In-house procurement may not be compatible with EU law
The award of an in-house procurement satisfying the conditions laid down in Art. 12(1)(a)–(c) of Directive 2014/24/EU is not necessarily consistent with European Union law, the Court of Justice of the European Union held in the judgment of 3 October 2019 in Case C-285/18, Kauno miesto savivaldybè. This ruling is not controversial, nor does it change the principles developed over the years for excluding internal procurement from the regime of the procurement directives. Nonetheless, it gives contractors an additional argument for challenging contracting authorities’ decisions ignoring such basic principles as transparency.
In-house procurement
An internal or “in-house” procurement is a concept developed by the Court of Justice of the European Union under which supplies, services and works obtained by the contracting authority as a result of involvement of its own resources in the work are not subject at all to the procurement directives.
In its pure form, an in-house procurement consists in a contracting authority carrying out the public service itself, which includes the contracting authority subcontracting work to its own units (employees, internal sections or departments), even if the agreements between the contracting authority and its own units are based on a contract. (We wrote about this in our article “In-house procurement occurs when a public contract is not awarded”.)
Furthermore, in exceptional cases, the conclusion of a contract under which the contracting authority commissions not its own unit but another legal entity to carry out works, supply goods, or provide services is qualified on an equal footing as an internal purchase, and is sometimes referred to as quasi in-house procurement, which allows the conclusion of such a contract without using procurement procedures.
Quasi in-house procurement encompasses situations in which a contract is concluded with an entity in relation to which the contracting authority has rights similar to what it has towards its own departments. In other words, in a quasi in-house procurement, the contracting authority exercises over the entity with which it intends to conclude a contract a control similar to that it exercises over its own units and, at the same time, that entity carries out a substantial part of the activity along with the contracting authority (on its behalf).
The Court of Justice has consistently held the view that public entities are free to obtain supplies and services within their own organisational structures. Indeed, the controlled entities participating in a quasi in-house award are formally part of the member state’s administrative apparatus.
In addition to the cases mentioned above, the court has also developed a concept of cooperation between public bodies, between which there are no control rights. This is horizontal cooperation of public bodies, which is also not regulated by the directive if it is intended to ensure that a public task they are obliged to carry out is carried out.
The conditions for excluding application of public procurement rules to in-house transactions, as drawn up by the court, were finally codified in Art. 12(1)–(3) of Directive 2014/24/EU.
Background to the CJEU decision
The case decided by the court concerned the interpretation of Art. 12 of Directive 2014/24/EU. The Lithuanian court had doubts under the national law, which significantly restricts Lithuanian contracting authorities in applying the in-house exemption: only local government units and companies controlled by them can benefit from it, provided that specific conditions are met.
In this case, the City of Kaunas awarded the contract for greenery maintenance services to the private company UAB Irgita, and then, after obtaining the required permit, concluded an agreement for the same service with the wholly owned municipal company UAB Kauno švara as an in-house contract. Irgita challenged the legality of the in-house procurement.
The court’s position
Under these facts, the court was asked to respond to a number of interesting questions with a universal dimension in the application of the procurement directives.
First, it resolved an intertemporal problem relating to an in-house procurement procedure initiated under the earlier version of the Classic Directive (2004/18/EC), where the contract was concluded after the new version (2014/24/EU) entered into force. The court held that the directive in force on the date when the contracting authority decided there was no need for a competitive procedure was applicable.
In the Lithuanian case, this does not necessarily mean that the moment when the decision is taken is the moment when the in-house award procedure is initiated, since the national procedure requires the approval of the Lithuanian Public Procurement Office, which only opens the way for consideration of an in-house award.
Next, the court examined whether Directive 2014/24/EU prevents a member state from introducing restrictions on the use of exemptions into its national law. According to the CJEU, the national legislature may impose specific conditions for the application of an in-house exemption (in Lithuanian law, such a condition is the poor quality of services obtained in a competitive procurement). As the court held, any conditions must clearly stem from the law and be predictable. The court also stressed that the choice of any mode of supply of services, e.g. a choice between internal procurement and competitive procurement, must respect the fundamental principles applicable to procurement. This can be considered an instruction for the contracting authority to be guided in such a decision by real needs to obtain a reasonable quality of service for the public interest.
Finally, the court found that compliance with the formal conditions for the award of an in-house award does not imply that its award is compatible with European Union law. However, the court’s position cannot be disputed, as it does not alter in any way the concept of internal procurement, but concerns a specific situation in which, according to the court’s determination, the fundamental principles of the Treaty on the Functioning of the European Union may have been violated.
In-house procurement does not distort competition on the private-sector market
In principle, in this judgment the court reaffirmed that member states are free to choose the mode for supply of services they consider the most appropriate. This view is not in any event disputable, as it is obvious from recital 31 of the preamble to the Classic Directive.
However, the court stated that the conditions for excluding in-house transactions introduced by Directive 2014/24/EU do not remove the need to assess whether the contracting authority is acting with respect for the treaty principles governing the single market and the resulting principles of equal treatment, non-discrimination, proportionality and transparency, which it is in any event bound to do.
In this context, the court concluded that entering into a non-competitive in-house contract, although formally authorised, covering the same range of services as the contract previously concluded with a private contractor under the directive, may violate the principle of transparency if the private contractor does not obtain a guaranteed minimum return or the new contract constitutes a substantial modification of the contract with the private contractor.
The court did not decide that question, but merely authorised the national court to assess whether the contracting authority’s conduct led to such a violation.
Thus, the Kaunas judgment does not mandate that private contractors obtain any protection against the contracting authority’s decision to use the in-house exemption. EU law protects the public procurement market in the context of in-house transactions only insofar as it prohibits in-house cooperation from privileging a private service provider over its competitors.
Instead, the court’s position reinforces the importance of the fundamental treaty principles (here, the principle of transparency) and confirms that contracting authorities are obliged to apply them in all their activities, even if the public procurement directives do not expressly provide for such an obligation.
Mirella Lechna, attorney-at-law, Infrastructure, Transport, Public Procurement & PPP practice, Wardyński & Partners
