In House Awards to Municipal Companies Under German Procurement Law

What are in house awards?

Public authorities can perform their tasks themselves, with their own staff, or procure services from the market. Between these options lies a third: providing services through a separate legal entity that the authority controls – a municipal utility (Stadtwerke), a waste management company, an IT service provider owned by several municipalities or a federal company. When the authority awards a contract to such an entity, the question is whether procurement law requires a tender. In house awards (Inhousevergaben) are the exemption that allows a direct award without a procurement procedure, on the basis that the authority is in substance using its own resources.

The exemption was developed by the Court of Justice of the European Union in its Teckal judgment (CJEU, judgment of 18 November 1999, C-107/98) and later case law, and codified in Article 12 of Directive 2014/24/EU. Germany transposed it in § 108 GWB. Because in house awards remove contracts from competition, the conditions are interpreted strictly, and private competitors regularly challenge them.

This article explains the conditions, the variants for joint control and inter-municipal cooperation, the pitfalls of private participation and the practical issues in remunicipalisation projects.

The three conditions in § 108(1) GWB

Part 4 of the GWB does not apply to contracts awarded by a public authority to a legal person under public or private law if three conditions are met cumulatively:

Control

Control similar to that over the authority's own departments is presumed where the authority exercises decisive influence over both the strategic objectives and the significant decisions of the entity (§ 108(2) GWB). Control may also be exercised indirectly through another entity controlled in the same way. For a GmbH, this is usually achievable through the articles of association and the shareholders' right to instruct the managing directors. For a stock corporation (AG), where the management board acts on its own responsibility, establishing sufficient control is more difficult and requires special arrangements, such as domination agreements.

Activity test

More than 80% of the entity's activities must serve tasks entrusted to it by the controlling authority or by other entities controlled by that authority. § 108(7) GWB clarifies that entrustment requires that a task within the authority's competence has been transferred to the entity recognisably, with defined content and in a legally binding manner (§ 108(7) GWB).

The percentage is determined by the average total turnover of the last three years before the award, or by another suitable activity-based measure such as costs (§ 108(8) GWB). Municipal utilities that sell energy on the market to third parties often fail this test for their overall activities, which is why in house awards in the utilities sector frequently involve dedicated subsidiaries.

No private capital

Any direct private capital participation excludes in house awards, with a narrow exception for non-controlling and non-blocking participations prescribed by statute that confer no decisive influence. Since the CJEU's Stadt Halle judgment (CJEU, judgment of 11 January 2005, C-26/03), even a small private minority stake has been fatal. Public-private partnerships therefore cannot benefit from the exemption; they need a tender, often in the form of an institutional PPP with a tendered selection of the private partner.

Joint control, reverse and sister awards

Several authorities can jointly own and control a company – for example an IT service provider owned by many municipalities. § 108(4) GWB allows in house awards in that case if the authorities jointly exercise control similar to that over their own departments, more than 80% of the entity's activities serve tasks entrusted by them, and there is no direct private capital participation.

Joint control exists if the decision-making bodies are composed of representatives of all participating authorities (one representative may represent several or all), the authorities can jointly exercise decisive influence over strategic objectives and significant decisions, and the entity does not pursue interests contrary to those of the authorities (§ 108(5) GWB).

The exemption also covers "reverse" awards from a controlled entity that is itself a contracting authority to its controlling authority, and "sister" awards to another entity controlled by the same authority, provided there is no direct private capital in the entity receiving the contract (§ 108(3) GWB).

Inter-municipal cooperation

Authorities can also cooperate without forming a common company. Under § 108(6) GWB, contracts between two or more authorities are exempt if:

1. the contract establishes or implements cooperation between the authorities based on a cooperation agreement to achieve common objectives;
2. the cooperation is governed solely by considerations relating to the public interest;
3. the authorities perform less than 20% of the activities covered by the cooperation on the open market; and
4. no private third party gains an advantage over its competitors directly as a result of the cooperation.

Inter-municipal cooperation is common in waste management, IT services, wastewater treatment and back-office functions. The CJEU has emphasised that a genuine cooperation is required: a mere transfer of a task in return for payment, where one authority simply buys a service from another, does not qualify. The cooperation agreement should therefore describe the common objectives and the contributions of each authority.

Cost reimbursement between the partners is permissible, but a structure in which one authority provides a complete service for a fee while the other contributes nothing beyond payment looks like an ordinary purchase and is vulnerable to challenge. Documenting the shared planning, decision-making and mutual contributions protects the cooperation.

In house awards in practice: utilities, waste and transport

Utilities: Energy and water supply are largely subject to sector rules, and concessions for energy networks follow the special competition rules of the Energy Industry Act rather than an in house exemption. Municipal utilities are frequently controlled by holding structures that combine regulated network business, competitive energy sales and other services, so the activity test must be checked at the level of the entity receiving the award.

Waste management: Municipalities often entrust waste collection and treatment to their own companies. If they later bring in a private partner, for example by selling a minority stake, existing in house awards lose their basis, and the contracts may have to be re-tendered.

Public transport: Direct awards of public service contracts to internal operators in public passenger transport are governed by Regulation (EC) No 1370/2007, which contains its own conditions for internal operators, including geographical limits on their activities, alongside German passenger transport law.

Housing and social services: Municipal housing companies and social service providers may receive tasks via in house awards, but state aid rules can apply to the compensation they receive, requiring entrustment acts that meet the requirements for services of general economic interest.

State aid, competition and tax aspects

Procurement law is only one of the regimes relevant to in house awards. Payments from the authority to its company can constitute state aid if they exceed what is necessary to perform a public service or if the company also operates in competitive markets. Compensation for services of general economic interest is compatible with the internal market if it meets the conditions of the Commission's framework, in particular a clear entrustment act, objective parameters for compensation and the avoidance of overcompensation. A well-drafted entrustment act can serve both purposes: it documents the entrustment required by § 108(7) GWB and the entrustment required under state aid rules.

Competition law also matters. Municipal companies active on markets are undertakings subject to the prohibition of abuse of a dominant position, and private competitors sometimes challenge cross-subsidies between protected and competitive activities. Separate accounts for in house tasks and market activities help demonstrate compliance and support the calculation of the activity test.

Tax law can influence the structure as well. The VAT treatment of services between authorities and their companies, and the tax position of holding structures that combine profitable and loss-making municipal businesses, often drive the choice between direct provision, cooperation agreements and company structures. These questions should be analysed together with the procurement analysis rather than afterwards.

Remunicipalisation, restructuring and risks

Many municipalities have taken services back from private providers in recent years – remunicipalisation. Structuring such projects requires attention to procurement, state aid, tax and employment law. The new municipal company must meet the in house conditions from the outset; transfers of staff from the former private provider may involve a transfer of undertaking under § 613a BGB; and the transfer of assets, contracts and permits must be planned well before the private contract ends.

The in house status is not static. Changes in ownership, governance or business activities can end it, and with it the legal basis for existing direct awards. Typical triggers include the sale of shares to private investors, mergers of municipal companies, the expansion of third-party business beyond 20%, and corporate restructurings that change control. Before such changes, authorities and companies should check which contracts depend on in house status and whether amendments or re-tendering are required.

Unlawful direct awards carry real risk. Competitors can apply for review and seek a declaration that the contract is ineffective because it was awarded without required EU-wide publication, within 30 days of being informed and no later than six months after conclusion (§ 135 GWB). Our article on procurement review explains the procedure.

How TRW & Co helps with in house awards

We advise municipalities, public companies and private competitors on in house awards and inter-municipal cooperation. We review and design governance structures to meet the control and activity tests, structure remunicipalisation projects, assess the effect of restructurings and private participation on existing contracts, and represent clients in procurement review proceedings. We also coordinate the state aid aspects of compensation for public services. Our work connects with our public procurement practice, our state aid team and our energy and utilities sector group. Please contact us. This article is general information and not legal advice.