I. Introduction
The European Commission has recently issued an “interpretative Communication on the application of EC law on Public Procurement and Concessions to Institutionalised Public-Private Partnerships (IPPP)”.[1] The purpose of the Communication is to illustrate how public authorities (hereafter PAs) can set up, jointly with a private partner, an entity (mixed-company) to which it may award a public contract, without infringing the relevant EC law. In the Communication, the Commission first confirms the position that it set out in 2004 Green Paper,[2] on the legitimacy and on the importance of IPPPs within the EC market. This model enables PAs to retain a relatively high degree of control over the task assigned and to benefit from the private partner know-how.
Secondly, the Communication aims to clarify a number of issues concerning the application of EC public procurement and competition law to mixed-companies. National legislators, judges and economic operators dealing with the phenomenon, have been facing an increasing degree of uncertainty regarding its compatibility with EC law, which, it was feared, could discourage public authorities and private parties from relying upon IPPPs. It will be argued however, that the Commission fails to dissipate all doubts and difficulties that practitioners and legal commentators have identified. Furthermore, the fact that the Communication provides that a mixed-company can only lawfully be entrusted with a public task, on the sole condition that the private partner is selected by means of a “specific” procedure, seems to openly contradict the European Court of Justice’s (hereafter ECJ) case law on the matter, and thereby complicate rather than clarify when and how IPPPs may be used.
II. Direct entrustment of public tasks and “mixed-entities”: the “Italian way”
Following the Stadt Halle[3] judgment, the “direct entrustment” of a public task to a mixed-entity is to be considered unlawful. The ECJ made it clear that the participation of private partners (no matter how they were selected) in the capital of a public company, impedes public authorities from exercising a control analogous to that which they exercise over their own departments. The element of analogous control is one of the Teckal[4] requirements that needs to be satisfied in order to lawfully assign a public task without an open procedure (“in-house derogation”). Consequently, the direct entrustment of a given task to a mixed company is in breach of EC public procurement law.
Some Italian legal commentators read this judgment as an outright prohibition on the setting up of mixed-company.[5] Other quarters, instead, advocate a less strict interpretation, according to which mixed-companies are not prohibited, provided that two tendering procedures are called: one for choosing the private partner and one for awarding the public task.[6]
Less than twelve months ago, the Italian Council of State (hereafter CoS) issued an Opinion[7] by which it departed from both of these opposing views. The CoS drew a clear distinction between the assignment of a task to a mixed-company without a tendering procedure and the “in house” derogation to the application of EC regulations on public contracts.[8] Mixed-companies constitute institutionalised public-private partnerships (IPPPs), consequently their compatibility with EC law must be assessed against the criteria set out in the 2004 Green Paper; criteria to which the CoS gives its own interpretation.
If a PA wants to set up a mixed-company for the provision of a public task, it must call for one public tender in order to identify the private operator that, firstly, will have a shareholding in the company and, secondly, will have “to provide” the tendered service. In other words, the public task is carried out not by the mixed-company, but by the private partner.
Therefore, the public task is in fact “contracted out” to a private operator that will also be, at the same time, a member of the mixed company. In the CoS’s view, the IPPP model is, in practical terms, a semi-contractual partnership, which enables the PA to exercise a strict public control over the private partner. As a consequence, the tendering procedure should identify the most suitable private operator to carry out the tendered task, rather than choosing a mere financial partner in the mixed company.
The CoS then went further by stating that the task and the mixed-company are symbiotically linked. The mixed-company is set up with the sole purpose of performing one task. The new entity may not therefore perform any activity other than the activity awarded under the original public contract. The practical effect of this is that even where the PA has a duty to carry out a similar task it cannot simply use the same mixed-company. The public contract awarded and the mixed-company have only a limited life-span. Upon termination of the public contract, the public authority is expected to call for a new tender procedure aimed at selecting a new partner for the assignment of that public task. As referred to above, the connection between the awarded public task and the mixed-company established to carry it out are so closely linked that one cannot survive upon the demise of the other: “the mixed company and the public contract are born together and also die together”.
Mere compliance with the above criteria is not however, sufficient for a public authority to lawfully set up a mixed-company. In order for a mixed-company to be legal, “from a public law perspective”, public interest reasons must prevent public authorities from contracting out the specific public task concerned. Accordingly, the mixed-company model should only be chosen when two cumulative conditions are met: first, public authorities are in need of the particular know-how possessed by private operators; and second, public authorities have to exercise a more effective control over the public task than is normally allowed, when acting as contracting authorities.
III. The European Commission provisions and the selection of the private partner
By means of the 2008 Communication, the Commission seeks to shed much needed light on the regime applicable to IPPPs. In doing so, the Commission first makes it clear that the setting up of a mixed-company is permitted under EC law. It also indicates two different paths for the creation of a mixed-company. These paths provide that a mixed-company may be set up either by the public authority and the private partner jointly incorporating a new company; or the private partner can acquire a stake in an existing publicly-owned company “which has obtained public contracts or concessions in-house in the past”[9] It should be observed that this last statement is rather ambiguous. Questions still remain unanswered, particularly in respect of whether the existing publicly-owned company must already be vested with the public task when the private partner acquires its stake, or whether it suffices that the company has performed a specific public task in the past.
In any event, neither the 2004 Green Paper nor the Communication attaches any importance to the choice made by the public authority on how to create a mixed-company. On the contrary, some legal commentators, with whom this author agrees, consider it necessary to make a distinction between the possible ways of setting up a mixed-company. In this regard, it has been argued[10] that only a mixed company, which has been newly incorporated by the public authority and the private partner, can be labelled as “pure IPPP”. Conversely, a mixed-company, the setting up of which is founded on a pre-existing public company, is instead, a “joint venture”. Before dealing directly with the importance of this distinction however, it is first necessary to consider the common conditions that have to be met in order to lawfully entrust a public task to a mixed-company no matter how it is created.
As has been admitted by the Commission itself, EC law (as interpreted by the ECJ) requires PAs to carry out two tendering procedures: one to choose the private partner and one for the awarding of the contract[11]. This approach is not however, problem-free. First, the requirement to carry out two tendering procedures is rather impractical. The public authority cannot be sure that the tendered contract will be awarded to the mixed company.
Furthermore, quite paradoxically, two tendering procedures would reduce rather than encourage competitive behaviour. The fact that a given public authority is, at the same time, both the tendering entity and shareholder[12] of one of the bidders, gives raise to a situation of conflict of interest. Furthermore, the requirement to have two tendering procedures makes the creation of a mixed-company of little appeal. Consequently a PA, unwilling to provide a public service through its own department, will normally entrust the task directly to an entirely public-owned company (the Teckal provision).[13] This option will result in a lower degree of competition than would result from setting up a mixed-company. The conclusion to be drawn from the above discussion therefore, is that the double tender procedure is not a feasible option.
Reliance on mixed companies, notwithstanding the risks of non-compliance with EC law, is still desirable, especially because it entails, at least to a certain extent, the opening up of a public market to competition.
Having said that, it is still unclear what steps need to be taken in order to ensure that a mixed company does not breach EC law.
In an attempt to clarify when a mixed company will not breach EC law the Commission states that it is necessary that the private partner be a “specific kind of partner” selected by means of a “specific kind” of procedure. In particular, the private partner cannot be a simple “private investor”, injecting capital into the company. Active participation in the carrying out of the tendered task is also required: “the private partner is selected by means of a procedure the subject of which is both the public contract[14] or the concession which is to be awarded to the future public-private entity, and the private partner's operational contribution to perform these task and/or his contribution to the management of the public-private entity. The selection of the private partner is accompanied by the founding of the IPPP and the award of the contract or concession to the public-private entity”[15] .
In order to asses the compatibility of the Commission’s proposals with the relevant EC law (as interpreted by the ECJ), a comparative examination with the CoS’s reasoning is helpful. In particular, it shows that these institutions share different views on a number of issues regarding the legal regime of mixed-companies. First, the Commission and the CoS take different approaches to the relationship between mixed-companies and the public tasks assigned to them, particularly in respect of to which entity the tendered contract is to be awarded. According to the CoS, the public task is not entrusted to the mixed-company, but materially awarded to the private partner. The Commission, on the contrary, considers that the public task is entrusted to the newly created entity. This is evident from the fact that the Commission requires the contracting public authority to include in the contract notice, or in the public contract itself, basic information on the public contracts and/or concessions which are to be awarded “to the future public-private entity.”[16] Further evidence is provided by the tender notice, which must include information on the arranged duration of the public contract or concession to be performed “by the public-private entity.”[17]
Second, the Commission and the CoS are also divided on whether the mixed-company is allowed to take on other activities in addition to the public tasks awarded to it. The CoS’s view is that the mixed-company shall carry out no other activities. This view is based on the assumption that the existence of the mixed-company itself is necessarily and inseparably linked to the public task which has been assigned to it. The Commission’s position however, is less restrictive and considers the mixed-company as just another economic operator. Therefore, the mixed-company may participate in other public tenders.
The Commission’s reasoning on these issues is not completely convincing and it leaves several problems unresolved. Firstly, the setting up of an IPPP is compatible with EC law on the sole condition that the private partner is chosen (pursuant to the regulations and principles governing public contracts) in relation to the specific task that the mixed-company has to carry out and in accordance with it. In other words, PAs have to act as normal private operators, which choose the best partner to carry out a specific economic activity. In practical terms however, as far as “pure IPPPs” are concerned, following the Commission’s reasoning, the public task is “directly entrusted” to the mixed-company. This is true even though the private partner is selected through a public tender procedure. It is uncertain how this situation should be evaluated under EC law. It remains to be seen how the ECJ will address the issue when faced with a preliminary reference on the point, especially in the light of its well settled body of case law that prohibits direct entrustment to a mixed company[18].
As far as joint ventures are concerned, if the task has already been directly entrusted to the pre-existing public company, the opening up of its capital to a private member is unlawful. Indeed, the ECJ has clearly ruled that one of the conditions to be met in order to lawfully proceed to the “direct entrustment” of a public task to a public company, is that the latter’s capital shall not be open to private partners in the future.[19] On the contrary, if the task has not yet been entrusted, the situation is exactly the same as in the case of pure “IPPPs”. On the one hand, the Commission requires the private partner to be selected in relation to a specific task and, consequently, for a limited period of time; on the other hand, it considers the mixed-company to be no different to a normal economic operator, free to engage in any economic activity. This is clearly a contradiction in terms.
One possible solution to the above questions could be found in the CoS’ Opinion. The CoS suggests that the activity be partially contracted out, with the PA maintaining strict public control over the entity by exercising its shareholder rights in the mixed-company. Such a solution was considered unfeasible by another judgment however,[20] where it was argued that partially contracting out a given task may not be compatible and would necessarily need to be coordinated with the general regulations and principles of company law.
IV. Sound management v. effective public control
Are public authorities free to rely on IPPPs instead of choosing another way of carrying out public tasks? Following the CoS reasoning, PAs are not entirely free, because they can only set up mixed companies if public interest reasons actually make the contracting out of the activity unfeasible. As a general rule, in accordance to the subsidiarity principle, any PA can decide how to perform the public tasks assigned to it, the only limitation being compliance with EC law. Moreover, the European Commission, in relation to “services of general interest”,[21] has stressed that “public authorities can provide their activities themselves (in-house provision) or by “contracting them out.”[22]
A few points should however, be made clear. Public activities, with the exception of so-called “core public activities” (such as those involving the exercise of public power, the adoption of general regulations and policy making) can be divided into “final activities” and “functional activities”. The latter are generally carried out for the benefit of the PA itself and are “functional”, in the sense that they indirectly enable public authorities to perform their statutory “final” activities. As far as the IPPP phenomenon is concerned, the distinction between “final” and “functional” activities emerges, albeit indirectly, through a comparative analysis of the 2004 Green Paper[23] and the 2008 Communication of the Commission. The 2004 Green Paper describes the IPPP as an entity jointly held by public and private partners, having the task of delivering a work or a service “for the benefit of the public.”[24] The 2008 Communication refers to IPPP as a co-operation between public and private parties involving the establishment of a mixed capital entity, which “performs public contracts or concessions.”[25] Therefore, in the 2008 Communication, the Commission seems to accept that IPPPs can be set up not only to carry out activities for the benefit of the public, but also for the benefit of the PA itself (notably “functional” activities).
In respect of how PAs can perform their public activities – be they functional or final – a distinction needs to be drawn between in-house provision, where the service to be performed does not go beyond the boundaries of the public sector and the Public Private Partnership model. In respect of in-house provision, Member States are free to fashion the way in which they satisfy their public obligations in their national legal systems. They can choose from several models, ranging from a “strict public provision” by Departments and Agencies, to a more flexible and business-minded/economic approach, by reliance upon Next Steps Agencies (Agenzie Ministeriali) and upon public companies in the sense that this term has been employed in the Teckal case.[26]
Another way of discharging public tasks is the Public Private Partnership method, which includes two different models: the contractual partnership (CPPP), consisting in the “contracting out” of the activity concerned; and the IPPP (that is the setting up of a mixed-company). It is worth noting, however, that, as referred to above, the CoS considers IPPPs as a particular form of CPPP, whereas the Commission seems to prefer a much clear distinction between the two of them.
The choice of which model to adopt has important consequences. As Prof. Craig[27] has pointed out, “the reasons for contracting out are said to be that: public sector “in-house” monopolies are inefficient and this is reflected in low productivity. There is an “open ended” financial commitment to public sector “in-house” units and such units do not take sufficient account of costs. Competition generates new ideas, techniques, etc. and contractors can be penalised for defective performance and late delivery. The reasons against contracting out are said to be that private contractors are unreliable, and may well default; (....) and private contractors in areas such as the Health service can place patients at risk (….)”
It is clear that the more an activity is “strictly in-house provided”, the more unlikely it is to be carried out in accordance with principles of sound management. It is equally clear that in case of “strict in-house provision”, public authorities have stronger and more effective control over the public task. Taking this into account, the question arises as to whether public authorities are free to choose among the above models in the light of the EC principles. In the author’s opinion, the answer to this question is in the affirmative. Nevertheless, some points have to be clarified, and this leads us back to the CoS’ Opinion, according to which the choice is free but not without limits. Any choice needs to be made on a case by case basis, taking into account the kind of activity at stake. More precisely, it is necessary to take into consideration whether the activity has a “final” or “functional” nature. A further element to factor in to any decision on how a PA is to satisfy a public obligation is the consequences that one model, as opposed to another, may have on public control over the assigned public task. The adoption of the CPPP model leads (or should lead) to a more efficient provision of the activities – particularly in respect of lower internal costs – but ultimately also leads to a reduction in the level of public control. The choice of “in-house provision” has the opposite effect: the strengthening of public control and less of a role for the business skills of the private partners.
Generally, “final activities” are carried out on what has been described as a “public market.”[28] They are “economic activities” – that is, activities consisting in offering goods and services “on” the market.[29] PAs, in order to make a lawful decision on how to carry out their obligations, must therefore bear in mind, not just public contract regulations, but also the overall EC regulations which apply to economic activities and in particular Article 86EC and the regime on services of general economic interest.
Functional activities, on the contrary, are not provided “on” a market, but for the benefit of the authority itself. Consequently, they cannot be considered as “economic activities”. The PAs therefore enjoy a larger margin of discretion on how to discharge their duties, as the EC regulations governing the exercise of economic activities do not need to be taken into consideration. It should be pointed out however, that in relation to some functional activities, a particularly strict degree of public control is needed. These activities are normally linked to core public law functions, the performing of which often entails the exercise of public powers.
Taking all of the above into consideration, it is arguable that mixed-companies can be considered a suitable method for balancing the conflicting exigencies faced by PAs. On the one hand, this model enables public authorities to rely upon the business skills of private partners and reduce the costs associated with the provision of the awarded services. On the other hand, within the mixed-company the public authority still has the capacity to exert a particularly strict control over the performance of the assigned public task. |
* L’articolo è in corso di pubblicazione su European Public Private Partnership Law Review, Lexxion 2008.
[1] Commission of the European Communities, 5 February 2008 C (2007) 6661.
[2] Commission of the European Communities, “Green Paper on public-private partnership and community law on public contracts and concessions”, 30 April 2004, COM(2004) 327 final.
[3] Case C-26/03, Stadt Halle and RPL Lochau v. Arbeitsgemeinschaft Thermische Restabfall, [2005] ECR I-1.
[4] Case C-107/98, Teckal v. Comune di Viano, Azienda Gas-Acqua Consorziale, [1999] ECR I-8121.
[5] See, ex multis, M. P. Chiti, “Verso la fine del modello di gestione dei servizi locali tramite società miste?”, at www.astrid-online.it.
[6]Sicilian Regional Administrative Court, judgment 589/2006, available at www.giustizia-amministrativa.it.
[7] Consiglio di Stato, sez., II, Opinion n. 458 of 18 April 2007, available at www.giustizia-mministrativa.it. Article 100 of the Italian Constitution confers advisory functions upon the CoS regarding some Italian Government acts. The CoS gave the Opinion at hand in its capacity as advisor. For a more detailed analysis of the Opinion, see M. Lottini, “Mixed (semi-public) companies and the provision of “public services”: a recent Opinion of the Italian Council of State”, EPPPL, 3, 2007, 135.
[8] Directive 2004/18/EC of the European Parliament and of the Council of 31 March 2004 on “the coordination of procedures for the award of public works contracts, public supply contracts and public service contracts”; Directive 2004/17/EC of the European Parliament and of the Council of 31 March 2004 “coordinating the procurement procedures of entities operating in the water, energy, transport and postal services sectors”.
[9] Commission of the European Communities, “interpretative Communication on the application of EC law on Public Procurement and Concessions to Institutionalised Public-Private Partnerships (IPPP)”, cit., par. 2.2.
[10] M. Burnett, “The application of public procurement law to Institutional PPPs (IPPP) – some practical considerations”, EPPPL, 3, 2007, 129.
[11] Commission of the European Communities,” interpretative Communication on the application of EC law on Public Procurement and Concessions to Institutionalised Public-Private Partnerships (IPPP)”, cit., par. 2.2.
[12] Indeed, as a general rule, public authorities tend to have a controlling shareholding in the mixed company.
[13] The capital of which will remain in the hands of the public authority itself.
[14] The Commission specifies that contracts of the kind in issue are to be considered as an example of those “complex contracts” for the awarding of which the “competitive dialogue” is to be used (article 29 of directive 18/2004/EC) Moreover, the Commission stresses that special attention has to be paid “to those contracts which fall outside the scope of the public procurement regime”. A number of principles and rules, such as a high level of transparency, equal treatment, ex ante disclosure of the tender notice and of the relevant criteria for the award of the tendered task, also apply to these contracts. See, par. 2.3.
[15] See, par. 2.3.5.
[16] Ibid.
[17] Ex multis, Case C-26/03, Stadt Halle and RPL Lochau v. Arbeitsgemeinschaft Thermische Restabfall, [2005] ECR I-1.
[18] The ECJ held that a direct entrustment of a given task does not infringe EC law if the assignment of the task is not based on an agreement between two different persons (Teckal). So the task assigned to the operator has to be treated no differently than if it were simply delegated internally. In fact, one entity is not independent from the other. One entity exercises a form of control over the other, which is similar to that which it exercises over its own departments. Moreover the controlled entity must carry out the essential part of its activities with the controlling authority or authorities. In other words, public contract regulations are not applicable in a case such as this, where there is no contract.
[19] Case C-458/03, Parking Brixen, [2005] ECR I-8585.
[20] Consiglio di Stato, sez. V, Judgment n. 5587/2007, available at www.giustiziamministrativa.it.
[21] Inter alia, see, Commission of the European Communities, “Green Paper on services of general interest”, 21 May 2003, COM(2003) 270 final.
[22]Commission of the European Communities, Green Paper on services of general interest, cit., par. 79.
[23] Commission of the European Communities, “Green Paper on public-private partnership and community law on public contracts and concessions”, cit.
[24] Ibid., cit., par. 3.
[25] Cit., Par. 1.
[26] Case C-107/98, Teckal v. Comune di Viano, Azienda Gas-Acqua Consorziale, [1999] ECR I-8121.
[27] P.P. Craig, “Administrative law”, 3rd.eds. Sweet & Maxwell, 1994, 110.
[28] C. Bovis, “How should services of general interest be financed: Does the relation between state aids and market forces reveal a link with Public Private Partnerships?”, EPPPL, 3, 2007, 153.
[29] Case C-118/85, Commission c Italy [1987] ECR 2599. |
