This article is an excerpt from the 2021 edition of The Art of Tendering: A Global Due Diligence Guide, which is available for purchase.
In its April 2007 decision in Asociación Nacional de Empresas Forestales v. Transformación Agraria SA, the European Court of Justice upheld the government’s right to directly award contracts to a state-owned entity, concluding that the challenged contracts fell within the government-to-government exception to open tendering rules. The dispute involved direct contract awards by Spanish government institutions to a state-owned company engaged in environmental protection and rural development. The Court ruled that the situation fell within recognized exceptions to open tendering even if the entity receiving the direct awards is a separate legal entity from the public entity awarding the contracts:
In any event, it is important to recall that, according to the Court’s settled case-law, a call for tenders, under the directives relating to public procurement, is not compulsory, even if the contracting party is an entity legally distinct from the contracting authority, where two conditions are met. First, the public authority which is a contracting authority must exercise over the distinct entity in question a control which is similar to that which it exercises over its own departments and, second, that entity must carry out the essential part of its activities with the local authority or authorities which control it.
The Court also noted that the state-owned company was entirely owned and controlled by public authorities:
As regards the first condition, relating to the public authority’s control, it follows from the Court’s case-law that the fact that the contracting authority holds, alone or together with other public authorities, all of the share capital in a successful tenderer tends to indicate, generally, that that contracting authority exercises over that company a control similar to that which it exercises over its own departments (Carbotermo and Consorzio Alisei, paragraph 37).
The Court also noted that about 90 percent of the activities conducted by that state-owned entity were conducted on behalf of public institutions:
In the case in the main proceedings, as is clear from the case-file, Tragsa carries out more than 55% of its activities with the Autonomous Communities and nearly 35% with the State. It thus appears that the essential part of its activities is carried out with the public authorities and bodies which control it.
The Court therefore ruled that the contracts awarded by government institutions to the state-owned entity were not subject to the open tendering obligations in the European procurement directive:
It follows from the entirety of the foregoing considerations that the reply to the second question must be that a body of rules such as that governing Tragsa which enables it, as a public undertaking acting as an instrument and technical service of several public authorities, to execute operations without being subject to the regime laid down by those directives, is not contrary to Directives 92/50, 93/36 and 93/37, since first, the public authorities concerned exercise over that undertaking a control similar to that which they exercise over their own departments, and, second, such an undertaking carries out the essential part of its activities with those same authorities.
As this case illustrates, open tendering rules typically do not apply to government-to-government contracts, a category that includes separate legal entities that are owned, controlled, and operated on behalf of public institutions.
