In this case the Court of Justice of the European Union (ECJ) considered whether arrangements for the "transfer of competences" between contracting authorities fell outside EU law in general and the public procurement Directives in particular. The transfer of competences is not a new concept but it is the first time that the ECJ has considered the issue in such detail. The ECJ confirmed that it in certain cases a transfer of competences will fall outside EU law and the procurement rules, but it set out stringent conditions which must be met in order for the exemption to apply.
Facts in brief
In January 2003 the Region of Hannover and the City of Hannover set up a special-purpose association (SPA) to undertake various tasks. An SPA is a particular type of organisation provided for under German law, and authorities that transfer duties to an SPA are released from the obligation to perform those duties. The Region of Hannover and the City of Hannover transferred various tasks to the SPA. One of the tasks transferred to the SPA was waste disposal for the Region of Hannover.
To enable the SPA to carry out the transferred tasks the City of Hannover and the Region of Hannover transferred to the SPA, at no cost, their respective bodies responsible for waste disposal, street cleaning and winter road maintenance tasks. The Region of Hannover also transferred to the SPA, again at no cost, 94.9% of the shares in its wholly owned waste treatment company.
The articles of association of the SPA permitted the SPA to have recourse to the services of third parties for the performance of its tasks, to enter into contracts for collection of packaging required for disposal of waste and recovery and to charge fees. In so far as the revenue was not sufficient to cover the costs of its tasks, the two authorities were required to pay contributions, determined annually.
By 2011 the activities of the SPA generated an annual turnover of approximately £189 million Euro.
Remondis is a commercial provider of waste disposal services. The SPA had been set up and operating for some years before Remondis brought a challenge in the German courts questioning the lawfulness of the transfer by the Region of Hannover of waste treatment tasks to the SPA. Remondis argued that whilst the original arrangements fell within the in-house “Teckal” exception, the increase in the levels of activity of the SPA for third parties meant that the exception no longer applied and so the arrangements were an unlawful award of a public contract.
The Region of Hannover and the SPA used a very different line of reasoning in response. They argued that the arrangements were not a public contract but a statutory decision concerning transfer of competences which are matters of internal state organisation and so do not fall under EU law in general and the public procurement law in particular.
ECJ case law has made it clear on a number of occasions that the internal organisation of a Member State does not fall under EU law. This is in line with Article 4(2) of the Treaty on the EU which provides protection for Member States by requiring the EU to respect the “national identities of Member States, inherent in their fundamental structures, political and constitutional, inclusive of regional and self-government” as well as respecting essential State functions. The ECJ has also previously recognised the possibility of transfer of competences falling outside the public procurement rules.
The 2004 Public Sector Directive, which was the applicable Directive at the time the challenge was made, was silent on the issue of transfer of competences. The 2014 Public Sector Directive specifically addresses the issue, confirming that matters of internal organisation of a member state, which may include transfer of powers and responsibilities, are not subject to the 2014 Directive.
Judgment of the ECJ
Definition of a public contract and the division/transfer of competences
The ECJ first looked at the definition of a “public contract”. It confirmed that in deciding whether a multi-stage operation (in this case the creation of the SPA, transfer of tasks and subsequent operation of the SPA) falls within the definition of a public contract the arrangement must be examined as a whole, taking account of its purpose.
The ECJ confirmed that “division of competences” (which includes transfer of competences) by a Member State are organisational measures which are an internal matter for the Member State alone. According to the ECJ, an essential characteristic of a division of competences is “the consequence that a previously competent authority is released from or relinquishes the obligation or power to perform a given public task, whereas another authority is henceforth entrusted with that obligation or power.”
In considering the definition of a public contract the ECJ noted that a division of competencies will not meet all of the conditions. This is because such an arrangement does not involve a contract for pecuniary interest as there is (1) no direct economic benefit to the contracting authority which has transferred its powers to another public authority; and (2) there is no payment of a price. The ECJ also confirmed that a public authority which transfers a task together with powers related to that task no longer has an economic interest in those tasks.
Conditions which a transfer of competence must meet in order to be an internal organisational measure not subject to EU law and the Public Sector Directive
The ECJ emphasised that certain conditions must be met in order for a transfer of competence to be considered an internal organisational measure of a Member State. There are two interrelated conditions which can be identified from the judgment.
Condition 1: There must be a complete and comprehensive transfer of the competence by the transferring authority to the transferee authority.
There must be a full transfer of the responsibilities concerned with the transferred competence, including the obligation to perform the task that the competence entails. There must also be a transfer of the powers that are a corollary to the transferred competence. The transferring authority must completely relinquish its powers in relation to the transferred competence. The transferring authority cannot retain primary responsibility over the transferred tasks.
Condition 2: The transferee authority must have complete decision-making autonomy and financial autonomy
The transferee authority must have decision-making autonomy: it must act autonomously and under its own responsibility in the performance of its task and must have the power to determine the regulatory framework and procedure for the performance of that task.
Advocate General Mengozzi (the AG) emphasises that the transferee authority "must be able to carry out the tasks for the performance of which powers have been conferred on it in full autonomy." The transferring authority must not have to provide prior approval for decisions by the transferee authority.
The transferee authority must also have financial autonomy allowing it to ensure the financing of the tasks for which powers are transferred to it.
The AG explains that "It thus must not depend financially on the transferring authority in the performance of that task". The transferring authority (or any other authority involved in the internal reorganisation of the public power in question) is able to provide the transferee authority with the necessary resources to perform the task. However, according to the AG, the provision of necessary resources "must not correspond to the remuneration to be given for contractual performance in the context of a relationship entailing reciprocal obligations."