Teckal and exceptions to the mandatory application of procurement procedures

Shared professionals iStock 000009503395Small Newsletter pic 146x219The European Court is currently determining the extent of the application of the Teckal and public authority cooperation exceptions to otherwise mandatory EU public procurement procedures under EU Directive 2004/18. Rebecca Houlden looks at the Advocate-General's opinion.

EU Directive 2004/18 prescribes mandatory procedures for the award of public service contracts by public sector bodies within the EU. Such bodies, referred to by the Directive as “contracting authorities”, must consequently follow strict tendering procedures for public service contracts.

However, this requirement is subject to the Teckal “in-house” exception, which provides that the procedures need not apply to “vertical” contracts between a contracting authority and its wholly-owned subsidiary. Similarly, the “cooperation between public bodies” exception removes the Directive’s requirements for contracts between public companies that are in the public interest and do not involve remuneration.

The rationale behind these exceptions is that contracting authorities should be given the freedom to perform the services themselves, albeit via an extension of their relevant departments in the form of a separate, wholly-owned corporate entity.

In Datenlotsen Informationssysteme GmbH v Technische Universität Hamburg-Harburg, the European Court of Justice (“ECJ”) was asked to consider whether the Teckal exception could be extended to “horizontal” in-house contracts between a public contracting authority and a body wholly-owned by the German state.

Background

The Technische Universität Hamburg-Harburg (the “TUHH”), a public teaching establishment and therefore a contracting authority for the purposes of the Directive, sought to procure a new information management system in 2011 and considered two candidates to provide this: (1) Hochschul-Informations-Systeme GmbH (“HIS”), and (2) Datenlotsen Informationssysteme GmbH (“DatenIotsen”).

The contract was awarded to HIS by the TUHH, which did not follow the public procurement procedure prescribed by the Directive. While the TUHH did not own any shares in HIS, HIS was a non-profit organisation, wholly-owned by the German State and its 16 Bundesländer.

DatenIotsen subsequently brought proceedings against the TUHH on the basis that the contract was one which fell within the Directive and that the Teckal exemption did not apply, as HIS was not controlled by the TUHH.

In his opinion following a reference from the German court, Attorney General Paolo Mengozzi considered the following points:

  1. whether the Teckal exception could apply to a horizontal in-house transaction, i.e. a contract between parties where the contracting authority does not control the contractor (but both are public authorities ultimately owned by the state); and/or
  2. whether the contract fell within the criteria of “co-operation between public bodies” and should therefore be exempt from the Directive ‘s procurement procedures.

The Advocate General’s Opinion

Examination of the Teckal Exception

The Advocate General considered the established conditions for the Teckal exception, being:

  1. the contracting authority must control the contractor; and
  2. the relevant services must be performed by the contractor for the contracting authority that controls it.

The Advocate General explained that the contracting authority needed to exercise crucial control over the contractor's strategic goals and important decisions. In other words, the contracting authority must exercise a structural and functional control that has a real effect on the contractor, and that such control must be direct, for the exception to apply. As the TUHH did not have controlling interest in HIS, the exception could not apply in this case.

He did consider that a horizontal in-house exception might apply in cases involving two companies, controlled by the same contracting authority, where the objective of the transaction between them was to carry out the (controlling) contracting authority’s public services. However, this was not the case here, as the TUHH was the contracting authority and exercised no control over HIS.

The Advocate General warned that the exception should in any event be interpreted narrowly and that any expansion of it should be severely limited, so as not to diminish the Directive's goal of enabling competition in a free market as far as possible.

The “co-operation between public authorities”

The Advocate General also considered the “cooperation between public bodies” exception to the Directive. This exception provides that where public bodies, neither of which controls the other, cooperate to carry out the same public task, and the aim of the contract governing that cooperation is the pursuit of public interest objectives, the Directive’s procurement provisions need not apply.

However, the Advocate General held that the cooperation exception contained an implied condition that it could not apply to contracts involving remuneration. While reimbursements of costs would be permitted, the contract between TUHH and HIS involved remuneration, and therefore fell outside the exception.

Conclusion

The Attorney General's opinion does not bind the Court. As such, it is possible that the Court will, in due course, take an alternative view. However, if this analysis stands, it suggests that public bodies will not be able to avoid a procurement process by awarding a contract to another public body except in very limited circumstances – essentially where both bodies exist to deliver the underlying public purpose.

This decision may seem harsh in light of the fact that HIS was wholly owned by the German state and its Bundesländer. However, the exceptions to the mandatory application of the procurement procedures must be kept to a strict minimum to ensure the Directive’s aim is not undermined. While the Attorney General’s decision therefore recognises the need for some practical flexibility in adapting the Directive’s provisions where appropriate, it is careful not to erode the important principles of creating a fair and open market.

Rebecca Houlden is a member of Burges Salmon's cross disciplinary procurement team led by John Houlden. They can be contacted on + 44(0) 117 939 2000.