Procurement in a nutshell – a third exemption?

The Teckal case set out an exemption for contracts awarded by contracting authorities (CAs) to legal persons under their control. The Hamburg case set out an exemption for contracts involving co-operation between public sector bodies.

A recent preliminary ruling by the Court of Justice of the European Union (CJEU) in the case of Remondis GmbH & Co. KG Region Nord v Region Hannover and others (Case C51/15) has opened up the possibility of a third exemption to the public procurement rules.

The facts

Two separate CAs, the City of Hannover and the Region of Hannover, formed a joint special-purpose association (SPA) to which they delegated responsibility for waste management services in both of the regions.

The SPA was set up for no consideration, governed by public law and was granted the power to impose fees. In terms of expenditure any shortfall in revenue to cover costs was met by the constituent CAs. The formation of the SPA was challenged by a commercial competitor in the waste sector, Remondis.

Remondis argued that the creation of the SPA failed to come within the scope of an in-house Teckal award by failing to meet the required criteria. It argued that the contract award should therefore have been subject to the relevant public procurement regime.

The question considered by the CJEU

The question that the CJEU had to consider was whether the creation of an SPA (such as that in this case), governed by public law and entrusted with tasks previously the responsibility of the CAs, constituted a “public contract”.

The decision

The CJEU ruled that such an SPA should not be regarded as a public contract. The following points were important to its consideration of the question:

• Mere delegation of functions to an SPA did not in itself meet the required conditions to come within the definition of a public contract.
• The contract had not been concluded for pecuniary interest. The CJEU held that an essential element of a public contract was the receipt of a direct economic benefit to the CA(s).
• The provision of funds to the SPA to perform the tasks could not be analysed as payment of a price; rather, it was a logical and necessary consequence of the transfer of tasks.
• Moreover, the reimbursement of cost overruns was not construed as remuneration. Rather, it was a guarantee for third parties.
• The Court also held that the transfer to the SPA must not only involve the responsibilities but also the associated powers. The entity to which the tasks are delegated must have the power to organise the performance of those tasks, to draw up the regulatory framework and have financial autonomy. The CJEU indicated that these matters are one of fact for the national court to verify, underlining that the determination of such situations will be fact-specific and individual to each scenario.

Why is this important?

The judgment of the CJEU appears to have opened up the door to a third possible avenue by which CAs can deliver public services without the need for full procurement under the PCR 2015.

This is of significance at a time when CAs face increasing fiscal pressure and must continue to push for efficiencies and cost savings to deliver public services for the best value.

However, adoption of this approach of delegated responsibilities would require careful consideration before embarking on the exercise. Indeed, this type of arrangement will only be suited to particular circumstances, especially given the need for the CA to give up control of how functions are performed.

Weighted consideration will need to be given to the practicalities of this type of arrangement as well as potential commercial implications. As a final note of caution, CAs must bear in mind that the Remondis decision was based on the specific factual circumstances in the case.

The adoption of similar arrangements would also need to take into account all the nuances of the judgment; CAs must not only carefully consider their options but they must also be appropriately advised.

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.