The use of Teckal company structures in public service delivery

Outsource iStock 000007727531XSmall 146x219Shared services, spin-outs and ‘in-house procurement’ – Amy Auton-Smith looks at using a Teckal company structure to deliver public services.

As austerity continues to bite, the public sector is looking more and more closely at the opportunities presented by shared services and mutual or spin-out companies. With enabling legislation now in place and a strong drive to make savings, the case for alternative delivery structures is getting stronger and achieving the goal of cooperation is becoming easier, practically and politically.

This note aims to provide clear background to the legal position on Teckal [1] companies and also guidance on how to ensure that you comply with the rules developed in Teckal and subsequent case law and legislation. Finally, there is a quick look at the Hamburg [2] requirements for joint committee or contractual cooperation arrangements.

Teckal and public procurement

As soon as public bodies start to look at shared services and company structures for service delivery they encounter difficulties with the public procurement regime. This regime is contained in the Public Contracts Regulations 2006 and the underlying European law [3].

The broad objectives of this legislation are to ensure that public bodies award contracts that are above the specified value thresholds only after fair competition and only on the basis of the lowest price or the most economically advantageous offer. On the face of the legislation, contracts let to the new company will have to be run through an open competitive procurement.

For obvious reasons, this can present a difficulty when the contract being let is to a joint company for public sector shared services or to a staff mutual, where the intention is to continue to provide the services from within the public realm, rather than outsource it to the private sector.

The Teckal case established that, under certain circumstances, a contract let to a third party will not count as a public service contract if “the local authority exercises over the person [ie the company] 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 activities with the controlling local authority or authorities”. These two elements have been called the control and function tests. These are examined in more detail below.

The recent case of RMP v Brent [4] (one of the LAML cases) confirmed that the Teckal exception applies to the Regulations. Further, the proposed new procurement directive [5] incorporates the Teckal control test, with the function test being clarified as a requirement for the company to undertake at least 90% of its activities for the owner public authorities. This Directive is expected to come into force in June 2014.

If a body is put forward as a Teckal ‘in-house’ company, then it will qualify as a ‘body governed by public law’ and will have to comply with public procurement law when letting contracts on behalf of its owner authorities.

The control test

The control test has created its own line of case law as contracting authorities have set themselves up in various corporate configurations. Some principles have become established.

Firstly, it is imperative that no private undertakings participate in the ownership of the company. In Stadt Halle [6] the contracting authority awarded a contract to a company in which it held just over 75% of the shares and a private company held the remaining shares. The court held that this was incompatible with the control test. The award of a contract to a ‘semi-public company’ without competition would interfere with the objective of free and undistorted competition, as well as giving the private company an advantage over its competitors. This was confirmed in subsequent cases, including Sea Srl [7] and in addition the proposed new directive also codifies the prohibition on private sector participation.

If the constitution of the company allows for the possibility of future private sector participation, this will not on its own undermine the application of the Teckal exemption [8], however, care must be taken about the circumstances under which private interests could be brought in and when this could happen.

In Sea Srl the court confirmed that, unless there is a real possibility at the time of contract that the company will bring in private ownership, that possibility should be disregarded. However, if private interests were brought in during the lifetime of the public contract this would be an alteration of a fundamental condition of the contract, which would require the contract to be put out for competitive re-tender [9].

Secondly, although no individual authority has to have sole control of the company [10], the participating authority or authorities must have ‘decisive influence’ over both strategic objectives and significant decisions.

In Parking Brixen [11], although the company was wholly-owned by one local authority, it had become market-oriented. Its constitution allowed for the possibility of bringing in private capital and the board had almost complete autonomy. The company had begun to provide services on a commercial basis to third parties. In this instance, the court held that the owner municipality could not be considered to have control similar to that exercised over its own departments and therefore the arrangements failed the control test.

This concept of ‘decisive influence’ was also considered in Carbotermo [12] where the lead authority owned 99.98% of the shares in a parent company, with adjoining municipalities holding the remaining 0.2%. A private company challenged the award of a contract to a wholly-owned subsidiary of the parent without competition.

The court indicated that, although the fact that public authorities own all of the share capital will tend to indicate that the control test is satisfied, this on its own is not decisive.

In Carbotermo the constitutional documents of the subsidiary company and the parent company gave extremely broad discretion to the boards of each. There were no specific voting powers that would restrict this freedom. The constitution of the subsidiary company allowed for the possibility of private ownership (subject to a limit that no shareholder may hold more than 10%).

It was held that, because of the very high degree of freedom given to the board and the fact that any ‘decisive influence’ would have had to flow down from the parent to the subsidiary, the necessary element of control was not present so the test was not satisfied.

This case highlighted the dangers that can exist in a group company structure, where a Teckal arrangement is relied upon. Carbotermo did not rule out the possibility of using a group structure, but it did make clear that care must be had where group structures are used to ensure that the essential element of control is present throughout.

By contrast, in Asemfo [13], 99% of the shares in the company in question were held by central government and four communities shared 1% equally between them. The court accepted that the public authority owners wholly controlled the company. Further, the company was required to act in accordance with instructions from its owners and the rates for that work were fixed by regulations. It had no power to change the terms on which it operated.

In this instance, the control test was fulfilled despite the four participating communities each holding only 0.25% of the shares: decisive influence can be present even where it can only be exercised alongside other public authorities.

Thirdly, when drafting the constitutional documents of a Teckal company, it is important to be clear about the objectives of the company, as this can help the arrangements to pass the control test. In Coditel Brabant [14] a contract was let to a co-operative that was wholly-owned by public authorities. Its governing council comprised members from each of the participating public bodies and its object under its constitution was the pursuit of the municipal interest – it did not pursue any interest that was distinct from that of the public authorities affiliated to it. As such, it did not have such a degree of independence as would preclude the participating authorities from exercising control similar to that exercised over their own departments and the test was satisfied.

On the question of whether control had to be exercised individually or whether it could be exercised jointly, the court has consistently held that control has to be effective, but it is not essential for it to be exercised individually.

“Control” part 2 – inter-authority co-operation where there is no separate joint company

As an interesting evolution of the control test, the Hamburg [15] case has provided a parallel to the Teckal approach that will apply where contracting authorities co-operate, but where there is no joint control of a separate entity. This scenario has long been familiar to local authorities in the UK, who are authorised under the Local Government Act 1972 to arrange for the discharge of their functions jointly or by joint committees and to share personnel and resources.

In this instance, four local authorities agreed with the City of Hamburg that Hamburg would procure a waste facility with sufficient capacity for all of them. It was agreed that capacity within the facility would be reserved for the four authorities at a price to be paid direct to the waste facility operator.

There was no joint company and the four authorities admitted that they did not ‘control’ the arrangements in the Teckal sense. Despite this, the court held that the arrangement was outside the public procurement regime. It was significant that the contract established cooperation between contracting authorities with the aim of providing a public service. The cooperation agreement did not include any private sector involvement. The arrangement did not prejudice the award of any public contracts that were necessary to deliver the facility and associated services and also did not place any private undertaking in a preferential position.

The Hamburg co-operation provisions have been included in the new draft directive. Although this directive is not yet in force, if the following five conditions are fulfilled then it is highly likely that the Hamburg arm of the exemption will be given: (1) there must be genuine cooperation aimed at carrying out public service tasks with mutual rights and obligations; (2) the arrangements must be solely concerned with the public interest; (3) no more than 10% (in terms of turnover) of the activity in question can be carried out in the open market; (4) financial transfers must be limited to cost reimbursement only; and (5) there can be no private participation in any of the contracting authorities involved.

The function test

Teckal also established that the ‘essential’ part of the activities of the company must be carried out for its public sector owners. Carbotermo evolved the thinking on ‘essential part’ and established the premise that any activities that were not carried out for the participating authorities must of ‘marginal significance’ [16] and that the activities were those which that undertaking carries out with all of the participating authorities together [17]. The court also said that the activities of the company should not be sub-divided by territory or type and it was irrelevant who was actually paying for the activities or where they were being undertaken.

The proposed new procurement directive provides that at least 90% of the activity of the Teckal company (ie 90% of its total turnover) must be for its public sector owners[18] and this threshold has become the generally accepted minimum level to satisfy the function test.

Shared services and mutuals – do they fit the model?

Setting up a shared services company is fairly straightforward, as far as Teckal compliance is concerned. Of course, bringing all the participants together under agreed terms that are also compliant could well be the more complicated task.

Ensuring that the arrangements are compliance checked against the Teckal criteria as they are developed and also after the company becomes operational will be essential. There will always be a risk that the company will fall out of compliance over time, especially when new members join, new business streams are taken on or the composition of the board changes. For this reason, it is a good idea to schedule a regular compliance check to make sure that both the control and function tests are still met, especially if the legal position continues to evolve.

With regard to mutuals, the position is less comfortable. Fitting a mutual company into the Teckal exemption can be difficult because the voting and control rights must remain with the public sector owners, rather than the employees of the company. In addition, the private participation of the employees could be a grey area. If there is a desire to give the spin-out employees full ownership and control over their mutual company, then it is difficult to see how the Teckal control test could be satisfied.

This was recognised by the UK government, who requested an exemption or a period of grace during which the procurement regime would not apply for newly-formed staff mutuals. Unfortunately, the EU Commission declined to allow this and the proposed new directive contains a clear prohibition on private participation and maintains the need for public sector control.

Because of the difficulties of fitting a mutual model into the Teckal exemption, the best approach may be one that takes a long-term view. Setting up a Teckal-to-mutual company is one possible approach. The local authority could set up a Teckal company, transfer certain services and employees to it and then allow the company to run as an in-house body for a period of time. This would give the former employees a chance to become accustomed to the new ways of working. The company and its share structure would need to be set up with care.

Once the company is established and operating, the public sector owners(s) could step out. At that point, all public contracts currently being operated by the company would have to be re-tendered, however, the spin-out would potentially be in a good position to compete on the open market as a truly independent undertaking.

Teckal checklist

In summary, in order to ensure that your company benefits from the Teckal exemption and complies with the provisions of the proposed new procurement directive:

  1. There can be no private ownership or involvement and preferably no possibility of issuing shares to private sector participants at a later date, although if this is a possibility, this will not in itself undermine the ‘in-house’ relationship.
  2. Ensure that the constitution gives ‘decisive influence’ to the public sector owners, acting together. This should include the ability to determine the strategic objectives and significant decisions of the company, with any proposal to move outside an agreed business plan being referred back to the members. The participating authorities must each have the ability to appoint a representative to the board.
  3. The company constitution should include objects that are clearly focussed upon the public interest and there should ideally be a clear prohibition or limit on pursuing commercial activities.
  4. If there is a strong desire to undertake open market activity, this must not amount to more than 10% in terms of turnover of the activity of the company – ie at least 90% of the activity of the company must be for its public sector owners.
  5. Care must be taken to ensure: (1) with any group structures, that the element of control is present throughout; or (2) if the company is intended to mutualise at some point in the future, that the public sector owners will be able to step out with control passing to the employees.

If the shared services arrangement is to be by way of agreement or committee, without a joint company, then the five ‘Hamburg’ elements should be present:

  1. There must be genuine cooperation aimed at carrying out public service tasks with mutual rights and obligations.
  2. The arrangements must be solely concerned with the public interest.
  3. No more than 10% (in terms of turnover) of the activity in question can be carried out in the open market.
  4. Financial transfers between the parties must be limited to cost reimbursement only.
  5. There can be no private participation in any of the contracting authorities involved.
Amy Auton-Smith is Service Manager and Deputy Monitoring Officer at Bristol City Council. She can be contacted by This email address is being protected from spambots. You need JavaScript enabled to view it..


[1] Teckal Srl v Commune di Viano Case C-107/98 [1999] ECR I-8121.

[2] European Commission v Germany Case C-480/06 [2009] ECR I-4747.

[3] Public Contracts Regulations 2006, SI 2006/5 and s2(2) European Communities Act 1972. Also, Council Directive (EC) 2004/18 (on the coordination of procedures for the award of public works contracts, public supply contracts and public service contracts) (OJ2004 L134 p114).

[4] Risk Management Partners Ltd v Brent London Borough Council and others [2011] 2 All ER 209, at para 26.

[5] 2011/0438 (COD) Proposal for a Directive of the European Parliament and of the Council on public procurement, draft Article 11.

[6] Stadt Halle v Arbeitsgemeinschaft Thermische Restabfall und Energieverwertungsanlage TREA Leuna Case C-26/03 [2005] ECR I-1. See paras 46-51.

[7] See for example Sea Srl v Commune di Ponte Nossa Case C-573/07 [2009] ECR I-8127.

[8] Commission v Italy, C-371/05 [2008] ECR I-00110, para 29.

[9] Sea Srl, para 53.

[10] See RMP v Brent, at para 53.

[11] Parking Brixen GmbH v Gemeinde Brixen Case C-458/03 [2006] All ER (EC) 779.

[12] Carbotermo SpA v Commune di Busto Arsizio Case C-340/04 [2006] ECR I-4137.

[13] Asociacion National de Empresas Forestales (Asemfo) v Transformacion Agraria SA (Tragsa) Case C-295/05 [2007] ECR I-2999.

[14] Coditel Brabant SA v Commune d’Uccle Case C-324/07 [2008] ECR I-8457.

[15] European Commission v Germany Case C-480/06 [2009] ECR I-4747.

[16] Para 63.

[17] Para 71.

[18] 2011/0438 (COD) Proposal for a Directive of the European Parliament and of the Council on public procurement, draft Article 11.