Foundations, along with associations, are the most widely chosen legal form for Polish non-governmental organizations (NGOs). Due to the specific nature of their relationships with the state, doubt may sometimes arise as to whether foundations may be legally obliged to organize tender proceedings. This is because the Public Procurement Law (PPL) does not list foundations among other types of entities which may act as ‘contracting authorities’. Does this mean that no foundation under any circumstances will ever have to observe public procurement laws? Naturally, this question can only be answered in the negative, as in some cases a foundation may acquire ‘contracting authority’ status under the above-mentioned laws.
1. Foundation — specific features. Relations with public entities.
Foundations belong in the NGO sector. In addition to the general constitutional freedom of association provided for in Article 58(1) and, more specifically, the ‘freedom for the creation and functioning of foundations’, enshrined in Article 12 of the Polish Constitution, foundations are governed by the Foundations Act, which lays down the rules for the establishment and operation of these organizations. That said, in practical terms, the provisions of the Public Benefit Activity and Volunteering Act2 also seem to play a vital role in regulating the way in which foundations may function in legal terms. The said Act contains a pivotal set of regulations regulating the implementation of public tasks and defines the rules of collaboration with public administration bodies. On the other hand, the statute of a foundation will lay down its internal structure, organizational matters and, first and foremost, the objectives pursued by the foundation.
What makes foundations stand out is that they exist at the interface between the public and private sectors. This is chiefly because they exhibit features unique to these two sectors. For this reason they are often said to belong in what is known as the ‘third sector’. On the one hand, their activities are aimed at attending to social needs and are not profit-oriented — which means that their overall goal is to pursue a public interest. On the other hand, though, these entities are strictly speaking excluded from the ‘state’ category and in fact independent of the state. Even the literal wording of the term “non-governmental organization” suggests a strict divide between foundations and the state system. By the same token, foundations are part of the private sector.
The above notwithstanding, due to the special position of foundations in the sphere of social and economic relations, strong links may be observed in practice between foundations and state sector entities. The most common reason is attributable to the fact that foundations are often financed from public sources in various forms, such as grants, subsidies from EU funds or 1% PIT donations made by the general public.
This factor has in fact a direct impact on why doubts arise in practice as to whether a foundation could be obliged to observe the PPL, as its legal status as a foundation or the fact it receives and spends public funding is not enough for it to qualify as a contracting authority.
2. Public contracting authorities.
The provisions of the PPL expressly define the categories of entities required to apply the PPL. The first category of contracting authorities are ‘public contracting authorities’ (Article 4 PPL), including:
1) ‘public finance sector units’ within the meaning of public finance regulations,
2) state organizational entities without legal personality other than those specified in item 1 above,
3) legal persons other than those specified in item 1 above, established for the specific purpose of meeting needs in the general public interest of no industrial or commercial nature, if the entities referred to in this provision and in items 1 and 2, whether individually or jointly, directly or indirectly via another entity:
a) finance them more than 50%, or
b) own more than one half of the shares, or
c) supervise their management board, or
d) have the right to appoint more than one half of members of the supervisory or management board,
4) unions set up by the aforementioned entities.
In view of the above list of entities statutorily required to apply the PPL in their activities and the wording of Article 3(2)(1) PBAaVA, in the first instance it needs to be pointed out that foundations will not belong in the category of entities referred to in item 1. This is because it expressly follows from the PBAaVA that NGOs (including foundations) are entities which do not belong in the public finance sector within the meaning of the Public Finance Law. Likewise, foundations do not belong in the category referred to in item 2 nor are they unions of these entities (item 4).
Consequently, for a foundation to be obligated to observe the PPL, at least one of the tests set forth in Articles 4(3)(a)-(d) PPL must be met.
3. Bodies governed by public law.
In implementing EU procurement directives into the Polish local legal system, the Polish legislator introduced, in Article 4(3) PPL, an obligation for ‘bodies governed by public law’ to observe the PPL. The following three conditions must be fulfilled jointly for such a legal entity to be legally obligated to apply the PPL provisions:
- the entity was established for the specific purpose of meeting needs in the general public interest of no industrial or commercial nature,
- the entity must have legal personality, and
- it must be predominantly financed by state, regional or local authorities or other bodies governed by public law; or its management must be supervised by such authorities or bodies; or over half of members of its administrative, management or supervisory bodies must be appointed by state, regional or local authorities or other bodies governed by public law.
As regards the above requirements, we will first note that the premise to the effect that an entity must have legal personality raises no doubt and merits no discussion, as every foundation acquires legal personality upon being entered in the NCR register.
Conversely, in order to interpret whether or not other tests have been met for a foundation to constitute a ‘body governed by public law’, it is advisable to apply the standards set out in EU directives, as well as to consult the guidelines stemming from the body of case law issued by the Court of Justice of the European Union.
4. Fulfilling needs in general public interest.
The criterion to the effect that an entity must be established for the specific purpose of meeting needs in the general public interest that are of no industrial or commercial nature refers to such needs that for the most part cannot be satisfied in the open market, and which the state meets on its own or has a decisive influence on meeting. It is strictly connected with the state’s institutional activities and should serve the society as a whole. The word “satisfaction” in this context denotes any activity that is not performed solely to satisfy a single, private purpose, and the words “general public”, when used as an adjective, ought to be interpreted as “concerning many people, available to many” or — at least — available to eligible individuals meeting the conditions set out by relevant regulations (rather than “available to all”). At the same time, so long as an institution meets the needs of general public nature, it will be regarded as a body governed by public law (regardless of how many percent of its activity it actually devotes to pursuing the general public interest).
Referring to the premise of satisfying needs in the general public interest, we note that it is primarily fulfilled by entities that are ‘public benefit organizations’. This, however, is self-evident if one takes a look at the statutory definition of such entities. Public benefit activity means socially useful activities carried out by NGOs (including foundations) in the sphere of public tasks specified in the PBAaVA (Article 3 PBAaVA). Notably, NGOs are established solely for the purpose of pursuing socially useful goals for the benefit of either the general public at large or a specific group of entities. Conversely, an NGO may be a public benefit organization if it jointly meets the requirements set forth in Article 20 PBAaVA, including, if it conducts public benefit activities for the benefit of the general public or a specific group of entities experiencing particularly adverse life or property circumstances, much inferior to those experienced by the rest of society.
5. State funding of tasks.
As regards the issue of procurement contracts being for the most part financed by public entities, bearing in mind the above-cited EU definition of ‘bodies governed by public law’, let us first point out that ‘state funding’ is understood as the provision of funds available to a given institution for the purposes of general operation of the institution, which inherently creates a relation of close dependence or subordination between the beneficiary of these funds and public entities. Within the meaning of the legal provision at issue, only payments made to finance or support activities of this particular entity can be understood as ‘public funding’, where no reciprocal consideration is being provided in return by this entity. The absence of a reciprocal consideration provided to the state by the public entity is attributable to the fact that the funding is used to ease the burden created by the performance of general public tasks for the benefit of the state.
That said, not every single transfer of public funds by the state can be considered as ‘funding’ provided to an institution within the meaning of Article 4(3)(a) PPL. This premise will not be met if a public entity finances the accomplishment of a specific cause in the sphere of interest of public entities, or if the funds so provided are insufficient to cover more than one half of the costs of activities of the given institution or if this threshold is exceeded but the funding is provided in exchange for specific benefits.
EXAMPLE: If more than 50% of a foundation’s general activities are financed by the Polish National Health Service Fund, the foundation is deemed a statutory ‘contracting authority’ and thus obligated to apply the PPL in its activities. However, if funding is obtained on the basis of a contract(s) and there is a mutual exchange of benefits between the foundation and the NHS Fund, then in such a case one cannot speak of ‘funding’ and the foundation is not obligated to apply the PPL.
In light of the above, in order for a foundation to establish whether it must observe PPL regulations in its activities, it needs to be determined whether or not more than 50% of its activities is financed by entities listed in Article 4(3) PPL. Moreover, a relationship of close dependence must be forged between the foundation and the state as an additional condition. Consequently, if the tasks performed by such an entity receive public funding, one must always examine whether there is a dependence relationship between this entity and the public entity.
6. Supervision of management body.
The premise of performing a supervisory role for a management body should be understood as the ability to affect decisions made by a given entity to the extent of being able to have a binding impact on its conduct by using certain measures vested in other contracting authorities (as defined in Article 4 (1)-(3) PPL), and thus constitutes a source of potential restrictions on autonomous decision-making in the course of day-to-day operations.
It therefore becomes necessary to determine whether another public institution exercises supervision over a body governed by public law, which may take the form of coordination or direction of its activities.
The test of supervision is deemed met in a situation where supervision means a connection with the state sector such as would have an effect equal to the affiliation created in the event of the two other tests being met, namely in a situation where the state sector is given the ability to influence the contracting authority’s decisions.
The activities of foundations are supervised by relevant regulators on the basis and within the remits of the laws applicable to their organizational and legal form, i.e., the Foundations Law. There are two forms of supervision: direct supervision (exercised by the registry court) and indirect supervision (by the relevant minister and the head of a county – starosta).
Bearing in mind the interpretive guidelines outlined above, it seems that the forms of supervision provided for in the Foundations Act cannot serve as the basis for recognizing a foundation as a ‘body governed by public law’, and thus as a contracting body within the meaning of the Public Procurement Law.
First of all, this supervision is carried out exclusively within the limits and on the basis of the principles set out by statutory law, is administrative in nature and cannot assume the form of the supervisory body affecting the course of activities and decisions of a specific entity. In particular, the body exercising supervisory powers has no control of the criteria that the supervised entity uses to organize procurements. Secondly, the supervision applies to the foundation as a whole, rather than only to its governing body as provided in the PPL. Thirdly, notwithstanding the public entities’ power to supervise foundations, this particular supervisory body is not legally responsible for the activities of the subordinate entity, because these entities operate on their own responsibility and for their own account.
That said, it cannot be ruled out in practice that the wording of the foundation’s statute might include provisions under which a specific public entity will be granted the power to affect the course of the foundation’s management. This is due to the method chosen by the Polish legislator for the purpose of regulating the structure and internal organization of foundations, whereby foundations are given a wide scope of discretionary freedom to adopt the provisions of their statute. Consequently, in some cases foundations may expose themselves to such a degree of influence exerted by public entities on their management that will in consequence impose on them the obligation to award public contracts under Article 4(3)(c) PPL.
EXAMPLE: In accordance with the foundation’s statute, its management board will determine such objectives and rules for spending its funds as will subsequently require the approval of the relevant minister (representing the State Treasury, which is the founder of this foundation).
7. Right to appoint more than one half of members of the supervisory or management board.
The final test for classifying a certain category of contracting authorities as ‘bodies governed by public law’ is the right to appoint more than one half of the members of the supervisory or management body vested in a public entity.
Although the Foundations Act stipulates that the management board is the only mandatory corporate body of a foundation, other corporate bodies, including supervisory bodies, may be created if so provided in the foundation’s statute. Since the Foundations Act does not specify the rules for electing management or supervisory board members, this issue may be regulated in the statute in any way the founders deem fit.
It is also permitted for the statuteto designate third parties authorized to elect the corporate authorities of the foundation. In some cases, this may involve the obligation to perform a specific function under specific legislation — for example, as a representative of the State Treasury.
EXAMPLE: Members of the foundation’s management board, including the Chairman and Secretary, shall be appointed and dismissed by the State Treasury Minister.
In addition, in many cases founders reserve the right to elect board members for themselves. However, considering the subject matter of the issue discussed in this article, it seems reasonable at this point to note certain doubts likely to arise in connection with the question of whether public entities may act as founders of a foundation and bestow upon their representatives the right to elect the management board.
Under Article 5(1) of the Foundations Act, the founder adopts the foundation’s statutewhich determine, among other things, the composition and organization of the management board, the method of appointment, as well as the duties and powers of this body and its members. Additionally, in the statement of will made to establish the foundation the founder must indicate, among other things, the assets set aside to set up the foundation, which may be in the form of cash, securities, as well as movable and immovable property donated to the foundation. In contrast, Article 45 of the Public Finance Law prohibits the incorporation of foundations (under the Foundations Act) using public funds.
In order to clarify the above issue, it should first be pointed out that the Foundations Act does not list the categories of entities that can act as a founder. Namely, both individuals and legal entities may be founders. Secondly, the rule provided for in Article 45 of the Public Finance Law only prohibits the incorporation of foundations with public funds. This must not be confused with public finance sector entities being prohibited from incorporating foundations.
In view of the above, we feel inclined to agree with the position advanced by legal authorities to the effect that the State Treasury and local government agencies, in their capacity as legal persons, may establish foundations under the Foundations Act. That said, foundations incorporated in this manner must not be endowed with funds originating from the state budget. It is possible, however, to bestow such a foundation with tangible assets.
EXAMPLE: The municipality, as the owner of a certain real property, transfers the real property to a foundation so that the property constitutes one of the foundation’s assets.
In view of the above, public entities may act as founders and adopt statute whereby their representatives will be granted powers to appoint the foundation’s authorities, thus retaining the ability to exert influence on the activities of the foundation and the achievement of its goals.
However, in order to determine whether the legal premise connected with “the right to appoint more than half of the members of the supervisory or management body” applies to a particular foundation, it is necessary in each case to analyze the provisions of its statute, especially the rules for selecting and appointing the majority of the members of its corporate authorities.
8. Contracting entities in utility sectors.
Other entities obligated to comply with the rules set out in the PPL are utility sector contracting authorities otherwise known as ‘contracting entities’ under Article 4 of the Utilities Directive. They are entities operating in a number of utility sectors including water, electricity, thermal energy and gas, transport, postal services, ports, marinas and airports, and fuel extraction. Utility sector ‘contracting entities’ are further subdivided into three groups:
1. Public contracting authorities to the extent that they conduct a utility sector activity,
2. Entities other than those specified in point 1, which conduct one of the utility activities referred to in point 4, and over which public contracting authorities, whether acting individually or jointly, directly or indirectly, exercise dominant influence, in particular:
a) By holding more than one half of shares, or
b) By holding more than one half of votes attaching to shares, or
c) By having the right to appoint more than one half of members of the supervisory or management board;
3. Entities other than those specified in items 1 and 2, which perform one of the sectoral activities referred to in item 4, if these activities are carried out on the basis of special or exclusive rights.
The common denominator for all categories of entities falling into the groups indicated above is the conducting of a utility sector activity. At the same time — in addition to the type of activity performed — the existence of a relationship between the activity pursued and the planned public procurement is also essential. Thus, the PPL provisions on utility sector procurements will not apply, in particular, to contracts awarded for purposes other than the conduct of utility sector activities. In addition, they should not apply to the activities of such a category of entities that either operate outside the utility sectors or operate in the sectors but are directly exposed to competitive forces in markets with unrestricted access.
A foundation primarily pursues the activities set out in its statute, particularly in such areas as health care, business and scientific development, education and upbringing, culture and art, social care and assistance, environmental protection and protection of historic monuments. In addition, it may conduct business activities, but only to the extent that they pursue the goals set out in its statute. That said, ‘economic activity’ must not be the primary purpose but merely serve as a means to achieving a purpose typical of foundations, i.e., publicly useful purposes, which by definition must be useful to society.
Although utility sector activities are admittedly useful to the general public, it is difficult to conceive of a situation where a foundation performs a utility sector activity, much less a situation where a procurement contract is awarded for the purpose of performing such activities. For this reason, we find it difficult to conclude that the standards provided for in Article 5 PPL could constitute a basis for classifying foundations as a type of contracting authority, as this would simply run counter to the overall goals behind their creation and activities.
9. Subsidized contracting authorities.
Article 6 PPL defines subsidized contracting authorities as entities that are generally not required to apply the PPL (such as foundations).
In accordance with the said Article, entities other than contracting authorities or contracting entities are obligated to apply PPL regulations if the following circumstances are jointly fulfilled:
- more than 50% of the value of the contract awarded by this entity is financed from public funds or public contracting authorities to the extent that they conduct a utility sector activity,
- the contract value is equal to or exceeds EU thresholds,
- the subject matter of the contract provides for civil engineering works defined in Annex II to the Classical Directive, construction of hospitals, facilities intended for sports, recreation or leisure activities, school and university buildings, or public administration buildings, as well as services related to any such construction works.
The term “contract financing” as used in this provision means the transfer of funds for a specific project. In contrast to entities classified as public contracting authorities, in this particular case it will be sufficient for a specific project to be predominantly financed from the public purse. The entities referred to in statutory law must account for the funds they disbursed as part of their support for a specific project. Such financing takes the form of grants or subsidies paid to a beneficiary of EU funds.
The legislator also requires that the contract value be equal to or exceed certain threshold amounts. Consequently, if the value of the contract to be awarded is below the current EU threshold, the entity concerned is not required to apply the procedures set out in the Public Procurement Law, even if the other conditions set forth in this provision have been met.
The last premise to be discussed here is the requirement that the subject of the contract must concern certain types of construction works (i.e., construction of hospitals, facilities intended for sports, recreation or leisure activities, school and university buildings, or public administration buildings, etc.), as well as services related to any such construction works. Consequently, this provision does not apply to construction works within the meaning of Article 7(21) PPL, but by reference to Annex II to the Classical Directive — it unequivocally narrows the scope of the subject matter of the contract indicated herein.
EXAMPLE: If public funds have been provided to perform specific construction works (e.g., construction of a new hospital), and at least 51% of the contract value is co-financed by the National Health Service Fund, and the overall contract value exceeds the applicable EU thresholds, which currently stand at PLN 23,969,275 — the foundation must apply the PPL. On the other hand, if less than half of the construction costs come from state coffers because, for example, the foundation contributes its own funds for this specific purpose, even if the contract value exceeds EU thresholds, the foundation will not be obligated to organize a public tender for the works.
10. 1% of pit tax contributions vs. the obligation to apply PZP.
Under rules and procedures set forth in separate regulations, a personal income taxpayer may set aside 1% of his/her tax to a public benefit organization of his/her choice (Article 27 PBAaVA). Foundations often pursue the objectives provided for in their statuteusing proceeds from these contributions.
Firstly, in order to determine whether these funds fall into the category of ‘financing the activities of a public entity’ within the meaning of Article 4(3)(a) PPL, it is essential to determine the rules and procedures for transferring these funds to public benefit organizations in light of the PPL. The 1% PIT donation to a public benefit organization in each single case will entirely depend on the taxpayer’s exclusive decision. At no stage is the allocation of funds under the 1% PIT deduction decided by public contracting authorities, notwithstanding the fact that the Director of the National Freedom Institute25 keeps a list of public benefit organizations exclusively eligible to receive 1% PIT donations. Naturally, the fact that an organization is listed by the Institute does not guarantee that it is going to raise any funds as this will in each case depend on the individual taxpayers’ willingness to make donations.
In view of the above, the fact that foundations receive funding from the 1% tax write-off made by taxpayers does not constitute ‘financing of the entity’s activities’ within the meaning of Article 4(3)(a) PPL, so this circumstance does not make them obligated to apply PPL regulations.
Now turning to the tests set out in Article 6 PPL, bearing in mind the specific features of “financing”, as provided therein and discussed above, we need to point out that the allocation of funds originating from 1% tax write-offs does not fulfill the test of such financing. This is due to the fact that funds received in this manner can only be used by the organization at issue to conduct public benefit activities (Article 27(2) PBAaVA) and by the same token these funds constitute general funding for its activities rather than monies transferred to finance a particular project.
In view of the above, the fact that foundations spend funds received as part of the 1% income tax write-off does not per se constitute an independent basis for establishing their obligation to apply the public procurement regime. In other words, this circumstance on its own cannot determine the foundations’ obligation to apply the PPL.
11. Conclusions.
While the PPL does not explicitly list foundations as a type of contracting authority, in certain situations they are obligated to observe the PPL. For this purpose, it will be necessary in each case to determine whether one of the cases specified in Article 4(3)(a), (c)-(d) PPL or Article 6 PPL applies to the foundation in question.
Nevertheless, the imposition of an obligation on foundations to award public contracts in certain cases ought to be considered necessary from the viewpoint of the necessity of ensuring that state budget funds are spent correctly and in order to ensure that there are no leakages from the public procurement system.
Legal basis:
- Directive 2014/24/EU of the European Parliament and of the Council of 26 February 2014 on public procurement and repealing Directive 2004/18/EC (OJ EU L, 2014, no. 94, p. 65, as amended);
- Directive 2014/25/EU of the European Parliament and of the Council of 26 February 2014 on procurement by entities operating in the water, energy, transport and postal services sectors and repealing Directive 2004/17/EC (OJ EU L., 2014, no. 94, p. 243, as amended);
- Act of 11 September 2019 titled “Public Procurement Law” (amended and restated text in: Journal of Laws of 2021, item 1129, as amended);
- The Public Finances Act of 27 August 2009 (amended and restated text in: Journal of Laws of 2021, item 305, as amended);
- Foundations Act of 6 April 1984 (Journal of Laws of 2020, item 2167);
- Public Benefit Activity and Volunteering Act of 24 April 2003 (Journal of Laws of 2022, item 1327),
- Real Property Management Act of 21 August 1997 (amended and restated text in: Journal of Laws of 2021, item 1899, as amended).
By Dominika Markowicz, Associate, Dentons