DET KONGELIGE SAMFERDSELSDEPARTEMENT. Ministry of Transport and Communications

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1 DET KONGELIGE SAMFERDSELSDEPARTEMENT Ministry of Transport and Communications EFTA Surveillance Authority (ESA) Rue Belliard 35 B-1040 Brussels Belgium Your ref Our ref Date U/1708-AU Reply to the Authoritys letter of formal notice for failure to comply with the fundamental principle of non-discrimination laid down in Article 4 and Article 48 of the EEA-Agreement Dear Sir/Madam Reference is made to the Authority's letter of formal notice regarding the above mentioned issue in the Authority's cases Nos and 69656, and to former correspondence concerning these cases. Reference is also made to the discussions at the package meeting in Oslo on 11. November In its letter of formal notice the Authority concludes that by allowing Aust-Agder County (the county) to award concessions for bus transport services without any form of publication, and to prolong these concessions without any form of publication, Norway has failed to comply with the principles of non-discrimination and transparency arising from Article 4 and 48 of the EEA Agreement. Furthermore, at the package meeting in November the Authority informed the Norwegian representatives that, in case Norway agrees with the views expressed by the Authority in its letter of formal notice, the Norwegian Government will be expected to identify the measures it intends to take to rectify the breach of EEA law and, in case an annulment of the contracts would not be possible, to provide a proper justification for that. The Ministry of Transport and Communications (hereinafter the Ministry) has forwarded the Authority's letter of formal notice to the County. ALT Law Firm that represents the county in this case has drawn up a letter explaining in details the situation as regards the award of concessions in the county, and has presented its Postal address: Office address: Tel. - switchboard Department of Public Reference: Postboks 8010 Dep Akersg / and Rail Transport Anne-Lise Junge OSLO Telefax: j ense n Org. no.:

2 arguments as regards the issues raised by the Authority in its letter of formal notice. The Ministry asks the Authority to study the arguments brought by the County in the enclosed letter with enclosures, and to assess the case in the light of the information and arguments provided in the letter. The Ministry's observations From the letter of formal notice the Ministry understands that the Authority holds that contracting authorities are not yet under the obligation to award contracts on the basis of a competitive tendering procedure. This is also the view of the Ministry. The Ministry recognizes that the award of public service concessions, as a starting point, is covered by the principles of transparency and non-discrimination. However, there does not seem to be established any detailed rules regarding the actual advertisement of the intention to enter into a service concession. Before the entering into force of Regulation No. 1370/2007 on public passenger transport services by rail and by road, the question of publication of concessions for direct award seemed particularly unclear in the transport sector. The Ministry is of the impression that the Commission's approach to contribute to the clarification of the legal uncertainty as regards the award of concessions in the transport sector, was to adopt Regulation 1370/2007, and that the Commission has not pursued individual cases in the transport sector, except for cases concerning state aid. Furthermore, it is the Ministry's impression that there is great variation between EEA states as regards the practice of awarding concessions in the transport sector. In this particular case, the Ministry would like to underline that the County is actually planning to put the relevant contracts out to tender, and that the process of tendering will be finalized long before the deadline in 2019 set in Regulation 1370/2007. The County seems to have a clear intention of complying with the rules of the Regulation. Furthermore, the Ministry would like to draw the Authority's attention to the fact that the concessions in question are all limited in time - all to a rather short period. The far biggest concession (covering approximately 70 percent of the compensation granted) is prolonged only for a period of 2 years. As demonstrated in the enclosed letter from ALT Law Firm, the process of tendering out public service concessions in the bus sector takes time if the authorities are to ensure a fair and open competition complying with EEA-law (e.g. the duty to publish the intent of the tender procedure 1 year in advance). The process should allow for more operators than the one at present operating the service to compete for the concession. Time must also be given for potential new operators to purchase the material needed to operate the service. Page 2

3 At this stage the Ministry asks the Authority to consider the arguments brought by the County in the enclosed letter as regards the compliance with the principles of nondiscrimination and transparency arising from Article 4 and 48 of the EEA Agreement. As regards the question of corrective measures the Ministry will revert to the question at a later stage if necessary. Yours^sincerely, Anne-Lise Junge-Jensen Enclosure Page 3

4 alt LAW FIRM EFTA Surveillance Authority Rue Belliard 25 B-1040 Brussels Belgium Oslo, 16 December 2011 BUS TRANSPORT SERVICES - REPLY TO THE EFTA SURVEILLANCE AUTHORITY'S LETTER OF FORMAL NOTICE (CASE AND 69656) 1 INTRODUCTION ALT Law Firm represents the County of Aust-Agder in the present case. Reference is made to the EFTA Surveillance Authority's (the Authority) letter of formal notice dated 12 October Reference is also made to the Authority's letters of 15 and 25 March 2011 and the letter from the Norwegian Government of 14 April 2011 in which a letter from the County of Aust-Agder (hereinafter the County) was enclosed. The Authority's preliminary view is that the public service concessions to bus companies appears to have been granted in violation of the principles of non-discrimination and transparency arising from Article 4 and Article 48 of the EEA Agreement. The County submits that it has endeavoured to comply with the EEA rules and principles when granting the concessions, and that no breach of EEA rules has been committed. It is also mentioned that the County will open the relevant market for competition earlier than required by Regulation 1370/2007. In the following, the County will elaborate on the relevant facts and the applicable law. \l I i.m linn loru.m ') 1 >M SIHisS j Ui,s,-nkraiil/-;ilc JO. illdiw Ni<> \,.rv,.!\ 4 ~ 'ill (t ~ : ^s '; i ; u \> u..iliaik okai.üo

5 2 FACTS 2.1 Introduction In this section, a brief presentation of case-relevant facts will be given. First, the holders of the public service concessions will be presented. Secondly, a chronological overview of the concession development since the 1920s and the processes prior to the award of the concessions at issue will be given. Finally, the County's plans to gradually open the market for competition will be presented. 2.2 The bus companies Holders of the public service concessions The public service concessions have been granted to the following bus companies, which provide bus transport services in the County: Birkeland Busser AS Frolandsruta Frode Oland NettbussSorAS 1 Setesdal Bilruter L/L Telemark Bilruter AS In item to 2.2.6, the County will provide brief information regarding the bus companies which is relevant for the case.' Birkeland Busser AS (organization number ) Birkeland Busser AS is owned by Setesdal Bilruter L/L (organization number ). At the moment, Birkeland Busser AS has 32 employees. The company operates less than 23 vehicles. With regard to the company's operation in Aust-Agder under the public service obligation, the company provides a total annual amount of kilometres of public passenger transport services. The annual value of the service concession contract amounted to NOK in The County's grant in 2010 amounted to NOK Frolandsruta Frode Oland (Organization number ) The owner of Frolandsruta Frode Oland is Frode Stoltenberg Oland. The company has three employees. Frolandsruta Frode Oland operates less than 23 vehicles. With regard to the company's operation in Aust-Agder under the public service obligation, the company provides a total annual amount of kilometres of public passenger transport services. The total value of the service concession contract was NOK in The County's grant in 2010 amounted to NOK The companies Risor og Tvedestrand Bilruter AS and Hovagruta AS previously provided public transport services. These companies were merged with Nettbuss Ser AS in the autumn For further information about the companies, see enclosure 1. 1

6 2.2.4 Nettbuss Sor AS (organization number ) Nettbuss Ser AS is part of the Nettbuss-group. The owner of Nettbuss Sar AS is Nettbuss AS. Norges Statsbaner AS is the owner of Nettbuss AS. At present, Nettbuss Sor AS has 729 employees. The company operates far more than 23 vehicles. With regard to the company's operation in Aust-Agder under the public service obligation, the company provides a total annual amount of kilometres of public passenger transport services. The total value of the service concession contract was NOK in The County's grant in 2010 amounted to NOK Setesdal Bilruter L/L (organization number ) The main shareholders in Setesdal Bilruter L/L are Sigmund Aune, Bravig Holding AS and the municipality of Bykle. Additionally, several municipalities in the County of Aust-Agder and Vest-Agder are among the shareholders. At the moment, Setesdal Bilruter L/L has 93 employees. The company operates more than 23 vehicles. With regard to the company's operation in Aust-Agder under the public service obligation, the company provides a total annual amount of kilometres of public passenger transport services. The value of the service concession contract was NOK in The County's grant in 2010 amounted to NOK Telemark Bilruter AS (orsanizalion number ) The main shareholders in Telemark Bilruter AS are the municipalities of Vinje and Seljord and Seljord Sparebank. Additionally, several municipalities in the County of Telemark own shares in the company. Telemark Bilruter AS has 114 employees. The company operates more than 23 vehicles. With regard to the company's operation in Aust-Agder under the public service obligation, the company provides an annual amount of kilometres of public passenger transport services. The value of the service concession contract was NOK in The County's grant in 2010 amounted to NOK Chronological presentation The historical background the period from the 1920s until 2009 Before 1981, the State had the responsibility to fund the public transport services. The responsibility was transferred to the counties as from 1 January It appears that at least one of the companies has served the relevant areas since the 1920s. Except for Birkeland Busser AS, all of the companies were awarded licenses shortly after the license system was introduced in Birkeland Busser was established late in the 1980s and has operated routes in the relevant areas since then. The public service concessions have been awarded through licenses and contracts which routinely have been extended. The two most recently issued licenses received by the bus companies have had license periods often years (1993 until 2003 and from 2003 until 31 December ). Cf. enclosure 2 and Annex A.2. of the complaint. 3

7 The first agreement entered into between the County and the bus companies which the County is aware of was the so-called main agreement (hovedavtalen) which entered into force as from 1 January The main agreement was replaced by agreements running from 1 January 2004 until 31 December These agreements were replaced by agreements with duration from 1 January 2007 until 31 December 2008." The process prior to the agreements with duration from 31 January 2009 until 31 December 2012 By decisions 12 June 2007 and 9 December 2008, the County decided to prolong the agreements with the bus companies. 7 The contracts were signed early 2009 and entered into force 1 January The contracts expire 31 December As addressed in the complaint, the County (on request from the minority of the County Council) asked the Government to conduct a so-called legality review with regard to whether the proposed contracts would be in line with the EEA Agreement, hereunder Regulation 1370/2007. The Government concluded that it was not in a position to conduct such a review. However, as the County was eager to act in accordance with the EEA Agreement and the Regulation, it undertook a comprehensive assessment of whether the contracts would be contrary to the Regulation. As the Regulation requires a gradual liberalisation of the market until 3 December 2019, the County was of the opinion that the agreements to be entered into would be in line with the Regulation. The County thereafter concluded the agreements. From the issue of prolongation came on the agenda and was publicly known during the spring 2007, until the contracts were signed in 2009 it took around 20 to 24 months. 9 The process was open and transparent. All case documents for the council meetings were published at the County's website several weeks before the meetings took place. The relevant council meetings were broadcasted live through the internet and were also accessible as downloads for an extended period of time. Following the meetings, the decisions to enter into the contracts were published at the County's website. Additionally, the County submitted a newsletter/press service to local newspapers and TV stations together with links to the abovementioned case documents. 10 Finally, it is worth noting that the process of entering into the agreements and the question of whether to announce competition for the contracts was featured in numerous newspaper articles.'' Further, important information about the expiry of the contracts has been submitted to the competitors of the relevant bus companies by the transport unit of the Confederation of Norwegian Enterprise, NHO Transport. NHO Transport is a business organization who represents about 130 bus, coach, tram, metro and truck operators. Based on requests from its members, NHO Transport has for several years submitted reports on status of tender 4 Cf. enclosure 3 (an example of the main agreement). 5 Cf. enclosure 4 (agreements which ran from 1 January 2004 until 31 December 2006). 6 Cf. enclosure 5 (agreements running from 1 January 2007 until 31 December 2008). Cf. Annex A.l. and A.3. to the complaint. " Cf. enclosure 6 (agreements which entered into force 1 January 2009 and which will expire 31 December 2012) 9 The contracts were signed and binding from the following dates in 2009: 11 Feb, 17 Feb, 23 Feb, 24 Feb and 15 May. 10 Cf. enclosure 7 (case 018/07 in news release dated 24 May 2007). '' Cf. enclosure 8 (newspaper articles). 4

8 procedures and contracts in the 19 Norwegian counties. 1 'The reports have been based on information received directly from the counties. With regard to the contract status in Aust-Agder, the reports clearly stated that the contracts would expire by the end of 2008: "Aust-Agder: No tender. Political decision in December 2002 implying that a fender at the earliest will he introduced in Quality agreements for the period are prolonged until the end of " * The reports have been submitted to NHO Transport's members, who carry out more than 90 per cent of Norway's public transport by bus and tram/metro. Additionally, the reports have been available at NHO Transport's homepage. In this connection it should be mentioned that the members of NHO Transport range from small family businesses to large multi-national transport operators. As an example, the following international companies are/have been established in the Norwegian market: Connex Norge AS/Veolia Transport Norge AS, Resfixarna AB and Swebus AB. Consequently, companies have been well informed with regard to the contracts which expired at the end of 2008 and that the County would enter into new agreements running as from 1 January The process prior to the prolongation of the concessions running for the period 1 January 2013 until 31 December 2014/31 December 2016 By decisions 15 June and 14 December 2010, the County Council decided to make use of the prolongation clause to extend the transport contracts described in item I4 The agreements were prolonged by signing a new enclosure C to the agreements. 15 The Nettbussconcession was prolonged until the end of 2014, while the other concessions were extended to the end of The process prior to entering into enclosure C was very similar to the procedure with regard to the main agreements described in item 2.3.2: To ensure that the agreements would not violate the EEA Agreement, the County (again on request from the minority of the County Council) once more requested a legality review by the Norwegian Government, cf. item 4 in the complaint. The process was open and transparent: o case documents for the council meetings were published at the County's website several weeks before the meetings took place o the council meetings were broadcasted live (and were accessible as downloads thereafter) o decisions were published at the County's website o the County submitted a newsletter/press service to local newspapers and TV stations together with links to the above-mentioned case documents 16 o the process was featured in newspaper articles Cf. enclosure 9 (reports on status of tender procedures and contracts in the Norwegian counties). Unofficial translation. Cf. enclosure 10 and Annex A. 11. to the complaint. Enclosure 11 (prolongations). 10 Enclosure 12. 5

9 From the first discussions to prolong the contracts with the existing operators took place, to enclosures C were signed, it took around one year The future - time frame of the County's plans to gradually open the market for competition Article 8 of the Regulation introduces a transitional period, which implies that the obligation to implement competitive tendering procedures fully apply as from 3 December During the transitional period, EEA States shall take measures to gradually comply with Article 5, cf. Article 8 (2). The transition period and the gradual transfer to competitive procedures were discussed in the Norwegian preparatory work. 9 The Ministry of Transport and Communication expressed that the local authorities were best placed to decide when to introduce competitive procedures during the transition period. Further, the Ministry highlighted the importance of gradual implementation of the Regulation. According to the Ministry, an opening of the whole Norwegian market at the same time could be unfortunate. The County has taken steps to comply with the Regulation and to gradually open the market. The most comprehensive contract, the contract with Nettbuss Sor AS, has the shortest contract period. The contract, which accounts for approximately 70 % of the grant from the County, expires at the end of Hence, a large part of the market will be opened up for competition as from The remaining contracts, which accounts for about 30 % of the grant from the County, expire at the end of The county has considered such gradual opening of the market to be the most appropriate for the potential operators. An accumulation of competitions for contracts in the area could lead to an undesirable restriction of competition, since operators may have difficulties taking part in several tender procedures at the same time. The process of liberalizing the market in Aust-Agder when the current concessions expire has started late However, as the County does not have the relevant administration staff or experience using tendering procedures in the award of contracts in the transport sector, the County will need some time to make administrative decisions and to plan the tendering processes. Prior to liberalization, the County must decide on several issues related to the call for competition, hereunder: organization of the procurement activities the division of responsibility between the County and the Bus companies assessment of the public transport need preparation of tender documents At present, the County considers the possibility of being a co-owner of Agder Kollektivtrafikk AS in co-operation with the County of Vest-Agder. 2() Agder Kollektivtrafikk AS was established as a management company for public transport in Vest-Agder in The company is owned by Vest-Agder county and the municipality of Kristiansand. If an 17 Enclosure 13. IS The enclosures were signed the following dates in 2011: 5 April, 6 April, 7 April. 22 April and 24 April. 10 Cf. Prop 113 L para Cf. enclosure 14 (Proposal for decision for the County Council's meeting 13 December 2011). 6

10 agreement on co-operation is reached, the County will benefit from the opportunity to utilize Agder Kollektivtrafikk AS* expertise within tendering procedures in the transport sector. Regardless of this possible co-operation, the conclusion of the tender procedure will take time. It should be recalled that possible bidders must be given enough time to assess whether they will participate in the competition and to prepare a competitive tender. This aspect is reflected in the Article 7 (2) of Regulation 1370/2007 which obliges the County to announce the invitation to tender at least one year before the launch of the competition. Further, the County must avoid short deadlines in the tender procedure to prevent that the existing operator is the only company that is able to submit a bid. The concession contract must also be awarded in sufficient time before start-up of the contract to ensure that the selected operator will be able to fulfill its obligations, hereunder to make necessary investments etc. Due to these aspects, the County consider the period as from January 2012 till 1 January 2015 to be necessary to implement a tendering procedure to replace the Nettbuss contract. 3 LEGAL FRAMEWORK AND ASSESSMENT 3.1 The requirements of transparency and non-discrimination contained in the EEA Agreement In this section the County will give a brief overview of the requirements which follows from the principles of transparency and non-discrimination with regards to awards of public service concessions in general. Thereafter, a more detailed presentation of practice in the transport sector and the applicable rules for this sector will be given. Service concessions are exempted from the detailed procurement procedures in the Directives on public procurement. 21 However, as a starting point, awards of public service concession contracts are covered by the principles of transparency and non-discrimination. In the TelAustria judgement, the ECJ stated that contracting authorities are bound to comply with the rules and principles of the EC Treaty when awarding contracts. 22 The requirements for the award of concession contracts were addressed in case C-231/03, Coname: "In those circumstances, the answer to the question referred must be that Articles 43 EC and 49 EC preclude, in circumstances such as those at issue in the main proceedings, the direct award by a municipality of a concession for the management of the public gas distribution service to a company in which there is a majority public holding and in which the municipality in question has a 0.97% holding, if that award does not comply with transparency requirements which, without necessarily implying an obligation to hold an invitation to tender, are, in particular, such as to enable an undertaking located in the territory of a Member State other than that of the municipality in question to have access to appropriate information regarding that concession, so that, if that undertaking had so wished, it would have been in a position to express its interest in obtaining that concession. """ The Court has not established more detailed rules governing the advertisement and the award of public service concessions. Except from stating that the principles apply, the Court has Directive 2004/17/EC and directive 2004/18/EC. Cf. case C-324/98. Cf. case C-231 /()3 paragraph 48. 7

11 only to a limited extent provided specific guidance on how the principles are to be complied with. In his reasoned opinion in case C-91/08 (Wall). Advocate General Bot suggested concrete rules for publication and award of concession contracts. However, the Court went no further than stating that the obligation of transparency "consists in ensuring, for the benefit of any potential tenderer, a degree of advertising sufficient to allow the service concession to he opened up to competition and the impartiality of the award procedures to he reviewed"." Thus, the content of the obligation of transparency is not fully established. Nevertheless, the contracting bodies are at least required to ensure transparency about the concession in a way that is sufficient to give interested companies a reasonable possibility to identify the planned concession award through their own market research. An example of a Member State's attempt to clarify the scope of the requirement for transparency is the Scottish guidance to Advertising of contracts that are exempt from the Scottish procurement regulations. 25 In this guidance the Scottish Procurement Directorate explains the contents of the Scottish rule fulfilling the obligations of transparency which can be deprived form the EC Treaty: "9. Regulations 8(21) and 11(20) do not lay down any rules on the form that an advertisement must take or for the means of publication. It is for individual contractins bodies to determine the form and means of publication taking into account the value of the contract and the extent to which it is likely to be of interest to the market. JO. Advertisement in OJEU is not required although there is nothing to prevent an advert being placed in OJEU on a voluntary basis (and this might be a useful step in the case of higher value contracts that are likely to he of significant international interest). 11. Publication on a contracting body's website or on recognised websites and portals created for the purposes of publicising contract opportunities (including the various commercial sites) will usually be enough to ensure adequate publicity'. Other means of advertising could include publication in relevant trade journals or specialised publications and also in national newspapers. 12. In all cases, the method of publication should reflect the relevance of the contract to the Internal Market. For example, where a requirement is likely to be only of interest to small, local firms, publication in a local newspaper may suffice. On the other hand, an advert in a local newspaper is unlikely to constitute adequate publicity 'for a high value service concession contract. 13. As a rule of thumb, the greater the value of the contract or market interest in the contract, the greater the coverage of the advert should be. In all cases, the form of advertising should be sufficient to allow interested companies a reasonable prospect of identifying the opportunity through their own market research. " 24 Cf. case C-91/08 paragraph Cf. Scottish Procurement Policy Note 3/2006, h^p-: www,scotland,go\,y^/l^so^ 8

12 3.2 Overview - organization of public transport in the EEA General comments on the liberalization of the transport market The transport sector has not been fully liberalized. Several EEA states have not opened up the sector for competition and many contracts are still awarded directly. The Community legislator has chosen to deal with the issue of direct award contra competition by adopting secondary legislation. The aim of Regulation 1370/2007 is to speed up the liberalization in the field of transport. It should be recalled that the chapter of transport in the EEA Agreement and regulations adopted on the basis of this chapter, is lex specialis to other rules in the EEA Agreement De facto organization of public transport in the European Economic Area The way public transport is organized varies considerably from EEA State to EEA State, and often also within an EEA State. Given the considerable complexity of Regulation 1370/2007 and the various ways in which it can be implemented, DLA Piper has conducted a study on behalf of the European Commission (Study on the implementation of Regulation (EC) N 1370/2007 on public passenger transport services by rail and by road, hereinafter the "DLA report") 26. The purpose of the report was to gain a clear overview of the application by Member States and within Member States of the organization of transport. Further, the report focused on the organization of public transport, and to give guidance on best practices in implementing the Regulation. The report gives an overview of the state of play in the transport sector which is of interest to the present case. The general picture is not one of competitive tendering procedures, but a mix of practices throughout Europe: "In general the legislation in force in Member States does not stipulate the choice of award procedure, operator and methodfor compensation. However, in some Member States, the operators are designated by law. precluding the competent authority from effectively choosing the operator and the way it awards the PSC [public service contracts]. In some other Member States, competitive tendering procedures operate.'"' At page 11 of the DLA report, the different types of awards are described: "PSC are awarded: - Directly: To an internal operator. Internal operators are often wholly owned by at least one competent authority. However, the geographical territory of their public transport activities is not always clear. To a third party. Directly awarded PS(' do not only relate to railway services: sometimes they are also awarded directly for road transportation. - After a competitive tendering procedure. " The report also describes the situation in the Member States with regard to the national legal framework and to what extent the national rules leaves the competent authorities in the EU http: ec.curopa.eu,-transport'rail,studies doe pso.put The DLA report page

13 Member States' freedom to decide how contracts should be awarded. This section does not address the issue of compatibility with EU law, but it is still relevant to demonstrate how the Regulation has been applied and interpreted in many European States: "2.1.6 Leeway of competent authorities The current section looks at the leeway accorded to competent authorities in applying Regulation 1370/2007. Freedom of choice of operator in national legislation - In general, competent authorities have the freedom to choose their public transport operator. - The operators are however determined hy law in FR as regards railway services, in PT as (Lisbon and Porto) and in BE. Freedom of choice of award procedure in national legislation - In general, competent authorities have the freedom to choose the way they will award PSC. This is the case for instance in AT, CZ. DE, ES. FR, IE, LT, NL. PL. UK (but with some exceptions) and in certain cases HU, where there is a possibility to make direct award. - Where the public transport operators are designated by law (be it regional or federal), it would appear that competent authorities may not issue competitive tenders. - In IT. direct award of regional rail services or to an internal operator is an exception to the principle of public tendering. However, public tendering can be used to designate a private operator which: (a) purchases at least 40% of the shares of the joint-stock publicly owned company providing the services: (b) takes on some specific operative tasks in managing those services. - In some Member States, there is an obligation to proceed to an open and competitive tendering (e.g. in SE and UK). " De facto, direct awards of contracts have been widespread in Europe, and the following table gives an overview of the use of direct awards and competitive tenders in the EU Member States which were subject to the DLA report: 2 " n The DLA report page

14 6e(<,.-e «'CO'." I Äfte" i;..i i i'.'.«direct award Competitive tender Direct award BE NL C <Ji A'listridan' Roneidarr an..: The Haan.-; - '^K r R iui'l- [;. -Paotroo'" Höxter '_7oeHmge r nos.-ib'v in City _>' Haile t\ 'i* Leipzig.is ol! 12 20_t>: r.is -.;.i '2_:iv L'E 1.:_? ii.nl i Competitive tender [-insm.t-y tn Nl posiih'v in OF r-ossibly >" PL A" at fir j. evt^ ai"^: i< 'Jisc-ission at '\ition.".! i^vfri Jt- <e q Reiqwissr county Rhein-Nerkar Ktt.-s: N_.rr_ ori!v of recessions! ->K IT i3ct>of PSCi FR (forirt and ".cai leve' n^reide He-i1e-F-i_nce< '.Z :i\"ia1' 3.3 Direct awards of contracts under the EEA rules No general prohibition of direct awards in the transport sector As long as the fundamental principles of transparency and non-discrimination are complied with, there is no general prohibition of direct awards of contracts in the transport sector. Historically, contracts in the transport sector have been awarded directly in many, if not most. European countries. The ECJ has introduced a requirement of transparency and non-discrimination when public authorities enter into public concession contracts. However, the Court has not introduced an absolute ban on the possibility to grant concessions directly. The case law requires that there has to be a sufficient degree of transparency in the awarding of contracts, be it in the context of a tendering procedure or in the context of a direct award.

15 3.3.2 Direct awards of contracts in light of regulation 1370/ Introduction The secondary legislation in the area of rail and road transport seeks to balance the wish to open up the markets with the need to ensure the proper operation of existing public services. Regulation 1370/2007 contains rules which open up for direct awards to a large extent. Thus, the Community legislator has not regarded the principles of transparency and nondiscrimination as being an obstacle to direct awards in the transport sector as long as the direct award is accompanied with certain safeguards. Regulation 1370/2007 balances the principle of transparency and non-discrimination with the inherent freedom of the EEA states to organise their public services within the field of transport. The possibility to award contracts directly in certain circumstances under the Regulation after its entry into force illustrates that there is no ban on direct awards of public service contracts. In this context, the County refers to the following statement in the DLA-report: "Transparency is a key principle for competitive markets and to guarantee the absence of illegal state aid. When PSC are directly awarded, compliance with the Treaty is ensured by transparency. Article 7(2) of Regulation 1370/2007 reads: [...} Article 7(2) of Regulation 1370/2007 imposes the publication, one year before the invitation to tender or before the direct award of the basic information relating to the prospective contract. This obligation does not apply to small contracts nor to contracts concluded under urgent circumstances. Should the situation change in the meanwhile, rectification can he brought to the announcement, without impacting the prospective date for the launch of the award procedure or the direct award. This provision would allow potential operators to express their interest in the prospective contract and possibly trigger a change in the award procedure 29 " With regard to contracts in the railway sector, the transparency is further ensured by publication of the notice one year after entering into the contract directly Main rule Article 5 of the Regulation contains rules on the award of public contracts. The main rule is that contracts shall be awarded on the basis of competitive tendering, cf. Article Exemptions The regulation opens up for substantial use of direct awards, even without making use of transitional rules. The regulation stipulates that EEA states may award contracts directly without any prior competitive tendering procedure in a number of circumstances. The regulation defines the term direct award in Article 2 h): "direct award" means the award of a public service contract to a given public service operator without any prior competitive tendering procedure At page 140 of the report. 12

16 Article 5.4 stipulates that one may award contracts directly where the annual value is below EUR 1 million or where less than km of public passenger transport services is provided yearly. In the case of small or medium-sized enterprises the limit is set to EUR 2 million or kilometers of public passenger transport services provided yearly. The regulation thus stipulates that a 10 year contract with a total value of EUR 20 million may be awarded directly to a small or medium-sized enterprise without any tender taking place. Article 5.5 regulates direct awards where services may be interrupted, while Article 5.6 allows direct awards to rail transport as such Transitional rules According to Article 8, during the period until 2019, the EEA States shall take measures to gradually comply with Article 5 in order to avoid serious structural problems, in particular relating to transport capacity. The justification of the transition period is described in Recital 31 of Regulation 1370/2007 which sets forth that competent authorities and the public service operators will need time to adapt to the provisions of the Regulation Direct awards decision making practice of the EU Commission In the EU Commission decision on state aid to the Danish railroads (DSB), case C-41/2008, the application of the internal market rules, and in particular regulation 1370/2007, was dealt with in depth. 30 It was undisputed that the contracts had been entered into between the Danish state and the Danish railroads without any prior competition taking place (the decision is only available in Danish and French): «Kommissionen gor opmcerksom pa, at alle de berorte kontrakter om offentlig trafikbetjening omhandler personbefordring med jernbane. og at de alle er indgaet uden forudgaende udbud mellem del danske Transportministerium og DSB. La Commission releve que I'ensemble des conlrats de service public en cause concernenl des services de transports de voyageurs par chemin defer et qu'ils ont tous ete attribues directement par le ministere danois des transports ä DSB.» The EU Commission was of the opinion that contracts can be awarded directly in the transitional phase: (folge artikel 8. stk. 2. gcelder del, at "med forbehold af stk. 3 skal indgäelsen qf kontrakter om offentlig trafikbetjening med jernbane og ad vej vcere i overensstemmelse med artikel 5 senest den 3. december 2019". De pägceldende kontrakter om offentlig trafikbetjeninsz kunne derfor indaäs uden forudgaende udbud. 3 ' En vertu de /'article S, paragraphe 2. «sans prejudice du paragraphe 3. I attribution de contrats de services publics de transport par chemin de fer ou par route est conforme a I'article 5 a partir du 3 decembre 2019». Sur celte base, les contrats de service public en cause pouvaient tout ä fail elre attribues directement. A similar line of reasoning can be found in several EU Commission decisions, for example with regard to bus services in Austria (Postbus), bus services in the Czech republic and cases concerning transport services in Germany. %ttp: 7ec.curopa.cu. competition stale aid cases pdf " Paragraph Paragraph

17 3.4 No breach of EEA law in the present case Overview As demonstrated above, it is not unusual that public authorities in EEA States grant public transport service concessions or enter into transport contracts without any form of competition. The County is not aware that the European Commission intervenes against such awards in the transport sector, arguing that there is a breach of the principles of nondiscrimination and transparency. The County submits that the contracts have been awarded in accordance with the EEA Agreement. The legal justification will be presented in the following order: The contracts have been granted in accordance with the transitional rules of Regulation 1370/2007 and decision making practice of the EU Commission (item 3.4.2) The awards have been done in a transparent manner (item 3.4.3) Several of the relevant contracts lack cross-border interest (item 3.4.4) Direct awards in accordance with the transitional rules of the Regulation and decision making practice of the EU Commission As demonstrated in item 3.3, the Regulation gives exception rules and transitional rules which open up for direct awards to a large extent. In light of the principle of legitimate expectations, it would be questionable to set aside agreements which were entered into in accordance with the principles in the regulation adopted by the Parliament and the Council, and which subsequently is incorporated into the EEA Agreement. At the conclusion of the contested agreements, the County has endeavored to comply with Regulation 1370/2007. In accordance with the transitional rules of the Regulation, the County awarded the contracts directly with limited contract periods in order to gradually open the markets earlier than required by the Regulation. Further, the case at hand is very similar to the DSB-case referred to in item It was undisputed that the contracts had been entered into without any prior competition. With reference to the transitional rule, the Commission concluded that the contracts were not entered into in violation of the Treaty and that they could be entered into without a prior competition. The County fails to see why the present case should be assessed differently than the DSB-case. As shown in item 2.3.1, the public service concessions have been awarded to the same bus companies through licenses and contracts which have routinely been extended for several decades. As in many public service contracts, the present contracts contained "option" clauses on prolongation of the contracts. The contracts were prolonged according to these clauses. However, the main contract (the Nettbuss-contract) where prolonged by only 50 % of the prolongation possible under the contract. Extensions of contracts are generally allowed, even if the Regulation restricts the prolongations to a certain extent. The quote below from the DLA report is illustrative: "Duration In general, PSC contain a clause stating their duration. The duration of existing contracts varies considerably from one Member State to another but is, for most of 14

18 I hem, below the maximum duration allowed under Regulation 1370/2007. However. PSC sometimes provide for a possible extension. The extension can be of the same duration as the initial contract, or of a shorter period. When so provided, there are no specific conditions in which extension can be envisaged, going beyond the terms of Article 4(4) of Regulation 1370/2007. However, in some countries, existing contracts have been secured for the maximum transitional period allowed in Article <V of Regulation 1370/2007. This is the case in FR which has, by law, fixed the current PSC for the region of lie de France until 31 December 2024 for road transport services, until 31 December 2029 for tramway services and until 2039 for metro services and other guided means of transport (such as suburban trains). Consequently, the contracts at hand should be regarded as awarded in accordance with the transitional rules of the Regulation and decision making practice of the EU Commission Transparency before awarding the concessions The contracts with duration from 1 January 2009 until 31 December 2012 and the prolongations (enclosure C to the agreements) have been entered into in full transparency. Interested parties, hereunder other bus companies, have been kept informed with regard to the on-going procedure of entering into the agreements. Reference is made to item and where it is demonstrated that: All case documents for the council meetings were published at the County's website several weeks before the meetings took place There was a live broadcast (by web TV) of the relevant council meetings and the broadcast was available as downloads thereafter Following the meetings, decisions were published at the County's website The County submitted newsletters/press services to local newspapers and TV stations together with links to the above-mentioned case documents The process of entering into the agreements and the question of whether to announce competition for the contracts was featured in numerous newspaper articles NHO Transport has for several years submitted reports on status of tender procedures and contracts in the 19 Norwegian counties. Thus, important information about the expiry of the contracts has been submitted to the competitors of the relevant bus companies by NHO Transport. The reports have been submitted to NHO Transport's members, who carry out more than 90 per cent of Norway's public transport by bus and tram/metro. Additionally, the reports have been available at NHO Transport's homepage. Consequently, the companies have been well informed with regard to the contracts. From the issue of prolongation came on the agenda and was publicly known during the spring 2007, until the contracts were signed in 2009 it took almost two years. In addition, the prolongations (enclosures C) were publicly known around one year before they were signed. The County's and NHO's announcements on their websites have, together with the media coverage, facilitated that operators in the entire EEA could be kept informed with regard to the contract status. Operators using media monitoring systems will have been provided with information about the County's contracts immediately after the news item was posted at the internet. Further, the relevant information has been searchable, and available, on the internet. ' At page of the report. 15

19 Based on available information, interested bus companies could have contacted the County and expressed its interest to submit an offer for the concessions. All operators have had the opportunity to submit comments to the County before decisions were made. The county also notes that the procedure adopted to ensure transparency seems to be in accordance with the procedure outlined in the Scottish guidelines referred to in item 3.1. Even though the requirements are met for both the main contracts and enclosure C, it should be mentioned that prolongation of contracts would normally not be subject to any additional requirements of transparency, as the transparency surrounding the original contract would suffice to satisfy the requirements under the EEA Agreement Contracts covered by the de minims rule The requirements of the EEA Agreement with regard to transparency are only applicable to concessions which may be of interest to operators in another EEA State. Normally, minor contracts do not have any interest for operators outside the local area of operation. According to case law, "[the] obligation of transparency applies where the service concession in question may be of interest to an undertaking located in a Member State other that in which the concession is awarded (see. to that effect. Coname. paragraph 17; see also, by analogy. Case C 507/03 Commission v Ireland [2007] ECR I paragraph 29. and Case C 412/04 Commission v Italy [2008] ECR paragraph 66). " J4 It is submitted that several of the relevant concessions lack cross-border interest. Even though the concessions have been entered into before the entry into force of Regulation 1370/2007, the thresholds in the Regulation could be guiding with regard to whether a contract has sufficient interest to operators located in other EEA States. Two of the five contracts subject to the present case should be regarded as not liable to attract any interest from other EEA States: Frolandsruta Frode Oland provides a total annual amount of kilometer. The value of the service concession contract was NOK in Telemark Bilruter AS provides an annual amount of km. The value of the services concession contract was NOK in Due to the limited number of kilometers driven, low contract value and the relatively short duration of the contracts, the County submits that these service concession contracts have no direct or potential interest to an undertaking located in other EEA States than Norway. Further, the lack of cross-border interest is illustrated by Regulation 1370/2007. Although the concessions was granted before the entry into force of the Regulation, the service concession contracts entered into with Frolandsruta Frode Oland and Telemark Bilruter AS meets the requirements of direct awards in Article 5 (4) first paragraph. A third concession also appears not to be liable to attract any EEA interest. This concerns the contract with Birkeland Busser AS. The company provides a total annual amount of kilometer. The value of the service concession contract was NOK in At the time of the grant of the concession, it would appear that little interest could be expected from operators in other EEA States. Both the size of the contract and the distance to neighboring EEA States makes the likelihood of any interest marginal. If granted today, it may even be a 34 Cf. case C-91/08. Wall, paragraph

20 question of whether the concession would fall within the exemption rules of the Regulation. Birkeland Busser AS meets the requirements of direct award provided that the company is considered to be a small or medium-sized enterprise, cf. Article 5 (4) second paragraph. However, as Setesdal Bilruter L/L is the sole shareholder of Birkeland Busser AS, this depends on the Regulation's definition of small and medium-sized enterprises. 4 CONCLUSIONS AND SUBSIDIARY APPLICATION FOR APPROVAL 4.1 No violation of the principles of transparency and non-discrimination The aim of Regulation 1370/2007 is to speed up the liberalization in the field of transport by gradually liberalizing the market. Following the reasoning of the EU Commission in the DSB case, the County is of the opinion that the contracts at issue could be entered into directly. The rules on direct awards in the Regulation would not have any purpose if EEA law where to be interpreted to imply that direct awards as such is prohibited. Further, in applying the regulation, the EU Commission appears to be of the opinion that direct awards are compatible with the EU Treaty if the rules in the Regulation (including the transitory rules) are complied with. The requirements for notification/announcement prior to awards of public service concessions are under any circumstances unclear. The County submits that the relevant concessions are allocated in such a way that the considerations behind the principles of transparency and nondiscrimination are complied with. The companies have been well informed with regard to the contracts. Based on available information, interested bus companies could have contacted the County and expressed its interest to submit an offer for the concessions. It is also submitted that several of the relevant concessions lack cross-border interest. 4.2 Application for approval under Regulation 1370 Article 8 (3) in fine Subsidiary, if the Authority, contrary to the assessment presented above, should be of the opinion that any of the concessions are entered into in violation of the EEA Agreement, the County of Aust-Agder hereby applies for the Authority's approval under Article 8 (3) in fine of Regulation 1370/2007. The relevant section reads: "Public service contracts may continue until they expire where their termination would entail undue legal or economic consequences and provided that the Commission has given its approval. " The termination of the contracts before their expiry contains a substantial risk both legally and economically. The County will revert to this issue and submit further information if the Authority maintains its preliminary view on the compatibility of the EEA Agreement with regard to the present concessions. In this connection it is mentioned once more that the Regulation contains exemptions and transitional rules which open up for direct awards to a large extent. The County has acted in reliance on these rules. Additionally, the Authority's press release regarding corrective measures dated 18 July 2011 was published after the concession contracts were entered into. An EFTA institution that publicly announces a marked change of policy would be expected to apply the new policy only on procurements and concessions granted after the notification of the change of policy. 17

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