As proposed by the Finnish Competition and Consumer Authority (FCCA), on 29 March 2019 the Market Court imposed a penalty payment of EUR 200,000 on the Town of Pargas for directly awarding a contract whose value exceeded the EU threshold, contrary to the Act on Public Contracts. In addition to the penalty payment, the Market Court ordered that the contract period must end seven months after the date that the decision became legally valid.
On 6 June 2017, the Town of Pargas decided to transfer its food service operations in the form of a business transfer to Arkea Oy, which is jointly owned by Finnish municipalities and federations of municipalities. In connection with this decision, the Town of Pargas also purchased 1,000 shares in Arkea Oy, which corresponds to a 0.12 per cent ownership stake in the company. In connection with the transfer of the business activities, the Town of Pargas signed a seven-year food service agreement with Arkea Oy and a possible two-year optional extension period. The total value of the agreement without the optional extension period is at least EUR 16.8 million. In addition, the Town of Pargas rented its entire preparation kitchen facility to Arkea Oy.
Procuring entities must exercise control over in-house entities
A procurement unit may purchase services from its in-house entity without a competitive tendering process if a specific set of criteria is met. One prerequisite is the use of control, as the procurement unit must be able to influence the strategic goals and important decision made by its in-house entity, either alone or jointly with other contracting authorities. According to the proposal made by the FCCA, the Town of Pargas could not exercise control over Arkea Oy with its 0.12 % ownership stake alone. In addition, the requirement for joint control could not be met, as the Town of Pargas did not have a sole or joint representative in Arkea Oy’s administrative bodies to represent the Town or the other owners of the company.
In its decision on 29 March 2019, the Market Court confirmed that the Town of Pargas has not exercised any control over Arkea Oy, as its representatives have not participated in the activities of the company’s administrative bodies or in the process used to appoint their members. Therefore Arkea Oy has never been an in-house unit of the Town of Pargas that could be used to make a procurement without the tendering process required by the Act on Public Contracts.
The obligation to competitively tender depends on the primary purpose of the agreement as a whole
The Town of Pargas proposed that the arrangement was a mixed contract referred to in the Act on Public Contracts, where the primary purpose of the contract was to secure the position of food service staff and not the procurement of services. The FCCA stated in its proposal that even if the outsourcing of services included several different contracts, the principal purpose of the agreement as a whole was the procurement of food services, which falls under the scope of application of the Act on Public Contracts, meaning that the procurement should have been implemented using a competitive tendering process.
In its decision, the Market Court stated that the agreements made on the purchase of shares and the related shareholder agreement, the sale of the business, the lease of the preparation kitchen facility and the food service agreement all belonged under the same groups of agreements. Taking into account how the agreements were connected as well as their monetary value, which must be evaluated on the basis of the conditions present when the agreements were signed, the Market Court ruled that the primary purpose of the agreements was the production of food services for the Town of Pargas. Therefore the situation constituted a service procurement that falls under the scope of the obligation to tender specified in the Act on Public Contracts. In addition, the Market Court stated that the Town of Pargas had not presented a justification based on the Act on Public Contracts to award the procurement using a directly awarded contract.
The Market Court ruled that the case constituted a directly awarded contract that violated the Act on Public Contracts and, as proposed by the FCCA, ordered the Town of Pargas to pay a penalty payment of EUR 200,000 to the state. In addition, the Market Court ruled that the contract period must end seven months after the date that the Market Court’s decision becomes legally valid.
Senior Specialist Elisa Aalto, tel. +358 29 505 3683
FCCA proposes imposition of sanctions against the town of Pargas for illegal direct award. Press release by the Finnish Competition and Consumer Authority, 11 April 2018