In a way, the title is a paradox in itself, as the procurement rules are not meant to apply to in-house awards. However, the borderline between in-house provision and external award becomes blurred very quickly: What happens when an authority sets up a separate company to deliver the service? What if the authority sets up a JV with other authorities to share the cost? Does it all change if a private operator is the JV partner or becomes a minority shareholder?

It is clear that the procurement rules do not apply where the service is provided by the same entity i.e. the relevant authority. Where, however, the authority sets up a different entity to provide the service (e.g. a limited company) then two further requirements need to be satisfied otherwise the procurement rules will apply: (i) the authority must exercises a control which is similar to that which it exercises over its own departments; and (ii) the controlled entity must carry out the essential part of its activities with the controlling authority.

The European Court has rather vaguely defined 'control' as "decisive influence over strategic objectives and significant decisions" butthe following core principles have emerged from case law:

  • Sole shareholdings. Where an authority is the sole shareholder, then this is likely to indicate control.
  • Multiple shareholders. Where there are other shareholders and where these shareholders are also public authorities then the control requirement is likely to be satisfied even if in practice any individual authority would share control with the other shareholders. Key here is that the entity must only be able to operate pursuant to orders received by the shareholders (i.e. the authorities) collectively.
  • Private participation. By contrast, any private shareholder involvement in the entity will mean that it does not pass the control requirement. Again, the level of the shareholding or the existence or absence of voting rights does not alter the analysis. Moreover, the courts will disregard any circumvention structures e.g. where at the time of the award the entity is fully in public ownership but where this is clearly only temporary in order to circumvent the application of the procurement rules.

The other key question is how much business does the entity have to do with the authority so that this satisfies the 'essential part' test. Here the European Court has been even less clear by holding that third party activities cannot be more than 'marginal'. As to what is marginal, in the past 10% or less of third party business was found to be acceptable but on the basis of judicial remarks we would counsel caution it is were likely that third party business exceeded that threshold.

The above, seeks to provide some basic pointers and as always there is more to the detail, so any decision on an award needs to be carefully considered. Moreover, going though a procurement exercise while adding a level of complexity can also provide a significant upside in terms of better value or better service.

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