sou · GWB338d2 · 2009-01-01 00:00:00 — 86(2) EC provides for a possible exception from the Treaty rules and can be relied upon by both the Member States and individual undertakings. can call upon the exception to justify legislative or administrative measures concerning pub- lic undertakings (or those granted exclusive or special rights) that would normally amount to an infringement of the rules of the EC Treaty.108 97.In order for a to benefit from the exemption provision, the following conditions have to be fulfilled: (1)the undertakings concerned have to be entrusted with the operation of services of general economic interest (SGEI) (or having the character of a revenue pro- ducing monopoly); (2)the performance of the assigned tasks would be obstructed by the application of the competition rules; (3)there should not be any adverse development of trade contrary to the Community interest. 98.The burden of proof for the first two conditions lies on the which invokes Art. 86(2) EC, in this case . The existence of the last condition has to be proven by the Commission. i.Undertakings entrusted with the operation of SGEI (i)Entrustment 99.The undertaking has to be entrusted with a public service obligation. This is the case if the State has assigned to it certain tasks by a positive act conferring on it certain functions. In the Dusseldorp case, Advocate General explained that an undertaking is entrusted [with a service where] certain obli- gations are imposed on it by the State in the general economic interest.109 In the GVL decision,110 the Commission referred to the strict interpretation of Art. 86(2) EC: 108Slot and , An introduction to Competition , (2006), p. 109Opinion of AG in Case C-203/96 v , Ruimtelijke Ordening en Milieubeheer [1998] ECR I-4075, para. Since Art. 86(2) permits, in certain circumstances, an arrangement which derogates from the Treaty, the concept of an undertaking which may rely on this provision must, however, be interpreted strictly. [] [A] granting of authorization is [] by its nature not an assignment of particular tasks, but only a permission to carry on certain activities. Authorization, which merely overrides a sta- tutory prohibition, has a completely different legal content from the entrusting of a task, whereby specific responsibility and hence specific obligations are officially conferred upon an undertaking.111 100.As regards the present case and the question whether the public housing companies have clearly been entrusted with a public service obligation by a positive act, the Swedish government in its response to the first complaint of with respect to State aid granted to the public housing companies states: []the existence of robust municipal housing associations repre- sents a significant public interest. This is based inter alia on the important role played by the housing associations as the muni- cipalities instrument for the implementation of a social housing policy and for the functioning of the Swedish utility value system. This role has not been given directly to the municipalities or the municipal housing associations in the form referred to in Article 86(2) of the , but may be regarded as having been formulated indirectly inter alia by the Swedish constitution, the on the social services, the on the municipalities respon- sibility for housing provisions, the rules of the Code of Land relating to the utility value test and the rules of the on non- profit housing associations on the obligation to obtain permission for the sale of municipal housing association properties.112 101.From the above wording it appears that the obligations imposed on the public housing companies with respect to the provision of good housing conditions irrespective of income are not as clearly defined as required by the ECJ and the Commission but can only be inferred from a combination of various legal acts. Such an indirect conferral is not sufficient for the purposes of Art. 86(2) EC especially considering the strict interpretation applied by the Court. 110Decision 81/1030/EEC [1981] OJ L 370/49. 111Ibid, paras 65 and 66. 112Response by the , Housing Division, to the first complaint of the EPF to Commission, dated 16 October 2002, p. 102.On the other hand, it appears from other information made available to me by the Inquiry that the Swedish Municipal Housing Provision Act113 unambiguously entrusts the munici- palities with the creation of good and inexpensive housing con- ditions for all inhabitants. Therefore, the Act seems to clearly identify the mission that the municipalities have to fulfil. The municipalities, in turn, have chosen to fulfil their role through public housing companies as instruments of housing policy and social action.114 103.As the information from the two different sources is contra- dictory, it is not possible to come to any conclusion whether the public housing companies have been entrusted with a public service obligation to the standard required in case law. In any case, an indirect entrustment of a public service task through the interplay of various legal provisions is not sufficient and may require, as the case may be, a redrafting of the relevant legislation. (ii)Services of General of Economic Interest (SGEI) 104.The notion of public services or services of general economic interest has become a key concept in Community law and poli- tics.115 It is a notion that is particularly important in all sectors that have been liberalised: transport, energy, , post as well as in other sectors such as broadcasting. of in 1997 added a new Article 16 EC, in which 113This is the same Act than the on the municipalities responsibility for housing provisions referred to by the Swedish Government. The name of this Act has been translated differently in the response to the first EPF complaint and the Memorandum of the Inquiry. 114Memorandum PM 4, p. 115Its political importance was highlighted during the French campaign for the referendum on the in the spring of 2005. One of the arguments of the No camp was that the Community was gradually undermining the public services. Note also that the concepts of public service obligations and services of general economic interest are of significance in the field of EC free movement law as well as under the competition rules: see, e.g., the discussion of the free movement of goods in the Energy cases (Cases C-157/94 Commission v [1997] ECR I-5699, C-158/94 Commission v [1997] ECR I-5789, C-159/94 Commission v [1997] ECR I-5815 and C-160/94 Commission v [1997] ECR I-5851, on which see Slot (1998) 35 CML Rev 1183) and of the free movement of capital in the various Golden shares cases (see, e.g., Case C-58/99 Commission v [2000] ECR I-3811; Case C-367/98 Commission v [2002] ECR I-4731; Case C-483/99 Commission v [2002] ECR I-4781; Case C-503/99 Commission v [2002] ECR I-4809; for discussion, see (2003) 40 493). the Community and the Member States, each within their respec- tive powers and within the scope of application of this Treaty, shall take care that such services operate on the basis of principles and conditions which enable them to fulfil their missions.116 105.Article 36 of the EUs Charter of Fundamental Rights117 recognises and respects services of general economic interest. Article III-6 of the Treaty Establishing a Constitution for Europe118 has expanded the text of Article 16 EC still further, and even though the Constitution will not enter into force it seems quite likely that this provision will make a comeback in a new amended treaty. 106.Yet, these provisions do not provide a definition of the con- cept of SGEI119 and it is generally left to the Member States to define what they regard as a mission of general interest on the basis of the specific features of the activities. This is further illustrated by the recent Protocol on Services of General adopted at Council summit meeting of 20 & 21 2007.120 The Protocol reads: Protocol on services of general interest The High Contracting Parties, Wishing to emphasise the importance of services of general interest agreed upon the following interpretative provisions, which shall be annexed to the Treaty on European Union and to the Treaty on the Functioning of Union: The shared values of the Union in respect of services of general economic interest within the meaning of Article 16 include in particular: the essential role and the wide discretion of national, regional and local authorities in providing, commissioning and orga- 116See , Article 16 EC and Services of General : From Derogation to Obli- gation (2000) 25 22. 117The Charter itself forms Part II of the Treaty Establishing a Constitution for Europe: see [2004] OJ C310/1 for the final consolidated text of the . 118OJ 2004, C 310/1. 119Services of general economic interest have been defined by the Commission as market services that discharge general interest tasks and are therefore subject to specific public service obligations imposed by the Member States. (Non-Paper on Services of general economic interested, dated ). 120See the Presidency Conclusions if the 21/22 2007, 11177/1/07 REV 1, Concl 2. nizing services of general economic interest as closely as possible to the needs of the users; the diversity between various services of general economic in- terest and the differences in the needs and preferences of users that may result from different geographical, social or cultural situations; a high level of quality, safety and affordability, equal treat- ment and the promotion of access and of user rights; The provisions of the Treaties do not affect in any way the com- petence of Member States to provide, commission and organise non-economic services of general interest. 107.Governments therefore have a broad of discretion in defining their SGEI which can only be subject to control for manifest error. It is therefore argued that the obligation on the public housing companies to provide good housing at reasonable rents to all kinds of citizens, irrespective of income in order to counteract segregation qualifies as a service of general econo- mic interest, given the overall objective of achieving social cohesion.121 108.It has already been established above, in the context of de- fining the notion of undertakings that the public housing companies engage in an economic activity. The non-profit nature of the provider does not rule out the possibility of carrying out an economic activity and to qualify the service as a service of general economic interest. Indeed, the case law of the Com- munity Courts and the decision making practice of the Com- mission clearly suggest that the concept of SGEI extends beyond the conventional utilities such as energy, water or transport services and also refers to pension schemes, ambulance ser- vices or social housing, i.e. services falling within the social and not only the economic sphere.122 109.Yet, the finding that the public housing companies provide a service of general economic interest seems to stand uneasily with a number of recent Commission decisions on State aid granted 121The emphasis here lies on the public housing companies as their conduct is under scrutiny. It needs to be highlighted, though, that also private housing companies are involved in the objective of achieving overall cohesion. Both public and private housing companies provide housing to all income groups. It can therefore be concluded that also the housing services provided by the private companies constitute SGEI. 122See e.g. Case C-67/96 etc. v SBT [1999] ECR I-5751, para. to social housing projects. It appears that for a service in the housing sector to be considered a social service of general economic interest, the Commission has established certain re- quirements. Thus, for a system of housing loans to constitute a SGEI, the Commission explained in its decision on State support for the in , that the persons who can apply for this service have to meet certain criteria: [b]eneficiaries of these measures are socially disadvantaged house- holds whose economic circumstances do not permit them to purchase or rent houses on the open market. to their poor creditworthiness, these households are generally unable to obtain a housing loan in the commercial, competitive sector at affordable rates, which has also to be proved by submitting letters of re- jection from two private sector mortgage lenders.123 110.In a subsequent decision concerning funding of housing asso- ciations in the , the Commission applied this state- ment and found that the Dutch support measures do not qualify as a SGEI because the activities are not limited to the socially deprived: When letting homes, housing associations are obliged to give pre- to persons who have difficulty in finding suitable living space (through low income or other circumstances). However, their housing activities are not limited to the socially deprived. On over-capacity cover, the housing associations let the dwelling to persons with relatively high incomes, so that commercial com- petitors, who do not receive State support, are disadvantaged. The possibility of letting homes to higher income groups or under- takings should be regarded as an error on the part of the public services.124 111.When applying these Commission statements to the present case, it could be argued that the same problem as it arises on the Dutch housing market also appears on the Swedish market. Although disadvantaged persons are the target group for Swedish public housing companies and represent the highest percentage of in publicly owned flats, a significant number of apart- ments is also rented out to persons with normal income who 123State aid N 209/2001 – . 124State aid E 2/2005 – The , para. are socially integrated.125 This would, in principle, argue against the qualification of the housing service as a SGEI. 112.However, the Commission statements in these two decisions should not apply unconditionally to the present case due to different characteristics and objectives of the housing markets. In the aid decision, the Commission assessed the relevant legislation and could easily conclude that the condition to show poor creditworthiness by submitting two letters of rejection from private sector lenders is in line with the concept of SGEI as the requirement imposed by Irish law is a strict one which is not easily fulfilled. It does not, however, mean that all social housing services have to be operated in the same way to qualify as SGEI. Equally, the arguments used in the aid decision may have to be qualified here as the objectives pursued in the Dutch housing policy are different from those pursued by . The Dutch housing policy is described as including the construction, purchase and letting of homes to ensure the viability of quality housing at reasonable rents, chiefly to persons on low incomes, the elderly and the handicapped.126 The rents charged by Dutch housing associations are free market rents. The objective pursued by the Swedish legislation, on the other hand, consists in the creation of overall social cohesion by regulating the rents for all apartments, whether publicly or privately owned, to provide access to good housing irrespective of income and cultural background. Thus, the objective pursued by is broader in that it includes all income groups but also more specific in its means to achieve this objective. 113.The achievement of social cohesion and the fact that social services have specific characteristics which warrant a different treatment from the conventional SGEI has been given particular emphasis by the Commission in its recent legislative package on social services of general economic interest.127 125No restrictions apply (in the form of income ceilings) to the groups who are eligible to live in apartments owned by public housing companies. (Memorandum PM 4, p. 126Ibid, para. 127Communication on Interest in Union of (). (COM (2006) 177 final) Annexes to the Communi- cation on Interest in Union of , SEC(2006) 516. In this context, the Communication reads: [a]lthough, under Community law, social services do not constitute a legally distinct category of SGEI, [their characteristics] There, the Commission stated that the rules in this area should be based on the balance between social cohesion and open- ness and on the principle of subsidiary, which also implies that Member States retain the exclusive responsibility in defining their missions and principle of organisation.128 Thus, the way in which a chooses to operate its housing market and to create a coherent system has to be taken into account when assessing whether the housing companies provide services of general economic interest. 114.The objective of rent control inherent in the Swedish legisla- tion in order to provide equal opportunities for access to good housing, irrespective of income, is a reasonable and valid objec- tive which favours social cohesion and integration and which has to be accepted by the Commission as lying within the Member States area of responsibility. It is therefore unlikely that the Commission and ultimately the Community Courts would adopt a strict approach with respect to qualifying a ser- vice as a social service of general economic interest.129 This is further illustrated by the Commission statement in the aid decision, which reads: demonstrate their special role as pillars of society and economy. (, p. The importance of housing in the process of strengthening social cohesion has also been recognised in the context of the strategy of combating social exclusion, adopted at the Summit on 23 and 24 2000 (available at: /pdf/PRESIDENCY_CONCLUSIONS_Lissabon.pdf) 128Commission /06/529, dated . 129The rather lenient approach towards social services is also illustrated by a ruling of the EFTA Court in the Case E-4/97 v EFTA Surveillance Authority [1999] EFTA Court Report 1. Here, the Court had to rule on the compatibility of a system of housing financing whereby the (Husbanken) provides different kinds of loan open to anyone without being means-test. The EFTA Surveillance Authority came to the conclusion that the loan services provided by Husbanken indeed constitute SGEI as there is no legislation at EEA level providing a uniform defini- tion of the boundaries of a social housing policy and public housing finances. (Decision cited in the judgment at para. 9) The EFTA Court agreed with this finding by referring to the essence of the services deemed to be of general economic interest and the fact that Member States cannot be precluded from taking account of objectives pertaining to their national policy when defining SGEI which they entrust to undertakings. A similar reasoning was adopted by the EFTA Court in the Case E-9/04 The Bankers and v EFTA Surveillance Authority [n.y.r.]. The case concerns a system of general loans intended to promote security and equal rights as regards housing in by providing loans on manageable terms to the general public throughout the territory of . The EFTA Court referred in its ruling to the earlier Norwegian case and stated that the general loans system is intended to promote security and equal rights as regards housing in and thereby goes beyond the normal economic interest of operators in the financial sector. Social housing is fully in line with the basic objectives of the . It is a legitimate element of public policy and as it is limited to what is necessary it is in the interest of the Community that social housing is supported.130 Nevertheless, it is possible that the Commission will require to change its legislation to make the public service mission it delegates to the public housing companies more explicit.131 ii.Obstruction of the performance of the tasks assigned 115.This condition refers to the question whether the application of the competition rules would obstruct the performance of the task assigned to the public housing companies. spe- cifically, it needs to be determined whether the application of the utility value system is necessary132 to enable the public housing companies to carry out their tasks or whether the pro- vision of housing at reasonable costs could also be achieved by other, less obstructive, means (proportionality test).133 116.The level of rents for housing is primarily determined by supply and demand. Thus, in regions with high demand, the rent level may exceed the actual value of the apartment if the market is left unregulated. Furthermore, and this is a special characteristic of housing markets, property owners have a position of superio- rity over . Thus, without any form of regulation, the property owner has free reign to drive up rents and to influence other terms and conditions to his advantage.134 117.The prime cost principle exerts a restraining effect on rent levels because it prevents that rents substantially exceed the direct costs of the apartments (and a reasonable return). These rents are then given a normative function through the utility value system both for other public housing apartments and for 130State aid N 209/2001 – , p. 131This was stated by the Commission in its Communication on Interest in Union of (). (COM (2006) 177 final, p. 132Whish, Competition , 5th edition, (2003) , p. 133The burden of proof that the restriction of competition meets the proportionality requirement rests on the Member States. 134Response by the to the second complaint from of , p. private housing in the same municipality. It could therefore be argued that the combination of the prime cost principle with the utility value system is indeed a necessary means to keep the rents at reasonable level and to carry out the task of pro- good and inexpensive housing to economically weak and vulnerable groups. 118.Arguably, there may be other means to control rent levels and the system employed in may be unique within Union. Nonetheless, the ECJ has clearly established that the relying on Art. 86(2) EC does not have to prove that there is no other way but through the utility value system to carry out its task: Whilst it is true that it is incumbent upon a which invokes Article [86(2)] to demonstrate that the conditions laid down by that provision are met, that burden of proof cannot be so extensive as to require the , when setting out in detail the reasons for which, in the event of elimination of the contested measures, the performance, under economically acceptable conditions, of the tasks of general economic interest which it has entrusted to an undertaking would, in its view, be jeopardized, to go even further and prove, positively, that no other conceivable measure, which by definition would be hypothetical, could enable those tasks to be performed under the same conditions.135 119.Thus, it is possible to argue that the utility value system is indeed a necessary means to carry out the service of general economic interest and that the application of, in particular, Art. 86(1) and 82 EC would obstruct the performance of the public housing companies. It remains to determine whether the application of the utility value principle affects trade to such an extent as would be contrary to the interests of the Com- munity. 135 Case C-157/94 Commission v [1997] ECR I-5699, para. iii.Adverse development of trade contrary to the interests of the Community