A recent European Court of Justice (“ECJ”) case has thrown up a novel legal issue which will be of interest to all public authorities which have established private companies.
The case itself is a judgement of 5 October 2017, following a request for a preliminary ruling from a regional court in Lithuania to the ECJ. The question submitted was essentially should a private company established by the Lithuanian state railway company, which independently carried out business in the private sector (in this case that business being providing rolling stock repair services to the state railway company) be considered a contracting authority.
The ECJ was also asked this question on the basis that less than 10% of the revenue from the subsidiary came from its services to the state railway? The question for the court was whether under Article 1(9) of Directive 2004/18, the subsidiary was a contracting authority, within the meaning of the Directive, in both these scenarios.
The ECJ considered the proper question for itself in light of the Directive was whether the subsidiary constituted a "body established for the specific purpose of meeting needs in the general interest, not having an industrial or commercial character”, as specified by Article 1(9) of Directive 2004/18.
After examination, the ECJ considered that the subsidiary may well be a contracting authority, though the facts in this case were for the referring Lithuanian court to decide. The basis of its reasoning was that the evidence suggested that its service to the state railway was the main reason the subsidiary had been created, even though revenues now came primarily from other sources. Therefore its founding aim had not been the accruement of profits but rather the provision of a service to the state railway, another contracting authority. Therefore the second question as to the 90%/10% split of profits was irrelevant in consideration of whether the company was a public body or not, the only important consideration was the intention at foundation of the subsidiary.
Contracting authorities should bear this case in mind when forming subsidiaries, particularly if they do not wish for them to se subject to the EU rules governing contracting authorities such as for procurement. They should be particularly careful as to the aims of the subsidiaries. If the subsidiary in question was formed purely for purposes of independent profit and to compete on the open market, and then perhaps later won business from the contracting authority through competitive bidding, the answer from the ECJ may well have been different.
LitSpecMet UAB v Vilniaus Iokomotyvu remonto depas UAB and another  EUECJ C-567/15 (5 October 2017).