Another public to public contract exemption from the public procurement rules

Introduction

This German case in the waste disposal and treatment sector is about a public-to-public arrangement that was held by the EU Court of Justice (EUCoJ) not to constitute a 'public contract' (i.e. a contract which must be procured competitively in line with EU procurement rules).  Some commentators have suggested that it adds to the list of so-called Teckal exemptions relevant to public-to-public contracts under Regulation 12 of the Public Contracts Regulations 2015 (PCR15), although the relevant circumstances might now come under Article 1(6) of the 2014/24 (Public Sector) Procurement Directive, which was not in force at the time of the events examined in this case. 

The case clarifies that if two public authorities transfer under law their competences (responsibilities and obligations) to a third contracting authority which is operationally and financially autonomous, the transfer of the provision of services to the new authority does not amount to a public services contract.  It remains an internal public reorganisation for the purposes of procurement law.

Facts

Under national legislation, the Region of Hannover (RH) and the City of Hannover (CH) were entrusted with waste disposal and treatment tasks in their areas.  Following a staged process, on 1 January 2003, RH and CH established an association (a public-law corporation - the Association) to which they fully transferred their responsibilities in relation to waste disposal and treatment, and respective resources.  Those resources included bodies responsible for waste disposal, street cleaning and winter road-maintenance services, as well as 94.9% of the shares in an RH-controlled company providing waste treatment services for the region.

The Association was empowered to procure the services of third parties to perform its tasks and to that end acquire holdings in undertakings and entities (so as to become vertically integrated), provide services to third parties and generally charge fees for its services, including to RH and RC.

The Association is governed by the 'General Meeting' of the chief administrative officers of the RH and RC.  The General Meeting decides various issues and appoints the managing director, who has control of the day-to-day operations of the Association.  The Association was expected in the longer term to cover its operating costs; however, in so far as its revenue is not sufficient, RH and CH would make contributions.

Legal challenge – issues

Remondis is a long-established, private company active in the waste sector and essentially a competitor of the Association.  They decided to challenge the establishment of the Association in court almost nine years after its establishment.  They submitted that the overall arrangements constituted a public contract within the meaning of, inter alia, Article 1(2)(a) of Directive 2004/18 (applicable at the time of challenge).  

Whilst Remondis accepted that the Association, when established, fell within the Teckal exception from the relevant public procurement rules, they contended that the subsequent significant increase in the Association's turnover from third-party clients, led to a situation where it no longer carried out the essential part of its activities for RH and RC.  So, it was argued, RH ought to tender the contract for waste disposal and treatment.

The judgement refers to the Association's turnover information (including its 2013 forecasts) and sets out the revenue deriving from third-party clients.  Evidently, that revenue accounts for less than 20% of the Association's total revenue, which was the ceiling that was commonly used (same like a similar ceiling for affiliated undertakings in the Utilities Directives) until adopted by Article 12 of the 2014/24 Directive and Regulation 12 of PCR15 as one of the three relevant tests for 'public-to-public' contract to be exempted from the application of the Directive 2014/24 and PCR15.  Nevertheless, the Court did not discuss the application of the Teckal exemption.

EUCoJ findings

The circumstances of RH, CH and the Association would have come under Article 1(6)1 of the 2014/24 Directive, if that had been in force at the time of the challenge.  EUCoJ referred to that provision.

The Court placed a lot of weight on Article 4(2) TEU in addressing the questions of the German (referring) court.  Article 4(2) states that the Union must respect national identities, inherent in their fundamental structures, political and constitutional, including local and regional self-government, including internal reorganisations of powers within a Member State.

The Court emphasised, in accordance with the relevant tests, that the previously-competent authority had been released from or relinquished the responsibilities and obligations or power to perform a given public service task; whilst another authority had been henceforth entrusted with that obligation or power. However, in addition, for a public (cf. public-to-public) contract to exist, consideration (a pecuniary interest) must be provided in return for a service, which must be of direct economic benefit to that contracting authority. The synallagmatic2 nature of the bargain is thus an essential element of a public contract.

The Court considered that the reassignment of resources to the Association did not amount to the payment of consideration; rather, it was a necessary consequence of the reallocation of the competence to it. The guarantee against 'cost overruns' was viewed as insufficient to be characterised as 'consideration' for this purpose.

The Court then emphasised that for reorganisations of powers and reallocation of competences between public bodies to come under Article 4(2), certain conditions must be met.

The first condition is that the transfer of competence must concern or include not only the responsibilities and obligations associated with the transferred competence, but also those powers that are the corollary thereof.  That would require that the Association is given the power to organise the performance of the tasks coming within the transferred competence and draw up the regulatory framework for those tasks.

The Association ought to be given financial autonomy to ensure the financing of those tasks.

That was different from the circumstances of the Piepenbrock3 case where the Kreis of Dueren (KD) entrusted the City of Dueren (CD) to perform the cleaning of local building(s) it owned in area of CD, through CD's cleaning contractor for consideration (payable to CD) whilst reserving the power to supervise the proper execution thereof.

According to the Court, for Article 4(2) to apply (and the relevant procurement rules not to apply) the newly-competent public authority (i.e. the Association) must act autonomously and under its own responsibility in the performance of its tasks.

The Court then explored the concept of 'autonomy' of the new authority.  Following its Advocate General, the Court clarified that 'autonomy of action' does not mean that the new authority must be shielded from any influence whatsoever by another public authority.  The Court accepted that the new authority can be still autonomous, even if the public authority transferring the competence were to retain a certain degree of influence over the new authority's tasks associated with the public service; as long as it is not involved in the actual performance of the transferred tasks.  The Court suggested that the General Meeting could exercise such permissible influence, to the extent this does not affect the performance of the Association's tasks (although this is a matter for the national court to decide).

The fact that the arrangements of RH and CH in relation to the Association were reversible was not found to have compromised the autonomy of the Association.

In formal terms, the Court's responses to the questions posed by the national court were as follows:

  • An agreement concluded by two (regional) authorities on the basis of which they adopt constituent statutes forming a special-purpose association (vehicle) with legal personality governed by public law and transfer to it competences previously held by those authorities does not constitute a ‘public contract’ for the purposes of the relevant procurement rules.
  • However, such a transfer of competences for the performance of public tasks exists only if it concerns both the responsibilities associated with the transferred competence and the powers that are the corollary thereof, so that the newly competent public authority has decision-making and financial autonomy.  The latter is a matter for the relevant national court to verify.
 

1.Agreements, decisions or other legal instruments that organise the transfer of powers and responsibilities for the performance of public tasks between contracting authorities or groupings of contracting authorities and do not provide for remuneration to be given for contractual performance, are considered to be a matter of internal organisation of the Member State concerned and, as such, are not affected in any way by this Directive.

2. A word with Greek origins beloved of lawyers from civil jurisdictions, which essentially means 'bilateral'.

3. C‑386/11