Transfer of competences and the “Teckal” in-house exception

European Court of Justice decision in C-328/19 Porin Kaupunki[1]

In this case, the Court of Justice of the European Union (ECJ) considered whether arrangements for the "transfer of competences" between contracting authorities fell outside EU law in general and the public procurement Directives in particular.  The ECJ also looked at whether the tests permitting use of the Teckal in-house exception were satisfied in circumstances where the contracting authority to whom competences had been transferred used a company wholly owned by itself to deliver services for the benefit of other contracting authorities. In that context, the ECJ emphasised the importance of ensuring that an in-house entity does not become market oriented.

Facts

The facts in this case are complex and this is a very brief summary to provide some context for the judgment. Under Finnish law, local authorities are permitted to enter into cooperation agreements for the joint performance of their public service tasks. They may also fully transfer the responsibility for performance of their public service tasks (their competence) to one of the other participating local authorities which then has legal, organisational and financial autonomy concerning the delivery of the services. This is referred to as the “responsible commune” model.

Five local authorities in Finland set up a Public Transport Cooperation Agreement (“PTCA”). Four of the authorities transferred their responsibilities for provision of public transport in their areas to the fifth authority, the city of Pori which became the “responsible commune” for these services. Each local authority paid for the cost of the services, calculated according to rules determined by a public transport commission on which each of them was represented.

At about the same time, four local authorities in the region, three of which were parties to the PTCA, set up a Health and Social Services Cooperation Agreement (HSSCA). Three of the parties to the HSSCA transferred their competences for the provision of health and social services to the city of Pori, which became the “responsible commune”. Costs are divided according to use of the health and social care services, so that each local authority pays the real cost of services used by its own population and residents for whom it is responsible.

The committee responsible for the day to day organisation of the health and social services under the HSCCA made a direct in-house award of a contract for the transport of people with disabilities to “PL”, a wholly owned company of the city of Pori. The services were to be delivered across the region covered by the HSCCA. PL already provided other transport services in the region covered by the PTCA. A local transport provider challenged the decision to award the contract for the transport of people with disabilities direct, without a competition.

Transfer of competences

ECJ case law has made it clear on a number of occasions that the internal organisation of a Member State does not fall under EU law. This is in line with Article 4(2) of the Treaty on the EU which requires the EU to respect the “national identities of Member States, inherent in their fundamental structures, political and constitutional, inclusive of regional and self-government” as well as respecting essential State functions.

In an earlier case, Remondis v Hannover,[2] the ECJ confirmed that, in certain circumstances, a transfer of competences is a matter of internal State organisation falling outside EU law and the procurement rules. However, it set out stringent conditions which must be met in order for this exemption to apply. In Porin Kaupunki the ECJ confirmed this approach. It concluded that the “responsible commune” model under Finnish law may be an exempt arrangement, subject to meeting tightly drawn conditions, for example, the power to organise the tasks and establish the regulatory framework lies with the responsible commune, which must also have financial autonomy in respect of the tasks transferred. The authority that transfers the competence cannot retain primary responsibility for those tasks nor can it reserve financial control or rights concerning key decisions. A transfer of competences assumes that the newly competent authority exercises the jurisdiction autonomously and under its own responsibility. The ECJ went on to comment that an authority which transfers competences may retain some limited influence, which can be exercised, for example through an organisation such as a representative body.

The 2004 Public Sector Directive, which was the EU procurement legislation considered in both  Remondis and Porin Kaupunki, was silent on whether or not such arrangements were exempt. The 2014 Public Sector Directive now specifically confirms, at article 1 (6), that the Directive does not affect matters of internal organisation of a Member State, which may include transfer of powers and responsibilities for the performance of public tasks. This case provides useful commentary on what that means in practice.

“Teckal” in-house exception and impact on the market

The in-house exception permits the award of a contract, without competition, by one or more contracting authorities to a separate legal entity which satisfies the “in-house” tests.  The in-house tests were codified in article 12 of the 2014 Public Sector Directive. This case was decided on the basis of the law prior to codification of the exception when there were, broadly, two tests which needed to be satisfied for the in-house exception to apply. First, the “control” test required the contracting authority to exercise power over the in-house entity which was analogous to control it exercised over its own departments. Second, the “activity” test required that the in-house entity carried out the “essential” part of its activities for the controlling authority/ies.[3]

In this case, it was claimed that the in-house exception did not apply. This was because PL was wholly owned by the city of Pori, not jointly owned by the authorities to which it delivered services and in calculating PL’s “essential” activity only activity for the benefit of the city of Pori, and not for the other authorities, was relevant. The activity carried out by PL for the city of Pori was not at a sufficient level to satisfy the test.

Control test: the ECJ confirmed established case law that where a public authority holds, alone or with other public authorities, all of the share capital in the in-house entity,  that tends to indicate generally, but not conclusively, that the contracting authority exercises over that entity control similar to that which it exercises over its own departments. The ECJ noted, however, that ownership of share capital is not the only determining factor in deciding whether the control test is satisfied. The ECJ was satisfied, on the facts of the case,  that the city of Pori was the contracting authority for the purpose of the delivery of all of the services which were the subject of the cooperation arrangements and it could use its wholly owned company, PL, to deliver the services. The ECJ also noted that the other local authorities had the possibility, through the governance structures, to exercise control and influence over important decisions of PL.

Activity test and market orientation: the ECJ confirmed that all of PL’s activities and turnover derived from the cooperation agreements, not just activities for the direct benefit of the city of Pori, were relevant to the calculation of level of activity. The ECJ also commented on an underlying aim of the activity test: to ensure that when a business which is controlled by one or more contracting authorities becomes market oriented then the public procurement rules should apply to contracts awarded. The ECJ made particular note of the fact that the cooperation agreements contained a number of safeguards the effect of which are to ensure that the in-house entity does not become market oriented and it remains under the necessary levels of control.

For more information please contact Emily Heard or Susie Smith.

[1] C-328/19 Porin Kaupunki ECLI:EU:C:2020:483

[2] See our case note on Remondis v Hannover

[3] When this second test was codified in art.12 Public Sector Directive 2014/Public Contracts Regulations reg. 12, the requirement became that the entity carries out more than 80% of its activities for the controlling contracting authority/ies or for other legal persons controlled by that contracting authority.