Joint control of in-house entities: ECJ issues additional guidance on limits to exceptions to public procurement obligations, but are they cumulative? (C-553/15)

In its Judgment of 8 December 2016 in Undis Servizi, C-553/15, EU:C:2016:935, the European Court of Justice (ECJ) offered additional guidance on the limits of the in-house exception to the obligation to tender public contracts subjected to the relevant EU rules, thus offering an extension of its well-known Teckal  case law (C-107/98, EU:C:1999:562) [for general discussion, see A Sanchez-Graells, Public procurement and the EU competition rules, 2nd edn (Oxford, Hart, 2015) 265-272].

Even if the case was decided in relation to Directive 2004/18/EC--or, more precisely, solely on the basis of the Teckal case law--the Undis Judgment may be relevant for the future interpretation of Article 12 of Directive 2014/24/EU and, in particular, regarding the accumulation of the in-house and the public-public cooperation exceptions that it regulates. 

On close reading, Undis Servizi is a rather puzzling case, not because of the answers provided by the ECJ, but due to the way the questions are structured and answered, as well as due to the scarcity of detail in the description of the factual circumstances of the case and the specific claims raised by Undis. It is also surprising that there was no Advocate General Opinion, particularly in view of the specific queries concerning the future interpretation of Art 12 Dir 2014/24 raised by the referring court. The following reflects my understanding of the situation as described by the ECJ--which may however not reflect the reality of the Italian case that triggered the Judgment.

Background and general remarks

The traditional position under the Teckal doctrine has been to exceptionally exempt the direct award of contracts to in-house entities from compliance with the EU rules only where the contracting authority or authorities exercises control over that entity that was similar to the control exercised over its (their) own departments, and where the controlled entity carries out the essential part of its activities with the controlling authority or authorities (or, conversely, where the controlled entity only engages in ancillary or marginal market activities).

On this occasion, the ECJ focused on the second element of the Teckal test (ie in the determination of the intensity of the non-public activities), which has traditionally been understood to require the volume of activities developed by the in-house entity in the market (ie, outside of the perimeter of the relationships covered by the similarity of control of its public shareholders) to be ancillary and marginal. This has now been (somehow) codified in Art 12 Dir 2014/24, which allows the in-house entity to carry out up to 20% of its activities outside the performance of tasks entrusted to it by the controlling contracting authority (or authorities) or by other legal persons controlled by that contracting authority (or authorities).

The need to evaluate the intensity of the public/non-public activities of the controlled entity triggers a difficulty in the calculation of the relevant turnover for the purposes of the assessment of the traditional Teckal requirement that the in-house entity carries out the essential part of its activities with the controlling authority or authorities, as well as the new statutory 80/20 threshold under Art 12 Dir 2014/24. In particular, the issue concerns the interpretation and application of the more developed Carbotermo test, according to which ‘the decisive turnover is that which the undertaking in question achieves pursuant to decisions to award contracts taken by the supervisory authority, including the turnover achieved with users in the implementation of such decisions’ (C‑340/04, EU:C:2006:308, para 65, emphasis added).

This may trigger some difficulties in cases of mixed in-house and public-public cooperation, where a group of contracting authorities decide to engage in public-public cooperation a la Commission v Germany (C-480/06, EU:C:2009:357), and then the leading contracting authority proceeds to an in-house award for the execution of the activity in the common interest to one of its (solely or jointly) controlled entities. In case some of the contracting authorities doe not participate in the (joint) control of the in-house entity, the application of the Carbotermo test raises issues as to whether any payments that may be made to the in-house entity by the non-controlling contracting authority fall within the category of 'turnover achieved by users as a result of the decision to award contracts by the controlling contracting authority' or not. In a nutshell, I think that this was the legal difficulty raised by Undis, even if this is not formulated in so many words and, in fact, the public-public cooperation element of the case is rather fuzzy.

Upon analysis of the circumstances of the Undis case (discussed below), the ECJ determined that, despite the fact that they were provided to other contracting authorities--ie not carried out in the (private) market--some of the activities undertaken by the in-house entity as a result of a direct requirement had to be considered 'activities carried out for third parties' (that is, activities which run against a finding that the controlled entity carries out the essential part of its activities with the controlling authority or authorities). This comes to clarify that the distinction of the relevant turnover by its origin follows a rather a narrow understanding of the 'circle of influence' of the controlling entities over the in-house undertaking--or, in other words, it follows the understanding that the in-house entity needs to be an instrument of (self)organization of the relevant contracting authority or authorities. This is also strongly linked in Undis to the peculiarity that the contracting authority imposing the obligation on the in-house entity was not part of the circle of jointly controlling authorities, but rather an administrative aggregation of those and other contracting authorities (ie a higher administration).

In particular, it is worth stressing that the ECJ ruled that 'in order to determine whether the contractor carries out the essential part of its activity for the contracting authority, including local authorities which are its controlling shareholders, an activity imposed on that contractor by a non-shareholder public authority for the benefit of local authorities which are also not shareholders of that contractor and do not exercise any control over it must not be taken into account, since that activity must be regarded as being carried out for third parties'. The following tries to clarify the reasons for this unsurprising finding, as well as the implications it may (or not) have in the interpretation of Art 12 Dir 2014/24.

UNDIS: Is IT Carbotermo plain and simple?

In Undis, the factual situation was as follows. Cogesa was a wholly public capital company owned by several municipalities of the Abruzzo Region (Italy). On 30 October 2014, the local authorities with shares in Cogesa entered into an agreement to exercise jointly over that body a control similar to that exercised over their own departments. By Integrated Environmental Authorisation No 9/11, the Abruzzo Region required Cogesa, in accordance with the principles of self-sufficiency, proximity and subsidiarity, to treat and recover the urban waste of certain municipalities of that region which were not shareholders of that company (see C-553/15, paras 11-13).

Undis, a potentially interested tenderer in the waste management contracts directly awarded to Cogesa, challenged these schemes on the grounds that the entrustment to Cogesa was contrary to the Teckal doctrine. For our purposes, it is relevant to stress that Undis challenged, in particular, that the criterion of intensity of the public/non-public activities of Cogesa was met, on the basis that 'Cogesa’s financial statements covering the years 2011 to 2013 indicated that only 50% of its overall activity had been performed with shareholder local authorities, given that activities carried out for the benefit of non-shareholder municipalities had to be included in that overall activity' (C-553/15, para 15).

In short, then, the legal issue for the ECJ was to determine whether the direct requirement by the Abruzzo Region (which did not itself hold any shares) for Cogesa to manage waste of municipalities in the region other than its own shareholders could be saved from a finding that it implied an illegal direct award under the EU rules because, even if the criterion of similarity of control was met (which was also disputed), Cogesa was not carrying out the essential part of its activities with its controlling authorities. In that regard, and after stressing that the in-house doctrine must be constructed narrowly because it creates an exception to the general rules and objectives of EU public procurement law, the ECJ determined that

32 ... it is essential that the contractor’s activity be principally devoted to the controlling authority or authorities; the nature of any other activity may only be marginal. In order to determine whether that is the case, the court having jurisdiction must take into account all the facts of the case, both qualitative and quantitative. In that regard, the relevant turnover is the turnover that that contractor achieves pursuant to the award decisions taken by that or those controlling authorities ...
33      The requirement that the person at issue performs the essential part of its activities with the controlling authority or authorities is designed to ensure that Directive 2004/18 remains applicable in the event that an undertaking controlled by one or more authorities is active in the market, and therefore liable to be in competition with other undertakings. An undertaking is not necessarily deprived of freedom of action merely because the decisions concerning it are controlled by the controlling municipal authority or authorities, if it can still carry out a large part of its economic activities with other operators. By contrast, where that undertaking’s services are mostly intended for that authority or those authorities alone, it seems justified that that undertaking should not be subject to the restrictions of Directive 2004/18, since they are in place to preserve a state of competition which, in that case, no longer has any raison d’être ...
34      ... any activity of the contractor which is devoted to persons other than those which control it, namely persons without any relationship of control in regard to that entity, including public authorities, must be regarded as being carried out for the benefit of a third party.
35      Consequently ... the local authorities which are not shareholders of Cogesa must be regarded as third parties. ... there is no control relationship between those local authorities and that company, with the result that the specific internal link between the contracting authority and the contractor, which according to the case-law of the Court justifies the exception for ‘in-house’ awards, is lacking.
36      Therefore, in order to determine whether Cogesa performs the essential part of its activity with the local authorities which control it, the activity which that company devotes to non-shareholder local authorities must be regarded as being carried out for the benefit of third parties. It is for the referring court to examine whether that latter activity can be regarded as merely marginal in comparison with the activity of Cogesa with the controlling local authorities, in accordance with the Court’s case-law on so-called ‘in-house’ awards.
37      That finding cannot be invalidated by the fact ... that Cogesa’s activity carried out for the benefit of the non-shareholder local authorities is imposed by a public authority, which is also not a shareholder of that company. Although it imposed that activity upon Cogesa, it is apparent from the information in the decision to refer that that public authority is not a shareholder of that company and does not exercise any control over it within the meaning of the Court’s case-law on so-called ‘in-house’ awards. In the absence of any control by that public authority, the activity which it imposes on Cogesa must be regarded as an activity carried out for third parties (c-553/15, paras 32-37, references omitted and emphases added).

This seems to me to be a clearly predictable answer to the preliminary reference by the ECJ, and one that is in line with its Teckal-Carbotermo case law, which was however designed for straightforward situations of vertical and direct (sole or joint) control by the contracting authority over the in-house entity. However, the applicability of this test under Art 12 Dir 2014/24 may create problems if the ECJ does not alter its interpretive approach.

Art 12 Dir 2014/24: how do we square the new circle?

Firstly, it seems problematic to consider that the Undis refinement of the Carbotermo test will survive the entry into force of the rules in Dir 2014/24. In that regard, it is necessary to stress that the transition from the simple in-house model in the Teckal case law to the more complex in-house architecture in Dir 2014/24 now allows for inverted and indirect control relationships. In particular, under Art 12(2) Dir 2014/24, the control criterion is deemed to also apply where a controlled legal person which is a contracting authority awards a contract to its controlling contracting authority, or to another legal person controlled by the same contracting authority, provided that there is no direct private capital participation in the legal person being awarded the public contract 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. The situation can be further complicated in cases of public-public cooperation under Art 12(4) Dir 2014/24 that may then incorporate some elements of in-house under Art 12(1) or Art 12(3) Dir 2014/24.

In that regard, it would seem that the functional criterion set by the Undis Judgment--as was the case in Carbotermo--is that the split between essential/ancillary or 80/20 levels of activity needs to follow precisely the contracts which direct award is saved by the in-house rules. Or, in other words, that the essential part of the activities (or 80% of turnover) needs to be achieved within the 'circle of influence' of the controlling entities (and its/their extended 'public-house') and the in-house undertaking.

Secondly, the fact that the Undis Judgment relies rather heavily on the point that the Abruzzo Region did not hold shares in Cogesa is troubling and somehow confusing (see para 37). I struggle to see how the ECJ could have decided that should the Region hold shares in its capital, it could then entrust Cogesa with the waste services of municipalities that did not themselves hold shares, this could be exempted from the EU rules and this would then make that activity not be classified as 'activities carried out for third parties'. Or, in other words, that in the future the ECJ could consider exempted from compliance with Dir 2014/24 the direct awards carried out by a contracting authority for the provision of services for other contracting authorities that do not have joint control over the in-house undertaking (then under Art 12 Dir 2014/24) if the 80/20 turnover split is respected--bearing in mind that the turnover of those activities would not be deemed to derive from 'activities carried out for third parties'.

This would seem to be in stark contrast with the other position held by the ECJ in Cogesa, whereby 'any activity of the contractor which is devoted to persons other than those which control it, namely persons without any relationship of control in regard to that entity, including public authorities, must be regarded as being carried out for the benefit of a third party' (para 34). But this could aim to be saved through a joint or cumulative application of the in-house and public-public exemptions, in particular by stressing that the market activity thresholds in Art 12(1) & (3) for the purposes of the in-house exception refer to the volume of activity of the controlled entity, whereas the threshold in Art 12(4) for the purposes of the public-public cooperation exemption requires that 'the participating contracting authorities perform on the open market less than 20 % of the activities concerned by the cooperation'. In my view, this would be a functionally incorrect reading of the new rules, but one that could carry some weight from a positivistic interpretation.

Ultimately, I guess that my confusion is about the likely way in which the ECJ will see the interaction of the in-house exemption in Art 12(1) to (3) and the public-public exemption of Art 12(4) Dir 2014/24. Read a contrario, para 37 of Undis may be seen as an indication that the accumulation of both exemptions is possible (which I would not favour, from the perspective of avoiding distortions of competition and the exclusion of significant volumes of public expenditure from EU public procurement rules and the ensuing checks and balances). It may also be just a mirage and that the ECJ will keep both exceptions separate in the future following the approach in para 34 of Undis (for which I would vouch). Either way, I also see increasing risks of State aid in these scenarios [on which see also GS Ølykke, "Commission Notice on the notion of state aid as referred to in article 107(1) TFEU - is the conduct of a public procurement procedure sufficient to eliminate the risk of granting state aid?", P.P.L.R. 2016, 5, 197-212]. Definitely a space to watch.