development agreements
Are we any clearer on when they are subject to the EU
procurement rules?
4 July 2011
In 2007, a state of uncertainty was created over the precise
circumstances in which development agreements are to be classified
as ‘public works contracts’ for the purposes of European Union
(EU) public procurement law, and consequently subject to a
competitive tendering requirement.
The general picture
The uncertainty arose after the case of Auroux v Comune de
Roanne, heard in the Court of Justice of the European Union in
early 2007. A name now on the lips of many a developer and local
authority, Auroux disturbed a previously popular belief that
contracts involving the development of land (for example in the
context of urban regeneration) fell outside the scope of the EU
procurement rules. A number of public development projects were
placed on hold because of the ruling, so the effect was
significant.
However, in the case of Helmut Muller in 2010, the court
signalled something of a relaxation of the approach taken in
Auroux, and clarified the position in a way which many welcomed.
The case made it clear that the EU rules are likely to require the
development agreement to be advertised where an authority:
- specifies the development work to a
significant degree
- imposes enforceable obligations on developer
to do the work
- provides pecuniary interest for the developer
in doing the work
However, in the Muller case, the court also made it clear
that:
- the mere sale by the authority of land (whether developed or
not), and
- the mere exercise by the authority of its urban planning
powers, in the absence of the above ingredients, will not trigger
the EU rules.
Pecuniary interest
Very importantly, the court in Muller considered the concept and
meaning of ‘pecuniary interest’, identified in the third limb of
the test above. What this amounts to is the authority receiving
some kind of service (or development) in return for a consideration
passing from the authority to the developer/contractor. This, in
turn, means that by definition the authority has to receive a
‘direct economic benefit’ from the project, and that this can only
arise where the authority:
- will own the development
- will have some kind of legal right in how the development will
be used
- will gain, economically, from the use of the development or
will (conversely) bear the loss deriving from failure of the
development, should it prove a failure.
Commission v Spain – the latest case
Commission v Spain was heard by the Court of Justice on
26 May 2011. In it, the European Commission took issue with the
procedure adopted by the Spanish Government in relation to the
award of what are called ‘Integrated Action Programmes’ (or IAPs)
in the Valencia region of the country.
IAPs are programmes of work which cover the development of
single or multiple parcels of urban land and which cover
infrastructure and public realm works. They can be carried out in
one of two ways - either by direct management by the local
authority when the land in question is identified, or by the
appointment by the local authority of a developer to manage the
development following public consultation and a competitive
process. The developer is paid either in cash or in kind (in the
form of developed land from the relevant landowner). At the end of
the programme the land may vest in the local authority, which is
then responsible for the future management of the development.
The European Commission initially challenged Spain on the basis
that a number of aspects of the procedures for the award of IAP
programmes did not comply with procurement law. The court’s
decision on 26 May was preceded by an opinion from the Advocate
General.
The decision and the Advocate General’s
opinion
Somewhat unusually, the Advocate General’s opinion in this
particular case is more informative in explaining the link between
development agreements and procurement law than the decision of the
court.
The court reached the same decision as the Advocate General –
the Commission’s complaint should not be upheld. However, the court
came to that conclusion for evidential reasons (i.e. the Commission
had failed to prove that the IAPs were contracts regulated by
procurement law), rather than considering whether the IAPs amounted
to public works contracts to which procurement law should
apply.
We look to the Advocate General on the latter point, who made
the following comments:
First (and tellingly) the Advocate General suggested that the
commission should “not overstretch the meaning of certain criteria
within the public procurement directives for the sake of fitting
the present arrangement within the scope of the public procurement
rules”. But the thrust of the opinion was whether, under the
arrangements, the local authority conferred a pecuniary interest on
the developer.
The Advocate General was clear that pecuniary interest is not
confined to cash – it could take some other form, for example land.
However, it had to come from the authority itself; the concept
pre-supposes a reciprocal arrangement whereby the authority pays a
price to a developer, who is required to carry out the works.
In other words, there will be no pecuniary interest (of the type
that has to exist if a development agreement is to be subject to
the EU rules) unless the authority is put to some economic
detriment; this, in turn, ordinarily can only happen in the context
of a mutually binding agreement between authority and
developer/contractor.
In the case of IAPs, it is the developer who is responsible for
funding the development costs, with reimbursement by the landowner
(even though the authority lays down the requirement for that to
happen). As such, the development is not paid for by the authority
even though the works in question are public ones and ordinarily
this may be permissible.
Conclusion
The Advocate General took the view that the fulfilment of public
works such as these via a private initiative - which might not
otherwise have come about – should not be frustrated.
Unfortunately, the court’s judgment of 26 May did not specifically
address all of the issues raised by the Advocate General, and so
there are still issues around development agreements which will
remain unresolved until cleared up judicially.
The Muller case by no means answers all of the questions around
the application or otherwise of ‘direct economic benefit’, and when
such benefit can be said to accrue, or not to accrue. It is fair to
say that there is still considerable scope for uncertainty as to
what that expression could capture, and whether the ingredients of
an agreement for a pecuniary interest are in turn met in a given
case.
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