In-house contracts and public-public cooperation issues under Directive 2014/24/EU
Interview with Willem Janssen, Lecturer and PhD Researcher at the Public Procurement Research Centre of Utrecht University and Twente University. His PhD researches the influence of EU public procurement law on the performance of services by cooperating public authorities and the issues of regulating and enforcing the make-or-buy decision of public authorities.
Thank you very much for accepting to be interviewed for the podcast. You were selected a few months ago to come to the conference but couldn’t join us so it’s great to finally be speaking with you.
Exactly. And, I mean, let me begin by thanking you for the opportunity to discuss public-public cooperation with you today. Before we begin, I must say that your podcast series is truly a great project. I think it really personifies what academia is in today’s society. I mean, writing a paper, presenting it amongst peers is simply not sufficient anymore and I think research must be relevant and accessible to society and Twitter, LinkedIn, blogs, they can play an imperative role in that to get your message across. But, truly, your podcasts they take it to the next level and I hope that will continue for a while.
I certainly hope so. And I think this series is going to be twenty episodes long, this is the last one, but thank you very much for the very kind words as we start the podcast. So let’s talk about in-house contracts. Why do you think discussing in-house contracts is important?
Truly, like what I said just then, it’s I think the perfect question to kick off our talk today. as I said, I believe the ‘why’ question is very important and the debate on the in-house doctrine and more particularly public cooperation is important for a number of reasons. But, maybe before we delve into more detailed conversation about the particularities of the Court’s jurisprudence or their codification in the 2014 directives, perhaps it’s good to first briefly outline the basics of this doctrine, which is quite technical, but if you’ll allow me, I will aim to briefly sketch their contours.
I think it’s important to consider that the basic notion of the EU public procurement rules is that they’re only applicable if a contracting authority awards a public contract to a separate entity. Now, this means that a contracting authority itself is always allowed to provide services with its own departments. Now, this type of delivery falls outside the scope of EU public procurement law and outside of the treaties. This would for instance be an IT department of a municipality that creates and maintains its own digital infrastructure, or a waste management department of the same town that picks up your bag of rubbish every Monday morning.
Now, where it becomes difficult though is when things aren’t as straightforward anymore as these situations, so the question really is, and that’s the question that the in-house doctrine raises, how do these rules apply within the public sector when contracting authorities decide to work together for the delivery of their tasks? And this is, I think, where the in-house doctrine starts. It all begins with considering that there’s no express exemption for contracting authorities that want to provide services in cooperation with others. This means that the rules on transparency and equality that we hold dear in the public procurement directives in principle apply to contractual agreements between two contracting authorities or between a contracting authority and a, for instance a privatised authority which was previously part of the contracting authority itself. Now, this also doesn’t mean that all of these contractual agreements are public contracts that must be put up for tender. Even if they qualify as a public contract they can be exempted from a duty to tender. And I think, it’s important to briefly touch upon three of these alternatives that can exempt a public contract from this duty.
The first one is the oldest possibility to do so is to grant an exclusive right to another contracting authority. This is currently vested in Article 11 of the new directives. Now, I won’t go too much detail on this but I mentioned it because it was the inapplicability of this exemption in Teckal in the year ’99 of the last century that made the Court of Justice decide to lay the foundations for the in-house doctrine. In this case, the applicable directive on supply contracts did not contain an exclusive right exemption at the time, which did exist in the directive on public service contracts, but as a consequence the Court decided to introduce two criteria, which would deem the award of a public contract exempt from the scope of EU public procurement law. Now, on the one hand, the awarding authority has to exercise control over the receiving entity. This control has to be similar to the type of control, which it exercises over its own departments. I think this is where you clearly see the link with the discretionary power of public authority to provide services with their own department and, on top of this control criterion, the controlled entity also has to perform the essential part of its activities. So I suppose briefly said formal independence must be trumped by practical dependence. A person at a conference once said “just like the Spice Girls, When Two Become One”. [Pedro laughs] So since then numerous cases before the Court have further clarified these two criteria and I believe what has caused a lot of confusion is the different names that it has gotten. It’s been called quasi in-house, vertical cooperation, or institutionalised exemption. Me myself I prefer ‘institutionalised’ as it actually shows that the cooperation is institutionalised in a separate entity, but I suppose that’s really your own preference.
Now, I’ll quickly go onto the second, or the third really, exemption, or the second exemption that was created by the Court in 2009, when it was faced again with a scenario where it deemed these Teckal criteria inapplicable, but it decided to introduce another type of exemption, in an infringement procedure of the Commission against Germany. Now, in this case, the Court ruled that a contractual agreement can be exempted if the cooperation between contracting authorities which does not rely on a separate entity is governed by considerations and requirements relating to the pursuit of objectives in the public interest and that the principle of equal treatment is respected so that no private undertaking is placed in an advantageous position when compared to its competitor. Now, this has since been referred to as the non-institutionalised exemption or horizontal cooperation.
So, I think, these are the basics of the in-house doctrine and now to get back to your question after what I realise was a fairly long introduction. So, why is it important to discuss these exemptions and why is it a good development that this line of case law has been codified in the directives? Well as I said, there’s a couple of reasons I think. I believe the societal relevance of efficient and effective service provision by contracting authorities which aims to ensure that best value for money is achieved is probably the most important one. I mean this means that rules should enable cooperation on the one hand and ban it if a public contract should be tendered in light of the internal market.
Value for money is not one of the directives of the directive and as you said public-public cooperation contracts are not covered by public procurement law because technically there’s not a contract being awarded, so not going to the market?
No, exactly. You’re absolutely right. I totally agree that on the European level the directives focus on achieving the internal market, however on the national level we do have to deal with these type of arrangements and that they do limit to some extent what contracting authorities can do for society or how they organise their service provision. So, I suppose yes, on a more dogmatic level, I completely agree with you, however on a national implementation level we’re still faced with national goals which are often to achieve best value for money.
Yeah. So, I think, the second reason is that there’s a strong regulatory dilemma, and I suppose that also comes back in what I just previously said, is that in EU public procurement law and the in-house doctrine we aim to strike a balance between on the one hand allowing service provision by contracting authorities who wish to cooperate for the provision of services, and on the other hand we try to achieve the main objective of this field of law like you just said which is to create an internal market for public contracts.
So clarity is very important for that and I think that has often lacked in practice, which is particularly troublesome if we look at the Court’s move to apply these exemptions to other subject matters such as concessions or perhaps even more in the future to limited authorisation schemes. And this is I think why I also welcome the codification of the in-house doctrine in Article 12 which in itself should be seen as a milestone of EU public procurement law and all of this is even more relevant when we consider that we’ve seen a rise in the popularity in many EU member states of these type of cooperations which are often in the form of shared service centres or other types of cooperations.
Going into the directive 2014/24, why do you think that the codification occur and why do you think that we have so many exemptions on Article 12 nowadays?
Yeah, that’s a great question actually. I love looking at the sometimes ungraspable regulatory part of the EU. And sometimes things happen for no reason I think. Sometimes they do fortunately but what’s interesting here though is that, what is very clear is that from the start of the reforms of the internal market from say 2010 when former EU Commissioner, Monty at the time, placed public procurement at the centre of his vision for the future of the single market. The new framework was aimed to improve the efficiency of public spending by simplifying the existing rules and aimed for further flexibility when applying them and I think in light of this it was the legislature of that deemed it important to clarify that the rules were applicable to in-house procurement but what we see in the expansion of these exemptions is that it’s driven by a strong call from contracting authorities all over the EU, who clearly found their way to the Commission and to the European Parliament who wanted more flexibility and space to provide services together. And I think that’s what mostly caused these exemptions to expand.
So changed in terms of public-public cooperation between 2004 and 2014? Because if you look at the way that public-public cooperation is included in the new directive is very different from what we had in 2004, so what do you think changed between these two sets of directives?
So, when they were attempting to codify the Teckal ruling in 2004 it failed obviously. We do now have the inclusion of Article 12 as something unique, in the sense that we didn’t have it before, but of course we had the exclusive right exemption. But perhaps this attempt failed at the time, because either the member states were not able to construct a common wording for this exemption as there had not been a lot of clarifications from the Court following Teckal and, I suppose, this can be explained again by the organisational differences between public-public cooperations across the EU. It would be great actually if everyone did things in the same way which means that making legislation would be a lot easier but, unfortunately, and I suppose luckily we’re not faced with that reality. On the other hand, the European legislature may have been hesitant like I said before to codify the jurisprudence at a stage where many questions and issues had not been decided upon.
So, what changed afterwards? Like I said I think the emphasis of public authorities in their role of contracting authorities wanting to jointly provide services grew substantially and I think because of that the boundaries of EU public procurement law also became more visible. And I suppose it made contracting authorities and competitors on the market who filed proceedings before the Court more aware of those limitations and with that came the call for more flexibility and legal certainty.
And this is interestingly enough also reflected in the case law of the Court of Justice. The Court was very hesitant to accept any of the cases put before it until 2007 when a clear turning point was visible in Tragsa and Coditel when the Court became more willing to accept and expand these exemptions. Now, in the past, it’s been argued that this was partly due to the recognition of regional and local self-governance in the Lisbon Treaty. Of course, this is one example of how strongly the EU is changing and that there’s not so much the EU level, or the member state level anymore, or the level of public authorities, but it’s recognising that national administrations are very complex and that we do have a local and a regional level that is also very important and has a say when it comes to codifying or making legislation.
Where do you stand in the argument about accepting or not private capital in public-public cooperation contracts under Article 12, Paragraph 3, in other words are you siding with the Court of Justice in Coditel or Stadt Halle?
I think, private capital, out of all the criteria that the Court has introduced, is probably the most interesting. I mean, this is really where the state, the market and their relationship really becomes visible and you can clearly see how the Court is struggling to deal with this.
Now, it’s fair to say that the Court has been very hesitant towards private capital and that is somewhat justified. The absolute ban provides absolute legal certainty which is interesting and has some benefits because yes there are risks involved when including private capital participation as the objectives of such parties can be different which would mean that control cannot be exercised anymore, and on the other hand it might favour these undertakings over their competitors which appears to prevent any type of state aid.
However, I do question whether an absolute ban is justified and completely necessary, particularly if one considers the practical and financial need for private capital investments that are very often necessary to be able to provide services at a certain level. And also state aid law if you compare it with this other field of law is generally not as strict. I mean, it requires an assessment of exemptions, even if state aid is found it can still be justified, so this means that I see possibilities to introduce a different approach which would be a presumption of diminished control. So, the existence of private capital would presume that control is diminished and I suppose the subsequent relevant question would then be if this means that decisive control is lost.
Now, this was something that was also advanced by the Advocate-General in Stadt Halle. And this different approach would not necessarily exclude private majority shareholdings but, in that regard, it is unlikely that the minority private holdings would be able to ensure decisive control over an entity. And, I mean in this respect, the higher the level of private participation the more unlikely it would be that control could exist. And it’s not just the actual percentage, I think that should be taken into account after having assessed the applicable national legislative framework, which would need to be considered as that can differ amongst member states in relation to the rights that types of shareholdings give shareholders in practice and if these rights are substantial, which can for instance be the case with veto and blocking rights, decisive control would be unlikely to exist. And, in addition to national legislation, the assessment would also need to include some of the practical determinations of rights in the statutes and overarching agreements which distribute these rights of shareholders and extend the limits of their rights.
So then, if we look at the new directive what’s interesting that the Court is, or the Court, I should say the legislature has in fact done all of this but only for a very limited amount of situations. And this is where only direct private capital can be allowed if it concerns the non-controlling, non-blocking forms of participation which are required by national legislative provisions and conform too with the treaty, and remarkably, which do not exert a decisive influence over the controlled legal person. So, really, what the legislature has done is just introduce this idea in a very small, on a very small scale particularly because it requires this participation to be required by national legislative provisions. I mean, I haven’t checked all of the states but so far what I’ve seen is that a very limited amount of countries, I think particularly France, would be able to benefit from this exemption but in the Netherlands we sure won’t be able to use this exemption.
So, what I’m trying to say, I think the approach of the Court is understandable, but there are certain ways that we can improve this test, particularly if you consider that the whole control test of institutionalised exemption is on a case-by-case approach and to reject private capital to that extent is maybe a bit extreme.
I have to say that on this occasion I think I’m on the extreme side in terms of rejecting private capital, at least where I stand now. The reason for that being that if we allow private capital to benefit from a public-public cooperation contract or services that is being performed, effectively we are allowing someone in the market, in the internal market to benefit from public money, not as state aid but as service provider or at least by owning a part of a service provider that is providing services for the public good for example. But in that sense in my view we’re no longer talking about public-public cooperation, we’re talking about something that involved private capital and as such at least that provision of capital should be subject to EU public procurement rules. Not because them joining the cooperation will in itself generate any public procurement but because at the tail end of the services that are going to be provided effectively we’ve got the procurement or service that is being provided by the state in one way or another.
So if we don’t do that the consequence is, and that’s what I fear about this field, the consequence will be that companies will understand that in certain sectors it may be easier to actually get in into those projects this way instead of actually trying to win them outright as part of public procurement contracts and public procurement competition and that may lead to regulatory capture, that may lead to very close relationships between certain economic operators in the state and I’m not sure in my view and from my perspective that we would be much better off in the end.
So I’m a little bit cagey about allowing private capital to be allowed into a public-public cooperation so I fully understand why we should have this exemption in terms of allowing contracting authorities to cooperate, I mean that should be obviously the case, but I’m more and more reserved and I’ve got more reservations about allowing private capital in in these projects. Because even if you apply let’s say the control test, even if you say that the economic operator, the private element of the public-public cooperation contract does not have a control, what if if you have an arrangement where let’s say most of the profits are derived from that public-public cooperation for the private contractor, you don’t have any control, just the terms of the agreement?
You raised some very valid points I think. When I started answering your previous question, what makes it so difficult is when you start mixing public money with private interests and I totally agree with all the points you raise. What I think is going to be very difficult for future things to come, let me just say I think what’s happened now in the directive to allow for private capital only in certain situations I think that’s very inconsistent. I mean it shows that there wasn’t really a vision behind implementing such a thing. I think it’s clearly been put in by one, or a couple of member states, that wanted to benefit from this so, but if you then consider more broadly on what the benefits of private capital could be for the performance of or the realisation of certain projects I think still that the Court’s approach is too strict.
And I think some of the points you raised, I mean, if the benefits or if the disadvantages of including private capital are really that strong there’s always the option to tender that type of capital participation to still create some type of competition to open it up to the market, so actually the participation would still be in need of obliging with the public procurement rules which I think would solve a lot of the issues that you raise.
But there’s no obligation in doing that. So there’s no obligation in privatising, because effectively you’re talking about a partial privatisation of a service, there’s no obligation in tendering. And I agree with you in that I think that’s one of the limitations we have in terms of public procurement rules is yes public procurement only deals with actually expenditures or expenses made by the state, so buying something, it does not deal with public-private relationships that may influence internal market if what is happening is money coming in the other direction, so money coming into the state.
No, it just makes me realise how interesting public procurement really is, I suppose. Because we are fortunate enough to be practicing in or studying a certain field of law that touches upon so many interesting subjects in society even though the actual content of public procurement procedures as such and their focus is sometimes limited and, but it does touch upon a lot of other fields of law, a lot of societal relevant issues which makes it very exciting to go to work every day I find.
One final question. How can we solve the legal uncertainties arising from Article 12, Paragraph 4? So what would you do to improve Article 12, Paragraph 4 of the directive?
Ooh, you’ve left the biggest and toughest question for last! [Laughter] I think there’s a lot of people that have looked at this exemption, a lot of people have discussed it and it’s still a very difficult exemption to grasp. And, I suppose, the newly introduced activities criterion appears to be the least troublesome, but it’s mostly because of the use of terms such as ‘public services governed by considerations relating to the public interest’ that cause difficulties and leaves open much room for interpretation. And because these terms differ with regard to national and cultural traditions or at least the way it’s been defined over the years, it’s nearly impossible for the Court to give a clear-cut answer.
Now, I think that practical cases before the Court will undoubtedly still clarify these criteria but only on a case-by-case basis, such as what happened when the Court clarified that cleaning services were not in the public interest in the case of Piepenbrock. But still, there’s a lot of open questions in this regard which I hope that the Court will address in the future. So say for instance the Court used to emphasise that no private provider can be placed in a position of competitive advantage and we cannot find this anymore in the codified criteria so it can be questioned what the actual relevance of this still is. And, more specifically, I think, and that’s where a bit of fundamental reasoning lacks, is how a cooperation, or at least I wonder, which can have private capital participation in the participating bodies and which is active on the market for 20% of its activities can still be governed by considerations relating to the public interest?
It’s a very difficult question and let’s hope that the cases before the Court will come, actually address some, and there’s more of these, uncertainties. And generally speaking, more attention should be paid in Europe on the European level and on the national level to identify the type of services that can rely on these exemptions, or at least how we come to a conclusion that something is in the general interest. This is a very old debate but it’s still so relevant as we still find it in much legislation.
I think, on a more broader level, the potential extensive application of these exemptions in practice raises more fundamental questions of how we approach the in-house doctrine. Mostly because the focus of these exemptions has always been of an organisational nature, how a service is organised depicts the influence of EU public procurement law. This would bring me to my push to have more attention to the phase prior to procurement in which a public authority decides which type of services it deems best for society as that is where the economic and societal relevance lies. And don’t get me wrong, this is a very difficult area to think about regulation, to think about enforcement, to think about how do we improve this, and I think this is also partially why it’s currently a national matter. It’s often left still unregulated also on the national level but definitely on the EU level because it delves so deep into the roots of the organisation of many member states.
Article 345 of the Treaty, the Protocol (nr. 26) on services of general interest, recognise firmly that national member states have held the discretion to define these services. But, nonetheless, the effects of in-house performance on the market are not necessarily taken into account very often. Innovation, sustainability can be hampered by in-house performance, but it can also be advanced by in-house performance. And what’s probably even more predominant and important from a legal perspective is that third parties have no say in this decision making process before procurement or in-house performance occurs, whereas their interests are often affected by the internalisation of a public contract which means there’s a lack of foreseeability as well.
Okay. I think that’s a great way to end the programme. Willem, thank you very much for accepting the invitation to come to the show and for the last half an hour.
Perfect. It’s been an absolute pleasure. Good luck with the rest of the series.
Thank you. You can find me at my blog Telles.eu or on Twitter where I use two handles, @Detig for general discussion and @publicprocure for public procurement related topics. As ever I’m very grateful for the support of the British Academy Rising Star Engagement Awards which made this series possible.