Regulation 12 – Public contracts between entities within the public sector

Commentary

The in-house revolution created by Article 12 of Directive 2014/24/EU has been transposed by a (not so) simple ‘copy-out’ in Regulation 12 on public contracts between entities within the public sector. These provisions consolidate both the public-public cooperation exception (Case C-480/06, Commission v Germany, [2009] ECR I-04747) and the in-house providing exception (Teckal Case C-107/98 Teckal Srl v Comune di Viano, Azienda Gas-Acqua Consorziale di Reggio Emilia]) to the EU public procurement rules, but also include significant deviations from the previous case law of the CJEU aimed at creating very ample flexibility for Member States to resort to non-market (?) alternatives to procurement. The logic of this exception is to facilitate public-public cooperation between different public sector legal persons and has been a contentious topic for years. For additional comments on the changes at the EU level, see A Sanchez-Graells, Public procurement and the EU competition rules, 2nd edn (Oxford, Hart, 2015) 264-272.

This Regulation is quite extensive and technical, containing three main exceptions to the rule of Part 2.

 

Where the awarding contracting authority controls the legal person and vice-versa

Regulation 12(1) establishes three cumulative tests to be fulfilled. First, the control exercised must be similar to departmental control, thus implying some flexibility on the interpretation of this requirement. Paragraph 3 provides further details on the control threshold, effectively stating that the controlling authority needs to have decisive influence the strategic direction and significant decisions. A seat at the board will not be enough, but controlling a majority of board members will probably suffice.

Second, 80% of the activities of the controlled entity need to be for performing tasks set by the controlling authority. This requirement establishes an important limitation on the idea of contracting authorities establishing legal entities to provide services on a “parallel market” (ie public-public, outside procurement rules). Paragraph 8 establishes how activities should be measured, establishing that turnover or an appropriate figure such as costs for the last three years is to be used, with a fall-back provision in case this is not possible. This requirement does not explicitly apply when the contract is being awarded to the controlling authority, but is inferred nonetheless. 

Third, there is no private capital involved or, where involved as a requirement of national legislative provisions, said capital has no decisive influence on the controlled entity. This exception covers a number of different bodies that have been used across the EU to fulfill public tasks. In Portugal and Spain for example it was quite common 20 years ago for local authorities to create public owned companies (which were not subject to public sector pay caps…) as means to pursue the general interest.

In terms of the transposition strictly considered, it is worth stressing that Regulation 12(1) drafting deviates from Article 12 Directive 2014/24/EU. The paragraph establishes the conditions under which a contract awarded by a public authority to a controlled (in-house) entity exclude the procurement from compliance with its Part 2 rules. This provision only mentions contracts “awarded by a contracting authority to a legal person” and suppresses the further specification in Article 12(1) of Directive 2014/24/EU that such legal person can be “governed by private or public law“. In our view, the suppression does not alter the content of the provision and this deserves no further analysis. 

Regulation 12(2) in fine PCR2015 deviates from Article 12(2) of Directive 2014/24/EU in a way that could be more relevant. The Directive article establishes a new “public-house” extension of the in-house doctrine that covers “inverted” and “horizontal” in-house situations whereby a controlled legal entity awards contracts to its controlling contracting authority, or to another legal person controlled by the same contracting authority. These situations are subject to an alternative condition: either i) that there is no direct private capital participation in the legal person being awarded the public contract; or, as an exception, ii) that the only private capital participation is limited to non-controlling and non-blocking forms of participation required by national legislative provisions, in conformity with the Treaties, and that private capital does not exert a decisive influence.

The difference comes in the wording of this final condition. Whereas Article 12(2) of Directive 2014/24/EU requires that “private capital participation … [does] not exert a decisive influence on the controlled legal person” (emphasis added), Regulation 12(2) in fine PCR2015 indicates that the requirement is instead for “private capital participation … [not to] exert a decisive influence on the legal person being awarded the contract“, that is, the controlling contracting authority, or another legal person controlled by the same contracting authority. 

The divergence in wording creates some doubts, as it seems to set a control-test applicable to different legal entities depending on whether the “controlled legal person” in the final reference of Article 12(2) of Directive 2014/24/EU is understood to be either i) the awarding downstream contracting authority which would be justified because the provision starts in that way, or ii) the contracting authority to which the contract is awarded and which is the one which private capital participation is being assessed, which is the reading that makes sense from a functional perspective.

In our view, the fact that Regulation 12(2) in fine clearly opts for this second, functional reading does not result in any significant deviation in the legal test applicable to the new ‘public-house‘ exception where there is legally-mandated private capital participation. The wording of art Article 12(2) of Directive 2014/24/EU is clearly defective and the wording under Regulation 12(2) in fine clarifies that both alternative conditions apply to the contracting authority being awarded the contract. Hence, despite the different wording, the transposition seems to remain clearly within the (expanded) limits of the public-public and in-house exceptions as recast in Directive 2014/24/EU.

Where there is joint control by various contracting authorities

The second exception provided by Regulation 12 is similar to the first, albeit with fewer points worth commenting on in terms of drafting. It also contains a similar set of requirements to that of the first exception above: i) similar control; ii) 80% activity limit; iii) no controlling interest by private capital. The key difference here is the control requirement which still needs to be present albeit shared by various contracting authorities.

A good example for this exception would be the creation of waste management companies under shared services model that are controlled by a group of local councils.

Where the contract is between two contracting authorities

The final exception provided for in this Regulation is for cooperation contracts between two contracting authorities. This exception contains its own list of requirements to fulfill. First, the aim of the contract must ensure the provision of public services and achieving objectives they have in common. This reference to public services thus immediately excludes any collaboration on supplies and works.

Second, the cooperation between authorities must follow only considerations related to the public interest. In our view, this leaves in the contracting authorities the burden of proof that their arrangement pursues the public interest, although we find it far-fetched courts would second guess the definition of public interest put forward by contracting authorities.

Third, the contracting authorities perform less than 20% of the activities covered by the arrangement in the open market. We are not sure we fully understand this requirement. The way we interpret this provision is that the exception will only be available if the arrangement results in over 80% of those activities being developed for the councils. In other words, they can only offer in the open market up to 20% of their activities, or else the co-operation arrangement is deemed illegal and they will have to procure 100% in the open market.

Last modified: July 4, 2016 by Pedro Telles

Award of contracts to controlled persons

12.—(1) A public contract awarded by a contracting authority to a legal person falls outside the scope of this Part where all of the following conditions are fulfilled:—

(a) the contracting authority exercises over the legal person concerned a control which is similar to that which it exercises over its own departments;

(b) more than 80% of the activities of the controlled legal person are carried out in the performance of tasks entrusted to it by the controlling contracting authority or by other legal persons controlled by that contracting authority; and

(c) there is no direct private capital participation in the controlled legal person with the exception of non-controlling and non-blocking forms of private capital participation required by national legislative provisions, in conformity with the Treaties, which do not exert a decisive influence on the controlled legal person.

(2) A public contract also falls outside the scope of this Part where a controlled legal person which is a contracting authority awards the contract to—

(a) its controlling contracting authority, or

(b) another legal person controlled by the same contracting authority, provided that there is no direct private capital participation in the legal person being awarded the contract with the exception of non-controlling and non-blocking forms of private capital participation required by national legislative provisions, in conformity with the Treaties, which do not exert a decisive influence on the legal person being awarded the contract.

(3) A contracting authority shall be deemed to exercise over a legal person a control similar to that which it exercises over its own departments within the meaning of paragraph (1)(a) where—

(a) it exercises a decisive influence over both strategic objectives and significant decisions of the controlled legal person, or

(b) the control is exercised by another legal person which is itself controlled in the same way by the contracting authority, and references to “control”, “controlled” and “controlling” in paragraphs (1) to (3) shall be interpreted accordingly.

Award of contracts where there is joint control

(4) A contracting authority which does not exercise over a legal person control within the meaning of paragraph (3) may nevertheless award a public contract to that legal person without applying this Part where all of the following conditions are fulfilled:—

(a) the contracting authority exercises jointly with other contracting authorities a control over that legal person which is similar to that which they exercise over their own departments;

(b) more than 80% of the activities of that legal person are carried out in the performance of tasks entrusted to it by the controlling contracting authorities or by other legal persons controlled by the same contracting authorities; and

(c) there is no direct private capital participation in the controlled legal person with the exception of non-controlling and non-blocking forms of private capital participation required by national legislative provisions, in conformity with the Treaties, which do not exert a decisive influence on the controlled legal person.

(5) For the purposes of paragraph (4)(a), contracting authorities exercise joint control over a legal person where all of the following conditions are fulfilled:—

(a) the decision-making bodies of the controlled legal person are composed of representatives of all participating contracting authorities;

(b) those contracting authorities are able to jointly exert decisive influence over the strategic objectives and significant decisions of the controlled legal person; and

(c) the controlled legal person does not pursue any interests which are contrary to those of the controlling contracting authorities.

(6) For the purposes of paragraph (5)(a), individual representatives may represent several or all of the participating contracting authorities.

Contracts which establish or implement co-operation between contracting authorities

(7) A contract concluded exclusively between two or more contracting authorities falls outside the scope of this Part where all of the following conditions are fulfilled:—

(a) the contract establishes or implements a co-operation between the participating contracting authorities with the aim of ensuring that public services they have to perform are provided with a view to achieving objectives they have in common;

(b) the implementation of that co-operation is governed solely by considerations relating to the public interest; and

(c) the participating contracting authorities perform on the open market less than 20% of the activities concerned by the co-operation.

Determination of percentages

(8) For the determination of the percentage of activities referred to in paragraphs (1)(b), (4)(b) and (7)(c), the average total turnover, or an appropriate alternative activity-based measure such as costs incurred by the relevant legal person or contracting authority with respect to services, supplies and works for the 3 years preceding the contract award shall be taken into consideration.

(9) Where, because of—

(a) the date on which the relevant legal person or contracting authority was created or commenced activities, or

(b) a reorganisation of its activities, the turnover, or alternative activity-based measure such as costs, are either not available for the preceding 3 years or no longer relevant, it shall be sufficient to show that the measurement of activity is credible, particularly by means of business projections.