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Public-public co-operation – the view from Brussels

The European Commission recently published guidance on applying procurement law to public-public co-operation. Deborah Ramshaw reviews what Brussels has to say.

On 4 October 2011 the European Commission published a Commission Staff Working Paper on the application of the EU public procurement rules to relations between contracting authorities (“public-public co-operation”). The paper comes at a time when the issue of shared service arrangements and new methods of delivering services remains high on the local government agenda.

Background to the paper

The Commission says that it is responding to requests for more clarity around the issue of the extent to which the public procurement rules apply to situations in which two contracting authorities co-operate with each other in performing their public tasks. The Paper provides a broad overview of the existing case law of the Court of Justice and in doing so provides a useful consolidation and summary of the case law in this area. The Paper does not create any new rules or requirements and is stated to be “an indicative document of the Commission services and…in any event, the interpretation of EU law is ultimately the role of the Court of Justice…” Nonetheless the Paper is a useful guidance document for anyone asked to advise on this area of law.

General Principles

The Paper sets out the general principles that all procurement practitioners will be familiar with: the Directive on public procurement will apply when contracting authorities conclude contracts for pecuniary interest with a different legal entity, regardless of whether that legal entity is private or public. The Paper then discusses a number of themes which are summarised below.

Public task performed by own resources – public-public co-operation which can fall outside the scope of the EU procurement rules

The Paper sets out the general rule that the Court does not restrict the freedom of a contracting authority to carry out public tasks using its own resources. There is no requirement for contracting authorities to call on outside entities to perform those tasks. The decision as to whether a service remains in-house or is carried out by a separate entity remains one for the contracting authority. If the public task is carried out using an authority’s own resources then the procurement rules do not apply because no contract for pecuniary interest is concluded – an authority cannot contract with itself. In-house provision is therefore clearly exempt from the procurement rules.

The Paper also goes on to state that the performance of public tasks using an authority’s own resources can also be exercised in co-operation with other contracting authorities. Several contracting authorities can “mutually assist each other” and provided this does not involve remuneration or any exchange of reciprocal rights or obligations then there is no service provision within the meaning of EU procurement law. The Paper gives an example of such mutual working: a general understanding between neighbouring municipalities that their respective music ensembles would perform at each other’s city celebrations. Not a wholly practical example but the lack of the remuneration and exchange of rights are the key factors to consider.

When contracting authorities do conclude contracts for pecuniary interest (i.e involving reciprocal rights and obligations) with one another then, despite the general rule above, it may still be possible for such contracts to be excluded from the scope of the procurement rules. Where authorities co-operate (on a contractual basis) with a view to jointly ensuring the execution of public interest tasks, this may involve the award of contracts without triggering the obligation to apply the procurement rules. Such co-operation can take the form of:

  • jointly controlling a third entity entrusted to perform the task (“vertical / institutionalised co-operation”) or
  • the performance of the task can be undertaken without the creation of a new or specially appointed entity (“horizontal / non-institutionalised co-operation”).

The Paper examines both of these options in further detail.

Co-operation Via Separate Legal Entities – “Vertical/Institutionalised Co-operation” or “In-house/Teckal case law”

The Paper neatly summarises the Teckal (Case C-107/98) line of case law and anyone advising on this exemption should refer to the Paper for some helpful guidance on this aspect. Practitioners will be aware that the Teckal case laid down two cumulative criteria (which have been refined in subsequent cases) for the exemption from the procurement rules of a relationship between a contracting authority and another legal entity (usually a wholly owned company). The relationship will fall outside the scope of the procurement rules if:

  • the contracting authority exercises over the legal entity concerned a control which is similar to that which it exercises over its own departments, and
  • at the same time, the legal entity carries out the essential part of its activities with the controlling authority or authorities.

Importantly, the Court has clarified that the Teckal exemption is available for public-public co-operation by providing that the two criteria above can be fulfilled jointly by several contracting authorities (as subsequently confirmed in the UK in the LAML case).

The Paper describes in some detail the relevant conditions relating to the exemption that subsequent Court judgments have set out. In summary these are:

  • the in-house control limb cannot be met if there is any private capital in the legal entity
  • the mere theoretical possibility that private capital may be injected at some future point does not in itself undermine the availability of the exemption. However, if private capital is invested at any point during the term of the relevant contract the Court would view this as a material change and one requiring the contract to be competitively tendered
  • the sole ownership of the entity by the contacting authorities can be regarded as an indication of the existence of the necessary in-house control but is not a decisive factor per se. The indication can be rebutted where authorities establish a company which is fully independent of them
  • the power of control over the entity must be “…a power of decisive influence over both strategic objectives and significant decisions” (Coditel case (C-324/07)
  • control within the first limb of the Teckal exemption can be exercised jointly. The procedure used by authorities in adopting collective decisions is immaterial, the control must be effective but does not have to be exercised individually
  • the authority (or authorities) must retain a sufficient degree of control over the entity so that it has the possibility to restrict the freedom of action of the entity. So for example, if relying only on company law in respect of majority shareholders this may in itself not be sufficient to constitute control within the first Teckal limb
  • if the entity becomes market orientated and enjoys a degree of independence which would render tenuous the control exercised by the authorities then the first Teckal limb would no longer be met (of relevance will be geographical scope of the entity’s activities, its contracts with the private sector and the scope of the activities carried out by the entity)
  • the entity must carry out the essential part of its activities with the controlling authority or authorities. The Court has ruled that the 80% turnover-based threshold provided for in the Utilities Directive (whereby so long as 80% of turnover of the entity is with an affiliated undertaking the contract between the undertakings is exempt) cannot be used as a reference in the public sector. Other activities carried out by the entity should be of only “marginal significance” and the activities of the entity should be devoted “principally” to the controlling authorities.

Horizontal/Non-Institutionalised Co-operation to Jointly Fulfil Public Tasks

The Paper notes that the EU Court in its Hamburg judgment (C-480/06) accepted that public-public co-operation outside the concept of using jointly controlled in-house entities could arise.

Until now the Hamburg case is the only judgment from the Court on this type of “horizontal” co-operation and there were a number of potentially unique factors in the case which may mean that the judgment does not have broader application in the public sector. However, the Paper concludes that it is reasonable to conclude from the Hamburg judgment that contracting authorities may establish horizontal co-operation amongst themselves (without creating a new entity) which could involve agreements falling outside the scope of the procurement rules if certain conditions are met. These conditions are:

  • the arrangement involves only contracting authorities and there is no participation of private capital
  • the character of the agreement is that of real co-operation aimed at the joint performance of a common task, as opposed to a “normal public contract”
  • the authorities’ co-operation is governed only by considerations relating to the public interest such that there are no commercial considerations and the co-operation agreement does not include activities to be offered on the open market.

In practice it may be difficult to establish something which meets these conditions, particularly with only one case to rely on. The Paper does give some further guidance, particularly on distinguishing between genuine co-operation which could rely on the Hamburg exemption and a normal public contract which would be subject to the procurement rules.

The aim of co-operation is to jointly ensure the execution of a public task which all the co-operation partners have to perform. The Paper states that the joint execution is “characterised by the participation and mutual obligations of contractual partners, which lead to mutual synergy effects…the contract needs to address a common aim, namely the joint performance of a common task”. If one authority is performing a certain task against remuneration this is unlikely to be considered to be genuine co-operation. However, ultimately it will be for the Court to decide on whether the nature of the agreement is one of genuine co-operation or a public contract and one can see that practitioners may be understandably wary of relying on this horizontal co-operation exemption.

Public task performed by external resources – other public-public relations

The Paper also deals with situations in which the public interest task is ultimately carried out by resources external to the authority. This can be the case where the competence for the public task is transferred to another public authority. The performance of a task may also be entrusted to another authority. This may be done (a) without establishing contractual links, or (b) calling on another authority which enjoys an exclusive right or (c) through joint procurement with other authorities or through central purchasing bodies.

This section of the Paper dealing with transfer of competence and exclusive rights is likely to be of less practical interest. However, understandably the Paper is addressed to all EU member states that organise their public sector administration in quite different ways. The section on joint procurement and central purchasing bodies does not provide anything new in this area and the principles will be familiar to practitioners.

Conclusion

As a summary of the current position of the law, particularly as regards the Teckal exemption, the Paper is very useful and practitioners will undoubtedly find the Paper of assistance if they are asked to advise on this area. Some of the other areas, such as horizontal co-operation, probably need further development in terms of case law before authorities will feel comfortable in knowing when to apply this exemption.

In the broader context practitioners will be aware that the Commission is currently developing its proposals to modernise the procurement rules and it intends to announce proposals before the end of this year.  The Green Paper consultation sought views on the issue of public-public co-operation and the summary of responses to the Green Paper indicated that a number of respondents supported legislation on the issue. It will be interesting to see what the Commission proposals say on this aspect given its undoubted importance in the context of service delivery over the next few years.

Deborah Ramshaw is Head of Procurement at Dickinson Dees LLP. She can be contacted by email at This email address is being protected from spambots. You need JavaScript enabled to view it. or on 0191 279 9836.