HEADED NOTEPAPER - Association for Public Service Excellence

March 2006
Briefing 06/19
ASSOCIATION FOR PUBLIC SERVICE EXCELLENCE
2nd floor, Washbrook House, Lancastrian Office Centre
Talbot Road, Old Trafford, Manchester, M32 0FP
Telephone: 0161 772 1810 Fax: 0161 772 1811
E:mail enquiries@apse.org.uk Web: www.apse.org.uk
TO ALL COUNCIL LEADERS, LOCAL AUTHORITY CHIEF EXECUTIVES AND
APSE CONTACTS IN ENGLAND, WALES, SCOTLAND AND NORTHERN
IRELAND
ECJ RULING ON THE AWARD OF PUBLIC SECTOR CONTRACTS TO WHOLLY
OWNED LOCAL AUTHORITY COMPANIES
� The ECJ has ruled in a case connected with the award of a public service
concession to a wholly owned local authority company.
� The case appears to support the position adopted by APSE in response to
new trading and charging provisions being that generally the award of
contracts that are above EU thresholds need to be subject to the competition
rules of the European Union.
� This briefing highlights some of the key findings of the case of Parking Brixen
GmbH v Gemeinde Brixen and Stadtwerke Brixen AG ( ECJ Case C-458/03)
1. Background
APSE has been at the forefront of developing options to maximise freedoms for local
authorities to trade and charge in services that they provide. This is an essential part
of the Governments efficiency agenda in developing cross-boundary working and
shared services between member authorities. However, as there are restrictions
which govern the award of public sector contracts between public bodies and
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equirements for local authorities to comply with EC rules this area of law has
become a major focus for local authorities in determining how they may wish to
organise future work.
A recent judgement from the European Court of Justice raises issues that are
pertinent to local authorities in awarding contracts and concessions to ‘in-house’ or
local authority companies. Such matters were also highlighted in ‘Charging and
Trading in Local Government’ written by John Bennett and Stephen Cirell of
Eversheds in association with APSE and published by Thomson / Sweet & Maxwell.
(Available to APSE members via Wai Lee on wlee@apse.org.uk)
The details of the case of Parking Brixen GmbH v Germeinde Brixen and Stadtwerke
Brixen AG is detailed below.
2. Case Details
In 2001 the Municipality of Brixen (Italy) converted Stadtwerke Brixen, a municipal
undertaking into a company limited by shares which then became named Stadtwerke
Brixen AG. The company’s nominal capital was 100% owned by the municipality
which was allowed under national legislation to remain as the sole shareholder for
two years.
In 2002 the municipality of Brixen agreed with the company that they would manage
a car park of about 200 spaces for a nine year term. As part of the agreement the
company would collect the parking charges for the car park and in addition it would
provide a free bicycle hire service and would allow for the continuation of a weekly
market in the area in question.
Parking Brixen GmbH, the company which managed another car park in the
municipality of Brixen challenged, before the Italian courts, the award of the
management of the car park to Stadtwerke Brixen AG agreeing that the municipality
of Brixen should have issued a public call for tenders. In response the Municipality of
Brixen maintained that it completely controlled the company that was awarded the
management of the car park and therefore there was no award of a contract or
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concession to a third party. Hence there was no obligation to proceed by way of a
public call for tenders.
The matter was referred to the Court of Justice of the European Communities for a
preliminary ruling on two questions.
On the first point the Court pointed to the fact that the co-ordination of procedures for
the award of public service contracts applies to contracts that involve consideration
that is paid directly by the contracting authority to the service provider but does not
apply to service concessions. Therefore, in the Brixen case, as the service providers
remuneration came from the parking fees, which it collected, the risk of operating the
service in question was with the service provider (not the local authority) and thus
the arrangement was characteristic of a public service concession. Therefore since it
was a public service concession the Directive did not apply.
However whilst the Directive does not apply the Court made it clear that a
concession granting public authority is, as a rule, bound by the general rules of the
EC treaty and must have regard to the principles enshrined within the Treaty such as
freedom of establishment, and freedom to provide services as well as the principles
of equal treatment, non discrimination and transparency. The application of that rule
can only be excluded if the concession granting public authority exercises over the
concessionaire control which is similar to that which it exercises over its own
departments and if that concessionaire carries out the essential part of its activities
with the controlling authority. In addition the Court stated that the concession
granting authority must have a ‘decisive influence’ over both the concessionaire’s
strategic objectives and its significant decisions.
In this particular case the Court found that the service provider (Stadtwerke Brixen
AG) enjoyed a high degree of independence which effectively precluded the
municipality from exercising control similar to that which it exercised over its
departments. Indeed it had widened its activities to providing services and expanded
not only into other parts of Italy but also abroad and its capital had to be opened to
other shareholders (as a result of domestic regulations). There was in effect no
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management control by the municipality and thus it could not be regarded as an in-
house company.
The Court therefore ruled that the failure to put out to tender the award of a public
service concession, such as that in question, is not compatible with community law.
3. Implications of the Judgement for APSE Member Authorities
Whilst the Stadtwerke Brixen case was concerned with the award of a concession
the similarities in the views expressed in this case are clear when looking at the
judgement in the Teckal Case ( Teckal Srl v Comune di Viano and AGAC ) which
found that “ where the local authority exercises over the person concerned a control
that is similar to that which it exercises over its own departments and, at the same
time, that person carries out the essential part of its activities with the controlling
local authority or authorities “[ awards of contracts would not trigger the EU regime].
APSE has consistently argued that in regard to Trading Companies (within England
only) established under the terms of S.95 of the Local Government Act 2003 such
arrangements could ultimately act as a barrier to the continuation of the service
within the public realm as it is likely that, at some point, the commercial element of
activities undertaken by a trading company would be likely to create a requirement to
put contracts from the parent local authority out to public tender.
Some have argued that the benefits of Teckal are extremely limited in the case of
local authority trading companies as UK company law has a requirement for
company directors to act in the best interests of the company. This may be at odds
with what is required under Teckal in terms of establishing that the parent local
authority has the ability to exercise control over the company in the same way as it
exercises control over its own departments. Hence it may be advisable to give
consideration as to how this may be overcome through looking at the structure of
company articles.
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In addition APSE has urged local authorities ( within England only ) to instead
consider the route of S.93 charging arrangements which do not need to operate
under a company framework but instead provide the opportunity for local authorities
to generate income from collaborative working with both other public sector bodies
and private sector clients. (See APSE Briefings available from the APSE website
www.apse.org.uk)
The judgement also raises further concerns in the context of the Efficiency agendas
in England, Scotland, Wales and Northern Ireland. Governments across the four
administrations have issued clear policy statement towards the sharing of key
services between public bodies. It was widely anticipated that this would produce
greater economies of scale in a partnership approach between public bodies.
However the prospect of challenge from bodies that have not had the opportunity to
tender for work awarded by one public body to another (for example revenue and
benefits contract shared by two or three local authorities) on the basis that the award
of a contract or concession ought to be subject to the EC Treaty if not the Public
Procurement Directive will cause concerns for local authorities. There is however
some comfort in the Parking Brixen decision which is that it supports the exemptions
set out in Teckal .
Teckal was of itself concerned with a consortium of contracting authorities. This
appears to support the fact that where the service provider is controlled by more than
one local authority the ‘Teckal exemption’ would still apply. The ‘exemption’
argument is put at risk where there is some share ownership by a private sector
partner, in which case the test of control and influence is raised.
The issue of a multiplicity of authorities exercising control over a company is further
supported in the case of Stadt Halle v TREA Leuan (Case C – 26/03) where the ECJ
confirmed “In accordance with the Court’s case law, it is not excluded that
there may be other circumstances in which a call for tenders is not mandatory,
even though the other contracting party is an entity legally distinct from the
contracting authority. That is the case where the public authority which is a
contracting authority exercises over the separate entity concerned a control
which is similar to that which it exercises over its own departments and that
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entity carried out the essential part of its activities with the controlling public
authority or authorities.’ The reference to ‘authorities’ is significant and again
supports Teckal. This appears to be a significant reassurance to local authorities
who are prepared to share services, through partnership arrangements, that
contracts would not as a result of such public / public arrangements, end up being
placed into a mandatory tender situation.
APSE’s Best Value Consultancy and our legal partners are currently looking at this
issue and seeking further advice from the ODPM and the Audit Commission on how
local authorities in creating public / public partnerships can be best safeguarded from
challenge including the use of Limited Liability Partnerships. (Contact Andy Mudd,
APSE BVC on amudd@apse.org.uk) as well as looking at further guidance for
Scotland, Wales and Northern Ireland.
Moreover there will need to be subsequent regulatory amendments and guidance
within England on establishing new definitions as to which local authorities can set
up trading companies (using existing freedoms and flexibilities) as the current
permissive framework on trading and charging is dependant upon definitions which
are effectively obsolete ( i.e. Excellent, Good, Fair and Week ). Revised definitions
are currently the subject of consultation. At the moment the ability to trade will be
dependant upon an authority’s classification as at July 2005 pending further
guidance.
A new APSE Master Class is also being developed on shared services and the
impact of the new TUPE regulations. Expressions of interest are currently being
invited and details are attached to this briefing.
Finally member authorities are reminded to seek appropriate competent legal advice
before acting on any matters arising from this briefing.
Mo Baines
Principal Advisor
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