Chapter V:

DEVELOPMENT OF SOCIAL HOUSING AND COMMUNITY INTEREST: by which means?

Introduction

Can the development of social housing in the European Union be altered or affected by Community interest?

The progression of Community litigation in connection with the definition of social housing in the Netherlands, the justification of state aid granted to the municipal housing enterprises in Sweden, or the proportionality of specific rights linked to public social housing funding in France can actually jeopardise the present modalities of how social housing is defined, organised and financed in the European Member States and, thus, impact the conditions for its development.

A restrictive and rigid definition of its scope would no longer allow the Netherlands to meet the needs of the increasingly diversified categories of its population with its social housing system and it would affect the future development in terms of both time and space. It would also jeopardise the cross-subsidisation necessary for new social housing and the economic viability of the sector. Furthermore, the questioning of state aid granted to municipal social housing enterprises would contribute to a further destabilisation of the regulatory tools for the Swedish housing market, i.e. the institutionalised negotiation of rents based on specific public service obligations imposed on the municipal housing enterprises with the local tenants’ associations. It would affect the special right to collect savings used for the public social housing funding system in France and could jeopardise the entire system of funding allocation, increasing the financing costs for social housing and reducing the present efforts and commitments in connection with the National Cohesion Plan.

Regardless of the potential consequences of these preliminary infringement procedures, they will result in Community decisions in the near future, and even in judgments by the Court of Justice of the European Communities in the event of appeals filed by the Member States, resulting in incursions of Community legislation, not all of which will be neutral for the further development of social housing in the European Union.

How will these Community decisions be adopted, and on which legal basis and according to which method will compliance by national measures with the provisions of Community legislation and the interest of the European Union be assessed? Will they rely on Community legislation, i. e. on the Council and the Parliament, or on the executive, which means the services of the European Commission as the pertinent authority for competition and the guarantor of the Treaties, or again on the Court of Justice of the European Communities?

Increasing Community litigation and legal uncertainty

“This aid, which is available to all investors, will help provide appropriate housing for elderly people in Sweden. Public intervention is necessary because currently the Swedish housing market is not able to cope with demand in this sector.”

Neelie Kroes, EuropeanCompetition Commissioner. TheCommission approves EUR 270 million in aid for social housing for the elderly in Sweden. Reference: IP/07/289, Date: 07/03/2007.

The social housing sector will have passed through all of the landmark stages of the European construction, from the Treaty of Rome and the single currency, all the way to the Amsterdam Treaty and the Single European Act without an excessive impact by a European legal framework - that otherwise regulates the entirety of economic activities - on its organisation and functioning.

As a chiefly local economic activity with a fairly weak impact on Community exchanges, and a social finality that is not so much present in the European debates, social housing seemed to have slipped through the meshes of the process of European economic and monetary integration.

Only at the end of the Nineties and in the first half of the year 2000 did certain Member States beginreporting their systems of funding and state aid for social housing to the European Commission, in the light of growing uncertainty with Community law in terms of state aid. The Republic of Ireland, the United Kingdom, Italy, the Netherlands, Germany, Sweden and the Czech Republic deemed it necessary to report their state aid systems for social housing to the European Commission in whole or in part, in order to obtain the legal certainty required for their development and modernisation.

The inevitable progression of the European integration process in concentric circles that followed the rhythm of continuous revision of the Treaties finally breached the cocoon in which social housing had formerly been protected by the Member States.

As a side note, it should be mentioned that the judicial clarification by the Court of Justice of the European Communities of the qualification of state aid as compensation for services of general interest had led the European Commission to adopt a Community decision relating to the a priori compatibility of state aid granted to social housing enterprises in the form of compensation for services of general interest and to define their conditions precisely. This decision also enabled clarification of the Community framework applicable to social housing enterprises and the conditions under which state aid for social housing complies with the European rules of competition as soon as social housing is qualified as a service of general interest.

The suits filed by the European Property Federationagainst state aid granted to municipal housing enterprises in Sweden and a consortium of French and Dutch banks against specific rights relating to public funding of social housing in France have also contributed to raising awareness of social housing actors, i.e. not only the competent authorities, but also the social housing undertakings, regarding the legal uncertainty of the systems presently existing in the Member States.

The answers to the of the Member States in the social housing sector: analysis of the criteria that constitute the compatibility of national aid to social housing

Beyond the criteria defined by the Community decision on state aid in the form of compensation granted to social housing undertakings, it is interesting to analyse the dispute that led the services of the European Commission in charge of competition to conclude that certain systems are presently compatible or incompatible with Community legislation. And it is at least equally interesting to analysethe corrections suggested to render national systems EU-compatible.

The Swedish case

The most recent example of an answer to the of a Member State regarding social housing is the Commission’s decision dated 7 March 2007 authorising Sweden - by applying the rules of the ECTreaty on state aid - to allocateannual subsidies of EUR54 million until 2011, i.e. EUR 270 million over 5 years, to the construction of social housing for the elderly.

The Commission states that“due to the general lack of housing on the Swedish market, building houses with special facilities for elderly people is currently not a priority for the private sector.”In fact, the Commission estimates “that the incentives proposed by Sweden adhere to the principle of social equity without unduly distorting competition in the Single Market.”

According to the European Competition Commissioner, Neelie Kroes “this aid, which is available to all investors, will help provide appropriate housing for elderly people in Sweden. Public intervention is necessary because currently the Swedish housing market is not able to cope with demand in this sector.”

The proposed financial aid relates to a special type of “adapted” housing: elderly persons are living in their own flats, but all care services, meals and leisure activities are organised by specialised staff. Elderly persons who need only a low level of daily care services can obtain this type of flat from the social services of their municipality if they are no longer able to live alone. The buildings and affiliated services are managed by private operators who act as service providers for the local authorities. Given the general shortage of housing in Sweden, housing adapted to the specific needs of the elderly is actually not a key priority of the private sector. However, confronted with the ageing population and an increasing demand, Sweden attempts to encourage enterprisesthrough additional incentivesto also provide this type of social housing. Over a limited period of time, these incentives - in the form of subsidies - correspondto roughly 10% of the construction costs and are available for any investor who decides to provide this type of housing. The size of the flats is limitedand usage thereof is temporary.

The European Commission has concluded that this state aid is necessary to attain the objective of social equality generally not sufficiently guaranteed by the market. In parallel, the effects of market distortion are limited due to the specific characteristics and the essentially local character of this activity. According to the Commission, the way this activity is structured limits any potential negative impact on competition, as it is open to all real estate owners without any discrimination. Subsidies are proportionate and provide an adequate incentive for the construction of urgently needed social housing, but the grants are by no means excessive. In particular, the amount of state aid has been calculated to cover a limited percentage of the actual costs of the construction. The provisioning of this type of social housingonly generates narrow margins due the additional costs for the workplaces of the service personnel. The restrictions imposed in terms of the use of this special type of social housing guarantee that the state aid granted is used exclusively for the elderly, and its use for merely commercial purposes is ruled out. This scheme has been authorised until the end of 2011, and final payments will be made in 2014 for projects that will have started in 2011.

This recent decision by the European Commission enlightens the procedures and criteria of the assessment of whether or not state aid for social housing complies with the Community rules of competition. Indeed, it is based on the general principles of the Treaty regarding necessity, proportionality, equality of treatment and non-discrimination, as well as on the assessment of the nature of those effects that are likely or not to affect competition:

  • Respect of the principle of necessity is affirmed by recognising the structural failure of the housing market to spontaneously meet the specific needs of the elderly. The acknowledgment of a “general housing shortage in Sweden“ also enhances recognition of the market failure as not only being limited to the accommodation of the elderly, but also extending to the overall demand. State intervention is therefore justified and qualified as necessary in terms of this housing market failure, which is considered cyclical, and especially in light of its objective of social equality;
  • Respect of the principle of proportionality is affirmed with reference to the limitation of state aid (10% of the construction costs), the constraint of narrow margins, the non-permanent nature of the subsidies (limited to 5 years) and the exclusive allocation of this type of housing to elderly persons under the direction of the local public authorities;
  • Respect of the principles of equal treatment and non-discrimination is affirmed by the fact that the state aid is available to all investors under the direction of the local public authorities regarding the allocation of the flats to elderly persons;
  • Finally, the effects of a distortion of competition are limited, considering the local character of the activity, the limited state aid and its accessibility to all investors.

Based on this decision, can we conclude that permanent state aid for social housing geared to recognition of a structural failure on the housing market and granted exclusively to social housing undertakings committed to coping with the housing needs not met by the market would not comply with the requirement to respect the principles of proportionality, necessity, equality of treatment and non-discrimination and that of an undue distortion of competition?

Strictly from the point of view of the rules of competition, the answer to this question is given by the Community decision of the European Commission on state aid granted to social housing undertakings entrusted with the operation of a service of general interest[1]. In fact, this decision applies directly in all Member States and admits the character of social housing as a service of general interest as soon as it is qualified as such by the individual Member States and, consequently, its permanent and structural character based on the respect of the principle of service continuity.

This decision defines a priori the rules of compatibility of state aid granted to social housing undertakings in line with the rules of competition, in connection with respect of the principle of fair compensation of the costs involved in providing public social housing obligations. The respect of the principle of fair compensation has only limited negative effects on competition. State aid does not yield an economic advantage for social housing enterprises, as long as they do not overcompensate the specific costs of social housing,i.e. the provisioning and management of social housing that the enterprises are entrusted with.

In the Swedish case, the government not only wanted to qualify the housing scheme as a service of general interest (likely due to its temporary character), but also did not even refer to social housing in its notification to the European Commission. The notion of social housing does not exist in the Swedish legislation, the market is segmented in a public market of flats for rent managed exclusively by local housing undertakings, but accessible to all, a private market and the housing cooperatives. In its answer to the notification, the European Commission qualified the concerned flats as social housing for the elderly. The term of social housing, used in the thirties as "Sociala bostäder" or also "Socialbostäder" with reference to housing schemes for poor families, is actually not used anymore. The term“särskilt äldreboende”used by the Swedish government in its notification means specific or adapted housing for elderly persons, accessible to all elderly persons regardless of their income or the level of their needs, in compliance with the principle of universal social services.

The same applies to the second Swedish case regarding the contestation of the European Property Federationrelating to the compliance of state aid granted to local housing enterprises. According to the plaintiffs, state aid granted to local housing enterprises, regardless of whether it is used for restructuring enterprises in regional markets that suffer from economic crisis, or for the construction of new housing in tight regional markets, such as in the Stockholm area, is not compatible with the rules of competition and would have to be reimbursed.

Sweden does not qualify local housing enterprises explicitly as social housing undertakings. As we have seen in chapter II, Sweden has a universal concept of social housing, open by definition for the entire demand and which strives to regulate the housing market in general and to prevent any real estate speculation.

Therefore, Sweden is constrained to decide how to position its system of local housing in connection with Community law. The ad hoc-commission appointed recently by the new government is entrusted to contribute elements for the official answer to the European Commission.It has just submitted three possible options:

  1. To narrow the local housing system down to the scope of social housing as defined unilaterally by the European Commission with reference to the decisions regarding Ireland and the Netherlands, in order to solve the issue of state aid in connection with compensation for social housing as a service of general interest strictly limited to disadvantaged persons;
  2. To introduce a mixed system of public local housing – social housing + public open housing, establishing a clear demarcation between both segments and limiting state aid exclusively to the social housing sector(partial qualification as a service of general interest and separate accounting for both activities);
  3. To maintain an open system of public local housing fully integrated in the market and no longer benefiting from any specific state aid, thus respecting the principle of equal treatment vis-à-vis private actors in the market (absence of any qualification as a service of general interest, abolition of specific state aid for social housing and reimbursement of such aid granted illegally since Sweden joined the European Union).

On the basis of these three options, a consensus seems to be possible that tends towards the third option, as the understanding of social housing as imposed by the European Commission is unfamiliar in the given culture and universalist traditions of public intervention in the housing market. This third option is actually the closest to reality and to the actual role of public local housing enterprises, which have a generalist approach to providing rented housing for all.

The preliminary infringement procedure in question

This explicit positioning in the housing market as a fully valid operator that forbids a priori any specific state aid to this sector is the result of the contestation forwarded by the European Property Federation: