Procurement in a nutshell – commercial trading companies

As a means of being more enterprising, many contracting authorities (“CAs”) are setting up trading companies to trade commercially.

This gives rise to an interesting question: can trading companies safely fit under the Teckal exemption?

Teckal – a reminder

The Teckal exemption (or the ‘in-house exemption’) relates to ‘vertical’ arrangements using an in-house company.

In certain circumstances, contracts awarded by CAs to legal persons under their control will fall outside the application of the procurement rules.

The exemption is contained in regulation 12 of the Public Contract Regulations 2015 (PCR 2015) and is a codification of the case law developed from Case C-107/98 Teckal.

Three cumulative conditions must be met for the exemption to apply:

The CA must exercise control over the company which is similar to that which it exercises over its own departments;

More than 80% of the activities of the controlled company must be for the parent company; and

There is no direct private capital participation in the in-house company.

To view our previous update explaining the Teckal exemption, please click here.

Applying the in-house exemption to commercial trading companies

The criteria listed above must be regarded as a starting point. The drafting of regulation 12 is not the end of the matter. Recital 31 of the public sector directive (Directive 2014/24/EU) makes it clear that pre-directive case law on the in-house exemption is still relevant.

The case law has laid down a number of principles and so the question must be considered in this wider context. One important principle stemming from the case law is the necessity of a public interest focus; private interest considerations are viewed as a deviation from this central concern.

Examples from EU case law are helpful to illustrate this:

• Case C-29/04 – Commission v Austria
  An Austrian town set up a wholly owned company and awarded it a waste contract in September. In October the town sold shares to a private company. Despite the lack of private participation when the contract was originally awarded, the matter was looked at as a whole and the terms of the in-house exemption were not met.
• Case C-458/03 – Parking Brixen
  The Court looked beyond the mere ownership of shares in a wholly owned subsidiary in its determination of proper “control”. It found that the company was market-orientated and as such it was independent from its parent authority.

The case law highlights the need to take into account the precise role of the in-house company and the dominant motive for setting it up, in determining whether the situation will fall under the in-house exemption.

Indeed, this point is brought into focus by the definition of a CA in regulation 2(1) of the PCR 2015 which requires that “bodies governed by public law” must be “established for the specific purpose of meeting needs in the general interest, not having an industrial or commercial character”.

Accordingly, if an in-house company is set up to have a ‘commercial character’ then, it seems that under PCR 2015, that company itself would not be a CA. It would then be contrary to consider that company to be a part of the wider in-house arrangements of the CA.

In short, a determination is required beyond the three cumulative criteria of what the company has been set up to do and why.

Why is this important?

This question has become central to many public projects. It has been brought into focus in particular by:

• The expansion of the procurement regime to cover a wider range of public services, such as health, education and social services, which were previously largely excluded from its scope; and
• The restrictions on trading other than through a company (in local government).

CAs will no doubt continue to attempt to find ways of using the Teckal exemption. It is critical that CAs carefully consider their business plans, take a holistic view of the procurement legal landscape and seek appropriate advice before embarking on any new enterprises.

How can I find out more?

If you have any queries on the issues raised or on any aspect of procurement, please contact us via our procurement hotline on 0191 204 4464.