(Overview of the Relevant Case law)

Ivaylo Dimitrov[1]

 

Abstract

The in-house exception has been unexplored in Bulgarian literature which may be explained by the lack of legislative rules on the matter, at least before the latest amendment of the Public Procurement Act in force since July and October 2014. The fact that in-house rules has crystalized exclusively in the field of  case law of the Court of Justice of the European Union (CJEU) and until recently have not been part of EU legislation  may be considered as a second possible reason for the lack of academic research.

In December 2011, as part of the Public procurement reform, the Commission proposed the revision of Directives 2004/17/EC and 2004/18/EC. The new directives were voted by the European Parliament on 15 January 2014, adopted by the Council in February and published in the Official Journal of EU on 28 March 2014.

Article 12 of the Directive 2014/24/EU sets new rules on co-operation in the public sector and amongst all codifies in a great extent the findings of the Court on the applicability of the directives on in-house operations. The codification reflects the settled practice of the Court with a few deviations. The latter, however, are of crucial importance and could potentially affect, in the author’s opinion, the raison d’être of the exemption itself.

This article seeks to throw light on the question of consistency of the new normative rules with the settled practice of the Court on the matter. It is the author’s belief that some aspects of the new article 12 of the Directive raise serious concerns and question its conformity with the basic principles of the public procurement regime, namely the free movement of services, the principle of non-discrimination and the opening the opening-up to undistorted competition.

The article is structures as follows.

I. The first part of the article is divided into two sections and explores the case law of the Court. It is the Court’s consistent view that two types of contracts entered into by a public entity do not fall within the scope of European Union Public Procurement law. The first type of contracts are those concluded by a public entity with a person who is legally distinct from that entity where, at the same time, that entity exercises over the person concerned a control which is similar to that which it exercises over its own departments and where that person carries out the essential part of its activities with the entity or entities which control it.These contracts are known as ‘in-house’ or ‘vertical co-operation’ and being outside of the scope of the directives may be concluded without a call for tender.

The second type of contracts are those which establish cooperation between public entities with the aim of ensuring that a public task that they all have to perform is carried out – so called ‘horizontal co-operation’. The Court has established a certain set of criteria which has to be at hand in order to satisfy the high threshold of the exception

1. The first section of this part observes the Court’s requirements with regard to the vertical in-house procurement. The exception is established in the landmark C-107/98 Teckal case. Initially, the question there was whether the contract at hand falls under the definition of contract under Directive 93/36/EEC. In paragraph 50 of the decision the Court found that a written contract for pecuniary interest may fall outside of the scope of the Directive only if the contract authority exercises over the person concerned a control which is similar to that which it exercises over its own departments and, at the same time, that person carries out the essential part of its activities’ with the controlling authority or authorities. This conclusion gave rise to the two cumulative requirements of the in-house exception – the ‘similar’ control test and the activities criterion. The decisions following Teckal have thrown light on the particular conditions pertaining to the two tests.

With regard to the similar control several different aspects need to be mentioned. According to the Court the capital of the controlled undertaking should be exclusively public. This question was addressed in Stadt Halle where the Court held that participation, even as a minority, of a private undertaking in the capital of a company in which the contracting authority in question is also a participant excludes in any event the possibility of that contracting authority exercising over that company a control similar to that which it exercises over its own departments. This finding was reasoned twofold. First, whereas the relationship between a public authority and its own departments is governed by public interest considerations, any private capital investment in an undertaking follows private interest considerations. Second the award of a public contract to a semi-public company without calling for tenders would interfere with the objectives of undistorted competition and equal treatment, in particular because such a procedure would offer a private undertaking an advantage over its competitors. The position of the Court that private input precludes the control over, similar to the control exercised over the authority’s own departments have been consistently confirmed.

The fact that the contracting authority holds, alone or together with other public authorities, all of the share capital in a successful tenderer tends to indicate, without being decisive, that that contracting authority exercises over that company a control similar to that which it exercises over its own departments. This indication should be complemented by a certain degree of control over the decision-making of the formally independent subject. As stated firstly in C-458/03 Parking Brixen it must follow from the examination that the operator in question is subject to a control enabling the public authority to influence the operator’s decisions. It must be a case of a power of decisive influence over both strategic objectives and significant decisions. The mere control which is conferred by company law on the shareholders is not sufficient to satisfy the test of de facto control. Likewise, the control should be direct. In Carbotermo the Court expressed its significant consideration that the participation of a holding company may, depending on the circumstances of the case, weaken any control possibly exercised by the contracting authority over the controlled company. Lastly, evaluating the control, the Court has always taken into account not only the control exercised by the relevant contracting authority, but also the control exercised by other public authorities, as well as their joint control over the operator. Further, the control should extend to all activities of the person. This conclusion is based on the recent findings in C-15/13 Technische Universität Hamburg.

2. The second main criterion of the Teckal exemption requires that the person controlled carries out the essential part of its activities with the controlling authority or authorities. The ratio legis of the requirement was determined in Carbotermo. The rules of the EU Public Procurement law are aimed precisely at preventing distortions of competition. This criterion aims to ensure that the directive rules remain applicable in case of an undertaking controlled by one or more authorities is active in the market and therefore likely to be in competition with other undertakings. The undertaking’s activities must principally be devoted to an authority and any other activities are only of marginal significance. In order to determine if that is the case, the competent court must take into account all the facts of the case, both qualitative and quantitative.  With regard to the relevant turnover the decisive one is that which the undertaking in question achieves pursuant to decisions to award contracts taken by the supervisory authority, including the turnover achieved with users in the implementation of such decisions regardless of who the beneficiary is – the contracting authority itself or the user of the services.   It is also irrelevant who pays the undertaking in question, whether it be the controlling authority or third-party users of the services. The issue in which territory those services are provided is also irrelevant. In Tragsa, for instance, the Court was satisfied with the fact that 90 % of the activities of the undertaking were performed with the controlling authority, as well as other public authorities.

The next section of the article examines the requirements concerning horizontal cooperation. The seminal decision in that regard is C-480/06 Commission v Germany.  The Court has pointed out, recalling its previous practice (Coditel Brabant), that a public authority has the possibility of performing the public interest tasks conferred on it by using its own resources, without being obliged to call on outside entities not forming part of its own departments, and that it may do so in cooperation with other public authorities. An arrangement may be considered as horizontal cooperation falling outside of the scope of the directives if:

• The arrangement involves only contracting authorities and there is no participation of private capital;
• The character of the agreement is that of real cooperation aimed at the joint performance of a common public task, rather than a standard public contract;
• The cooperation is governed only by considerations relating to the public interest.

The articles includes also the opinion of the European Commission as stated in the Commission Staff Working Paper concerning the application of EU public procurement law to relations between contracting authorities (‘public-public cooperation’).

II. The second part of the article points out the similarities and the differences between the provision of article 12 of the new Directive 2014/24/EU and the practice of the Court, as described above.

Article 12, para. 1 sets out three cumulative conditions which must be met for the exclusion of the application of the directive. Art. 12, para. 1(a) codifies the ‘similar’ control requirement. The second requirement is that 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. The directive has arranged only quantitative criteria. Consequently, according to the new rules the question whether the activities test is fulfilled will depend exclusively on quantitative criteria. Therefore the qualitative assessment from Carbotermo is rendered redundant.

Articles 12, para. 1(c) requires that 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. This is the main difference between the new normative rules and the longstanding practice of the Court which excludes private input in the controlling person even as a minority. Furthermore, Directive 2014/24/EU allows indirect control control by another legal person, which is itself controlled in the same way by the contracting authority which is in strong contrast with the Court’s consideration in Carbotermo that the participation of a holding company may, depending on the circumstances of the case, weaken any control possibly exercised by the contracting authority.

Additionally, the provisions of the new directive codifying the horizontal cooperation give green light to the participating contracting authorities to perform less than 20% of the activities concerned by the cooperation on the open market. According to the decision in Commission v Germany, as well as the Commission Staff Working Paper the horizontal cooperation is governed only by considerations relating to the public interest and in performance of common public task.

It should also be mentioned that these inconsistencies are not to be found in the initial Commission’s proposal for Directive and were added subsequently.

The author’s opinion is that the described discrepancies are dangerous and question the conformity of the in-house cooperation as codified in the new directives with the fundamental principles underlying the whole public procurement law. The possibility that certain services maybe directly contracted to semi-public persons without calling for tenders poses real risk for the competition on the different markets since. This means that the new rules could potentially place certain operators in advantageous position distorting competition.

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Линк към статията на български език: КОДИФИКАЦИЯТА НА IN-HOUSE ВЪЗЛАГАНЕТО НА ОБЩЕСТВЕНИ ПОРЪЧКИ В ДИРЕКТИВА 2014/24/ЕС ПРЕЗ ПРИЗМАТА НА УСТАНОВЕНАТА ПРАКТИКА НА СЪДА НА ЕС

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[1] Lawyer. Participant in various International moot court competitions such as Phillip C. Jessup International Law Moot Court Competition and Central and Eastern Europe Moot Court Competition (‘CEEMC’). Former assistant at the Ministry of Education and Science, Public Procurement Department.