We’ve seen an interesting case, Hannover, where the European court examined the exemptions for in-house contracts and joint cooperation (sometimes called the “Teckal” and “Hamburg” exemptions after the cases which originally established them) and found that the situation in hand was entirely distinct from either of them. Keen students of procurement law will also know that these two exemptions have now been written into the statute books, at Regulation 12 of the Public Contracts Regulations 2015 (PCR 2015), and that in the process they have been clarified and fine-tuned.
The full nuances of the exemptions are set out in the regulations, but can be summarised in very high level terms as follows:
- for the Teckal, or Regulation 12(1), exemption to apply, the in-house company must be controlled by its owner public bodies (the “control test”) with no private sector shareholding, and must do the majority (80%) of its work for them (the “activity” test); and
- for the Hamburg, or Regulation 12(7), exemption to apply, the contract must represent a joint cooperation between two public bodies in furtherance of their public law duties, where neither performs on the open market more than 20% of the service that is the subject of the cooperation.
The Hannover case is interesting as it established what could be called a “third model” to accompany these exemptions. Although it predated the fine-tuned versions of the exemptions that we now have in the PCR 2015, the general principles set out in the original Teckal and Hamburg cases were considered and the situation in the case was held to be distinct from either.
The case concerned a waste management contract. The Region of Hannover and the City of Hannover both had public duties around waste management, and cooperated to create an SPV company to perform waste management by transferring (at no cost) into that SPV their waste management operations and nearly all the shares in a company that had previously provided those services to the Region. To the extent that the SPV needed further funds beyond the revenues it generated itself, the Region and the City were to make financial contributions to it. About 6 per cent of the SPVs revenue came from activities with private sector customers. The new entity enjoyed autonomy in the performance of its tasks but was required to abide by the decisions of a general meeting of representatives of its two founding authorities, which was responsible, amongst others, for appointing its managing director.
A challenger argued that the Teckal exemption could no longer be said to apply and that this was therefore an illegal direct award, particularly due to the private sector involvement.
The Court disagreed and said that this arrangement was actually a transfer of powers which did not attract the application of procurement law at all.
This was because procurement law only applies where there is a “public contract” (as defined), and one of the key elements of a “public contract” is that pecuniary interest is paid.
To establish this in this case, it would have had to be shown that the Region and the City had made some sort of pecuniary contribution to the SPV. The Court said that the reassignment of resources used to perform the tasks associated with a function could not be categorised as the payment of a price, but was merely the logical consequence of that transfer. Nor did the fact that the Region and the City undertook to cover potential cost overruns in relation to revenues amount to remuneration (because this guarantee was given for the benefit of the third parties).
To qualify as an exempt transfer of powers, the Court said, the following features would need to be present:
- Not only the activities/duties would need to be transferred but also the powers associated with them, meaning that the SPV would need to have the power to organise the performance of the tasks on an autonomous basis, and to draw up the regulatory framework for those tasks, and have the financial autonomy to ensure the financing of those tasks.
- The transferring entity may retain some influence over the service/activity (such as in this case, by being represented in general meetings of the SPV), but, in order for the exemption to apply, it must not have any involvement in the performance of the transferred duties (in this case, waste management).
- There was no requirement that the transfer of powers be irreversible, so in principle this could be done for a fixed term and then unwound.
It remains to be seen how useful this sort of the structure would be to contracting authorities. While shared services and joint working is common, the arrangement in Hannover involved the transfer to an new entity of actual the public law duties and powers to provide the service in question (waste management, in this case, but in theory at least it could have been a health service). That said, the decision is useful clarification of the point at which procurement law ceases to have applicability and of the important distinction between a public services contract on the one hand and an actual transfer of public functions on the other.
If you would like to find out more about this topic or you if need legal advice, please contact Jenny Beresford-Jones or any of our legal experts on public procurement and procurement disputes.