“In-house exemption” and “Capacity Awaps”: Clarity and New Clouds 

July, 2009 - William Timmermans, ALTIUS

In two recent cases (Coditel and Stadtreinigung Hamburg), the ECJ dealt with the so-called “in-house exemption” in procurement matters. This is an exemption to the public procurement rules applicable to a public authority if it awards a contract to another entity (i) if the control exercised by the contracting authority over this entity is similar to that which the authority exercises over its own departments and (ii) if that entity carries out the essential part of its activities with the controlling authority or authorities.

Clarity: Coditel and the In-House Exemption

In the Coditel case (case C-324/07, 13 November 2008), the Belgian municipality of Uccle organised a procedure for awarding a concession for the operation of its cable television network. Four bidders, including Coditel, filed bids. Brutélé, an inter-municipal company, offered Uccle an affiliation as an associated member instead of bidding for the concession. Uccle then decided to terminate the tender procedure and became a member of Brutélé, which would then operate Uccle’s municipal cable television network. Coditel challenged this decision before the Belgian Council of State. The Council of State referred the case for a preliminary ruling to the ECJ. The question was whether or not an entity such as Brutélé fulfilled the first condition for the in-house exemption and in particular whether or not the control by contracting authorities could be exercised jointly. The second condition was not at stake: apparently, the Council of State considered it to have been fulfilled.

The ECJ took a clear stance. To evaluate the control exercised by the municipalities on Brutélé, the Court took into account four aspects. First, the absence of any private undertakings as members of Brutélé: the company is not open to private members. Second, the Court indicated that the administrative bodies of Brutélé are composed of representatives of the member municipalities. Third, the governing council of Brutélé enjoys very wide-ranging powers.The ECJ noted that there were sufficient arguments to conclude that Brutélé had not become so market-oriented that the control by the municipalities had become tenuous. In this respect, the Court took into account the legal form of Brutélé (it is not a société anonyme, which could pursue objectives independent of those of its shareholders) and considered that Brutélé, as an inter-municipal company, is bound by law not to pursue any other interests than those of the municipalities affiliated to it.

On the issue of joint control, the ECJ held that it is sufficient that contracting authorities (such as the municipalities) jointly excercise their control over entities such as Brutélé. In essence, the Court argued that public authorities have the right to use their own resources to perform their tasks and that they also have the right to do so in co-operation with other public authorities.

Coditel seems a clear judgment. It is in line with previous case law and with the opinion of Advocate-General TRSTENJAK. She particularly stressed the importance of inter-municipal co-operation (Opinion 4 June 2008, N° 80-87), as did Germany, in its submission. The Commission took the view that a direct affiliation to Brutélé conflicted with the transparancy requirement. This argument was (implicitly) rejected by the ECJ.

New Clouds: “Capacity Swaps” between Public Authorities as New Exemption to Procurement Rules

A recent ECJ judgment is somewhat more surprising. In Commission v. Germany (Case N° C-480/06, 9 June 2009), the Court had to deal with the question of whether or not a contract between public authorities could be exempted from the procurement rules, even if the contracting authorities were not in a position to exercise any control whatsoever over the contracting entity.

Surprisingly, the Court held that this was possible, paving the way for a new type of public procurement exemption. It is unclear what this new exemption will be called. If one looks at the facts, it could be called a “capacity swap”.

The facts of the case were rather simple. Four German district councils concluded a 20-year contract with Stadtreinigung Hamburg for the disposal of their waste in a new incineration facility. Stadtreinigung Hamburg reserved part of the incinerator’s capacity for the districts, which paid it annual fees, which it passed on to the facility’s operator. The districts also made available to Stadtreinigung Hamburg their excess landfill capacity to alleviate the lack of landfill capacity of the City of Hamburg.

The Commission was of the opinion that the district councils had entered into a public service contract and should have complied with the Procurement Directives. According to the Commission, the “in-house exemption” could not apply because the districts had no control over Stadtreinigung Hamburg. Advocate-General MAZAK agreed with this point of view in his Opinion.

The ECJ saw things differently. It stressed that this contract did not govern the relationship between Stadtreinigung Hamburg and the facility’s operator, but that it was a contract between the four districts and Stadtreinigung Hamburg for the reciprocal treatment of waste. The Court analysed in detail the obligations of the parties, and concluded that this contract established a co-operation between local authorities with the aim of performing a public-interest task. Public authorities are free to perform public-interest tasks themselves or in co-operation with other public authorities. There seem to be two conditions under which such co-operation agreements are exempted from the procurement rules: (i) the co-operation is governed solely by the pursuit of objectives in the public interest (e.g. waste disposal); and (ii) no private undertaking is placed in a position of advantage vis-à-vis its competitors (here: this agreement did not prejudice the award of contracts necessary for constructing or operating the waste treatment plant).

The Court ended its judgment with a bitter note for the Commission. At the hearing, the Commission had admitted it would not have taken any action against Germany if the districts and Hamburg had set up a body governed by public law to carry out the waste disposal. The ECJ commented that Community law does not impose a particular legal form on public authorities to carry out public service tasks.

The organisations representing EU municipalities were very pleased with  this judgment. However, it does not seem that easy to implement or interpret. Firstly, the principle under European procurement law has been that public authorities have to respect procurement rules, even if they enter into contracts with other public authorities. It may not always be easy to distinguish (exempted) cases whereby public authorities jointly organise their public service tasks from (non-exempted) cases whereby a public authority is nothing more than a bidder like any other private undertaking. Secondly, it seems that there have to be “objective” boundaries to these “capacity swaps” between public authorities. Otherwise we may end up with a small municipality with several dozen engineers swapping its capacity with other municipalities who have surplus of IT experts, HR managers, technicians, etc. That could not be what the ECJ had in mind. Therefore, the Court will have to clarify its view in future cases –which will hopefully blow away the clouds.

William Timmermans
[email protected]




WSG Member: Please login to add your comment.