The in-house award that is not in-house
The managing authority (MA) of a €480m ERDF programme is reviewing a project by the city of Valmar. The city plans to renovate a former industrial hall into an innovation centre at a total cost of €6.1m, with 60% ERDF co-financing. It intends to award the main works contract, valued at €5.4m, directly to Valmar Energia, a wholly city-owned company that also manages district heating, without a call for competition. The city argues the arrangement is an in-house award because it controls the company. Valmar Energia derives 22% of its turnover from private sales. The MA checklist flags the award as a 'national procedure below the EU threshold'. The project has 14 months left before n+3 decommitment, and the city says a tender would add nine months.
1. Is the city's in-house justification defensible? Set out the test you would apply and the conclusion you would reach on these facts.
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Test: An in-house award is defensible only if three cumulative conditions are met: (i) the contracting authority exercises over the entity a control similar to that exercised over its own departments; (ii) the entity carries out the essential part of its activities for the controlling authority; and (iii) there is no private capital participation in the entity.
Application:
- Control: wholly city-owned, so control is plausible, but the MA should check board composition, veto rights and operational independence.
- Essential activities: 22% private turnover means 78% is for the city. Commission guidance uses an 80% threshold for the 'essential part' test, so the company is on the wrong side of the line. The city cannot rely on the in-house exception without a robust justification, and a marginal case is not enough for ERDF money.
- Private capital: none apparent.
Conclusion: The justification is not defensible on the turnover figure alone. The MA should treat the award as a normal procurement unless the city can show that the private activity is incidental and that the 80% guidance is met on a stable, non-artificial basis. The 'below EU threshold' label is irrelevant to the in-house test and does not displace Treaty principles or national procurement rules.
2. What procurement and state aid risks arise, and what should the MA do operationally given the decommitment deadline?
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Procurement risk: If the in-house exception fails, a direct award of a €5.4m works contract breaches the principle of equal treatment and, depending on national law, EU rules. The MA cannot certify expenditure for an unlawful award. Aggregation and lot-splitting must also be checked.
State aid risk: If Valmar Energia is a market operator and receives a contract without competition, the city may confer an advantage. The relevant question is whether the price reflects market conditions. A direct award is weak evidence of market price; an independent valuation or benchmark is needed. If an advantage exists, the MA must check whether it is compatible, de minimis or notifiable. ERDF cannot be used to fund unlawful aid.
Operational response:
- Suspend certification and request the city's legal analysis and valuation.
- Require either a competitive tender or a documented, defensible in-house decision with control and turnover evidence.
- If time is short, allow phased procurement: tender the main works package now, with a bridge contract only if legally available.
- Record the decision and inform the city that deadline pressure is not a legal justification. Decommitment risk is managed by reprogramming, not by accepting an irregular award.
3. The city offers to 'regularise' the award after signature by publishing a voluntary ex ante transparency notice. How should the MA respond?
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A voluntary ex ante transparency notice is not a cure-all. It may provide limited protection against later challenge in some circumstances, but it does not convert an unlawful direct award into a compliant one, and it does not resolve state aid. The MA should ask:
- Was the notice published before contract signature and with sufficient information?
- Does national law permit this route for this contract type?
- Does it address the in-house failure?
Response: The MA should not accept regularisation as a substitute for competition. It should require the city to demonstrate that the chosen route is lawful, or to re-tender. If the contract is already signed, the MA should assess whether expenditure can be declared, consider a financial correction, and seek recovery if the irregularity is material. The MA's own audit trail should show why it accepted or rejected the city's proposal.