Public Contracts Regulations 2015 - Regulation 12

Regulation 12 - Public contracts between entities within the public sector

Regulation 12 transposes Article 12 of Directive 2014/24/EU regulating how contracting authorities can award contracts to fellow contracting authorities without having to apply the bulk of procurement substantive rules. Directive 2004/18/EC did not have a similar exception and Article 12/Regulation 12 are the first attempt to put into statute the Teckal ruling by the CJEU (Case C-107/98 Teckal Srl v Comune di Viano, Azienda Gas-Acqua Consorziale di Reggio Emilia).

The logic of this exception is to facilitate public-public cooperation between different public sector legal persons and has been a contentious topic for years. I am sure Albert will find a competition angle to this and its implications in the market, as contracting authorities may effectively award contracts to a poor supplier in contrast to what is expected from public procurement.

This Regulation is quite extensive and technical, containing three main exceptions to the rule of Part 2:

  • Where the awarding contracting authority controls the legal person and vice-versa;
  • Where there is joint control by various contracting authorities;
  • Where the contract is between two contracting authorities;

Where the awarding contracting authority controls the legal person and vice-versa

Regulation 12 establishes three cumulative tests to be fulfilled. First, the control exercised must be similar to departmental control, thus implying some flexibility on the interpretation of this requirement. Paragraph 3 provides further details on the control threshold, effectively stating that the controlling authority needs to have decisive influence the strategic direction and significant decisions. A seat at the board will not be enough, but controlling a majority of board members will probably suffice.

Second, 80% of the activities of the controlled entity need to be for performing tasks set by the controlling authority. This second requirement establishes an important limitation on the idea of contracting authorities establishing legal entities to provide services on a "parallel market" (ie public-public, outside procurement rules). Paragraph 8 establishes how activities should be measured, establishing that turnover or an appropriate figure such as costs for the last three year is to be used, with a fall-back provision in case this is not possible. This requirement does not explicitly apply when the contract is being awarded to the controlling authority, but is inferred nonetheless.

Third, there is no private capital involved or where involved said capital has no decisive influence on the controlled entity.

This exception covers a number of different bodies that have been used across the EU to fulfil public tasks. In Portugal and Spain for example it was quite common 20 years ago for local authorities to create public owned companies (which were not subject to public sector pay caps...) as means to pursue the general interest. I would say they are the prototypical example of body covered by this first exception.

Where there is joint control by various contracting authorities

The second exception provided by Regulation 12 is similar to the first and contains a similar set of requirements: control; 80% activity limit; no controlling interest by private capital. The key difference here is the control requirement which still needs to be present albeit shared by various contracting authorities. A good example for this exception would be the creation of waste management companies under shared services model that are controlled by a group of local councils.

Where the contract is between two contracting authorities

The final exception provided for in this Regulation is for cooperation contracts between two contracting authorities. This exception contains its own list of requirements to fulfil. First, the aim of the contract must ensure the provision of public services and achieving objectives they have in common. This reference to public services thus immediately excludes any collaboration on supplies and works.

Second, the cooperation between authorities must follow only considerations related to the public interest. In my view, this leaves in the contracting authorities the burden of proof that their arrangement pursues the public interest, although I find it far-fetched courts would second guess the definition of public interest put forward by contracting authorities.

Third, the contracting authorities perform less than 20% of the activities covered by the arrangement in the open market. I am not sure I fully understand this requirement. The way I interpret this provision is that the exception will only be available if the arrangement covers over 80% of those activities by the councils. In other words, they can only procure in the open market up to 20% of activities, or else the arrangement is deemed illegal and they will have to procure 100% in the open market.