Public - public contracts

On 26 August 2015, the Crown Commercial Service issued the guidance on "Public/Public" contracts ("Guidance") set out in Regulation 12 of the Public Contracts Regulations 2015 ("PCR 2015"). The Guidance covers new provisions concerning contracts between public bodies and re-emphasises the principles set by the Teckal and Hamburg cases, and can be accessed here: Guidance on Public/Public contracts

The general position and European law

Regulation 12 of PCR 2015, which came into force on the 26 February 2015, includes provisions that govern the contractual relationship between one public body and another, otherwise known as "Public/Public" contracts. The general position is that where contracting authorities (as defined in PCR 2015) enter into collaborative arrangements with each other or other public bodies, they are subject to the provisions of PCR 2015. However, European case law led to the development of two important exceptions which have been furthered by Directive 2004/18/EC on Public Procurement as incorporated in  Regulation 12 of PCR 2015.

The Teckal[1] case - "in house awards"

This case sets out the circumstances where vertical contracts (i.e. between a contracting authority and separate legal body that the contracting authority controls) can be excluded from public procurement rules. If either the contracting authority exercises a control similar to that which it exercises over its own departments, or the person involved carries out the essential part of their activities within the controlling authority, then the contract falls outside of the public procurement rules. There is also a third requirement of no private sector capital participation which was laid down in the case of Stadt Halle v TREA Leuna.[2]

These principles have now been codified under Regulation 12(1) PCR 2015, which states that the exclusion will apply where a public authority awards a contract to a legal entity which:

  • It controls in a manner similar to the control it exercises over its own departments.
  • Provides 80% or more of its services to the "parent" public authority or by other legal persons controlled by that public authority.
  • Has no direct private sector capital participation, with the exception of "non-controlling" and "non-blocking" forms of private capital participation required by national legislation which do no exert a decisive influence on the controlled legal person.

Provided all three requirements above are satisfied, an agreement between the "parent" contracting authority and the legal entity set up by it will fall outside of the public procurement rules  on account of being an "in house" arrangement, as opposed to a contract with an external provider.

Regulation 12(2) PCR 2015 sets out another important provision. It states that one controlled body can award a contract to another controlled body where both of them are owned by the same contracting authority or where the controlled body awards a contract to its controlling contracting authority owner. This has become known as the "reverse Teckal exemption."

Regulations 12 (4) to (6) PCR 2015 set out the conditions where a contracting authority may award a public contract directly to a legal person over which it exercises joint control with other contracting authorities, even though it the control it exercises over the legal person in its own capacity is not such as it exercises on its own departments. However, the following requirements must be fulfilled in order for the joint control exemption to apply:

  • The contracting authority exercises control jointly with other contracting authorities over the legal person which is similar to that which it exercises over its own departments (as per Regulation 12 (5), "joint control" is exercised where (i) "the decision-making bodies of the controlled legal person are composed of representatives of all contracting authorities", (ii) "those contracting authorities are able to jointly exert decisive influence over the strategic objectives and significant decisions of the controlled legal person", and (iii) the controlled legal person does not pursue any interests which are contrary to those of the controlling contracting authorities).
  • More than 80% of the activities of that legal person are carried out in the performance of tasks entrusted to it by the controlling contracting authorities or by other legal persons controlled by the same contracting authorities.
  • There is no direct capital participation in the controlled legal person, with the exception of "non-controlling" and "non-blocking" forms of private capital participation required by national legislation which do no exert a decisive influence on the controlled legal person.

The Hamburg case[3] - "inter-authority" co-operation

This case concerns horizontal arrangements between contracting authorities co-operating with one another to provide the public services that they have to perform with the aim of achieving common objectives. In this instance four authorities in Hamburg came to an agreement in relation to a waste treatment facility. In order to fall under the public procurement exemption, the ECJ found that arrangements must be genuinely co-operative and non-commercial in nature. This principle has now been codified under Regulation 12(7) PCR 2015, and sets out the conditions that must be satisfied for the exclusion to apply:

  • The participating contracting authorities co-operate to perform public services they have to provide, with a view to achieving common objectives.
  • The co-operation is for public interest reasons only.
  • The participating contracting authorities perform less than 20% of the activities concerned by the co-operation on the open market.

Addressing frequently asked questions

The PCR guidance note provides clarification on several issues: 

What constitutes "control" of an organization?

Control is established when an organisation exercises control over both the "strategic objectives" and "significant decisions" of an organisation. There may be different layers of control; for example, organization A exercises control over organization B, who in turn is controlled by a contracting authority.

How is the percentage of activities calculated?

The 80% or more of services needed to establish the "in house" exception, and 20% for the co-operation rule, are calculated by taking into account the previous three years' turnover, or an alternative activity based measure, such as three years of costs connected with services, supply or works.

Can an exemption be relied upon where some of the funding is supplied through private capital?

The exemptions do not extend to situations where there is direct participation by a private sector operator in the capital of a supplying organization, as this would give the private sector operator an advantage over its competitors. However, if the private capital is made compulsorily by national legislation and is "non-controlling" and "non-blocking" then the exemption can apply.

Does competition between contracting authorities imply a particular legal form?

The guidance clarifies that co-operation can take any legal form. It should centre around the concept of co-operation but all of the contracting authorities are not required to assume the performance of main contractual obligations. Instead they should commit to the performance of the public service in question.