Looking into the State aid angle of the Portuguese train tender

When I published my first entry into the Portuguese train tender, I received an email tipping me off to a potential other issue with it. The email argued that the maintenance shed which is part of the contract object would be used for the manufacturing of the trains and as such constitute illegal state aid. A couple of caveats here though: I'm a lot less comfortable discussing state aid than I am public procurement since my expertise is in the latter. Also, there are a lot more assumptions to be made here than in my original post. I did run my ideas by a couple of colleagues who know a bit more about this than myself, alas all mistakes my own etc etc. Let's start with what is in the tender documentation, shall we?

Tender documentation

The object of the contract is to purchase 117 sets and a maintenance shed for them. Once completed, this building will be transferred from the contractor to the contracting authority (CP, the train company). So far, so good. Or so it would seem at first glance.

There are a couple of problems here. Buying the trains and the maintenance shed together means this is a mixed contract with two parts that could be separated and tendered independently. To do this properly, then the shed should be assessed via the award criteria. However, the maintenance shed is not subject to any specific award criteria, although it can be argued it is part of the price criterion. But bearing in mind the lack of specific criteria to assess the shed and that this is not lowest price only tender, the shed itself appears more to be a condition for performance than anything else. It would seem then there is no real competition for the shed since its price is included in the overall price for the contract and respective criterion.

But there's more about the maintenance shed in the fine print the tipster pointed me towards. Buried deeply in one of the annexes to the tender documentation there is a cryptic reference to the physical space where the shed is to be located and what can be done with it. And this is where it gets interesting since the provision reads along the lines that if the economic operator wishes to use that space for manufacturing the train then the handover of the building is to happen three months after the last train set is to be delivered. This means economic operators can build the 'maintenance shed' and use it as a manufacturing plant for the duration of the contract.

This is problematic because of the difference in treatment afforded to economic operators. If you build the trains in the shed, you only have to handover the shed itself to the contracting authority three months after the last train has been delivered. If you want to build them anywhere else then that is fine but the shed must then be delivered 24 months *before* the final train is delivered. Therefore, anyone manufacturing the train in the shed gets the advantage of using it for free for 27 months.

As it happens, as far as I know, the preferred bidder is going to use the shed for manufacturing the trains. What will be of the vaunted 'Portuguese train factory' (as a going concern) and the employees hired to put the trains together, that's anyone's guess.

The State aid angle

State aid is heavily regulated inside the EU for obvious reasons: if you allow member States to sponsor and throw money to their champions, off the window goes the idea of an internal market with a level playing field and, yes non-discrimination once more. I have to express my concern about the direction of travel for state aid medium term now that the UK is out of the EU and France (+ Germany as seen recently) can more easily push for the protection of their industries even if at the expense of European competitors. They simply have deeper pockets to play that (fools) game. But we're not there yet.

Current State aid rules from art 107 TFEU kick in if the following cumulative conditions are met:

  • Use of State resources
  • Imputable (attributable) to the State
  • Recipient obtains an economic advantage on a selective basis
  • Competition has been or may be distorted
  • Intervention is likely to affect trade between member States

Even if these conditions are met, if any of the exceptions are present, then it may be compatible with the internal market for the State to provide such aid. The most recent examples is the Recovery and Resilience Facility which, for example, was used in Portugal to fund the development of a train from scratch (unrelated to the contract at hand). The operative word here is that all these are *exceptions* to the main rule that state resources are not to be used to help out undertakings in general.

In addition, member States also have the obligation to notifiy the Commission any State aid measure they want to provide for their compatibility to be assessed. Crucially this is to be done *before* the  measure is granted.

Classifying the use of the maintenance shed by an economic operator

Looking at the requirements for State aid, it is obvious that at least the first requirement is clearly met. This is a public contract where the State is intervening and also using State resources to pay for the construction of a maintenance shed and allowing the use of public land for free for an undertaking to manufacture the trains.

Since the contract is being tendered by CP (a public owned company) it is important to look into imputability as well, although in accordance with Portuguese legislation the Minister responsible for the transport sector has significant powers to shape the behaviours of the company's board. The presence of the Minister at the launch of the procedure in December 2021 and his words about the importance of having a train factory in the country shows us a clear link between a political decision and the award criterion. Furthermore, as established previously for CP where the trains are built is irrelevant so the possibility of the maintenance shed for building the trains is not a decision a profit maximising undertaking would take by itself. And as we have seen the jury of the procedure could not care less where the trains were actually built since it gave all bidders the same score in the relevant award criterion.

As for the third, it seems trickier and the harder to nail down concisely. The Commission's guidance (para 93) establishes that if EU rules for public procurement have been followed then, the presumption is State aid does not exist since there is no selective advantage being given. The problem is that as established in the previous post the procedure does not comply with the existing EU procurement rules (ie art 36 of Directive 2014/25/EU) and also art 34 TFEU. On top of that, as mentioned earlier in the post the price and delivery conditions for the maintenance shed itself are neither clear nor non-discriminatory  in the tender documentation meaning there is a breach of para 96 of the Commission guidance too. So, for now, I am tentatively considering this requirement to be met but aware this is probably where a state aid case would turn.

Regarding the distortion of competition, I think this one is clearer. It is obvious that if the preferred bidder is using a facility paid for by the Portuguese state to build the trains, it is not using its own facilities to do so, releasing them to be used in other contracts elsewhere and thus distorting competition since those facilities are available to be deployed and not tied up. This means that in this scenario the undertaking would have to deploy its own capital to expand production which it now does not have to since it is using a facility in Portugal free of charge.

The final requirement is also a simple one to meet. The contract was covered by Directive 2014/25/EU due to its price so there is a presumption of cross-border interest and as such a potential effect on the trade between member States.

In addition, Portugal was under obligation to communicate the measure to the European Commission. That I do not know if it happened. During the launch of the tender in December 2021 the then Minister mentioned he wanted to talk with the Commission to convince them of the importance of EU funds being used to buy the trains. If that included the formal notification state aid mechanisms it is unknown to me although one does not necessary follow the other. Having said that, I did a cursory search here and here and could not find anything about a notification by Portugal to the Commission.