In-house procurement occurs when a public contract is not awarded
Even when work was underway on an amendment to the Public Procurement Law in 2016, there was some controversy surrounding the question of in-house procurement. In late 2017, the National Appeal Chamber rejected the first contracts concluded under the new provisions between local government authorities. It would be unfortunate if at this time a practice emerged in Poland stifling cooperation between public authorities working together to carry out their duties.
The in-house concept in European public procurement
The concept of in-house procurement, developed on the basis of the case law of the Court of Justice of the European Union, is that in cases where supplies or services are obtained by a contracting authority using the authority’s own resources, neither the procurement directive nor the Treaty on the Functioning of the European Union will apply.
The ruling of 1999 in C-107/98 Teckal is crucial in this regard. Under this ruling, assignment by the contracting authority of work to its own divisions (employees, internal units, departments) is not an agreement under which a contract is awarded, and in such a case there is no requirement for transparency or a competitive procedure of any kind. A situation of this kind is described as a pure form of in-house procurement, and from a formal point of view the contracting authority performs the public service itself (even where the arrangements reached between the contracting authority and a unit of that contracting authority are agreements constituting a contract under national law).
The issue raised in the Teckal case was primarily whether the procurement directive applies when the contracting authority assigns supply or provision of services to a consortium in which one of the members is that contracting authority. The consortium was a legal entity in its own right, was separate from the contracting authority, and was set up by local government authorities, including the contracting authorities, for the purpose of performing services for those authorities.
The Court of Justice found that there is a principle that public procurement regulations apply to contracts concluded by contracting institutions with other entities even when the other entities themselves are public sector entities (contracting authorities). At the same time, the court ruled that this principle is excluded only in exceptional situations, and does not apply when two criteria are fulfilled:
- With respect to a particular entity the contracting authority has powers similar to those it has towards its own departments; in other words the control it has over the entity it intends to enter into an agreement with is similar to the control it has over its own units.
- That entity conducts a significant portion of its activities jointly with the contracting authority (for that entity).
Therefore, in special situations, conclusion of an agreement under which the contracting authority contracts supplies or provision of services to another legal person is classed as equal in status to in-house procurement and is termed “quasi in-house.” As a result, even though under different circumstances it would be a public contract in the meaning of the directives, that agreement can be concluded without following procurement procedures and without conducting a competitive procedure.
The quasi in-house concept is a logical continuation of the view adopted by the CJEU that public entities have a right to freely obtain supplies and services within their own organisational structures. The controlled entities that are party to a quasi in-house contract are formally part of a member state’s administrative apparatus. In this sense, EU law confirms that in-house procurement does not cause distortion of competition on the private sector market.
The criteria for classification of contracts as in-house procurement were subsequently expanded by the CJEU. Initially, the case law was directed towards limiting the situations in which tender procedures could be disregarded in transactions with controlled entities, and the interpretation of arguments in the Teckal ruling was restrictive (e.g. C-458/03 Parking Brixen, C-340/04 Cabotermo, C-182/11 and C-183/11 Econord). Eventually, however, a firmly established view took hold that control over an entity the contracting authority enters into an agreement with is not necessarily identical in every aspect to that exercised by the contracting authority over an entity of its own, and in particular can be exercised by a number of contracting authorities collectively (which means that none of them does so exclusively) (C-324/07 Coditel Brabant, C-295/05 Asemfo). It has also been acknowledged that applying an exception according to the rules established in Teckal does not prevent potential and future privatisation of a controlled entity (C-573/07 Sea Srl and probably C-29/04 Mödling).
No consistent view has been formulated in CJEU case law with regard to the criterion for the exception concerning the core operations of a controlled entity. To give an example, the Court of Justice found that this criterion was fulfilled if the entity’s activities in the private sector were incidental (C-573/07 Sea Srl). In a different case, it found that the core activity is the activity that accounts for 90% of the services provided (C-295/05 Asemfo). It also examined whether the core activity can be activity that accounts for 80% of the average turnover (C-340/04 Cabotermo). This condition and other conditions devised by the CJEU for exemption from public procurement provisions for transactions with controlled public entities were ultimately codified in Art. 12(1)–(3) of Directive 2014/24/EU.
In application of the Public Procurement Law in Poland, there is agreement with the view that transactions fulfilling the criteria specified in the Teckal ruling fall outside of the act. In opinions, the president of the Public Procurement Office has clarified that outsourcing by a municipal authority of its own duties to a commercial company which it has formed does not constitute a public contract, and outsourcing by a local government authority of municipal management duties to an entity created by that authority does not require the procedures provided for in the Public Procurement Law to be followed.
According to Supreme Administrative Court case law as well, there are no grounds for applying competitive procedures when a local government entity assigns its own duties to a company which it has set up. At the same time it was pointed out that a company of this kind “is an instrument through which that entity’s duties are performed” (judgment of 24 September 2014, Case II OSK 1314/14) and that the Public Procurement Law does not apply to public utility tasks performed by an organisational entity which the municipal authorities create for that purpose (judgment of 11 August 2005, Case II GSK 105/05). On the other hand, in these rulings the key argument for the Supreme Administrative Court was that there was no requirement to conclude an agreement in order to assign tasks to a municipal company, and the tasks were assigned in the form of legislation creating that company.
In the amendment of 2016, lawmakers ultimately supported exclusion of quasi in-house contracts from the Public Procurement Law, and provided in Art. 67(12)–(14) that no competitive procedure was required in the case of in-house contracts. It was thus confirmed at the same time that in such a case the public services market would not be open for private sector players.
Understandings between public entities among which there is no control
The concept of quasi in-house agreements, devised on the basis of principles laid down in the Teckal case, did not cover all situations in which the CJEU found grounds for procurement procedures not to be applicable in the case of an agreement between two public entities.
Under separate case law, the CJEU therefore developed a concept that an agreement between public entities in which there are no powers of control is also not subject to the directive if the purpose is to ensure that a public task is performed, and that task is an obligation of those entities (C-480/06 Hamburg and more specifically C-159/11 Azienda Sanitaria Locale di Lecce). Cooperation of this kind is referred to as “horizontal cooperation” between public entities.
The CJEU specified the criteria for an agreement for tasks between public entities not to be considered to be subject to the directive in the Hamburg case, and subsequently in Lecce. According to the “Hamburg doctrine,” agreements of this kind are not subject to the directive if:
- The agreement concerns performance of a public mission shared by those entities
- The agreement is dictated solely by considerations and requirements related to goals which are in the public interest, and
- The private sector is excluded and under the agreement no preference is given to one private service provider over that service provider’s competitors.
In Hamburg, the Court of Justice found in particular that an agreement concerning waste management between various local government entities was not a public contract because no services were provided under that agreement. This was because, in the agreement in question, one of the parties (the Hamburg city authorities) entered into arrangements with neighbouring municipalities regarding construction and future availability to those municipalities of a waste incineration plant, and agreed to act as an intermediary in forwarding the costs of use of the incineration plant to the operator. The court therefore took the view that for an agreement between public entities for performance of public utility services to be excluded, it could not provide that one of the parties simply provides that service for the other party.
The CJEU acted according to similar premises in subsequent adjudications. In Lecce, a healthcare centre and a university—both of which were public entities—concluded an agreement for a paid service provided by the university, for tests to determine the ability of hospital buildings to withstand seismic tremors. The agreement was concluded without a tender procedure, because the parties believed the agreement was concluded for a purpose in the public interest. The Court of Justice found however that the agreement was an ordinary commercial transaction, pointing out in particular that the agreement did not in any way concern a public task which was an obligation of the two parties.
The court took a similar view of an agreement between public entities in C-386/11 Piepenbrock. The court was asked whether an agreement between an association of municipalities and a municipality belonging to that association under which the association was to transfer the obligation to clean buildings belonging to the association but located within that municipality was excluded from the procurement directive. The agreement provided for a fee for the municipality for these activities, calculated at an hourly rate.
The court found that elements of the agreement between the association and the municipality, i.e. the nature of the service provided (services listed specifically in an annex to the directive), the fact that the agreement envisaged a paid service (even if it was not for profit and the municipality was not a regular player on the market) and the association’s right to unilaterally terminate the agreement, determined that this constituted a public contract.
Having classed the agreement between the association and the municipality in this way, the Court of Justice proceeded to look at whether the agreement met the criteria for exclusion from the procurement directive. It concluded however that the agreement did not meet any of the Hamburg criteria, all of which would have to have been fulfilled. Above all, the court stated that the agreement did not constitute cooperation between public entities for the purpose of realising a shared public mission.
Indeterminate scope of necessary cooperation
When ruling on the Piepenbrock case, the court did not specify however the grounds according to which it concluded that the Hamburg criteria had not been fulfilled. The general argument made in the legal literature is that when devising the Hamburg concept the CJEU did not define universal criteria for exclusion, but only adjudicated on the facts presented on a case-by-case basis (S. Arrowsmith, The Law of Public and Utilities Procurement: Regulation in the EU and UK, Sweet & Maxwell, 2014, 6-191).
This means that there is no precise guidance as to the form that public-public cooperation has to take in order not to be subject to a tender procedure.
Interestingly, the CJEU did not state that cooperation between public entities means that each of them has a specific public utility task to perform. A European Commission document (Commission Staff Working Paper SEC(2011) 1169 final Brussels, 4, 10.2011) states that cooperation of this kind takes the form of measures taken to achieve a common objective, i.e. it is collective performance of the same public task by allocating tasks or areas of specialisation with a view to achieving synergy when performing a public task. For the purpose of demonstrating the correct form of cooperation, the Commission describes a hypothetical agreement in which public entities have the joint objective of waste management, while one party is responsible for tasks relating to gathering waste, and the other incineration of the waste.
The CJEU stated that it is important that cooperation of this kind not bear the hallmarks of a normal service which one entity provides for another. An example of commercial cooperation that is subject to public procurement law is the agreement reviewed in the Lecce case. In that case, one public entity placed an order for a service with another for a fee. The issue of a fee being paid is not the determining factor, however, as according to both CJEU case law and the standpoint of the Commission, reimbursement of true costs of services or deliveries between public entities which work together does not mean that exclusion from the procurement directive does not apply.
According to CJEU case law, the most important issue appears to be whether the public entities enter into cooperation with respect to the public tasks they are responsible for. In the Lecce case, the CJEU found that the parties to the agreement did not have a common duty to perform the subject matter of the agreement. In Hamburg, meanwhile, it stated more specifically that the parties had a common public mission because they entered into cooperation with respect to treatment of waste, as this was connected with compliance with the Waste Directive, which places certain obligations on member states. In a different case, C-532/03 Irish Ambulance, the court stated that if under national legislation the two public entities working together have authority to perform the type of service in question, then (provided that there is no evidence to the contrary) each of those entities is acting within its area of responsibility. As a result, an agreement between them providing for a mechanism for financing services of that kind does not mean that provision of the services in question is award of a public contract.
In the Piepenbrock case, a national court clarified that under national law an agreement between an association and a municipality delegates the association’s responsibilities to the municipality. Legal instruments of this kind regulating the transfer of rights and obligations related to public tasks performed between the contracting institutions or groups of contracting institutions, under Art. 1(6) of Directive 2014/24/EU, are subject solely to national law on condition that they do not provide for remuneration for performance of the agreement. The Commission expressed a similar standpoint, saying that a state administration organisation as such does not fall within the remit of the EU, and therefore transfer of powers with regard to a particular public task by one public entity to another is a question of organisation or reorganisation of public administration, and is for a member state to decide.
The CJEU did not examine this issue, however, as it was stated in the request for a preliminary ruling that the subject matter of the agreement did not fall within the scope of public utility tasks but was performance of support activities, and specifically the cleaning of premises used for public utility tasks. In other words, in the Piepenbrock case, entry into cooperation with respect to activities that are not a public task could be the factor leading the CJEU to determine that a public mission was not being pursued and therefore an agreement between an association and a municipality was a public procurement contract.
The criteria for determining that the directive is not applicable to agreements between public entities working together to perform public services have been codified in Art. 12(4) of Directive 2014/24/EU. This provision states that the directive does not apply when an agreement “establishes or implements a cooperation 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.” This does not enable simple identification of the scope and manner of cooperation. It is still the case, in Polish practice as well (as Art. 67(1)(15) of the Public Procurement Law is worded in the same way), that each set of circumstances has to be evaluated individually, applying analogies when the guidelines given by the CJEU are general.
The Hamburg doctrine states clearly that for the directive not to be applicable, the purpose of cooperation between public entities cannot be circumvention of public procurement rules, and thus agreements whose true intention is not to enter into cooperation but to avoid the formalities required under the directive should be questioned.
Mirella Lechna, Infrastructure, Transport, Public Procurement & PPP practice, Wardyński & Partners
