Shared services?

There is a lot of confusion regarding contracts between contracting authorities and whether they are exempt from the Public Contracts Regulations…

There is seemingly a lot of confusion out there regarding contracts between contracting authorities and whether they are exempt from the Public Contracts Regulations 2006. We are seeing many instances of “wishful thinking” on the part of contracting authorities; when the legal position is somewhat different. A couple of recent cases have aided clarity and the new Directive codifies these requirements further.

Cases going back decades establish the starting point in any of these debates, which is that contracts for cooperation concluded between contracting authorities are prima facie subject to the law on public procurement. (see Case C-215/09 Mehiläinen Oy and Terveystalo Healthcare Oy, formerly Suomen Terveystalo Oyj v Oulun kaupunki and case C-84/03 Commission v Spain).

While there are no general exclusions for intra- authority contracts; there have been instances where the courts have found that certain of those arrangements (known as “horizontal agreements”) have been outside of the scope of the Regulations.

The principal case in this regard is Commission v Germany [2009] EUECJ C-480/06 (09 June 2009). (“Hamburg Waste”). In this case four German local authorities concluded a contract on 18 December 1995 with the Hamburg local authority relating to the disposal of their waste in the new incineration facility at Rugenberger Damm.

In that contract, Hamburg reserved a capacity of 120 000 tonnes per annum for the other local authorities in question, for a price calculated using the same formula for each of the parties concerned. That price was to be paid via Hamburg to the facility's operator.

In the judgement, the court was keen to re-emphasise the principles of 'give and take' and cooperation. The court held that the content of the contract at issue went beyond a standard 'service contract' as:

  • it required the local authorities concerned, in return for treatment of waste in the Rugenberger Damm facility, to make available to Hamburg, at an agreed rate, landfill capacity which the other authorities did not use. They also agreed to take for disposal in their landfill the quantities of slag remaining after incineration that cannot be utilised in proportion to the quantities of waste which they have delivered.
  • The legal relationship is described in the preamble to the contract as a 'regional cooperation agreement for waste disposal'. It paved the way for cooperation between the contracting parties who, if necessary, would assist each other in the performance of their legal obligation to dispose of waste and would perform that service jointly in the region concerned.
  • It was envisaged in the contract that, in certain circumstances, the authorities concerned would agree to reduce, for a specified period, the quantity of waste delivered in the event of the treatment facility malfunctioning. They therefore agreed to limit their right to performance of the contract.
  • One of the fundamental purposes of the contract was to enable the City of Hamburg to build and operate a waste treatment facility by pooling the requirements of the four local authorities involved. Without the collaboration, there was doubt that the facility would have been built.
  • Hamburg did not assume any responsibility for the operation of their facility and did not offer any guarantee in that regard. In the event of the facility ceasing to operate or malfunctioning, its obligations were limited to offering replacement capacity.

In addition to the features of the contract no private undertaking was placed in a position of advantage vis-a-vis competitors.

In Brent London Borough Council and others (Harrow London Borough Council) (Appellant) v Risk Management Partners Limited (Respondent) [2011] the Supreme Court helpfully recapped the features that placed the Hamburg Waste contract outside of the Regulations:

  • The contract established cooperation between local authorities with the aim of ensuring that a public task they all had to perform was carried out; and
  • It was concluded solely by public authorities without the participation of any private party, and it did not provide for or prejudice the award of any contracts that might be necessary in respect of the construction and operation of the waste treatment facility.

The judgement went on: “In short, not only are local authorities free to use their own resources to perform the services which they exist to provide, but they may also co-operate with other local authorities to ensure that, collectively, they have the necessary resources to do so.”

Many authorities are seemingly guilty of shoe-horning their “shared service”, “delegated”, “collaborative” ventures into these definitions, while the reality of the arrangements is radically different, and amounts to no more than the award of a contract to another contracting authority; and in the absence of the genuinely co-operative discharge of a “public task” these awards must be viewed as being at odds with the public procurement regime, and therefore open to legal action be a provider denied the opportunity to participate in a tendering process.

In terms of the more recent cases, in Case C-386/11 - Piepenbrock Dienstleistungen GmbH & Co. KG v Kreis Düren the European Court of Justice (ECJ) gave a ruling on whether a contract between two local authorities constituted a public contract. The contract at issue involved one public authority transferring to the other responsibility for providing building-cleaning services, in return for compensation covering its expenses. The ECJ concluded that this contract did constitute a public services contract, the subject matter of which could not be regarded as mere co-operation between public authorities with a view to carrying out a public service task that both of them have to perform.

In its judgement the ECJ noted that

  • for the purposes of the definition of "public contract" it is immaterial whether the operator is itself a contracting authority, and whether the body concerned is primarily profit-making, whether it is structured as an undertaking or whether it has a continued presence on the market.
  • a contract must be considered as being "for pecuniary interest" (and therefore not outside the scope of the regime), even if the remuneration provided for remains limited to reimbursement of the expenditure incurred to provide the agreed service.

Further, the ECJ considered the essential features of the types of contract that do not fall within EU public procurement law:

In-house exception. To benefit from the Teckal exception, a contracting authority must control the contractor to a degree which is similar to that which it exercises over its own departments and that distinct entity carries out the essential part of its activities with the local authority or authorities which control it (Case C-107/98 Teckal SrL v Commune di Viano & Azienda Gas ([1999] ECR-I-8121)).

In this case, neither entity controlled the other as there is no separate legal entity. While the awarding authority reserves the right to supervise the proper execution of that task, it does not exercise over the other authority a control capable of being classified as similar to that which it exercises over its own departments. Further, the service provider was not carrying out the essential part of its activities for the first entity.

Co-operation with other public authorities. Contracts which establish co-operation between public entities with the aim of ensuring that a public task that all of them have to perform is carried out fall outside the public procurement rules insofar as such contracts are concluded exclusively by public entities (without the participation of a private party), no private provider of services is placed in a position of advantage in relation to its competitors and implementation of that co-operation is governed solely by considerations and requirements relating to the pursuit of objectives in the public interest.

In this case, the aim of the draft contract at issue in the main proceedings does not appear to be to establish co-operation between the two contracting public entities with a view to carrying out a public task that both of them have to perform. Further the contract authorises the use of the services of a third party for the accomplishment of that task, with the result that such a third party might be placed in a position of advantage in relation to other undertakings active on the same market.

There also seems to be a view that contracts are exempt if they do not generate a profit or surplus element. In Case C-159/11 - Azienda Sanitaria Locale de Lecce v Ordine degli Ingegneri della Provincia di Lecce and others the ECJ handed down its judgment, stating that it is immaterial whether the economic operator is itself a contracting authority. It is also immaterial whether the economic operator is primarily profit-making, whether it is structured as an undertaking and whether it has a continuous presence on the market. The judgement went on to say that a “pecuniary interest” is created even where consideration does not exceed the costs incurred, as a lack of profit does not mean that there is no pecuniary interest in a contract.

So, what does the draft Directive have to say? While we await the final wording, the principles of the new Article 11 will endure into the final Directive – which the UK will have 12 months to introduce.

This states:

Article 11
Relations between public authorities

  1. A contract awarded by a contracting authority to another legal person shall fall outside the scope of this Directive where the following cumulative conditions are fulfilled:

    1. the contracting authority exercises over the legal person concerned a control which is similar to that which it exercises over its own departments.
    2. at least 90 % of the activities of that legal person are carried out for the controlling contracting authority or for other legal persons controlled by that contracting authority;
    3. there is no private participation in the controlled legal person.
    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 point (a) of the first subparagraph where it exercises a decisive influence over both strategic objectives and significant decisions of the controlled legal person.
  2. Paragraph 1 also applies where a controlled entity which is a contracting authority awards a contract to its controlling entity, or to another legal person controlled by the same contracting authority, provided that there is no private participation in the legal person being awarded the public contract.
  3. A contracting authority, which does not exercise over a legal person control within the meaning of paragraph 1, may nevertheless award a public contract without applying this Directive to a legal person which it controls jointly with other contracting authorities, where the following conditions are fulfilled:

    1. the contracting authorities exercise jointly over the legal person a control which is similar to that which they exercise over their own departments;
    2. at least 90 % of the activities of that legal person are carried out for the controlling contracting authorities or other legal persons controlled by the same contracting authorities;
    3. there is no private participation in the controlled legal person.
    For the purposes of point (a), contracting authorities shall be deemed to jointly control a legal person where the following cumulative conditions are fulfilled:

    1. the decision-making bodies of the controlled legal person are composed of representatives of all participating contracting authorities;
    2. those contracting authorities are able to jointly exert decisive influence over the strategic objectives and significant decisions of the controlled legal person;
    3. the controlled legal person does not pursue any interests which are distinct from that of the public authorities affiliated to it;
    4. the controlled legal person does not draw any gains other than the reimbursement of actual costs from the public contracts with the contracting authorities.
  4. An agreement concluded between two or more contracting authorities shall not be deemed to be a public contract within the meaning of Article 2(6) of this Directive where the following cumulative conditions are fulfilled:

    1. the agreement establishes a genuine cooperation between the participating contracting authorities aimed at carrying out jointly their public service tasks and involving mutual rights and obligations of the parties;
    2. the agreement is governed only by considerations relating to the public interest;
    3. the participating contracting authorities do not perform on the open market more than 10 % in terms of turnover of the activities which are relevant in the context of the agreement;
    4. the agreement does not involve financial transfers between the participating contracting authorities, other than those corresponding to the reimbursement of actual costs of the works, services or supplies;
    5. there is no private participation in any of the contracting authorities involved.
  5. The absence of private participation referred to in paragraphs 1 to 4 shall be verified at the time of the award of the contract or of the conclusion of the agreement.

    The exclusions provided for in paragraphs 1 to 4 shall cease to apply from the moment any private participation takes place, with the effect that ongoing contracts need to be opened to competition through regular procurement procedures.

As can be seen, sections 1, 2 and 3 codify the existing Teckal exemption. Please note the reference to “legal person” in the context of the controlled entity. In the UK this will mean an incorporated body, such as a company or limited liability partnership. Section 4 restates the “Hamburg Waste” position; stressing the requirements of “genuine cooperation” to carry out “jointly their public service tasks” which involve “mutual rights and obligations of the parties”. Once the other constraints are factored in the reality of the position is that instances where an activity will be within the scope of Article 11(4) will be limited to certain very strategic projects and not (as we are often asked) covering intra-authority contracts for the supply of back office service functions.

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