ECJ Rules on when a company owned by a contracting authority is governed by procurement rules

INTRODUCTION

A recent ruling of the European Court of Justice (ECJ) has confirmed that a wholly owned subsidiary of a contracting authority can itself be regarded as a ‘body governed by public law’ and therefore subject to the procurement rules, even where it is active in a competitive market. The judgment, LitSpecMet UAB v Vilniaus lokomotyvu remonto debas UAB (C-567/15) will have implications for contracting authorities establishing group companies providing a mix of public service and market-facing profit making activities.

HOW DID THE ISSUE ARISE?

The issue arose from a request for a preliminary ruling from a regional court in Lithuania to the ECJ over whether a company (VLRD) would be considered to be a ‘contracting authority’ where:

• it had been established in 2003 by a public company operating a state-owned rail transport network (LG), which itself was a ‘contracting authority’;
• it independently engages in business activities and competes throughout the European Union and beyond, manufacturing rolling stock and providing rolling stock repair services;
• at the time, VLRD provided 90% of its services to LG (i.e. in-house services); and
• the in-house services were intended to ensure LG’s passenger and freight transport activities.

An interesting follow up question from the referring court, was whether the analysis would be different if the value of VLRD’s in-house services to LG fell below 90% of its turnover, or indeed represented only an insignificant part of the company’s turnover.

WHAT DID THE ECJ DECIDE?

The test under the EU public procurement rules for whether an undertaking is ‘a body governed by public law’ is whether it:

• is established for the specific purpose of meeting needs in the general interest, not having and industrial or commercial character;
• has legal personality; and
• is financed by a government authority (State, regional or local) or body governed by public law; or it is majority owned or controlled by such a body.

There is well established case law that this is a cumulative test and, if one element is not satisfied, then a body cannot be regarded as ‘a body governed by public law’ and therefore is not a contracting authority.

In the case of VLRD, it was clear that it had legal personality and was controlled by LG. The critical question was whether it was a body ‘established for the specific purpose of meeting needs in the general interest’. To determine that question, the ECJ looked at the history of VLRD’s establishment from which it was clear that it had been formed as part of the restructuring of LG and to service its requirements. Therefore, despite the fact that it also carries out activities on competitive markets under normal market conditions and aims to make a profit and bear the losses associated with it activities, the ECJ concluded that it met the test, and is a contracting authority.

Having reached that view, the ECJ concluded that the fact that the value of the in-house services VLRD might provide to LG in the future could represent substantially less than 90% of its turnover was not determinative to its status as a contracting authority.