It Won't Last Long? CJEU takes a functional, competition-based approach to in-house provision that questoins the criteria in the new EU procurement directives (C-574/12)

In its Judgment in Centro Hospitalar de Setúbal and SUCH, C-574/12, EU:C:2014:2004, the Court of Justice of the EU (CJEU) has issued a new decision concerned with the in-house exception to the application of the EU public procurement rules (for a previous summary of the doctrine, see here). The Judgment is concerned with Directive 2004/18, but the findings are already relevant for the interpretation of the revised in-house exception in Directive 2014/24.
In the case at hand, a Portuguese hospital awarded a services contract for the provision of meals to patients and staff to a non-profit organisation (SUCH) which membership included public entities (such as other hospitals) as well as private social solidarity institutions carrying out non-profit activities. The hospital considered it an in-house provision situation and, relying in the Teckal doctrine (recently revisited and affirmed by the CJEU, see here), did not comply with the transparency obligations of Directive 2004/18.

However, a competitor of SUCH challenged the award on the basis that the Hospital did not exercise a control over the non-profit organisation that qualified for such an exemption, particularly according to the requirements of Stadt Halle and RPL Lochau, C-26/03, EU:C:2005:5, according to which "the investment, however small, of a private undertaking in the capital of an undertaking of which the awarding authority also forms part prevents, in any event, the awarding authority from being able to exercise a control over it similar to that which it exercises over its own departments" (C-574/12, at para 13).
The main point of law for the CJEU to interpret was, consequently, whether only participation of private for profit undertakings excluded the in-house exception or if, on the contrary, participation of any other sort of non-profit entities triggered the same effect. Following a commendable functional approach to the in-house exception based on the avoidance of distortions of competition, the CJEU opted for the second solution. Indeed, according to the C. H. de Setúbal and SUCH Judgment,
35 […] it must be pointed out that the exception concerning the in-house awards is based on an approach according to which, in such cases, the awarding public authority can be regarded as using its own resources in order to accomplish its tasks in the public interest.
36 One of the reasons which led the Court to the findings established in the judgment in Stadt Halle [...] was based not on the legal form of the private entities forming part of the contractor or on their commercial purpose, but on the fact that those entities obeyed considerations particular to their private interests, which were different in nature from that of the objectives of public interest pursued by the awarding authority. For that reason, that authority could not exercise control over the contractor similar to that which it exercised over its own services (see, to that effect, Stadt Halle [...] paragraphs 49 and 50).
37 Having regard to the fact, pointed out by the referring court, that SUCH is a non-profit association and the private partners which formed part of that association at the time of the award of the contract at issue in the main proceedings were private social solidarity institutions, all of them also non-profit, it must be noted that the fact that the Court referred, in the judgment in Stadt Halle [...], to concepts such as that of ‘undertaking’ or ‘share capital’ is due to the specific facts of the case which gave rise to that judgment and does not mean that the Court intended to restrict its findings to those cases alone where commercial for-profit undertakings form part of the contractor.
38 Another reason which led the Court to the findings in the judgment in Stadt Halle [...] is that the direct award of a contract would offer a private undertaking with a capital presence in that contractor an advantage over its competitors (see, to that effect, Stadt Halle [...] paragraph 51).
39 In the main proceedings, SUCH’s private partners pursue interests and objectives which, however positive they may be from a social point of view, are different in nature from the public interest objectives pursued by the awarding authorities which are at the same time partners of SUCH.
40 In addition, as the Advocate General noted in point 37 of his Opinion, the private partners of SUCH, despite their status as social solidarity institutions carrying out non-profit activities, are not barred from engaging in economic activity in competition with other economic operators. In consequence, the direct award of a contract to SUCH is likely to offer an advantage for the private partners over their competitors (C-574/12, at paras 35-40, emphasis added).
In my view, the CJEU has applied good logic and has incorporated the likely distortions of competition in the market for the provision of meals that could result from non-profit partners of SUCH having preferential (direct) access to the supply to the public sector. This functional approach is economically sound and deserves all praise.

The only difficulty that the C. H. de Setúbal and SUCH Judgment creates is its compatibility/coordination with the new rules under Art 12(1)(c) and 12(3)(c) of Directive 2014/24, which recast the in-house provision exception but modify the Teckal/Stadt Halle doctrine by relaxing the requirement that there is no private participation whatsoever--so that, in the future, the in-house exception can be applied provided "there is no direct private capital participation in the controlled legal person with the exception of non-controlling and non-blocking forms of private capital participation required by national legislative provisions, in conformity with the Treaties, which do not exert a decisive influence on the controlled legal person" (emphasis added).
The explanation provided for such a change in recital (32) of Directive 2014/24 is as follows:
The exemption should not extend to situations where there is direct participation by a private economic operator in the capital of the controlled legal person since, in such circumstances, the award of a public contract without a competitive procedure would provide the private economic operator with a capital participation in the controlled legal person an undue advantage over its competitors. However, in view of the particular characteristics of public bodies with compulsory membership, such as organisations responsible for the management or exercise of certain public services, this should not apply in cases where the participation of specific private economic operators in the capital of the controlled legal person is made compulsory by a national legislative provision in conformity with the Treaties, provided that such participation is non-controlling and non-blocking and does not confer a decisive influence on the decisions of the controlled legal person. It should further be clarified that the decisive element is only the direct private participation in the controlled legal person. Therefore, where there is private capital participation in the controlling contracting authority or in the controlling contracting authorities, this does not preclude the award of public contracts to the controlled legal person, without applying the procedures provided for by this Directive as such participations do not adversely affect competition between private economic operators (emphasis added).
These two justifications for the relaxation of the Teckal/Stadt Halle/SUCH  absolute prohibition of private participation will prove controversial, given that they can give rise to situations where an effective market advantage is derived from the (apparent) in-house award. Indeed, the drafting of the condition in Art 12(1)(c) and 12(3)(c) of Directive 2014/24 seems quite open and it is possible to anticipate the need to conduct an assessment of proportionality between the objectives pursued by the national law imposing private participation and the carve-out that it creates in the application of the EU procurement rules. It will then be for the CJEU to either stick to its functional, competition-based approach to the in-house doctrine, or to defer to the quite express will of the EU legislator (fundamentally, in this case, the Member States). I would personally want it to tilt the balance in favour of the first option, but I can see the difficulties now that the text of the Directive is so clear.