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Cooperation contracts not subject to public procurement law – new leeway for direct public-public cooperation

03/29/2019 - Reading time: 5 minutes

Author

Bernhard Scherzer

Associate

Against the backdrop of tight budgets, cooperation with others in the same situation is an important topic for many of Austria’s municipalities, specifically when it comes to waste and sewage disposal, IT services, or drinking water supply. A study conducted by the Austrian Institute for Federalism showed that close to 1,000 municipal cooperative ventures existed in 2016 in Tyrol alone. Apart from many other legal provisions, it is above all public procurement law that has to be kept in mind when implementing such a cooperation. So far, the question that came up most regularly in this context was under what conditions municipalities (and other local authorities and public economic operators) were allowed to cooperate without being subject to public procurement law rules and thus to an obligation to issue calls for tender.

The newly promulgated 2018 Federal Procurement Act (Bundesvergabegesetz 2018, BVergG 2018), which implements the 2014 Public Procurement Directive, has now created legal certainty in this respect. For the first time, the BVergG 2018 now regulates explicitly under which conditions municipalities are allowed to cooperate directly – without any legal entity controlled by them being ‘interposed’ – on the basis of a civil-law contract and without being subject to public procurement law. The following provides a brief overview of the conditions and requirements applicable under the new legal framework:

Pursuant to section 10 (3) BVergG 2018, contractual cooperation between municipalities is not subject to public procurement law if:

“1. […] the contract establishes or implements a cooperation between the participating contracting authorities with the aim of ensuring that public services they have to perform are provided with a view to achieving objectives they have in common;

2. the implementation of that cooperation is governed solely by considerations relating to the public interest; and

3. the participating contracting authorities perform on the open market less than 20% of the activities concerned by the cooperation.”

Each of the municipalities involved must make a real contribution

On the basis of the ‘cooperative concept’ underlying the cooperation, all the municipalities involved must make a contribution to performing the relevant public service that exceeds any remuneration payments as may be contemplated in the contract. This means that the cooperation must not take the form of one of the municipalities involved acting as mere procurer of services (‘remuneration for performance’). While it is not required that all municipalities involved take on equivalent duties and obligations, the cooperation partners still have to ensure, when structuring such a cooperation, that all of them will make a real contribution. Given the principle of non-circumvention as enshrined in European Union law, a cooperation will not be deemed admissible and thus not subject to public procurement law pursuant to section 10 (3) BVergG 2018 if one of the municipalities involved provides nearly all of the services or makes only a formal contribution.

Cooperation between municipalities to provide ‘public services’

What is more, municipalities may only establish or implement a cooperation that is not subject to public procurement law if such cooperation concerns the provision of ‘public services’ the cooperating municipalities have to provide. In its case law so far, the ECJ has alternated in limiting the admissibility of contractual cooperation without a call for tender to either ‘public tasks’ or ‘public interest tasks’. In light of such case law, there are compelling reasons to believe that a contractual cooperation for performing public services, being public interest tasks which are not in general carried out mostly by private parties, is admissible under public procurement law. However, for such cooperation to be admissible, it is not necessary that the tasks of all cooperating municipalities be equivalent, they may also be complementary. It is thus not primarily relevant whether the task is identical (‘joint’), but whether the tasks to be performed by (each) of the municipalities serve to achieving a common objective.

In addition, the cooperation, including any financial transfers between the municipalities,  must be governed solely by considerations relating to the public interest. Consequently, no private contractor must be given an advantage over their competitors. In this context, financial transfers between the municipalities are in any case harmless if they are limited to mere cost equalization.

Limited open market activity

Finally, the inherent principles of public procurement law, in particular the principle of fair competition, set narrow limits for how much open market activity is admissible for the cooperating municipalities. Under these principles, performance on the open market (outside the cooperation) is limited to less than 20% of the activities concerned by the cooperation. There are different ways to determine what percentage is admissible: (i) If records exist for the three years preceding contract award or conclusion of contract, the reference value will be either the average total revenue of all services provided by the municipalities within the scope of the cooperation, or a suitable alternative value related to the activities in question. Such a suitable alternative value may be the cost incurred by the municipality in question during the three years preceding contract award or conclusion of the cooperation contract. (ii) Where no record of revenue or a suitable alternative value exists for this three-year period (either because of the time of establishment or the time of commencement of operations), it is sufficient if the relevant figure is based on forecasts or reliable estimates.

Conclusion

By eliminating existing legal uncertainties and creating a clearly defined exemption (also) for public-public contractual cooperation, the BVergG 2018 gives municipalities more leeway in shaping contractual relationships. They can now cooperate directly on a contractual basis without the need for a call for tender if (i) the cooperation concerns public services, if (ii) each municipality involved in the cooperation makes a ‘real’ contribution, if (iii) the cooperation is governed solely by considerations relating to the public interest, and if (iv) less than 20% of such activities are performed on the open market (outside the cooperation). As tasks are becoming increasingly complex and therefore require more and more specialisation, public-public cooperation is expected to keep growing in importance also in the future.

Author

Bernhard Scherzer

Associate