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A B C D E F G H I J K L M N O P R S T V W Y

Can a Contracting Authority use a Teckal company to trade with third parties?

Can a Contracting Authority use a Teckal company to trade with third parties?
Wednesday 11th November 2015

The Public Contracts Regulations 2015 (the ‘Regulations’) govern the award by a “contracting authority” of a “public contract” for goods, works or services over a particular value. There are, however, certain types of contracts which are excluded from the scope of the Regulations.

Regulation 12 codifies the exemption which arose out of the Teckal case (the ‘in-house exemption’). In this article we will consider whether the in-house exemption, which exempts contracts between a contracting authority and a wholly (or partly) owned subsidiary (“Teckal company”) from the application of the Regulations, could be used by the contracting authority to trade for the purposes of third party revenue generation.

Under Regulation 12, a contract will be considered to be exempt from the application of public procurement law where the following conditions are met:

  1. the contracting authority exercises control over the Teckal company “which is similar to that which it exercises over its own departments”;
  2. more than 80% of the activities carried out by the Teckal company are carried out in the performance of tasks entrusted to it by the contracting authority or other bodies which the contracting authority controls; and
  3. the Teckal company is not directly privately owned.

If the above conditions are fulfilled, a contracting authority may directly award a public contract to the Teckal company without needing to put it out to tender. However, the conditions are cumulative and as such, all of them must be fulfilled before the in-house exemption can apply.

Recital 31 of the Public Contracts Directive (Directive 2014/24/EU), from which the Regulations are derived, states that Regulation 12 must be interpreted in accordance with existing case law. This means that the motive of the contracting authority in setting up a purported Teckal company must be examined to determine whether it is “commercial in nature” and/or “market orientated”. The more commercial it is, the less likely the in-house exemption will apply.

Arguably, the requirement which is most limiting and difficult to ensure under Regulation 12 is that more than 80% of the Teckal company’s activities must relate to the performance of tasks entrusted to it by the contracting authority. This means that only up to 19% of the Teckal company’s activities (calculated by taking into account the previous 3 years’ total turnover or activity) may take place on the open market. The rationale behind this threshold is that if the Teckal company’s open market activities are higher than 19%, it would be competing with other companies which are not exempt from the Regulations and, as such, would gain an unfair commercial advantage over them.

Although the 80% threshold is lower than that generally assumed prior to the Regulations coming into force, it continues to prevent a Teckal company from carrying out “commercial activities” which are not public sector focussed. As such, a contracting authority must be clear as to the role of any company it sets up and whether its activities could potentially be considered “commercial in nature”.

A contracting authority would need to exercise continued control and supervision over the activities of the Teckal company in order to ensure that such activities do not exceed the 19% threshold and could not be considered as “commercial in nature”. This is because if the threshold is exceeded or the activities of the Teckal company are considered to be commercial, the company will no longer comply with Regulation 12 and any contract awarded to it by the contracting authority would be considered an illegal direct award and a breach of the Regulations.

Therefore, it seems that if a contracting authority wishes to use a subsidiary company to trade commercially, it would need to set up a subsidiary which is not intended to be used for the contracting authority’s own activities, at least not without going through an OJEU-compliant tender. As the subsidiary would be commercial in nature, it could generate income but it would not be able to assist with tasks or services for the contracting authority itself.

Therefore, it appears a subsidiary company of a contracting authority can only be either a Teckal company or trade commercially, but not both. So what is the solution?

One possibility is for a contracting authority to set up two companies: i) a commercial entity for revenue generation and ii) a Teckal company which fulfils the in-house exemption requirements.

This type of arrangement would allow the commercial entity to be commercially focussed and market orientated, allowing it to contract with third parties and have profit making as its main focus for the benefit of the contracting authority. The Teckal company’s role would have a public sector focus and be able to deliver the contracting authority’s services, and such an arrangement would benefit from the in-house exemption.

As both companies would be within a group structure, the arrangement could allow the contracting authority to reduce its costs by effectively operating two subsidiaries each with a different focus but with one set of overheads as resources and costs could be shared between both companies by agreement, effectively increasing profit and efficiency.

Contracting authorities should, however, be aware that numerous different considerations and legal advice should be sought before adopting and maintaining such a corporate structure.


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