Tales from the National Appeal Chamber: Non-statutory grounds for in-house procurement?
Municipal waste collection and transport is the subject of many in-house procurements in Poland. Art. 67(1)(12) of the Public Procurement Law provides one of the possible grounds for awarding such contracts, requiring the contracting authority to meet three conditions. But are there really only three? This issue arose in a case in which the National Appeal Chamber had to decide whether the contracting authority must also meet other, non-statutory conditions to properly award a sole-source contract.
National Appeal Chamber (KIO) ruling of 16 December 2020 (case no. KIO 3069/20)
Factual state
Intending to award a sole-source contract for collection and transport of municipal waste to a company controlled by a Polish municipality, the municipality published a notice of intended award. According to the justification prepared by the contracting authority, the basis for applying the sole-source procedure was Art. 67(1)(12) of the Public Procurement Law.
A contractor appealed, demanding that the contract be awarded competitively. The contractor questioned the nature of control that the contracting authority exercised over the subordinate company, claiming that the supervisory board of the company had no real influence over the decisions of the management board and the shareholders meeting. Moreover, in the contractor’s view, it was erroneously found that more than 90% of the activities of the controlled company concerned the performance of tasks entrusted to it by the controlling contracting authority, since, according to the National Court Register (KRS) excerpt, the subject of the activity of the company to which the contracting authority wished to award a sole-source contract was the collection of non-hazardous waste. In the contractor’s view, this did not guarantee that in the future the company would carry out its activities almost exclusively for the contracting authority and exclusively in the area of waste management.
In addition, the contractor alleged that the contracting authority violated the principles of competition and proportionality under Art. 7(1) of the Public Procurement Law, as in its opinion, the contract was awarded as a sole-source contract even though there were entities on the market providing the same services at a lower price for the type, quantity and area. Thus, in the contractor’s opinion, the contracting authority should first study the market and assess whether there are any market players that could perform the award the same way at a lower price. In the appellant’s view, if that was the case, the contracting authority should have used one of the competitive methods.
Conditions for awarding sole-source contracts under Art. 67(1)(12) of the Public Procurement Law
In the case under consideration, a sole-source contract was to be awarded on the basis of Art. 67(1)(12) of the Public Procurement Law. Pursuant to this provision, a contracting authority may award a sole-source contract to a legal person if the following conditions are met:
- The contracting authority exercises over that legal person control equivalent to that exercised over its own units by exercising a dominant influence over strategic objectives and significant decisions regarding the management of the affairs of that legal person; this condition is also fulfilled when another legal person controlled by the contracting authority in the same way exercises such control.
- More than 90% of the activities of the controlled legal person involve performance of tasks assigned to it by the contracting authority exercising its control or by any other legal person over which that contracting authority exercises its control referred to in point (a).
- There is no direct participation of private capital in the controlled legal person.
Control by a contracting authority over an internal entity
The first condition in Art. 67(1)(12)(a) specifies the required nature of the relationship between the contracting authority and the entity applying for the contract. The condition for recognising a given entity as an internal entity of the contracting authority is full control over it. The law specifies that control means a dominant influence on shaping the entity’s strategic objectives and key management decisions. In this regard, the National Appeal Chamber stated: “The concept of the strategy of a company should be understood as a long-term concept of its functioning, including in particular the objectives of its establishment and methods of achieving business goals. Therefore, it can be considered that it actually decides on the sense of the entity’s existence. The powers to shape the organisation, to give directions to it development, to modify them as needed (including decisions on entering or exiting a specific market) and, importantly, to decide on termination of operations, constitute the highest level of control.” However, the condition under discussion is not limited to the possibility of exerting strategic influence on the entity, as it also includes the possibility of intervening (effectively) in management decisions with a significant impact on the company’s activity.
To determine whether Art. 67(1)(12) of the Public Procurement Law was correctly applied, first, the panellists at KIO needed to examine the organisational structure of the entity to which the contracting authority intended to award the contract, and the legal relationship between the entity and the contracting authority. As the chamber pointed out, “The basic issue in adjudicating whether the contracting authority exercises legal control in a given case is to analyse the competences granted to specific bodies of the company.” Thus, in analysing the articles of association, the chamber concluded that the shape and composition of the management board depends directly on the actions and decisions of the supervisory board and the shareholders meeting, which were granted the right, among other things, to appoint members of the management board or approve its bylaws.
When analysing the organisational structure of the company, the chamber also found that the company’s management board depends on the decisions of other bodies, which not only control and audit its activities, but also directly influence and even shape its work. As a result, by holding all the votes at the shareholders meeting as the sole shareholder, the contracting authority was able to exercise proper control over the company’s activities.
Performance of tasks assigned by the contracting authority exerting control
The question of whether 90% of the activity of the controlled company relates to performance of tasks entrusted to it by the contracting authority exerting control should be answered under Art. 67(8)–(9) of the Public Procurement Law. Pursuant to these provisions, the calculation of the percentage of activity takes into account the average revenue generated by the legal person or the contracting authority in respect of services, supplies or construction works during the three years preceding the award of the contract. If such data are unavailable or inapplicable due to the date of establishment or commencement of activity by the legal entity or the contracting authority, or reorganisation of their activities, the percentage of activities is determined through reliable commercial forecasts. In the present case, the company had been incorporated only a few months earlier, so the percentage of business was determined by reliable commercial forecasts.
However, the chamber had no objections as to whether the second condition, set in Art. 67(1)(12)(b) of the law, was met. In its view, under the company’s articles of association and the financial forecast for 2021–2023 submitted by the contracting authority, the structure of the company’s projected revenue was uniform, i.e. it would consist entirely of sales revenue from activities commissioned by the contracting authority. Moreover, the chamber stressed that the percentage share should be calculated “on the basis of the value of sales revenue from services, supplies or construction works entrusted (commissioned regardless of the mode) to the company by the city, by entities dependent on the city or over which the city exercises control, and derived from other sources, but in relation to the city’s explicit intervention ordering contracting with the company.”
No direct participation of private capital
The third condition required to award a sole-source contract under Art. 67(1)(12) is that there should be no direct private capital participation in the controlled legal person. Based on the excerpt from the National Court Register for the company, the chamber found that the company’s only shareholder was the contracting authority, holding all votes at the shareholders meeting. In the opinion of the chamber, these findings were sufficient to conclude that there was no direct participation of private capital in the controlled company.
As a result, the chamber took the position that the contracting authority duly fulfilled the requirements that must be met to award a sole-source contract under Art. 67(1)(12) of the Public Procurement Law.
Does the contracting authority also have to meet other, non-statutory conditions?
In the appellant’s opinion, the contracting authority incorrectly assumed that a sole-source contract could be awarded despite the existence of competition on the market, resulting in an unjustified preference for one contractor at the exclusion of other entities interested in participating in the procedure. Moreover, in its opinion, the contracting authority should have used competitive methods to award the contract, as there were entities on the market that could perform it for a lower price.
Referring to these allegations, the chamber stressed that the cited provisions of the Public Procurement Law do not show that in order to award a sole-source contract, it is necessary to meet other conditions than those explicitly listed in Art. 67(1)(12). As the lawmakers did not provide any other requirements for award of a sole-source contract, neither the contracting authority nor other entities operating on the market could require fulfilment of such requirements.
In the chamber’s view, “This is one of the exceptions referred to in Art. 10(2) of the Public Procurement Law to the principle of primacy of the most competitive modes (i.e. tenders—open and limited) under Art. 10(1).” In other words, “Under Art. 10, if conditions for award of a sole-source contract under the Public Procurement Law are met, there is no violation of the rule under sec. 1, as in such case the exception under sec. 2 applies. In such a situation, Art. 7(1) of Public Procurement Law is not violated either, as it is obvious that in the mode of award of a sole-source contract, the essence of which is the lack of any competition for a sole contractor, it is difficult even to consider how the contracting authority could ensure fair competition between contractors, and the principle of equal treatment of contractors by the contracting authority is irrelevant.”
In short, Art. 67(1)(1)–(15) of the Public Procurement Law contains a closed catalogue of all situations where the contracting authority may award a sole-source contract, and each of them consists of specific conditions that must all be met. Demonstrating the fulfilment of these conditions is necessary and, at the same time, sufficient for the contracting authority to be able to award a sole-source contract.
Cyprian Herl, Infrastructure, Transport, Public Procurement & PPP Practice, Wardyński & Partners