or concerted practices contrary to Article [81] or to reinforce their effects, or to deprive its own legislation of its official character by delegating to private traders responsibility for taking decisions affecting the economic sphere.42 34.The Court continued by explaining the first part of the second sentence by stating that legislation may be regarded as intended to reinforce the effects of pre-existing agreements, decisions or concerted practices only if it incorporates either or in part the terms of agreements con- cluded between undertakings and requires or encourages com- pliance on the part of those undertakings.43 35.The second element of the last sentence, the delegation of responsibility to private traders, was clarified by the Court in the subsequent case of Italian Customs Agents,44 an action brought by Commission under Art. 226 EC. The case concerned Italian legislation which required to set compulsory tariffs for customs agents. The ECJ ruled that by adopting the national legislation in question, not only required the to compile a compulsory, uniform tariff agreement contrary to Art. 81 EC but also to: 41Case 267/86 v ASPA [1988] ECR 4769. 42Ibid, para. 43Ibid, para. 44Case C-35/96 Commission v [1998] ECR I-3851. relinquished to private operators the powers of the public authorities as regards the setting of tariffs.45 36.Moreover, by adopting a Decree, the Minister of Finance gave the agreement the appearance of a public regulation approving the tariff set by 37.From the above case, it clearly emerges that Art. 81 in con- junction with Art. 10, 3(g) EC only applies if there has been a prior agreement contrary to Art. 81 EC. This seems obvious when applying the first element of the ruling stating that the has to require or favour the adoption of agreements, decisions or concerted practices contrary to Article 81 or to reinforce their effects. Yet, the condition of a prior agreement also applies in the context of delegation of responsibility, i.e. the ECJ has always clearly stated that if the final determination of prices remains with the Member States without any preceding agreement between market participants, Art. 81 in conjunction with Art. 10, 3(g) EC is not applicable. 38.The case Cullet v Centre Leclerc47 may serve as further illustra- tion of this principle. The case concerns a challenge to fixed minimum and maximum retail prices for petrol. These retail prices are fixed by government authorities in accordance with the French law governing the distribution of prices. However, as the fixing of prices was a pure State measure un- related to any agreement between undertakings, the ECJ did not find the State measure to be incompatible with competition rules: rules such as those concerned in this case are not intended to compel suppliers and retailers to conclude agreements or to take any other action of the kind referred to in Article [81](1) of the Treaty. On the contrary, they entrust responsibility for fixing prices to the public authorities, which for that purpose consider various factors of a different kind.48 45Ibid, para. 46Ibid, para. 47Case 231/83 and Chambre syndicale des réparateurs automobiles et détaillants de produits pétroliers v Centre à and Centre à Saint-Orens-de- Gameville [1985] ECR 305. 48Ibid, para. 39.The requirement of the existence of an agreement has been confirmed by the ECJ in many subsequent cases, among which the Meng case49, the Ohra50 and the Reiff51 judgments.52 It may be criticised that the insistence that there must be an agreement contrary to Art. 81 EC before a can be found to have infringed Art. 10, 3(g) EC places an obvious limit on the extent to which it is possible to challenge State measures. It is clear, however, that Art. 10 EC cannot be used simply because a State measure produces effects similar to those of a cartel.53 40.When applying these principles to the present case, the question arises whether the Swedish legislation on the utility value system and the prime cost principle infringes Art. 81 in conjunction with Art. 10, 3(g) EC. The case at issue could only fall within the scope of these provisions if the legislation, i.e.