Source: https://www.howtocrackanut.com/blog/tag/LitSpecMet
Timestamp: 2019-05-24 22:21:23
Document Index: 382257384

Matched Legal Cases: ['CJEU ', 'CJEU ', 'CJEU ', 'CJEU ', 'Art 1', 'CJEU ', 'CJEU ', 'CJEU ', 'CJEU ', 'CJEU ', 'CJEU ', 'CJEU ', 'CJEU ', 'Art 12', 'CJEU ', 'Art 1', 'Art 2', 'Art 12', 'Arts 28', 'Arts 13', 'Art 35']

In its Judgment of 5 October 2017 in LitSpecMet, C-567/15, EU:C:2017:736, the Court of Justice of the European Union (CJEU) has considered the limits of the in-house exemption from the procurement rules in scenarios where a contracting authority controls an in-house entity and, in turn, the in-house entity engages in activities with third parties--or, in other words, the CJEU has assessed the functional limits of the exemption in relatively complex public house situations.
The CJEU has not really followed the thrust of the Opinion of AG Campos (which was largely based on competition considerations, see here), but rather provided a clarification that focuses the assessment of the applicability of the EU procurement rules to the purchases by the in-house entity from third parties on an independent analysis of whether the in-house entity 'at the end of the public house chain' meets the definition of 'body governed by public law'. This offers some clarification that could be useful in the future, but the way the CJEU applies the tweaked test also creates new areas of uncertainty and opens up the case law to criticisms on the basis of the conflation of activities along the 'public house chain' despite setting out to avoid such conflation.
In LitSpecMet, more specifically, the CJEU considered "whether the second subparagraph of Article 1(9) of Directive 2004/18 must be interpreted as meaning that a company which, firstly, is wholly owned by a contracting authority the activity of which is to meet needs in the general interest and which, secondly, carries out both transactions for that contracting authority and transactions on the competitive market may be classified as a ‘body governed by public law’ within the meaning of that provision and if so, in that regard, what is the effect of the fact that the value of the in-house transactions may in future represent less than 90% or not the main part of the total financial turnover of the company" (C-567/15, para 23).
The case was decided on the basis of Art 1(9) of Directive 2004/18/EC but, given that its terms are largely coincidental with Article 2(1)(4) of Directive 2014/24/EU, it is of broad and future relevance. In the end, both provisions establish three cumulative conditions for the consideration of an entity as a 'body governed by public law': (a) be established for the specific purpose of meeting needs in the general interest, not having an industrial or commercial character; (b) have legal personality; and (c) (i) be financed, for the most part, by the State, regional or local authorities, or by other bodies governed by public law; or (ii) be subject to management supervision by those authorities or bodies; or (iii) have an administrative, managerial or supervisory board, more than half of whose members are appointed by the State, regional or local authorities, or by other bodies governed by public law.
In LitSpecMet, the CJEU started by reiterating its case law on the cumulative conditions that determine the status of 'body governed by public law' (paras 29-30) and on the functional and broad approach to the interpretation of the personal scope of application of EU procurement rules (para 31). Given that in LitSpecMet it was uncontroversial that the relevant entity had separate legal personality and was controlled by a contracting authority (para 32), the analysis rested on whether the entity constituted a "body established for the specific purpose of meeting needs in the general interest, not having an industrial or commercial character" (para 33).
Specific purpose of meeting needs in the public interest
In this analysis, and decoupling the different phases of the relevant test, the CJEU stressed that
34 It is clear ... that the requirement [for the entity to have been 'established for the specific purpose of meeting needs in the general interest, not having an industrial or commercial character'] must be satisfied by the entity whose classification is being examined and not by another entity, even if the latter is the parent company of the former which supplies the latter with goods or services. It is therefore not sufficient that an undertaking was established by a contracting authority or that its activities are financed by funds derived from activities pursued by a contracting authority in order for it to be regarded as a contracting authority itself (judgment of 15 January 1998, Mannesmann Anlagenbau Austria and Others, C‑44/96, EU:C:1998:4, paragraph 39).
35 In addition, it is necessary to take into consideration the fact that the use of the term ‘specific’ shows the EU legislature’s intention to make only entities established for the specific purpose (sic) of meeting needs in the general interest, not having an industrial or commercial character, the activity of which meets such needs, subject to the binding rules on public contracts.
36 Accordingly, it is necessary to determine, first of all, whether [the in-house entity] was established for the specific purpose of meeting needs in the general interest, the activity of which meets such needs before, if necessary, examining whether or not those needs have an industrial or commercial character (see, to that effect, judgment of 22 May 2003, Korhonen and Others, C‑18/01, EU:C:2003:300, paragraph 40) (C-567/15, paras 34-36, emphasis added).
Even if the drafting could have been clearer, particularly that of para 35 (which is tautological and, frankly, impossible for me to crack), the thrust of the test set out by the CJEU in LitSpecMet comes to assess the functional purpose of the in-house entity under consideration, rather than the nature of the activities it carries out. This comes to severe any intended chains of justification based on the activities in the general interest carried out by contracting authorities further up the 'public house chain' and concentrates on the purpose of the in-house entity 'at the end of the public house chain'--which must have been specifically established for general interest purposes.
This seems like the proper approach in abstract terms. However, the difficulty is that such a strict approach to the assessment of the activities of the in-house entity are likely to lead to the conclusion that it does not carry out activities in the general interest, which creates a difficult functional conundrum. This is visible in LitSpecMet where, in my view, the CJEU creates a great deal of confusion in the way it applies the test to the relevant entity in LitSpecMet in two ways.
First, in the way that the CJEU considers the purpose of the entity, which is to supply goods and services to enable its parent company to carry out the latter's activity (para 37), to be in the general interest because its "activity, in particular the manufacture and maintenance of locomotives and rolling stock and the supply of those goods and services to [the parent company], appears necessary for [the parent company] to be able to carry out its activity intended to meet needs in the general interest" (para 38).
To me, this seems wrong because the supply activity is not in the public interest, but in the interest of the parent company, which means that the entity whose classification is being examined does not meet the requirement (ie, in contravention of para 34) and because functionally it conflates the main activity of the parent company (in the general interest) with the ancillary (commercial/industrial) activity of the in-house entity 'at the bottom of the public house chain'. Otherwise, this would be tantamount to saying that a (private) supplier of the public sector carries out activities in the general interest where its supplies are necessary for a public authority to carry them out--quod non. In that regard, the test suggested by AG Campos concerning whether the in-house entity indirectly contributed to the general interest activities would seem preferable.
Second, and more importantly, the CJEU creates additional confusion when it indicates that, in the assessment of whether the in-house entity was specifically established for the purpose of meeting needs in the general interest,
40 ... it is irrelevant that, in addition to the activities intended to meet needs in the general interest, the entity in question also carries out other activities for profit on the competitive market (see, to that effect, judgments of 15 January 1998, Mannesmann Anlagenbau Austria and Others, C‑44/96, EU:C:1998:4, paragraph 25, and of 10 April 2008, Ing. Aigner, C‑393/06, EU:C:2008:213, paragraph 46 and the case-law cited).
41 Thus, the fact that [the in-house entity] does not carry out only activities intended to meet needs in the general interest through internal transactions with [its parent company], so that [the parent company] may carry out its transport activities, but also other profit-making activities is irrelevant in that regard (C-567/15, paras 40-41, emphasis added).
Once more, with the ultimate goal of preventing an 'escape' from the procurement rules by in-house entities carrying out activities outside of the public house, this seems to me to wrongly ignore the focus previously put on the assessment of the activity of the entity whose classification is being examined. Functionally, where an entity carries out activities in the public interest and activities of a commercial or industrial nature, it makes no sense to treat all activities the same.
This is not the approach followed in the context of utilities procurement under Directive 2014/25/EU. Furthermore, in EU competition law, where entities carry out activities that represent the exercise of public powers and economic activities, their assessment is based on the severability of the activities. In my view, the same approach would be appropriate here and, even more, in keeping with the functional logic of the in-house and public-public cooperation exemptions from compliance with EU public procurement rules, it would seem that the opposite approach should be preferred--to the effect that, where an entity carries out a significant volume of its activities for the benefit of entities outside the public house, it should not be considered a 'body governed by public law' for the purposes of subjecting it to the procurement rules but at the same time, the exemption from compliance with public procurement rules in the award of public contracts by other entities in the public house should disappear.
In other words, functionally, I do not think it makes sense to take such a strict approach to the assessment of the existence of activities in the general interest for the purpose of assessing the classification of the in-house entity as a 'body governed by public law', but rather to take a more holistic approach to the assessment of the position of the entity within the public house--ie, the entity must be either in or out of the public house.
Thus, in my opinion, the formulation of the test (and its sequencing) seems appropriate, but its application and the conflation of activities--both (i) the conflation of the activities of the controlling and the controlled entity, and (ii) the conflation of the activities in the general interest and the commercial or industrial activities of the latter inter se--is erroneous and comes to create significant confusion that muddies the waters of the intended clarification.
Needs not having an industrial or commercial character
Moreover, given that the CJEU considered the in-house entity 'at the bottom of the public house chain' to have been established specifically to meet needs in the general interest, the Court continued setting out the detailed test, and established that
43 ... in the assessment of [needs in the general interest, not having an industrial or commercial] character account must be taken of relevant legal and factual circumstances, such as those prevailing when the body concerned was formed and the conditions in which it carries on its activity, including, inter alia, lack of competition on the market, the fact that its primary aim is not the making of profits, the fact that it does not bear the risks associated with the activity, and any public financing of the activity in question.
44 ... if, with regard to the activities intended to meet needs in the general interest, the body operates in normal market conditions, aims to make a profit and bears the losses associated with the exercise of its activity, it is unlikely that the needs it seeks to meet are not of an industrial or commercial nature (judgment of 16 October 2003, Commission v Spain, C‑283/00, EU:C:2003:544, paragraphs 81 and 82 and the case-law cited).
45 That being the case, the existence of significant competition does not, of itself, allow the conclusion to be drawn that there is no need in the general interest, which is not of an industrial or commercial character.
46 In those circumstances, it is for the referring court to ascertain ... whether... the activities carried out by [the in-house entity], seeking to meet needs in the general interest, were exercised in competitive conditions and in particular whether [the in-house entity] was able ... to be guided by non-economic considerations (C-567/15, paras 43-46, emphasis added).
I also find the formulation of this part of the test confusing, not least due to the unclear position that the existence of competitive markets assumes. As I mentioned when discussing the Opinion of AG Campos, the sole fact that the controlling entities within the public house are directly awarding contracts to the in-house entity without having to comply with the procurement rules suffices to exclude a consideration that those entities are actually exposed to the vagaries of the market because they have a captive demand from the controlling entities--which significantly insulates them from market risk where such demand is enough to absorb 80% of the entities' turnover. Ultimately, then, either there is an exemption at the level of the relationship between the contracting authority and the in-house entity, or there is an obligation to tender at that level (which then frees the otherwise in-house entity from public procurement duties). But, either way, the logic of exposition to competition in the market does not allow for both exclusions. In addition to that consideration, I think that the position of the CJEU in LitSpecMet creates additional issues.
First, it is not clear to me whether the analysis in this second step needs to be constrained to the activities "intended to meet needs in the general interest" (para 44, particularly in relation to para 40) or to all the activities of the in-house entity (as suggested in para 46?), particularly where the in-house entity carries out for-profit activities with third parties, but also carries out not-for-profit (or not fully commercial) activities with the controlling entity and/or other entities within the public house. Would profit-seeking activities with third parties (even if of a relatively small volume, say 10% or 20% of the turnover of the in-house entity) suffice to make it fall foul of the definition of 'body governed by public law'? Second, it is not clear to me how to assess whether an entity is "able to be guided by non-economic considerations". Third, it is also unclear to me whether transactions are carried out in competitive conditions where the mere existence of the in-house entity may suppress any relevant comparator.
Ultimately, I guess that what is relevant is to try to understand the functional rationale and implications of the second part of the test. The situation here is one where an in-house entity carries out procurement activities ancillary to the activity in the general interest of its parent company (first step of the test) and, at this point, the assessment of whether its activities are competitive or not, and whether it can be guided by non-economic factors, determine the applicability of procurement rules to its purchases from third parties (second step of the test).
In my reading, that means that (a) if the in-house entity carries out its relevant activities in competitive conditions, it falls foul of the definition of 'body governed by public law' and does not need to comply with the procurement rules in its acquisitions from third parties; and (b) if the in-house entity does not carry out its relevant activities in competitive conditions and/or can be guided by non-economic considerations, then it will be classed as a 'body governed by public law' and thus obliged to comply with the procurement rules. At least (a) can be problematic in some scenarios--although (b) can also be problematic where the analysis is constrained to solely part of the activities of the in-house entity.
Regarding (a)-type situations, where the in-house entity that receives the direct award of contracts from other entities in the public house without subjection to public procurement rules carries out competitive activities, the test seems to allow it to benefit from its in-house position to compete in the market without having to comply with procurement rules in its purchases--which is functionally opposite to the restrictions on market activities of the in-house entity under Art 12 Dir 2014/24/EU (as mentioned above).
I think that my uneasiness with the Judgment in LitSpecMet primarily derives from the fact that, where assessing the activities of in-house entities 'at the bottom of the in-house chain', the first part of the test ignores whether, in addition to (indirect) activities in the general interest, the entities carry out additional for-profit activities with third parties. And, subsequently, the second part of the test (potentially) concentrates on the existence of such activities (and the existence of profit goals and business risk) to exclude the non-commercial and non-industrial nature of those activities. Even if I cannot say exactly why, I sense a disconnection between both parts of the test. I will have to give this case some additional thought but, for now, I think that the CJEU would have been better off by adopting a functional approach to the in-house exemption and its limits, rather than a functional approach to the concept of 'body governed by public law', which implementation creates confusion.
Tags LitSpecMet, Court of Justice, public procurement, body governed by public law, Art 1(9) Dir 2004/18, Art 2(1)(4) Dir 2014/24, test, competition, general interest, in-house, confusion
In his Opinion of 27 April 2017 in LitSpecMet, C-567/15, EU:C:2017:319, Advocate General Campos Sánchez-Bordona has addressed a complicated issue concerning the boundaries of the in-house exemption from compliance with the EU public procurement rules. AG Campos' Opinion is based on the 2004 Directives, but his views and the ECJ's ruling in LitSpecMet will be relevant for the interpretation of the 2014 Public Procurement Package (in particular, in relation to procurement derived from transactions covered by Art 12 Dir 2014/24, Arts 28-30 Dir 2014/25, and Arts 13-14 & 17 Dir 2014/23).
Differently from other cases, where the in-house exception was assessed in relation to contracts awarded within the 'public house', LitSpecMet concerns a question on the obligation to comply with procurement rules by 'in-house entities' themselves. And, in particular, the extent of the obligation in situations of relative complexity of control and functional relationships between contracting authorities and their controlled entities, where the controlled entities indirectly contribute to the contracting authorities' role in meeting a need in the general interest that does not have either an industrial or a commercial character. In other words, the LitSpecMet case concerns the boundaries of public procurement obligations for entities pertaining to a corporate conglomerate ultimately controlled by a contracting authority, and which award contracts outside the 'public house'.
In the case at had, the Lithuanian railway company (LG, itself a contracting authority with a public sector mission) fully owned an entity dedicated to the manufacture and maintenance of locomotives and railway carriages (VLRD). At the relevant time, orders from LG accounted for almost 90% of VLRD’s turnover. Therefore, LG and VLRD entered into direct contractual relationships on the basis of the in-house exception to the otherwise applicable obligation to comply with EU public procurement law. In turn, VLRD entered into contracts with third parties in accordance with its own Interim Procurement Regulations, rather than in compliance with Lithuania's Law on Public Procurement (LPP). This legal structure was challenged by LitSpecMet, on the basis that VLRD's procurement should be fully covered by the LPP (as a result of the scope of coverage of the EU rules), regardless of the in-house exemption from which contracts between LG and VLRD benefitted.
The main arguments put forward by LitSpecMet are summarised by AG Campos as follows:
the ... activity carried out by VLRD falls under general interest, in that it enables LG to ensure provision of the public service for which it is responsible, namely the management of railway infrastructure and the provision of passenger transport. In its view, this activity is not of an industrial or commercial nature, since LG is the only undertaking in Lithuania engaged in it, which means that it can easily operate according to considerations which are not purely economic. To accept that public procurement rules do not apply to VLRD would mean that a contracting authority (LG) would be able to avoid those rules simply by setting up a subsidiary (VLRD) for in-house transactions (para 24, emphasis added).
VLRD and the Lithuanian government oppose this argument on different points, mainly related to the non-transferability of LG's duties to VLRD (paras 26-27). The arguments put forward by intervening Member States are also interesting, with Germany supporting the subjection of VLRD's procurement to the EU rules, while Portugal (and, surprisingly, the European Commission) advocate for the exclusion of VLRD's procurement activities from the EU rules (paras 28-32).
In conceptual terms, the legal dispute can be represented as follows, with the left graph depicting the legal structure adopted by the Lithuanian State, and the right graph depicting the alternative coverage put forward by LitSpecMet:
Ultimately, the issue of whether VLRD (as the in-house entity) is subject to the EU procurement rules depends on the answer to two questions: (a) is VLRD in principle directly covered by the EU rules and (b) is the in-house situation relevant and capable of having the effect of either (i) excluding coverage if VLRD is in principle covered or, conversely, (ii) extending coverage to VLRD despite not being covered in principle? Given that VLRD is not a contracting authority, these questions revolve around the interpretation of the concept of 'body governed by public law'.
At this point, it may be worth recalling that, for the purposes of both the 2004 and the 2014 EU public procurement rules, a 'body governed by public law' is that which meets the three cumulative conditions of: (a) being established for the specific purpose of meeting needs in the general interest, not having an industrial or commercial character; (b) having legal personality; and (c) being financed, for the most part, by the State, regional or local authorities, or by other bodies governed by public law; or being subject to management supervision by those authorities or bodies; or having an administrative, managerial or supervisory board, more than half of whose members are appointed by the State, regional or local authorities, or by other bodies governed by public law.
AG Campos stresses that it is commonly accepted that "VLRD satisfies the second and third: it has legal personality and it cannot be disputed that another body governed by public law (LG) has a role in its financing, the supervision of its management or the composition of its administrative, managerial or supervisory board" (para 38). Therefore, he proceeds to the analysis of the first condition in two parts, by first assessing the boundaries of the requirement of directly (or indirectly) meeting needs in the general interest, not having an industrial or commercial character (paras 37-59); and then proceeding to a more specific assessment of these conditions where the meeting of needs in the general interest, not having an industrial or commercial character, takes place in the context of in-house transactions (paras 60-84).
directly (or indirectly) meeting needs in the general interest, not having an industrial or commercial character
Concerning the first aspect, of whether an indirect contribution to meeting needs in the general interest not of an industrial or commercial nature, I find AG Campos' analysis interesting in that he stresses that the
... the key factor in answering the question is not so much the public nature of the need to be met but the conditions in which this is done. When interpreting the expression ‘needs in the general interest, not having an industrial or commercial character’ it is essential to ascertain on what terms these are to be met.
... according to the spirit of the procurement directives, what is important is to safeguard competition in the market and to prevent it being altered or distorted by participants who do not operate according to free trade principles. Consequently, the determining factor is not whether, by supplying goods and services to LG, VLRD is itself meeting a need in the general interest, or whether it does so indirectly, but whether, in either case, [VLRD] is operating under the same conditions as any private competitors, that is to say, without incentives to offer unfair advantages to national producers.
... for these purposes it is necessary to take into account multiple legal and factual circumstances, amongst which the Court of Justice has mentioned, by way of example, the circumstances prevailing when the body concerned was formed and matters such as ‘the fact that it does not aim primarily at making a profit, the fact that it does not bear the risks associated with [its] activity, and any public financing of the activity in question’. (paras 54-56, emphasis added and reference omitted).
This is largely in line with the clarification that recital (10) of Directive 2014/24/EU sought to introduce by establishing that "a body which operates in normal market conditions, aims to make a profit, and bears the losses resulting from the exercise of its activity should not be considered as being a ‘body governed by public law’ since the needs in the general interest, that it has been set up to meet or been given the task of meeting, can be deemed to have an industrial or commercial character." It is also substantively aligned with the exemption from the utilities procurement rules for entities exposed to competition (Art 35 Dir 2014/25, and previously Art Dir 2004/17). Therefore, this logic seems to carry significant weight and to match adequately the tests applicable in other parts of the EU public procurement system.
The only difficulty with this test is that it has elements that may conflate two of the conditions in the definition of a body governed by public law, in particular where the third condition is met due to the entity being 'financed, for the most part, by the State, regional or local authorities, or by other bodies governed by public law'. Therefore, in applying this test, it would be particularly relevant to take into account that it will be almost impossible to establish that the in-house entity is not a body governed by public law because, by the fact of having to derive at least 80% of its turnover from its activities with its controlling entity or entities, it will hardly be in the situation of operating in normal market conditions.
In my view, the sole fact that the controlling entities are directly awarding contracts to the in-house entity without having to comply with the procurement rules suffices to exclude a consideration that those entities are actually exposed to the vagaries of the market (to use the expression from the field of concessions contracts) because they have a captive demand from the controlling entities--which significantly insulates them from market risk where such demand is enough to absorb 80% of the entities' turnover. Ultimately, then, either there is an exemption at the level of the relationship between the contracting authority and the in-house entity, or there is an obligation to tender at that level (which then frees the otherwise in-house entity from public procurement duties). But, either way, the logic of exposition to competition in the market does not allow for both exclusions.
meeting needs in the general interest in the in-house context
From a different but not unrelated perspective, AG Campos also engages in an assessment of the relationship between these VLRD and LG to determine "whether the former is a proxy entity of the latter (or its own resource) which can use the ‘in-house exemption’ ... [by] analysing the substantive issue from an organic perspective as opposed to the perspective of the activity" (para 60). In that regard, he considers that it is necessary to make a
... distinction between ‘marginal’ activities and the ‘essential’ activities of proxy entities which justify the application of the in-house exemption. ... in relation to [marginal] activities the undertaking is operating within the market and can compete on an equal footing with rival economic operators.
... the same is not true of the ‘essential’ tasks which have been entrusted or assigned to the subordinate undertaking by the contracting authority under the in-house system. Where in order to carry out those tasks the undertaking (VLRD in this case) needs to obtain goods, services or supplies from third parties to a value which exceeds the level for harmonised procurement, then the public procurement directives apply.
Any other interpretation would give rise not only to inconsistency but to a potential circumvention of the law; the former because it would be inconsistent with the single effective identity of the two bodies, which was acknowledged for the purposes of exempting them from procurement procedures when dealing with each other, and the latter because it would make it easy to escape the application of the EU public procurement rules (paras 75 to 77, reference omitted).
I am not sure I fully understand the distinction between 'marginal' and 'essential' activities that AG Campos is proposing and, for the reasons above, I do not think it arguable that the in-house entity carries any activities in the market under normal conditions. However, this does not seem to be determinative of his analysis, as AG Campos more clearly states that
In other words, the contracting authority can make use of proxy entities, within the limits already mentioned, by entrusting them with particular tasks which should, in principle, be subject to public procurement procedures but which are exempted. This exception is not, of itself, open to question, legally speaking, in the light of the case-law of the Court of Justice (and, now, Article 12(1) of Directive 2014/24). However, where such proxy entities do not have the resources needed to themselves carry out the tasks assigned by the contracting authority and are obliged to have recourse to third parties in order to do so, the reasons for relying on the in-house exemption disappear and what emerges is actually a hidden public (sub-)procurement where the contracting authority, through an intermediary (the proxy entity) obtains goods and services from third parties without being subject to the directives which should govern the award.
... if the connection between LG and VLRD is such as to justify the application of the in-house exemption to transactions between them, then the external transactions that are essential to the performance of the tasks entrusted to VLRD by LG cannot avoid being caught by the procurement directives (provided they are in excess of the relevant value threshold). Otherwise, simply by reorganising the activities of LG through the establishment of VLRD, LG would be able to avoid the consequences that flow from its status as a contracting authority (paras 79 and 81, emphasis added).
This seems the appropriate functional approach and is completely aligned with the considerations made above in relation with the exposition of the activities of the in-house entity to the vagaries of the market. Therefore, I think that the two prongs of the substantive assessment proposed by AG Campos lead to the same conclusion: that the in-house exemption can only be used once, or that it is exhausted at the first step of avoiding access to the market (except in cases where the in-house entity has, in a complex public house infrastructure, the possibility of entrusting works or services to another, second-tier in-house entity).
Therefore, I hope that the ECJ will follow the approach outlined by AG Campos and confirm that, in simple terms, nobody can have two bites of the in-house cherry.
Tags LitSpecMet, public procurement, in-house, needs in the general interest, not of an industrial or commercial nature, public house, public house exception