In-house procurement | In Principle

The concept of “in-house procurement,” i.e. a contract awarded by one public entity to another public entity, is already recognised under Polish law, but the amendment to the Public Procurement Law proposes major changes in this area.

Under Art. 4(13) of the Public Procurement Law, in force since 2010, purchases from a “public budget institution” for a “body of public authority exercising the functions of the founding body” of that institution are excluded from the procurement regime. This exclusion applies if all the following conditions are met:

• The public budget institution carries out the essential part of its activity for the public authority in question.
• The public authority exercises the same kind of control over the public budget institution as it does over its own units without legal personality, and in particular influences the strategic and individual decisions concerning management of the affairs of the institution.
• The subject of the order falls within the scope of the basic activity of the public budget institution as defined by the Public Finances Act of 27 August 2009.

The new Classic Directive (2014/24/EU) significantly expands the possibility of applying in-house procurements. It permits avoidance of the public procurement regime in the case of purchases from a broad range of state budgetary units and companies owned by the state or local government. But attempts to implement the directive in this area have met with resistance from the business community in Poland. According to the justification for the bill to amend the Public Procurement Law, representatives of employers and employees in the Social Dialogue Council have opposed introduction of the proposed regulations on in-house procurement, while the changes are supported by the Joint Commission of Central and Local Government. The private sector argues that expanding the use of in-house procurement will limit competition and could even drive out the private market for public services.

As a result of the resistance to in-house procurement in some circles, instead of completely excluding application of the act to these types of purchases, the bill provides that in-house procurement will be conducted on a single-source basis.

The bill provides for five categories of contracts between public-sector entities:

• Purchases by a controlling entity from a controlled entity (in-house procurement)
• Purchases by a controlled entity from the body controlling it (reverse in-house procurement)
• Purchases by one controlled entity from another entity controlled by the same authority (“sister” in-house procurement)
• Purchases from a controlled entity by multiple authorities jointly controlling it
• Entrusting of tasks in horizontal cooperation between public bodies.

Below we describe in more detail the conditions for awarding of public contracts within these specific categories:

• Public contracts awarded to controlled entities (in-house procurement, Art. 67(1)(12))—contracts awarded by a contracting authority (as referred to in Art. 3(1)(1)–(3a) of the Public Procurement Law) to a legal person when all of the following conditions are met:

• The contracting authority exercises control over the legal person corresponding to the control exercised over its own departments, consisting of a dominant influence over the strategic goals and major decisions concerning management of the affairs of the legal person. This condition is also met if such control is exercised by another legal person controlled by the contracting authority in the same manner.
• Over 90% of the activity of the controlled legal person involves performance of tasks entrusted to it by the contracting authority that controls it or another legal person controlled by the contracting authority.
• There is no direct participation of private capital in the controlled legal person.

• Orders from a controlled entity to the body controlling it (reverse in-house procurement) or orders between entities controlled by the same body (“sister” in-house procurement)—Art. 67(1)(13). Orders are placed by a legal person with the body that controls it, or another legal person controlled by the same body, under condition that there is no direct private capital in the legal person performing the contract.
• Public contracts granted to an entity jointly controlled by several contracting authorities (Art. 67(1)(14)), when all of the following conditions are met:

• The contract is awarded by a contracting authority defined in Art. 3(1)(1)–(3a) of the Public Procurement Law.
• The contracting authority and the other authorities referred to in Art. 3(1)(1)–(4) of the act exercise joint control over the legal person corresponding to the control they exercise over their own departments. Joint control, in turn, exists when all the following conditions are met:

• The decision-making bodies of the controlled legal person are made up of representatives of all of the participating authorities, although a specific person may represent more than one authority.
• The participating authorities can jointly exert a dominant influence over the strategic goals and major decisions of the controlled legal person.
• The controlled legal person is not pursuing an interest conflicting with the interests of the authorities exercising control over it.

• The two other conditions characteristic of in-house procurements are fulfilled—namely, over 90% of the activity of the controlled legal person involves performance of tasks entrusted by the contracting authorities and there is no direct private capital involved.

• Entrusting of tasks in horizontal cooperation between public bodies (Art. 67(1)(15)). Such a contract may be concluded between two or more contracting authorities (as defined in Art. 3(1)(1)–(3a) of the act) if:

• It establishes or implements cooperation between the cooperating authorities in order to ensure performance of public services they are required to perform, with the aim of achieving their common goals
•  Implementation of such cooperation is guided only by considerations of the public interest, and
• The authorities carrying out the cooperation perform on the open market less than 10% of the activity that is the subject of the cooperation.

What is particularly controversial in the private sector is that as a result of the proposed amendment, the possibility of in-house procurement would extend to contracts by municipal authorities for collection, or collection and management, of communal waste from owners of real estate. Currently, under Art. 6d(1) and 6g of the Act on Maintenance of Cleanliness and Order in Communes of 13 September 1996, such contracts can be concluded solely through a competitive tender.

In light of the resistance from the private sector and the continuing work on the bill to amend the Public Procurement Law, the fate of in-house procurements in Poland is still an open question. It should nonetheless be pointed out that introduction of the possibility of awarding in-house orders in the currently proposed form would at least to some extent enable review of such contracts—unlike the concept of exempting them altogether from the scope of the Public Procurement Law. There would still be a duty to publish a notice of the intention to award such contracts in a single-source procurement. It would also be possible to challenge the decision by the contracting authority to follow this procedure, and the contract awarded under the procedure would be public knowledge.

At the same time, the drafters of the bill have heightened the conditions for awarding of in-house procurements, as compared to the requirements of the directive, so that as far as possible, entities awarded such contracts without a tender would not be involved in competition on the open market (for example by raising the amount of activity performed by a controlled legal person consisting of performance of tasks entrusted to it by the contracting authority from 80% to 90%). It should also be stressed that under the proposed wording of the amended Art. 67 of the Public Procurement Law, the use of in-house procurement—including in the case of communal waste—would only be an option for the contracting authority and would not be mandatory.

Natalia Rutkowska, Infrastructure, Transport, and Public Procurement & Public-Private Partnership practices, Wardyński & Partners