Will the Finnish Government Programme End the Era of In-house Procurement?

Two of the listed goals in the new government programme are (a) to guarantee the efficiency of public procurement and (b) to allow for flexible public administration. The government aims to accomplish these goals by i.a. revising the regulation covering in-house entities. An in-house entity is an entity that is owned and controlled by one or several contracting entities, but that formally and based on its internal decision-making constitutes a separate stand-alone entity. The government programme lists four central regulation changes covering in-house entities, two of which will be analysed in-depth in this article:

1. Implementation of a minimum ownership of 10 % by a contracting authority for an entity to be considered an in-house entity.
2. Stricter rules governing in-house procurement, so that the use of in-house procurement is permissible only when it is economically advantageous in comparison to alternatives available on the open market, or if there is a particularly weighty public interest favouring the use of in-house procurement.
3. Limiting the public sector’s opportunities to use in-house entities to produce support services for which there are working markets, such as cleaning, financial administration, food and IT services.
4. Harmonising limits on economic activities carried out by in-house entities in the performance of tasks entrusted to them by entities other than their controlling contracting entities to 5 % and EUR 500 000 of an in-house entity’s economic activities.

Imposing a minimum ownership requirement of 10 %

Perhaps the most important change proposed by the government programme is the implementation of a minimum ownership requirement applicable to in-house entities, as the matter has not previously been regulated. Contracting authorities are today able to freely use the services of in-house entities despite owning only a fraction of the entity in question, as long as they fulfill the control requirements set out in 15 § of the Finnish Procurement Act.

The Finnish Competition and Consumer Authority (FCCA) made a noteworthy decision in May 2023, when it announced that it will sue the Vantaa and Kerava wellbeing services county over their recent procurement of personnel services, requesting that the Market Court should terminate the procurement contract prematurely. The FCCA argued that the wellbeing services county’s 0,04 % ownership of the in-house entity Sarastia Oy did not meet the control requirements set out in the Finnish procurement act. The FCCA recently took a similar stance when it concluded that the Varsinais-Suomi wellbeing services county did not meet the aforementioned control requirements in its 2022 procurement from the in-house entity Revire Perintä Oy. The wellbeing services county owned only 0,09 % of Revire Perintä Oy’s parent company Sarastia Oy.

In practice, the proposed minimum ownership requirement would have a significant impact on the ownership and governance structures of in-house entities, as the change would limit the number of shareholders to 10. It remains to be seen exactly how this limit will be implemented into law and how the change will affect procurement contracts currently in force, but one likely outcome is that current in-house entities will be split into multiple smaller entities, and that the responsibility for many of the services currently provided by these in-house entities will be returned to small municipalities, resulting in considerable cost increases on a municipal level. The legislators will also have to decide if the limit should be implemented retroactively to existing procurement contracts, and if so, how such implementation affects the contracting parties. Another factor that has to be considered is how to prevent contracting entities from circumventing the limit, e.g. by ownership arrangements where two or more in-house entities purchase 10 % stakes in each other.

Stricter regulation – in-house procurement has to be economically advantageous in comparison to alternatives available on the open market

Pursuant to 115 § of the Finnish Procurement Act, the contracting entity shall select the most economically advantageous tender, meaning the tender with the lowest price, the most affordable cost, or the best price-quality ratio. Contracting entities have thus far been free to choose the basis for evaluating their chosen comparison criteria. The contracting authority must announce the basis and any comparison criteria that it applies for determining the most economically advantageous tender in the contract notice or in the call for tender.

The government programme indicates that the stricter regulation in this case would require the contracting entities to consider at what price and on which terms a procurement could be made from the open market, and based on that information justify on what basis the in-house alternative would be more economically advantageous. This implies that the proposed changes would oblige the contracting entities to conduct market research, e.g. market consultations and dialogues prior to in-house procurements, as the contracting entity must have sufficient information about the prevailing market terms, e.g. price, to determine which alternative is most economically advantageous. The legislators will also have to determine the meaning of the term “particularly weighty public interest”. The efficiency of this proposed change is dependent on the required scope of (a) the market research by the contracting entities and (b) the justification for the most economically advantageous alternative.

The road from government programme to law

The changes proposed by the government programme are significant and will require diligent preparation before the government can present its proposal. Olli Hyvärinen, commercial adviser at the Ministry of Economic Affairs and Employment of Finland, stated on 9 November 2023 that the government plans to appoint a procurement committee tasked with preparing the legislative proposal during the spring of 2024. The proposal is expected to be presented to the Finnish parliament during the autumn of 2025.