Patrick McGovern Partner Arthur Cox

1. IRISH CENTRE FOR EUROPEAN LAW TRINITY COLLEGE DUBLIN PUBLIC PROCUREMENT CONFERENCE • Shared and Collaborative Services • 28 June 2012 • Royal Irish Academy, Dublin Patrick McGovern Partner Arthur Cox

2. Fundamental Principles of EU Law • Equality • Non-Discrimination • Transparency • Proportionality (particularly relevant in this context) • Reflected expressly in Public Sector Directive 2004/18/EC and in (UK) Public Contracts Regulations 2006 (SI 2006 No 5) (eg Regulation 4(3)) (Regulation 17 of (Irish) European Communities (Award of Public Authorities’ Contracts) Regulations 2006 (SI No 329 of 2006)) (equality, non-discrimination and transparency)

3. Legislative Bases • Treaty on the Functioning of the EU (TFEU) • Transparency • Applies to Selection and Award Criteria • Long line of cases • Review of EU Procurement • Extensive in 2011 • Takes into account “secondary” objectives in policy such as social, labour, environmental – Relevant to e.g. Shared Services • Green Paper on “Modernisation of EU Public Procurement Policy – Towards a more efficient European Procurement Market” (COM (2011) 15/4) published 27 January 2011 – consultation period to 18 April 2011 • Green Paper on “Expanding Use of e-Procurement in the EU”, (COM (2010) 571 Final), 18 October 2010 – consultation closed 31 January 2011 • Evaluation Report, European Commission, June 2011

4. Legislative Bases • Legislative Proposals 20 December 2011 • 3 new draft Directives (1 on Concessions – first time), • Explanatory Memorandum • Working paper • Working Document • ● Commission envisages enactment into national law by 30 June 2014 if adopted by end 2012 • ● “Clusters” of issues in Legislative Proposals under active discussion in Working Groups in Brussels • Directive 2004/18/EC • Recitals (5) and (6) Protection of the Environment and promotion of Sustainable Development – Again, relevant to Shared Services

5. Shared Services • Contracting Authorities procuring together • Economic/Technical Imperatives • Central purchasing body • Framework Agreement • Provisions in Directive 2004/18/EC and Public Contracts Regulations 2006 (SI 2006 No 5) • Other Legal Dimensions, e.g. • - Vires • - TUPE • Many UK Government Reports and Initiatives • Ireland – Croke Park Agreement – Shared Services and Outsourcing

6. Shared Services - Teckal Exception • Case C-107/98 Teckal SrL v Comune Di Viano [1999] ECRI-8121 • Judicially created • Intended to cover in-house services or services provided by a “captive” subsidiary/entity • But under Public Procurement Law no general exception exists simply because contractual counterparty is itself also a Contracting Authority : Case C-84/03 Commission v Spain [2005] ECRI-139 • Rationale for Teckal is that not really a contract with a different party or parties for purposes of Directive • One Public Authority to Another: Case C-475/99 Ambulanz Glöckner v Landkreis Südwestpfalz [2001] ERC I-8089 – to be distinguished from Outsourcing or a Service Concession

7. Shared Services - Teckal Exception • See also: • - Mr Binman Ltd v Limerick City Council [2005] IECH 192 (Dunne J) • - Ryanair Ltd v Minister for Transport [2009] IEHC 171 (Finlay Geoghegan J) • - Case C-532/03 Commission of European Communities v Ireland [2007] ECRI - 11353 • New Guidance on Service Concessions: Case C-274/09 Privater Rettungsdienst und Krankentransport Stadler v. Zweckverband für Rettungsdienst und Feuerwehralarmierung Passau, 10 March 2011 • See generally • - Report of Procurement Lawyers Association Working Group on Shared Services (January 2011) and (post Brent) Addendum (April 2011), www.procurementlawyers.org and • - EU Green Paper (January 2011) and subsequent developments leading to Commission Legislative Proposals, December 2011

8. Shared Services - Teckal Exception • Under Teckal, contracting authority must exercise “over the person concerned a control which 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 activitieswith the controlling authority or authorities” • (emphasis added) • Two limbs • “control” element • activity • Teckal – private sector participation • Any element of private participation ousts benefit of Teckal exception • Case C-26/03 Stadt Halle and subsequent cases

9. Shared Services - Teckal Exception • However, where provision made for subsequent investment in Teckal vehicle it is not necessarily illegal before that investment would happen : Brent LBC v Risk Management Partners Ltd [2009] EWCA Civ 490, [2010] PTSR 349 • However, Teckal allows more than one “parent” or controlling contracting authority over the SPV or similar “captive” service provider • See Case C-324/07 Coditel Brabant SA v Commune d’Uccle [2008] ECRI-8457[2009] 1CMLR 29 • Multiplicity of small municipalities in Brussels Capital Region • Management of “Brutélé” • For benefit only of municipal authorities and with their hands on involvement of each • Contrast with Brent LBC • Case C-340/04 Carbotermo Spa v Comune di Busto Arsizio [2006] ECRI 4137

10. Shared Services - Teckal Exception • Risk Management Partners Ltd v Brent LBC [2009] EWCA Civ 490 [2010] PTSR 349 • Mutual company formed by Brent and several other London boroughs to provide insurance arrangements to participating Boroughs • Contracts awarded without contract notice and without any competition to London Authorities Mutual Ltd (LAML) the SPV company • Challenge in High Court (Stanley Burnton LJ) and in Court of Appeal • Challenge successful on ultra vires grounds (relevant UK local government legislation) and on Public Procurement grounds (as unlawful or illegal direct award) • Judgment in Court of Appeal on 9 June 2009 – by coincidence the very same day as judgment in European Commission v Germany (Hamburg Waste Case) – see below

11. Shared Services - Brent – Some Peculiar Features • Business of SPV (London Authorities Mutual Limited) (“LAML”) under control of its Board • Majority of member directors nominated by six of the (representative) Boroughs (not Brent) • Awarding authority contracted independent management • Provision for Borough to be excluded from decision making in relation to a claim by itself (conflict of interest/insurance principles) • General Meeting empowered to give directions to Board by special resolution • General Manager was from private firm of managers with broad powers subject to direction by Board

12. Shared Services - Brent – Some Peculiar Features • Judgment held that control condition could be satisfied by joint control (multiple controllers over Teckal SPV entity) • Control test not satisfied on facts of case especially in light of peculiar features of relationship of insurer and insured together with independent manager • Teckal was an exception and fell to be construed narrowly as such • Court also adverted to fact that directors’ duties owed to LAML in context of large sums and with significant financial regulator requirements

13. Shared Services - Brent – Some Peculiar Features • Arrangements between Board and management company designed to produce “operational independence” but this not consistent with Teckal control regime • Court also noted differing interests of different authorities and affiliates – not consistent with collective control by the promoting Boroughs • However, Moore-Bick LJ thought use of contracted or private managements “not in itself fatal” but he adverted to “an air of unreality about the notion that a public body can obtain insurance from one of its own departments, since it is of the essence of insurance that risk is transferred from one person (the insured) to another person (the insurer).”

14. Shared Services - Some Questions arising from Brent • Very restrictive approach to Teckal in Court of Appeal • Quaere: if Board were not entitled to such significant powers might this, on relevant and appropriate conditions and in appropriate circumstances, still be consistent with Teckal provided these powers to be exercised for the benefit of the members • Quaere: whether directors’ fiduciary duties to company (rather than its shareholders a typical feature of English and Irish law) would necessarily be fatal - a benefit of Teckal exemption in Ireland or UK

15. Shared Services – Brent - UK Supreme Court • Coincidentally Court of Appeal Judgments delivered on very same day as Case C-480/06 Commission v Germany (Hamburg Waste), [ 2009] ECRI-4747, 9 June 2009 • Appeal heard from Court of Appeal before UK Supreme Court in December 2010 over three days • Separate Judgments given by Lord Hope, Deputy President, and Lord Rodger, with Lords Walker, Brown and Dyson concurring • Supreme Court held that: • Teckal exception applied to the UK Regulations – this was so even though the definitions in UK Regulations are slightly different from those in the Directive but, nevertheless, the purpose of the UK Regulations was to give effect in national law to the Directive. There was nothing to indicate that the UK Regulations were intended to depart from the Case Law of the ECJ (now CJEU) • Teckal exception was available in respect of insurance contracts. Whether the service was one which the local authority could provide for itself was irrelevant; the key was whether the arrangement satisfied the control test • the London Boroughs did exercise sufficient collective control over LAML

16. Shared Services – Brent - UK Supreme Court • Reference made by Supreme Court to • - LAML Board not validly constituted unless majority of those present were • Directors representing a participating Borough • - each participating Borough had one vote at General Meetings and retained power to direct the board by special resolution • - the fact that a Director could not participate in a Board Meeting which considered • a claim by a member (conflict of interest provision) was merely a matter of detail • - no private interests were involved • - the functional test (LAML must carry out the essential part of its activities with the controlling boroughs) – this was held to be satisfied here • Extensive review of ECJ Case Law • Purposive interpretation of Directive adopted • Purpose of Directive was not to protect commercial sector by compelling public authorities to obtain services which they needed on the commercial market – that would remain a matter of discretion for the relevant public authorities

17. Shared Services – Brent - UK Supreme Court • Rather, purpose of Directive was that, if public authorities chose or elected to seek to obtain services from outside bodies then proper procedures had to be followed to ensure that potential providers had an opportunity to compete fairly for the work • Accordingly, Directive did not apply where a public authority obtained goods or services from its own resources • Furthermore, applying Teckal, where public body obtains services from separate body so closely connected with it the public body should still be regarded as, in substance, obtaining the services in-house. Then procurement formalities did not apply • No distinction in principle between bodies being controlled by single local or public authority or several local or public authorities

18. Shared Services – Brent - UK Supreme Court • Teckal control test required public authority to exercise decisive influence over both strategic objectives and significant decisions of the controlled body • Sufficient that the public authority could exercise control over controlled body either alone or together with other public authorities • Applied test that no private investment in controlled body was permissible (Stadt Halle) • Consistent with Directive where public bodies allowed to participate in collective procurement of goods and services so long as no private interest involved and public bodies are acting in public interest • Any argument that individual control was necessary would contravene ECJ Case Law

19. Shared Services - Hamburg Case • European Commission v Germany Case C-480/06, ECJ, [2009] ECRI-4747, 9 June 2009 • Other Hamburg region local authorities made arrangements with Hamburg City to supply waste to Hamburg City which in turn went to market to secure construction and operation of incinerator plant • On foot of complaint, European Commission challenged arrangements between the City of Hamburg and the neighbouring districts or local authorities as to the arrangements between them for waste supply to each other • Contract for construction and operation of incinerator plant not impugned and outside the decision – it had gone to the open market

20. Shared Services - Hamburg Case • European Commission (supported by Advocate General) contended that a procurement competition was necessary because it was not a Teckal exemption case – on the basis that the neighbouring districts did not control the City of Hamburg • European Court sanctioned arrangements. Para 47 of Judgment states: • “… Community Law does not require public authorities to use any particular legal form in order to carry out jointly their public service tasks … . Such cooperation between public authorities does not undermine the principal objective of the Community rules on Public Procurement, that is, the free movement of services and the opening up of undistorted competition in all the Member States, where implementation of that cooperation is governed solely by considerations and requirements relating to the pursuit of objectives in the public interest and the principle of equal treatment … is respected, so that no private undertaking is placed in a position of advantage vis-a-vis competitors …”

21. Shared Services - Features/Rationale of Hamburg Judgment • There was no profit element whatever accruing to any of the participating districts (either Hamburg City or its neighbours) • Arrangements were cooperative between public authorities performing public tasks • Facilitating City of Hamburg and putting in place large facility to the benefit of Hamburg and its neighbours being regarded as in public interest • Cooperation between districts was not all one way – (merely supplying waste to Hamburg City) but there were important reciprocal elements • There were no financial transfers other than reimbursement of costs and importantly no profit making

22. Shared Services - Other Questionsarising from Hamburg Judgment • This appears to be new “exception” (if an exception at all) • Quite distinct from Teckal but clearly related: Case C-573/07 Sea Srl v Comune di Ponte Nossa, [2009] ECRI-8127, 10 September 2009 • Could have formed a Teckal company to put in place in Hamburg arrangements • All arrangements very local amongst contiguous authorities or municipalities (in that respect, similar to Coditel)

23. Shared Services - The Future • Each of Teckal and Hamburg seems to represent an important exception • Each to be construed narrowly • Nevertheless likelihood that each will be developed further in the near future • Recent English case R (Chandler) v Secretary of State for Children, Schools and Families, [2009] EWCA Civ 1011 [2010] PTSR 749 [2010] EuLR 232 (9 October 2009) • Croke Park Agreement • Shared Services • Outsourcing • Models

24. Patrick McGovern Partner Arthur Cox Tel: + 353 1 618 0545 Email: patrick.mcgovern@arthurcox.com http://www.arthurcox.com/procurementlawupdate