Background

Once again the Court of Justice of the European Union (CJEU) has been asked to consider the extent to which land development schemes fall within the scope of the public procurement rules. The application of the procurement rules to town centre development agreements, regeneration projects, planning and infrastructure agreements following the Roanne case (Case C-220/05 18 January 2007) delayed many urban regeneration schemes in the UK while public bodies considered whether an OJ competition process was needed.

However, the case of Helmut Müller (Case C-451/08, 25 March 2010) marked a retreat from an onerous interpretation of the rule.

Most recently, in September 2010, the Advocate General in Commission v Spain warned the CJEU "not to over-stretch the meaning of certain criteria ...for the sake of fitting the present arrangement within the scope of the public procurement rules".

Helmut Müller provided some much needed guidance as to when a development agreement will be caught by the procurement rules. This decision led the OGC to issue updated and additional guidance on development agreements and planning agreements (Information Note 12/10 30 June 2010). The note helpfully summarises the key factors in determining the existence of a public works or works concession contract:

  • are the works required or specified by a contracting authority?
  • is there an enforceable obligation in writing on a contractor to carry out the works?
  • is there some pecuniary interest, cash or otherwise, for carrying out the works?

If the answer to all these questions is "yes" then it is likely there is a public works or works concession contract and the procurement rules will apply. The CJEU pointed out in Helmut Müller that the sale by a public authority of undeveloped land or land already built on is not a public works contract. A public works contract requires the authority to assume the position of purchaser not seller and the objective of the contract must be the execution of works.

The court went on to say that the pecuniary nature of the contract referred to in the third limb of the test means that the authority as purchaser receives a service in return for consideration. Such a service must by its nature be of direct economic benefit to the authority. The consequence has been to limit the application of the procurement rules to contracts where the authority:

  • is to become the owner of the works, or
  • is to hold a legal right over the use of the works in order that they can be made available to the public, or
  • derives economic advantages from the future use or transfer of the works, in the fact that it contributed financially to the realisation of the works, or in the assumption of risks should the works become an economic failure.

The court added that this direct economic benefit test is not satisfied by the more exercise, in the public interest, of urban-planning powers.

Each of these cases recognises the importance of the authority as a purchaser and not as a vendor. This is fundamental to a public works or works concession treatment. This principle has been underlined by the Advocate General in Commission v Spain.

Commission v Spain - the facts

Infringement proceedings were brought by the European Commission against Spain claiming that the Spanish Government had failed to fulfil its obligations under the Procurement Directives in relation to the procedure for the award of Integrated Action Programmes (IAPs) in Valencia.

Urban development on more than one parcel of land in Valencia takes place under the integrated action regime. The IAP defines the works to be carried out, timetable and technical/financial terms. The works cover infrastructure, the public realm and, possibly, contributions to the local authority and social housing. IAPs can be carried out directly or indirectly. Under the direct procedure, works are financed by public funds and managed by the local authority. Under the indirect management procedure, the local authority chooses a developer, following a public consultation, and approves or modifies the IAP. The developer is paid by receiving either land or cash from the landowners.

The IAP can be initiated by the local authority or at the request of a third party, irrespective of whether it owns the land concerned. The landowner can participate voluntarily (receiving developed land and/or cash) or be subject to compulsory purchase. A developer initiating the IAP is at an advantage when compared with later tenderers for the IAP.

AG's opinion

In considering whether indirect IAPs should be classified as public contracts subject to the procurement rules, the issue in dispute was whether the local authority conferred a pecuniary interest within the meaning of the Directives.

The Advocate General concluded that for pecuniary interest to exist in relation to the works concerned, the contracting authority must bear some economic detriment. This will either be by accepting a payment obligation itself or by suffering a loss of income or resources which would otherwise be due to the contracting authority.

This is based on the aim of public procurement law being to ensure that when public money is spent there is no distortion of competition.

In the context of the IAPs, the developer financed the costs of the development and was reimbursed by the landowners, as required by the local authority. As such, the landowner pays for the public works and no pecuniary interest passes from the contracting authority to the contractor.

As the Advocate General pointed out, this enabled private initiative to drive urban development within the confines of the public regulation of land use and development. The Advocate General urged the court not to overstretch the public procurement rules in a way which would preclude this form of private initiative and thus frustrate planning objectives.

Implications

The Advocate General's opinion focuses on the question of what constitutes "pecuniary interest" for the purpose of public procurement law. As such, he focuses on whether the authority is actually purchasing works or services from the developer.

It emphasises that pecuniary interest will only exist where there is a "mutually binding relationship in the nature of an exchange of performance with a tangible economic value between the contracting authority and the economic operators executing the works or services in question".

Although the AG's opinion does not consider the situation in which an authority transfers or grants an interest in land to a developer, the AG is clear that pecuniary interest must move from the authority to the developer. The AG also confirmed his agreement with the decision in Helmut Müller that the exercise of mere statutory planning powers does not amount to pecuniary interest.

Unfortunately, the AG's opinion does not address some of the more complex and interesting questions left unanswered by the CJEU in Helmut Müller.

In particular, the extent to which the holding by an authority of a legal right over the use of the works to make them available in the future for the public will constitute a direct economic benefit which indicates a pecuniary transaction. For example, in relation to the transfer by a developer to an authority of public open spaces and nomination rights to social housing.

Similarly, the extent to which economic advantages to be derived from the future use or transfer of the works could indicate a direct economic benefit to the authority and evidence the requisite transfer of pecuniary interest. Examples might be restrictions on user or alienation without the authority's consent. Likewise, to what extent will the assumption of risk by the authority in the works point to a pecuniary interest? Does this include a side-by-side income sharing rent in contrast to a guaranteed ground rent with or without a review?

What is sure is that this saga has a long way to go yet before these uncertainties are finally resolved.