Following the Stadt Halle, Commission v Austria and Parking Brixen cases last year the European Court of Justice ("ECJ") has provided further clarification on in-house awards in Carbotermo SpA v Comune di Busto Arsizio, AGESP SpA C-340/04.

The ruling discusses the tests (set down some years ago in the Teckal case) that must be met by a contracting authority before it can sidestep the public procurement rules and award an 'in-house' award, e.g., to its own services divisions.

The Teckal case held that the following two conditions must be met for an award to be classed as in-house:

(i) the procuring entity must exercise "a control which is similar to that which it exercises over its own departments" over the supplying entity; and

(ii) the supplying entity must carry out "the essential part of its activities with the controlling local authority or authorities".

Both of these tests must be satisfied, otherwise any contracts awarded to the service provider will first have to be competitively tendered under the procurement rules.

In the Carbotermo case, the service provider (AGSEP) was a wholly owned subsidiary of another entity (AGSEP Holding) the principal shareholder of which was the relevant contracting authority (the Comune di Busto Arsizio).  Nonetheless, the Court held that the mere fact that the share capital of the service provider was entirely owned by the public sector was not sufficient to confer the requisite degree of control on the Comune di Busto Arsizio.  

In particular it noted that "The control exercised by the Comune di Busto Arsizio over those two companies can be described as consisting essentially of the latitude conferred by company law on the majority of the shareholders, which places considerable limits on its power to influence the decisions of those companies".

It further commented, "Moreover, any influence which the Comune di Busto Arsizio might have on AGESP’s decisions is through a holding company. The intervention of such an intermediary may, depending on the circumstances of the case, weaken any control possibly exercised by the contracting authority over a joint stock company merely because it holds shares in that company".

The implications of this are clear.  Contracting authorities cannot not simply rely on shareholder rights.  Instead, additional explicit powers of intervention and supervision need to be included.

The Carbotermo case also considered the second leg of the Teckal case.  It held that the affiliated undertaking provision which applies in the Utilities sector (which requires 80% of the average turnover for the preceding three years to be derived from the provision of such services to undertakings with which it is affiliated) should not be applied when considering whether the supplying entity carries out the essential part of its activities with the controlling local authority or authorities.

Instead, the ECJ commented that the decisive turnover is that which the undertaking in question achieves pursuant to decisions to award contracts taken by the supervisory authority and that the activities to be taken into account are those the undertaking carried out as part of a contract awarded by the contracting authority regardless of who the beneficiary is. 

It also clarified that where several authorities control an undertaking the condition relating to the essential part of its activities may be met if that undertaking carries out the essential part of its activities with all of those authorities together.

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