Further clarity on the second limb of the 'Teckal Exemption'

Thursday, 9th February 2017

Advocate General Sanchez-Bordona (the "AG") has given a preliminary opinion regarding the correct application of the 'Teckal Exemption' to the activities of an in-house provider. The AG's opinion on the case of Undis Servizi Srl v Comune di Sulmona and others (2016) ("Undis Servizi") has clarified the second limb of the three part 'Teckal Exemption'.

The Teckal Exemption

If an organisation can meet the requirements of the 'Teckal Exemption', under the Public Contracts Regulations 2015 ("PCR 2015") the contracting authority will be permitted to make an 'in house' award of a public contract without a procurement process. The test for the exemption consists of three cumulative criteria, the second of which is that more than 80% of the activities of the controlled entity must relate to the performance of tasks given to it by the contracting authority ("the 80% test").

The Undis Servizi opinion

This case arose when an Italian local authority ("Sulmona") awarded a waste management contract to a company owned by several local authorities of the Abruzzo Region, including Sulmona.

Undis Servizi, a company with an interest in the contract for waste services, claimed that the 80% test had not been met, highlighting that the company's financial statements covering the years 2011 to 2013 indicated that only 50% of its activities derived from shareholder local authorities.

The Italian courts referred the issue to the Court of Justice of the European Union ("CJEU") for a preliminary ruling.

The AG's opinion in this matter (if adopted by the CJEU) may go some way to clarify how the 80% test should be calculated.

The principal points of interest in the opinion were that:

  • Any application of the Teckal Exemption must be interpreted strictly
  • There must be a clear, specific internal link between the contracting authority and the contractor, even if the latter is an entirely separate legal entity
  • It is essential that the contractor’s activity be principally devoted to the controlling authority or authorities. To determine this, the court has to take into account all the facts of the case, both qualitative and quantitative.
  • Following an analysis of this kind, any activity of the contractor which is found to be devoted to persons other than its controlling shareholders, including non-shareholder public authorities, must be regarded as being carried out for the benefit of a third party, and so should not be taken into account when calculating the 80% test.

Presently, the only guidelines on calculating the 80% test are found in Directive 2014/24:

  • The percentage of activities carried out in the performance of tasks for the contracting authority should be calculated based on average total turnover, or an appropriate activity-based measure such as costs incurred by the relevant contracting authority with respect to services, supplies and works for the three years preceding the contract award, and
  • Where the turnover, or alternative activity based measure such as costs, are either unavailable or irrelevant, it shall be sufficient to show that the measurement of activity is credible.

If the opinion is adopted by the CJEU, the guidelines outlined in the opinion may be read together with this Directive to make it easier for contracting authorities to calculate whether the 80% test is met when seeking to apply the Teckal exemption in order to make in-house awards of public contracts.

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Lucy Woods

Senior Associate

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+44 (0)1392 333977


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