Procurement in a Nutshell – Procurement Act 2023 – Teckal & Hamburg Exemption
28th March, 2024
This Nutshell will analyse the new obligations on contracting authorities in relation to the Teckal & Hamburg Exemption, drawing attention to any key changes from previous procurement legislation which contracting authorities ought to be aware of.
Introduction
On 26th October 2023 the Procurement Bill received Royal Assent and is now expected to come into force in October 2024.
The Act will, in particular, revoke the following:
- Public Contracts Regulations 2015 (PCR)
- Concession Contracts Regulations 2016
- Utilities Contracts Regulations 2016
What’s new?
Schedule 2 of the Act sets out contracts which are exempt from the new Procurement Act. This list is similar to that which is currently set out in Regulation 10 of the PCR, including (among others):
- Contracts for the Acquisition of Land and Buildings
- Broadcasting Contracts
- Alternative Dispute Resolution
- Employment Contracts
- Emergency Services
- Research and Development Services
- National Security
- Intelligence and Defence
The ‘vertical exemption’ at paragraph 2 of Schedule 2 replicates the exemption at Regulation 12(1) – 12(6) of the PCR (often referred to as the ‘Teckal’ exemption). This exemption allows a contracting authority, that is a public authority, to award a contract within its ‘corporate family’ and vice versa, for example, between the contracting authority (‘parent(s)’) and its subsidiary (‘child(ren)’).
The primary test to be met as set out in Schedule 2 is that there is a relationship of ‘control’ between the parties to the contract. ‘Control’ is satisfied, under Schedule 2 paragraphs 2(2) and 2(3), when:
- The contracting authority is a parent undertaking
- No person other than the authority, or authorities, exerts a decisive influence on the activities of the controlled entity (either directly or indirectly),
- The controlled entity carries out more than 80% of its activities for the contracting authority (the ‘activity threshold’).
A person is not to be regarded as controlled by a contracting authority if any person that is not a public authority holds shares in the person.
The ‘horizontal exemption’ at paragraph 3 of Schedule 2 replicates the exemption at Regulation 12(7) of the PCR (often referred to as the ‘Hamburg’ exemption). This exemption allows a contracting authority to award a contract to another contracting authority provided various tests are met.
The first test is that the parties are ‘cooperating’ to achieve common objectives in carrying out their public functions and the arrangement is solely in the public interest. The second test is an ‘activity threshold’. This requires that no more than 20% of the activities are intended to be carried out for other (non-public) purposes.
The draft statutory instrument establishes how the ‘activity threshold’ for both the horizontal and vertical exemptions will be calculated, which should replicate the effect of Regulation 12(8) and (9) of the PCR, namely that the average total turnover for the 3 years preceding the contract award is considered.
What’s changed?
There is very little change between the PCR and the Procurement Act in relation to exempt contracts, specifically regarding the Teckal and Hamburg exemption.
What does this mean?
The similarities between the PCR and the Act is a key benefit for contracting authorities as it will minimize the changes, and therefore the adjustments needed, following the introduction of the new legislation.
For further information please contact Melanie Pears or Tim Care in our Public Sector Team
Please note that this briefing is designed to be informative, not advisory and represents our understanding of English law and practice as at the date indicated. We would always recommend that you should seek specific guidance on any particular legal issue.
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