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Trading companies and procurement
Trowers Public Insight

Trading companies and procurement

Public authorities are increasingly establishing trading companies (for local authrities these are often known as LATCs), either as wholly owned subsidiaries or, more and more, as joint ventures in local government with other authorities. They may do so either to deliver services in new, innovative, ways or to launch a trading business with the aim of generating revenue.

We are often asked how procurement law applies to these companies.
There are really two separate questions that arise:

Can a local authority issue contracts to its subsidiary, or to a joint venture?
This question is important if the company will support its parent authority/authorities in delivering services.

Does the subsidiary or joint venture itself have to comply with procurement law?
This question is important if it is desired that the company should be able to behave similarly to other commercial businesses, free from some of
the bureaucracy that affects the public sector.

The first question was answered back in 1998 by the European Court of Justice case known as Teckal. The essence of the case was that contracts may be freely awarded to a subsidiary if it is controlled by the public authority as if it were just another department of the authority. Subsequent cases have developed the principle to make clear that:

  1. the Teckal exemption cannot be used if any private-sector party owns any part of the subsidiary;
  2. the Teckal exemption can be used even if multiple authorities jointly own the body, so long as they control it jointly;
  3. the Teckal subsidiary must perform at least 80% of its activities for its parent authorities rather than for the open market;
  4. the Teckal subsidiary can also award contracts upwards to its parent authorities (which is useful for buy-back services).

The exemption is now part of the Public Contracts Regulations 2015. It is a vital ingredient when planning corporate structures for public authorities. But the third condition above can be a frustrating limit because it can prevent the Teckal body being used for any significant trading activity.

It is, in theory, possible for a subsidiary to derive up to 19.9% of its turnover from trading activity. But if the aim is for the body to act semi-independently, with a focus on revenue generation, there can be doubt as to whether the body is tightly-enough controlled to qualify for the exemption.

We are therefore increasingly setting up structures which include two subsidiaries - one Teckal compliant subsidiary to perform services for public authorities and another independent subsidiary with a focus on the outside world. The subsidiaries can then share staffing and other resources between them.

Set up in this way, the independent subsidiary might escape procurement law altogether. New bodies must be tested to establish whether they are a ‘body governed by public law’. Part of the test looks at links to other public bodies, such as whether they are controlled or funded by the public sector. A trading body will almost always satisfy this part of the test.

But the other part of the test looks at whether it behaves commercially, facing similar challenges and risks to other competitors on its marketplace. If the trading body operates sufficiently separately from its parent authority, we can often advise that it is not subject to procurement law. Of course, this separation also implies that it would not qualify for the Teckal exemption, further emphasising the benefits of the 'two subsidiary' solution.


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