Economy, Locational Policy
and Competition
Services of general interest: the state as beneficiary?
For fair competition between state and private sector,
as well as more investments, greater efficiency and
optimisation of charging structures
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Services of general interest: the state as beneficiary?
For fair competition between state and private sector,
as well as more investments, greater efficiency and
optimisation of charging structures
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Services of general interest: the state as beneficiary?
Foreword
3
Foreword
There is no contradiction between competition and services of general interest. The citizen wants a high quality, area-wide and affordable supply of necessary and important services. To that end, competition is indispensable. The
state should restrict its activity to core areas of services of general interest
and limit its involvement to supervision to ensure proper provision of these
services. Private companies want to engage in fair competition to provide the
best service offer across all economic sectors. Yet the state shies away from
such competition in many areas – it is the citizen who pays the bill.
The services that fall under the umbrella of »services of general interest«, formerly provided as sovereign tasks of state,
Länder and municipalities, are now increasingly also offered by private companies. The private sector impressively
demonstrates that, normally, it delivers high quality services at attractive prices. And it usually delivers these services
much more efficiently than the public sector. Unlike the public sector, private companies are essentially under constant
competitive pressure which results in ongoing improvements to and optimisation of the service offer.
Nevertheless, in the recent period the public sector has once more markedly expanded its activity in a number of market-related service areas. Furthermore, Länder and municipalities are particularly active in markets which have only
recently been liberalised. In addition, there is a trend towards municipalities bringing services that have already been
privatised back into the public sector. In this context, public authorities claim that the supply of important services
would often not be secure without their own economic involvement. By so doing, it disregards the fact that, as a general
proposition, private companies competing with each other can offer more dynamic, more innovative and more attractively priced services of general interest than public undertakings. This has been shown by liberalisation successes, especially in the network infrastructure markets that were previously organised as sovereign tasks of the public sector. These
successes should not be reversed through an extension of state activity. The liberalisation and privatisation process
should be extended to further sectors – for example, such as water and waste management – in order to exploit their
growth potential, to the benefit of the consumer. Privatisation of public services and meeting the general interest do not
pull in opposite directions. The state’s steering function and sovereignty are unaffected, thanks to an appropriately
shaped statutory or contractual framework governing the activities of private service providers. This follows on from the
state’s responsibility for delivery.
With this publication, the BDI seeks to expose misunderstandings about relations between state and private sector, and
to argue in favour of competition on a level playing field: the proven best supplier should be allowed to provide a service of general interest. To this end, it is essential that the private sector is in a position to offer its services in fair competition. The benchmark should be the citizen’s expectations, not the desire of public authorities to perform tasks under
their own responsibility – regardless of capacities and expertise.
Jürgen Thumann
President
Federation of German Industries
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Services of general interest: the state as beneficiary?
Contents
5
Contents
A. Services of general interest – a concern of the private sector . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
B. Dimensions of services of general interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
1.
»Services of general interest« – a concept with no fixed contours . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
a) Services of general interest in Germany . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
b) Services of general interest in Europe . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
2.
Competition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
a) Pre-eminence of competition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
b) Competition in the European internal market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
c) Competition and public interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
d) Competition and economic activity by public authorities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
10
10
10
10
11
3.
State aid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
a) Distortions of competition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
b) State aid and the EC treaty . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
c) Exceptions for services of general economic interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
d) Transparency directive . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
12
12
12
12
12
4.
Municipal commercial law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
a) Municipal right to self-administration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
b) Restrictions on economic activity by public authorities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
c) Financing public tasks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
d) Legal protection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
14
14
14
15
15
5.
Public procurement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
a) No freedom to award contracts for cooperation between municipalities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
b) Criteria for exemption of in-house services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
c) Trends in national legislation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
16
16
17
17
6.
Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
a) VAT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .19
b) Corporation and local business tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
c) Land transfer duty . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
C. Individual services of general interest and other economic sectors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
1.
Energy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
2.
Telecommunications and postal services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
3.
Transport . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
4.
Waste . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
5.
Water . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
6.
Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
7.
Engineering and consulting services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
D. Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
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Services of general interest: the state as beneficiary?
A. Services of general interest – a concern of the private sector
A. Services of general interest – a concern of the private sector
Economic activity is not one of the core tasks of public authorities. If there is
a functioning market for a service and no compelling requirement for it to be
provided by the state, the state must withdraw.
The private sector’s potential for creating value cannot be
realised when public undertakings enjoy and can deploy
competitive advantages vis-à-vis private companies. Forms
of economic activity by public authorities are varied,
including in-house municipal undertakings (»Regiebetriebe«), stand-alone municipal enterprises (»kommunale
Eigenbetriebe«), public law corporations (Anstalten des
öffentlichen Rechts«, »AöR«), unions of municipal authorities for the joint service management (»kommunale
Zweckverbände« – hereafter: »municipal union«) or technically privatised businesses partly or fully owned by public authorities. The privileges enjoyed by the public sector
have a negative impact on Germany’s economic strength.
In particular, many jobs in small and medium-sized enterprises are at risk. Instead of releasing growth potential
through competition, Länder and municipalities are hanging on to obsolete structures.
It is true that some municipalities are today increasingly
business-like and cost-conscious as compared with the
times when important service areas such as telecommunications, local energy supply and waste management were
essentially run as state monopolies. That is also necessary
in the interest of the citizen and essential against the
background of the budget situation. However, when
municipalities claim to be able to supply services generally
more securely and at more attractive prices than the private sector, this is an overhasty and misguided conclusion.
If municipalities can genuinely offer cost savings as compared with a private supplier, which may occur in the very
rarest cases, this is due to uneven competitive conditions
and is ultimately bought at a high price.
of supply, social, charitable and cultural interests, and
municipal self-administration would be jeopardised if this
does not happen.
Länder and municipalities are pursuing the wrong regulatory route. The reference to services of general interest as
a means of protecting their social institutions and constitutionally guaranteed right to self-administration is only a
front. At heart, the situation is somewhat different. Public
authorities are using »services of general interest« to justify responding to an increasingly stretched budget situation
by intruding into profitable business areas previously
reserved for or transferred to private companies. Between
1999 and 2004 municipalities boosted their revenues from
economic activity by around 8.8 billion euros. This corresponds to an increase of almost 11%. In North RhineWestphalia, these revenues jumped by no less than 21.4%
over this period. In addition, market opening in other sectors was impeded, not to secure better provision of services of general interest but to secure lucrative business
fields. As a result, Germany is falling back into being a
state-run economy which had seemed to be a thing of the
distant past.
Municipalities: the state as business operator
Municipal revenues from direct economic activities,
in million euros
1999
2004
Bavaria
1,323
1,562
As a percentage of total revenues
7.7
Baden Württemberg
1,520
1,468
7.6
Rhineland-Palatinate
382
420
7.5
Mecklenburg-
Instead of leaving economic activities to competition
between private firms, regional and local authorities push
private undertakings out of important fields of economic
activity under the cloak of services of general interest.
Even areas that have already been privatised are increasingly being provided by the public sector, and possibilities
are sought to circumvent obligatory tender calls. For
instance, Länder and municipalities in Germany are calling for elimination of legal restrictions on economic activity by municipalities and »tender-free spaces« for municipalities; in Europe, they want to restrict the principle of
competition to the benefit of municipal undertakings supplying services of general interest. They claim that security
Western Pomerania
196
209
Saxony
392
432
1,847
2,243
Schleswig-Holstein
North Rhine-Westphalia
240
272
Thuringia
213
224
Hesse
650
675
Saarland
76
82
Lower Saxony
633
723
Brandenburg
216
221
Saxony-Anhalt
211
216
Western Germany
6,671
7,444
Eastern Germany
1,228
1,302
German Länder, excluding city states
iwd: Institut der deutschen Wirtschaft Köln
© 35/2007 Deutscher Institutsverlag
7.4
6.8
6.6
6.4
6.4
6.2
6.0
5.9
5.7
5.6
6.9
6.4
Original data: Statistisches Bundesamt
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This publication turns the spotlight on various aspects of
services of general interest. We first discuss some of the
dimensions. We then examine individual sectors and provide examples.
Example: Since 1 July 2006 waste collection in Bergkamen has been back in public hands after a consultancy
calculated a 30% savings potential if the town provided
this service itself. Such abstract calculation models are
based on historical and long obsolete price structures
and incorporate tax privileges. Public undertakings legally constituted as such pay neither turnover tax nor profit
tax. Ultimately, waste collection charges were reduced
only by 7.8% (2006) and 3.4% (2007). Since this transfer
back to the local authority took place without a new tender call, it is in no way proven that a private supplier
would have been able to deliver smaller savings on the
basis of current cost conditions. The squeeze on the private sector also means that tax revenues are foregone,
which leads to greater pressure on the public budget.
Services of general interest: the state as beneficiary?
A. Services of general interest – a concern of the private sector
7
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Services of general interest: the state as beneficiary?
B. Dimensions of services of general interest
B. Dimensions of services of general interest
The limits of municipal self-administration, constitutional obligations regarding the freedom of private undertakings to exercise their profession as well as
constitutional rules guaranteeing freedom of competition and a level playing
field also apply in the area of services of general interest. Similarly, the provisions of European state aid legislation and public procurement law must also
be taken into account. This calls for action.
1. »Services of general interest« – a concept with no fixed
contours
The services that fall within the nebulous concept of »services of general
interest« which were previously supplied as sovereign tasks can and generally are supplied under better conditions by private undertakings. The
state should create an appropriate
framework for competition in this
area.
water, energy and waste processing plants. In addition,
there are often references to services of general interest
with respect to provision of telecommunication services,
guarantees for savings banks or extension of local public
transport services. Yet – by contrast with the picture that
is lovingly painted – the concept of services of general
interest in no way refers to obligatory responsibilities of
the state. Rather, it generally relates to economic services
which are supplied by the state in the framework of services management and by private undertakings on the basis
of private law. The state only has responsibility for ensuring delivery; but this does not imply that the task itself has
to be performed by municipalities and their own businesses. On the contrary, the rules governing municipalities
postulate economic activity by the state only in exceptional cases; it is essentially the private sector that should be
active.
a) Services of general interest in Germany
The concept of services of general interest has no fixed
contours. In Germany, it can be traced to Ernst Forsthoff
who coined the term for the first time in 1938 in his paper
entitled »The administration as a provider of services«.
For some people, services of general interest means a
comprehensive supply of important economic goods
under the same conditions; some understand the term to
cover social and charitable institutions; while yet others
believe that it encompasses even development of the
regions. The term is invoked with reference to public security, national defence and justice. And lastly – if we are to
take the public debate seriously – the concept includes
keep-fit circuits, nature trails, sports grounds and swimming pools. In this wide interpretation, services of general
interest relate to a range of policy areas and seem to
embrace everything which in any way benefits man, i.e.
takes care of his interest in the widest sense.
The vague concept of services of general interest has
shaped policy-making in German Länder and municipalities for many years – and still does. Its content has been
in constant flux. Town councils, mayors and district councillors invoke services of general interest when they set up
b) Services of general interest in Europe
In other Member States of the European Union, the concept of services of general interest (known as »services of
general interest« (England), »services d’intérêt général« or
»service public« (France) or »servizio pubblico« (Italy)
with varying content) means the provision of important
services precisely by the state to a much narrower extent
than in Germany. There are differences in the scope of
state activity in services of general interest sectors.
The European Commission describes »services of general
interest in Europe« as »market or non-market services
which the public authorities class as being of general
interest and subject to specific public service obligations«.
It distinguishes between »services of general interest« and
»services of general economic interest«, the latter explicitly referred to in Article 86 of the EC treaty. These relate to
market activities performed in the general interest and
which are therefore associated in the Member States with
specific public service obligations.
This distinction presupposes that it is possible to draw a
line between market and non-market services. That is
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doubtful. After all – with the exception of a few public
goods such as public security, national defence or justice –
whether companies can provide a service in the market or
whether it is deemed better that the state should provide
certain services depends on the local legal, economic,
social and political situation. The terms »services of general interest« and »services of general economic interest«
cannot be separated. They are very closely related. It is
important to acknowledge that the Member States provide
important services to their citizens via a range of regulatory policy instruments. The state and public undertakings
are increasingly – and rightly – reducing their role across
Europe. It is now becoming commonplace for important
services to be provided by competing private undertakings. The positive results for innovation, progress and
lower costs are undeniable. Nevertheless, public authorities have recently once more been expanding their economic activity to the detriment of the private sector.
The principle of competition has consequences for the
concept of »services of general interest«. Hence, services
of general interest should be understood primarily as the
task of the state at all levels to create an appropriate competition framework so that private companies can provide
a high level of services which the population regards as
important and for which there is a demand.
Example: Towns and municipalities are advancing into all
areas of economic life – alongside the services of general interest which have now been extensively liberalised
and privatised. For instance, they offer: fitness and nail
studios, tuition, city tours, camping sites, concert and
event agencies, driving schools, hotels and restaurants,
breakdown services, garden centres, crematoriums,
heating maintenance services, DSL connections, funicular railways, etc. This list is far from exhaustive. These
activities by public authorities are neither dictated by the
public interest nor allowed under the principle of subsidiarity set out in the rules governing activities by
municipalities.
Services of general interest: the state as beneficiary?
B. Dimensions of services of general interest
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2. Competition
Only competition guarantees effectiveness, quality and sustainably
affordable, innovative services for the
consumer.
a) Pre-eminence of competition
Services of general interest are generally provided at a
higher level of quality, with greater choice and at more
attractive prices by the private sector in competition. That
is the practical experience from liberalisation and privatisation of the energy and telecommunication markets.
Spurred by the European Union, the Member States have
rightly opened these important services of general interest
to competition. So what is holding back liberalisation of
the water industry? Our social insurance systems, our
health sector and our universities also need more competitive elements. Both citizens and large swathes of the
political establishment feel the advantages of competition
and do not wish to be deprived of it. Some municipalities
are today increasingly business-like and cost-conscious as
compared with the times when important service areas
such as telecommunications, local energy supply and
waste management were essentially run as state monopolies. That is also necessary in the interest of the citizen
and essential against the background of the budget situation.
b) Competition in the European internal market
The principle of competition has a particular significance
in the European internal market. According to article 3
paragraph 1 point g) of the EC treaty, the Member States
want to create a system which protects competition within
the internal market against distortions. According to the
EU summit on 21-22 June 2007, this requirement will in
future be embodied in a protocol but will still have the
same status as the treaty text. The European Commission
has the important function of monitoring compliance with
the competition rules of the EC treaty. In particular, the
European Commission must ensure that competition
between companies can be exercised effectively and fairly.
The European Commission monitors not only restrictions
on competition and abuse of dominant positions by companies but also illegal state aid by Member States. In so
doing, it ensures that market forces in the European internal market can be deployed without distortions and that
demand from individuals can be satisfied at a high level by
supply from the private sector.
Services of general interest: the state as beneficiary?
B. Dimensions of services of general interest
In addition, the European Commission is an important
engine for market opening and hence for further progress
in the internal market. Following telecoms and postal
markets, electricity and gas markets, the European Commission is now rightly advocating liberalisation of local
transport. It has recognised that, normally, market forces
allow better use of resources, greater efficiency, better
quality and more attractive prices. It set out this position
most recently in its 2004 white paper on »Services of general interest« in which it states that – in many cases at
least – an open and competitive market has made an
essential contribution to improving efficiency, and has led
to a widening of the range of services offered and affordability.
c) Competition and public interest
The body politic rightly recognises its responsibility for the
public interest. However, meeting public interest objectives does not necessarily encroach on the freedom of
competition. On the contrary: in a market economy, the
state should give preference to meeting public interest
objectives by creating an appropriate competitive framework without otherwise intruding on the market. The
competitive framework must be shaped in such a way that
it provides sufficient incentives for private undertakings to
satisfy the needs of citizens for important services as optimally as possible. Competition ensures that businesses are
excluded from the market if they do not recognise customer needs or if they fail to meet them at a satisfactory
level. It is only this genuine threat that releases the necessary entrepreneurial forces to work steadily for constant
innovation. It is not state planning but competition
between private undertakings which ensures that new
markets are developed and citizens can demand the highlevel services of their choice. It is not public undertakings
but private undertakings – occasionally encouraged by
incentives from the public authorities – that are the
engines of innovation and dynamic development.
If policy-makers believe that the level of certain services
or the standards they desire cannot be provided or cannot
be provided adequately by the private sector in open competition, they are in a position to adjust the competitive
framework. For instance, policy-makers can lay down
minimum standards which they believe are necessary for
the public interest. Whether and to what extent minimum
standards are necessary depends on the importance of the
service in question, on demand and on the structure of the
market. We have minimum standards for health protection, safety at work, product safety or environmental protection. These standards can be flanked by obligations,
agreements or other measures. For instance, in the case of
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Services of general interest: the state as beneficiary?
B. Dimensions of services of general interest
postal and telecommunications services, the population is
guaranteed a basic service by applying the principle of
universal service. This principle, whereby the supplier of a
service is obliged to supply that service everywhere in the
state or licence area at affordable prices and with comparable quality, can in the short term be an appropriate
instrument for ensuring the supply of important services
across the board, i.e. also in remote areas. However, the
BDI warns against an over-generous definition of services
which it is deemed necessary to provide on a universal
basis. Giving Member States greater discretion to interpret
the definition of services of general interest creates the
temptation for public authorities to interfere with the market mechanism and to engage in economic activity. It can
only be right in justified exceptional cases to restrict contractual freedom through universal service obligations.
Contractual restrictions are alien to the principle of competition and are therefore essentially the wrong regulatory
instrument. As an important element for the competition
and demand behaviour of market participants, the price –
also for important services – should not be regulated.
The BDI believes that economic activity by the public
authorities is unacceptable as a matter of principle. This
principle should only be set aside for a closely defined
public purpose. Economic activity by the state geared
exclusively to the pursuit of profit is contrary to the Basic
Constitutional Law (»Grundgesetz«). Another factor militating against economic activity by the public authorities
is the fact that private undertakings have to pay a considerable part of their profits to the state in the form of tax.
Accordingly, they should be able to expect that the state
will not also operate against them as a competitor. Furthermore, competition between private undertakings and
public undertakings does not take place on an equal footing. Public undertakings generally demand advantages
that private undertakings cannot afford. This is demonstrated by privileges to public undertakings when state aid
is granted, in the framework of municipal commercial law,
in the area of taxation and in public procurement law.
d) Competition and economic activity by public authorities
Where by way of exception a service is not to be provided
by the market on the grounds of public interest – for
instance justice, homeland security and national defence –
it is justified for the state itself to provide this service.
However, economic activity on the part of the state is
essentially unnecessary for the provision of services of
general interest and the wrong route in terms of regulatory
policy. Particularly harmful are state monopoly positions
in sectors which could be just as well served by the private
sector, for instance in sections of the waste management
business or the water industry. Given that state monopolies have been extensively dismantled in recent years, economic activity by public authorities is an anachronism
which persists only thanks to differences in competition
conditions and extensive exemptions from public procurement requirements, to the detriment of the private sector.
It is not that private firms in any way fear competition
with public undertakings as such. Competition is the
expression of a competitive economy. In any event, public
undertakings will be unable to hold their own in the long
term in a competitive economy due to their links to the
state and the associated structural inefficiencies. »New
management models« will do little to alter this situation.
What is detrimental is that the taxpayer must pay for the
inefficiency of public undertakings. It is a matter of concern for the private sector that competition from the public authorities can have a ruinous effect on individual
companies, in particular small and medium-sized firms.
11
Example: Market opening and competition in the liberalised sectors have resulted in considerable price reductions and improved service offers.
Telecommunications: For speech telephony services
on weekdays, the price is now only around 4% of the
amount payable during the monopoly period. In the area
of mobile telephone services, the price level has gone
down by around 70% since 1995, and the consumer
price index for Internet use has shrunk by 44% since
2000. Furthermore, a wide range of new products and
services have been made available to the customer in all
areas of telecommunications and IT services.
Transport: Since September 2001, the city of Frankfurt
am Main has progressively contracted out its bus services on the basis of tender calls. Today an additional
850,000 bus kilometres are being driven, financed exclusively from the efficiency gains generated by the tender
process.
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3. State aid
a) Distortions of competition
State aid seriously distorts competition between undertakings and
encourages cross-subsidisation to the
detriment of the private sector.
State aid distorts competition. Particularly often, public
authorities grant state aid to public undertakings – to the
detriment of the private sector. The claim by many public
undertakings that they would be unable to manage without state aid is a distortion of reality. Even when they are
not paid direct subsidies, public undertakings benefit indirectly from the state in various ways. They do not run a
real bankruptcy or employment risk. Outside financiers
can assume that the state or regional authority standing
behind public undertakings organised under private commercial law will absorb any losses. Moreover, public
undertakings regularly use the personnel of the administration that stands behind their business. This is another
advantage not enjoyed by private undertakings. Not least,
thanks to their proximity to the administration, public
undertakings generally have a competition-relevant information lead which private undertakings cannot come
close to matching, even with the greatest efforts. These
indirect advantages enjoyed by public undertakings – and
not excluding straightforward financial assistance – should
be taken into account when the extent of state aid to public undertakings is under discussion.
b) State aid and the EC treaty
Financial state assistance to public undertakings is not
only objectionable in terms of regulatory policy. Article 87
of the EC treaty proscribes state aid that distorts competition, in order to safeguard equality of opportunity between
companies in competition. State aid law does not distinguish between whether the state aid is paid to a private
business or a public undertaking. Both are unacceptable
in principle. The concept of state aid is widely drawn, in
order to ensure the most comprehensive possible control
of state support. It encompasses direct financial payments
as well as indirect state aid, for instance in the form of
low-interest loans or sale of land at below market value.
Services of general interest: the state as beneficiary?
B. Dimensions of services of general interest
these demands. Even today – via the exceptions in article
87 of the EC treaty – EU state aid law allows exceptions
for services of general interest that arguably go too far. It
would appear that the German Länder and municipalities
underestimate this fact. In addition to the possibility to
determine the desired level of services of general interest
at national level through general rules, article 86 paragraph 2 of the EC treaty provides that the competition
and state aid rules of the EC treaty apply to undertakings
(private or public) which provide services of general economic interest only insofar as the rules do not impede
performance of the tasks. It is essentially up to the Member States to determine which services they want to see
provided in the general interest. In particular, the Member
States can entrust provision of such services to private
undertakings. In practice, it is primarily public undertakings that benefit from state aid under article 86 paragraph
2 of the EC treaty. Public authorities are allowed to offset
the disadvantages suffered by undertakings performing
special tasks through appropriate levels of state aid. For
instance, if a municipality close to a boundary wants to
provide a splinter settlement with a regular bus service,
but the local bus undertakings do not serve or inadequately serve the route to and from the splinter settlement, it
ought to be compatible with EU state aid law if the
municipality pays a bus undertaking appropriate grants –
following a transparent tender call – for the higher costs
of serving the uneconomic route. According to the ECJ
decision in the Altmark-Trans case (C-4280/00 – 24 July
2003), a compensation payment becomes state aid if it is
granted without a prior tender call or is not based on the
costs of an average, well-managed business.
In the view of the European Commission, the public
authorities have further discretion for the definition of
services of general interest. Against this background, the
demand by German Länder and municipalities for further
exceptions is unacceptable. In particular, regional and
local authorities are too ready to assert the need for state
aid, especially to the benefit of public undertakings. Fair
competition with private undertakings is undermined.
Open or concealed state aid enables municipal undertakings to appear competitive only in the short term. Also,
»new management models« fail to solve the problems of
structural inefficiency suffered by public undertakings.
d) Transparency directive
c) Exceptions for services of general economic interest
In the discussion on services of general interest, German
Länder and municipalities demand further exceptions
from the ban on state aid for services of general economic
interest. The BDI emphatically warns against giving in to
It is absolutely right that services of general interest
should not be completely fenced off from European competition control. The state should not abuse services of
general interest to distort competition in favour of public
undertakings. In particular, the state should give state aid
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to undertakings that provide services of general interest
only to the extent necessary for the undertakings to be
able to perform the tasks with which they have been
entrusted. A precondition for this is that the public
authorities set the objectives that are to be met in a clear
and transparent manner. State aid may then be permissible to the extent necessary to meet the stated policy goal.
State aid that goes beyond what is necessary is rightly outlawed. In other words, a municipality which pays a bus
undertaking grants to serve an uneconomic route should if
need be compensate the specific extra costs incurred by
the bus undertaking.
Particularly problematic is state aid to undertakings which
provide services both in the open market and as a publicly
conferred task. There is a danger that the assisted undertaking will use the state aid to help finance activities in
the open market (cross-subsidisation). The bus undertaking in our example, which receives grants to serve an
uneconomic route, could and would use unduly high
grants to support its general bus business in open competition. This cross-subsidisation is everyday practice.
The transparency directive seeks to solve this problem.
Under this directive, undertakings that are active in both
completely liberalised markets and markets in which they
enjoy special rights must keep separate accounts for their
different activities. This means that the transparency directive is an instrument for preventing distortions of competition. Undertakings which have special rights to provide
services of general economic interest, and which receive
state aid in return, must now keep the two areas separate
and document how they use the state aid. In the latest
revision of the transparency directive in 2005, the European Commission even made it clear that this obligation is
applicable independent of the legal classification of compensation payments as state aid and thereby confirms that
cross-subsidies must be ruled out in all cases.
The BDI resolutely rejects the demand by German Länder
for further exceptions from EU state aid law. Exceptions
from the ban on state aid would send the wrong regulatory signal for Germany and for Europe. Distortions of competition caused by state interference would be rendered
legitimate, the liberalisation and privatisation successes of
recent years would be destroyed. Urgently needed reforms
would be delayed or even prevented. Lastly, state aid is
also objectionable when it is not prohibited by European
state aid law, for instance because the state aid does not
influence cross-border competition. This places an even
greater responsibility on national policy-makers.
Services of general interest: the state as beneficiary?
B. Dimensions of services of general interest
13
Example: In the 1990s Deutsche Post AG cross-subsidised its parcels service from revenue from the letter
service. The European Commission only refrained from
imposing a fine because it was not possible to clarify
what cost standards have to be applied to businesses
which are active on both reserved monopoly markets
and competitive markets. In a further Commission decision in 2002, Germany was required to demand repayment from Deutsche Bundespost of financial support
amounting to EUR 572 million plus interest, which was
deemed to be illegal state aid. Deutsche Post AG had
used state resources totalling EUR 572 million, which
was supposed to ensure the basic service, to finance an
aggressive pricing strategy which allowed it to undercut
the prices of private providers of parcels services
between 1994 and 1998. Such behaviour infringes the
principle that companies which receive state aid to
finance services of general interest must not use these
resources to finance activities which are open to competition.
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4. Municipal commercial law
Municipal self-administration is not
an unlimited right and does not give
municipalities carte blanche for any
economic activity. If there is a functioning market for a service and no
compelling requirement for it to be
provided by the state, the state must
withdraw.
Municipalities and districts believe that their economic
activity is an expression of collective self-administration in
the area of services of general interest. It is not only
municipal electricity generators that have traditionally
been concerned to keep private competitors out of the
local market. Recent instances in which public authorities
have entered competition with private undertakings under
the cloak of services of general interest are municipal garden centres and cemeteries, workshops for production of
car number-plates, municipal cafés, district bus undertakings or municipal travel agencies.
It is true that article 28 paragraph 2 of the Basic Constitutional Law enshrines municipal self-administration as a
constitutional right. However, this in no way means that
municipalities can automatically provide what are deemed
to be services of general interest through public institutions. Municipal ordinances, budget laws and competition
law rightly set limits. But even when the public authorities
use the discretion granted to them by the legislator for
economic activity in the framework of the applicable legislation, economic activity by the public authorities is the
wrong regulatory policy route.
Services of general interest: the state as beneficiary?
B. Dimensions of services of general interest
municipality’s internal structure. In other words, the right
of self-administration does not give municipalities carte
blanche for economic activity. Economic activity by
municipalities as a specific collective activity has geographical limits and is rightly subject to further tight
restrictions.
b) Restrictions on economic activity by public authorities
The municipal ordinances decreed by the Länder give
concrete form to the constitutional requirement of precedence for the private sector and make economic activity
by public authorities subject to three reservations: (1) it
must be justified by a public purpose, (2) there must be a
need which the public authority is in a position to meet
with the available resources, and (3) private undertakings
must not be in an equally good position to provide the
services (principle of subsidiarity).
Economic activity by public authorities is not covered by
the requirement of a public purpose if it secures for the
public undertaking profits with which tasks and wishes of
the public authorities are to be financed. The service itself
must serve a public purpose. Exploitation of excess capacity that does not serve the public purpose also hampers
the private sector and is therefore unacceptable. Many
municipalities and districts disregard these requirements
in order to generate profits to the detriment of private
undertakings and to the disadvantage of citizens, who
have to pay higher costs. The public purpose may not be
diluted through a wide interpretation or circumvention.
a) Municipal right to self-administration
The subsidiarity principle, which lays down precedence
for the private sector, may not be disregarded either.
Enshrinement of the subsidiarity principle in municipal
ordinances gives concrete expression to the constitutional
right of private undertakings to deploy their economic
activities freely. Before Länder and municipalities assume
responsibility for a service, they should demonstrate
through objective market research that the private sector
is unable to provide that service in the market.
The law governing self-administration by municipalities
gives the latter – in the wording of the Federal Constitutional Court (»Bundesverfassungsgericht«)- the possibility
to satisfy needs and interests which have their roots in the
local community, in other words which are shared by the
municipal population as such, insofar as they relate to collective municipal life. Citizens should have the opportunity to take part in governance of the local community’s
affairs. At the same time, this objective – democratic control of municipal affairs – determines the content of and
limits on the guarantee of municipal self-administration.
What is guaranteed is autonomous administration of the
Lastly, policy-makers may not undermine the principle of
local provision. The argument sometimes advanced that
the principle of local provision leads to unequal treatment
of public undertakings in competition with private undertakings is wrong even in principle. It cannot be a matter
of public undertakings receiving equal treatment in competition with private undertakings. Rather the reverse:
economic activity by public authorities should have a special justification, since it impinges on the freedom of private undertakings to exercise their profession. A public
administration continues to be an administration even if it
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Services of general interest: the state as beneficiary?
B. Dimensions of services of general interest
is involved in economic activity. Accordingly, economic
activity by municipalities can be justified as interventionist
public administration only within territorial limits. All in
all, in liberalised markets it should be increasingly difficult
to justify economic activity by public authorities. This also
and specifically applies for services of general interest. If
economic activity by public authorities were to be justified
in exceptional cases by a public purpose, it must then continue to be limited to the extent necessary and to the territory of the municipality. The tendency among municipalities to further hollow out the principle of local provision
by setting up more municipal unions and engaging in
more cooperative ventures between municipalities is often
inspired by the intention to keep private businesses out of
economically interesting markets. The traditional role of
cooperation between municipalities – which is sometimes
perfectly sensible – is being lost and replaced by a desire
to secure market shares.
too, in order to use their institutions to realise profits.
Representatives of the public authorities regard it as selfevident that they should compete against private undertakings for market shares. This is covered by neither
municipal ordinances nor budget law, and certainly not by
a municipality’s right to self-administration.
The BDI firmly rejects the demand by public undertakings
for a watering-down of these conditions. The restrictions
in municipal ordinances are rooted in fundamental rights
and at the same time an expression of the regulatory policy decision of the national legislator that economic activities should be left to free competition between private
undertakings. Furthermore, the legislator rightly does not
want to leave citizens with the possibility that municipality representatives will burden municipal budgets with
investments they often cannot afford. The costs of risky
investments that go wrong would have to be borne by the
citizens in the municipalities. For that reason, it is difficult
to understand why the local municipal surveillance system
is so reticent when evaluating economic activity by public
authorities.
Insofar as the public authorities provide their economic
services in accordance with public law, they are also
bound by the principles of budget law. In particular, they
must take account of the principles of equivalence and
cost coverage. Under the principle of equivalence, the
service provided (public or otherwise) must be proportionate to the cost. The principle of cost coverage means that
the fees charged for a public or other service must both
cover the cost of providing that service and may not
exceed the costs over the accounting period. This alone
leaves no room for profit-making. The civil courts have
transferred the principle of cost coverage – albeit only for
monopoly undertakings – to economic activity deployed
under private law in order to prevent a flight by the public
authorities into private law. This concept is right and
should be extended to public undertakings. In practice,
Länder and municipalities often disregard this restriction
15
c) Financing public tasks
On closer examination, the reason for economic activity
by Länder and municipalities is only rarely a wish for selfadministration in the life of the local community. The
main point is that municipalities can no longer afford to
perform a growing number of tasks and are therefore on
the lookout for alternative sources of finance. While this
wish may be understandable, tight public finances should
not be addressed to the detriment of private undertakings.
Private undertakings pay taxes and should therefore be
able to expect that the state will not shift the economic
foundations through additional competition. The constitution supports this justified expectation with the concept of
the tax state whereby the state finances itself through tax
revenues and not through its own economic activity.
Instead of extending generation of resources at the
expense of private undertakings, we should be discussing
a limitation on public spending and changes in the way
Länder and municipalities are financed.
d) Legal protection
Private businesses which feel that they are disadvantaged
in unfair competition with public undertakings must be
able to protect themselves against economic activity by
public authorities. However, a complaint based on the law
on unfair competition (§ 3 UWG) is no longer a successful route since the Federal High Court decided that illegal
economic activity by a municipality cannot automatically
be classified as unfair. Hence, what is missing is an
urgently needed statutory standardisation of a right of
appeal for private undertakings against municipalities, in
order to protect these undertakings against illegal competition from public authorities.
Against the background that private undertakings are
dependent on municipalities, for instance when public
contracts are granted, a tightening of the legal supervision
of municipalities is necessary in any event. For that reason, any economic activity by municipalities should be
subject to a permitting obligation.
If public authorities give illegal state aid to a public undertaking, a competition complaint under public law can
already be considered.
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Services of general interest: the state as beneficiary?
B. Dimensions of services of general interest
5. Public procurement
Example: The restrictive jurisprudence of the Federal
High Court (BGH) on economic activity by municipalities
requires an explicit inclusion of individual public rights in
municipal law, from which private undertakings can
derive legal protection in the form of the right to apply
for an injunction.
BGH decision of 21 July 2005 – I ZR 170/02 – Friedhofsruhe: »A municipality does not infringe competition law
or antitrust law without the presence of particular circumstances if it accommodates its commercial funeral
service in the cemetery building on the site of the
municipal cemetery.«
BGH decision of 25 April 2004 – I ZR 250/00 – Elektroarbeiten (this related to electrical installation work by
municipal power stations including construction and dismantling of service cabinets and connection pillars for
the »temporary buildings« on Auer Dult and at the Oktoberfest):
»a) An infringement of the provision of article 87 BayGO
which places limits on the commercial activity of municipalities is not at the same time unfair within the meaning
of § 1 UWG.«
»c) The provision of § 1 UWG does not have as its
object the preservation of certain market structures.
Even in cases where demands for the preservation of
competition on a certain market can be derived from this
provision, the aim is not to preserve certain market
structures but to prevent commercial behaviours which
are also unfair as competitive measures in the light of
the overall circumstances taking account of the impact
on the market structure.«
Tender calls should always be issued
where market solutions are possible
and appropriate. This applies regardless of the ownership structure and
the legislative form chosen.
Public procurement is an important economic factor
across Europe. Public procurement law provides the
appropriate legal framework for competition to win public
contracts. The decisive point is to find the best possible
solution for the citizen. If services are selected in competition in line with the criteria of economic effectiveness, this
benefits the citizen and hence serves the general good.
Market demand has a positive influence on the level of
charges. It is therefore important to create fair competitive
conditions between the public sector and private businesses, and not to restrict the scope of public procurement legislation.
If contracts to cooperative ventures between municipalities are awarded without a tender call, no comparison can
be made with services provided in an open market. There
is no possibility of correcting how the service is provided
and hence the price to be paid for it. This does not in any
way rule out cooperation between municipalities. However, by contrast, the general exemption of cooperative ventures between municipalities from public procurement legislation does not contribute to efficient provision of services, to the benefit of citizens. The range of sectors affected
is wide. The impact can be seen in particular in the offer
of software, IT and telecommunications services, engineering services, in the area of waste management, in the construction sector, in postal services and the cleaning of
buildings. All these services must be sought in a fair competition and using a formal tender procedure on the market. If a municipality turns to third parties to perform its
tasks, there is an obligation to issue a tender call in application of the public procurement coordination directive
(18/2004/EC).
a) No freedom to award contracts for cooperation between
municipalities
Also according to ECJ jurisprudence, the award of contracts to cooperative ventures between municipalities must
not be generally excluded from public procurement legislation. The concept of cooperation between municipalities
covers all cooperative arrangements between municipali-
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Services of general interest: the state as beneficiary?
B. Dimensions of services of general interest
ties and municipal undertakings. In particular, this
includes contracts or transfer of duties to municipal
unions and public law corporations. If contracts are
awarded without a competition, this has an inhibiting
effect on the private sector. Offers from private businesses
are not taken into account, even if these offers are more
attractive than those from public undertakings. The market is closed to private endeavour.
The concept of in-house services assumes that the principal exerts control as it does over its own service agencies
(ECJ, Teckal) and that the contractor works essentially for
the principal (ECJ, Stadt Halle). The control and essence
criteria have since been given concrete form in many
European and national decisions. Hence, for example,
even if the municipality owns 100% of the shares, the control criterion is not met if the control of an indirectly held
company is no longer ensured via the powers of the intermediate holding company (e.g. ECJ, Carbotermo). In a
later decision, the European Court of Justice ruled that the
criteria of both control and essence are met when contracts are awarded to a mixed public company (ECJ,
Tragsa). Both are given if only public agencies are
involved in the undertaking placing the contract and services are only provided for these agencies. As a result,
cooperative ventures between public authorities are privileged vis-à-vis PPP structures in terms of public procurement legislation, even if they provide the same market
services.
National jurisprudence has also taken a position – albeit
not always uniform – on the issue of exempting municipal
cooperation from public procurement legislation. Mandating another municipal undertaking should be subject to
the provisions of public procurement legislation in line
with §§ 97 et seq. GWB (law against restraints on competition). A transfer of tasks is mandated if municipal contracts are awarded without a simultaneous complete transfer of duties under public law. By contrast, a characteristic
of delegation is complete transfer of tasks. For these cases,
the courts have reached divergent decisions. If duties are
transferred in the framework of a dedicated agreement, a
public tender call should be necessary. By contrast, the
transfer of duties to a municipal union is deemed to be an
internal organisational act, which can be implemented
without a tender procedure.
In this respect, two aspects are essential. First, an internal
organisational act not requiring a tender call can be
assumed only for sovereign services for which there is
genuinely no market. This is not contested for internal
and external security as well as the administration of justice. All other areas can and must be open to all market
participants. Second, it is not reasonable that a transfer of
duties via a bilateral contract (»Zweckvereinbarung«)
should be regarded differently from cooperation within a
municipal union. It needs to be clarified in the highest
courts that both structures require tender calls.
b) Criteria for exemption of in-house services
The difference between cooperative ventures between
municipalities and so-called in-house services is that, in
the latter case, services are contracted to an undertaking
in which the municipality awarding the contract has a
stake under company law. In-house services are provided
without a tender procedure. But if private companies have
even a very small shareholding, a tender call becomes
obligatory. This has a detrimental consequence if publicprivate partnerships (PPP) are set up and award contracts
to their own shareholders. This makes it difficult for private companies to access the market.
17
The essence criterion is narrowly interpreted in national
jurisprudence. An exempt in-house service is denied if the
contracting company only generates 92.5% of its turnover
from business for the principal. In addition, the company’s
constitution must ensure that business in the open market
will continue to be marginal in the future. European
jurisprudence deems the essence criterion to be met if at
least 90% of the contracting company’s work is for the
public principal (ECJ, Tragsa). A narrow interpretation of
the essence criterion is essential in order to prevent extensive exemption from tendering rules and the consequent
narrowing of the market.
c) Trends in national legislation
A revision of the GWB is currently under discussion. In
this context, serious consideration is being given to wideranging exemption of cooperative ventures between
municipalities from public procurement legislation, going
well beyond the present legal situation and failing to
reflect both national and European jurisprudence. For
instance, not only delegation of duties would generally be
exempt from competition but a tender procedure would
not be essential for mandated transfer of duties either.
Thought is also being given to dispensing with the control
criterion stipulated in European law. Consequently, the
boundaries between cooperation between municipalities
and in-house services would be removed.
The BDI warns against inclusion of a provision in the
GWB which makes it possible for a public principal to
award a contract without tender procedure to a wholly-
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owned public undertaking by applying only the essence
criterion. That would have fatal consequences for competition. It could be misunderstood as the spark for farreaching nationalisation of services of general interest and
squeezing-out of private economic endeavour. Such a
wrong step in regulatory and competition policy must be
avoided at all costs.
Services of general interest: the state as beneficiary?
B. Dimensions of services of general interest
Example: The municipal union RegioEntsorgung set up
in 2005 took over management of domestic waste for
four towns and municipalities in the Aachen and Düren
districts with effect from 1 January 2006, thereby providing a service for 72,000 inhabitants. The municipalities of
Würselen, Linnich, Inden and Langerwehe transferred
management duties for the collection and transport of
waste to the municipal union RegioEntsorgung. Three of
the municipalities had previously entrusted these duties
to private waste management businesses for many
decades. The municipalities of Herzogenrath and Alsdorf
joined the municipal union RegioEntsorgung on 1 January 2007 as further members. As a result, the number of
inhabitants in the waste management area covered by
the municipal union RegioEntsorgung increased to
165,980 in 2007. According to the plans of municipal
union RegioEntsorgung, this plan is set to increase further to 180,289 with the accession of the municipality
Niederzier in 2008. Member municipalities continue to
be responsible for setting and collecting the charges.
Inasmuch, there is no distinction from a contract placed
with a private waste management company. Day-to-day
operations are taken care of by RegioEntsorgung AöR (a
public institution). According to the provincial high court
in Düsseldorf (judgement of 21 June 2006 –
RegioEntsorgung), the transfer of duties to the municipal
union is an internal organisational act and hence does
not require a tendering procedure. The contract awarded
to AöR by the municipal union is regarded as an inhouse service which similarly does not require a formal
tendering procedure. The municipalities present this
model as a textbook example. When the waste management agreements expire, there will be no need for a further public tender or the award of future contracts to private businesses; instead, commercial services will be
performed by the state. The consequence is that a
whole range of service providers are shut out of markets. Competition is restricted without any possibility for
service providers to submit offers. This ignores the
requirement to provide the citizen with the best possible
and most cost-effective service. The BDI therefore calls
for fair competitive conditions between municipal and
private undertakings to be further guaranteed through
full application of public procurement legislation.
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Services of general interest: the state as beneficiary?
B. Dimensions of services of general interest
6. Taxes
In a report from the end of 2004 on the VAT treatment of
public authorities, the Federal Audit Office (»Bundesrechnungshof«) also comes to the conclusion that the interpretation of § 2 paragraph 3 UStG must always take account
of the European legislator’s intentions, in particular the
competition clause. The Federal Audit Office sees an
urgent need to fundamentally rethink the tax arrangements for public authorities, even to the extent of a new
law, and to ensure balanced, complete and competitionneutral taxation. This is also the BDI’s demand. Unequal
treatment in the area of VAT between undertakings organised under public and private law must be eliminated, in
order to create fair competitive conditions to the benefit
of all.
Create the same tax conditions for
businesses organised under public
and private law.
The concept of »services of general interest« is not
enshrined in German tax legislation. Nevertheless, some
economic activities of entities established under public
law are exempt from VAT, corporation tax and business
tax, the rationale of which is a reference to services of
general interest. There are regularly distortions of competition in these areas, in particular where private undertakings have to pay taxes with respect to the same activities.
The potential for improvement stemming from fair competition remains unexploited. For that reason, equal competitive conditions should be put in place in line with the
principle of tax neutrality.
a) VAT
The European Commission has recognised the danger of
distortions of competition through privileges regarding
value-added-taxes. According to article 13 paragraph 1.2
of the VAT system directive, entities established under
public law are liable for VAT on activities incumbent on
them in the framework of public administration insofar as
their treatment as non-taxpayers may lead to significant
distortions of competition. Under this provision, Member
States are obliged to subject public law corporations to tax
if these activities – in competition with them – can also be
performed by private undertakings and exemption from
tax can lead to distortions of competition. It is the responsibility of each Member State to transpose this provision
into its national law.
As currently worded, the transposition into the German
VAT law in § 2 paragraph 3 of that law (UStG) runs
counter to the intentions of the European legislator.
Under this provision, legal persons under public law are
only businesses and therefore liable for VAT in the framework of their commercial activities. Sovereign activities
and ancillary activities are free of VAT regardless of
whether private undertakings might provide these services
as subcontractors or independent parties, i.e. in competition, alongside the entities established under public law.
The exemption from VAT for public undertakings leads to
a competitive advantage since public undertakings can
offer their services in the market without VAT. Private
businesses must add 19% VAT.
19
It also happens that public undertakings consciously want
to be treated as businesses for the purpose of VAT legislation. This is always when large investments are being
made. The reason for this lies in advance tax deduction,
i.e. the tax office reimburses to companies the VAT
charged in incoming invoices. Advance tax deduction is
only available to taxable undertakings and confers a liquidity advantage. In the case of large investments, the
immediate liquidity advantage is more interesting than the
indirect and long-term advantage of a more attractive
price structure. The call for recognition of advance tax
deduction is a sign that the VAT privilege enjoyed by public authorities is an anachronism that needs to be eliminated.
b) Corporation and local business tax
When granting exemption from direct taxes, the legislator
is guided by the sovereign activity which is reserved for
the state »by custom and by law«. It takes account of neither the true nature of the activity nor possible distortions
of competition. The BDI rejects this approach, since
equality of competition in tax law can only be achieved if
economic activities by public authorities which can also
be carried out by private undertakings, i.e. which essentially have the nature of a service and do not therefore
necessarily represent a »customary activity reserved for
the state«, are fully liable for tax.
In addition, German tax law is of a competition-distorting
nature insofar as it exempts services which are secondary
to sovereign activity from tax liability even though these
activities can be offered independently by private parties.
The finance administration also interprets sovereign activity and the associated tax privilege very widely. For
instance, the finance administration specifies that the sale
of substances and energy derived from waste is a sover-
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BDI – Federation of German Industries
eign activity even though the public authority is not carrying out a »customary activity reserved for the state«. The
economic interest of the public authority in becoming
involved in this lucrative business is encouraged thanks to
exemption from tax.
c) Land transfer duty
The land acquisition tax law exempts legal persons established under public law from land transfer duty if the
property in question is transferred in tandem with the
transfer of tasks under public law and does not serve predominantly for a commercial business. As a result, the
public authority can transfer properties free of tax, even if
the property is to be used for a commercial business. Only
predominant use in a commercial business would rule out
exemption from tax. This legal situation is uncertain and
leads to competitive disadvantages for private undertakings whenever predominant use in a commercial business
is denied to the benefit of the public authority. By contrast, private undertakings are liable for land transfer duty
to a considerable extent, in particular when carrying out
necessary restructuring within a group.
Services of general interest: the state as beneficiary?
B. Dimensions of services of general interest
Example: In July 2002 representatives of Preetz identified a deficit of EUR 970,000 during their deliberations
on the budget, which prompted the idea of privatising
the town’s in-house drainage service. The town of Preetz
(60 km from Hamburg, in Schleswig-Holstein) carried out
a market survey in which the Hamburg city drainage
service (HSE) and various private drainage service
providers also took part. HSE is a public law corporation
which deals with the city’s waste water. Accordingly,
alongside its offer under private law, HSE was also able
to submit to the town of Preetz an offer under public
law. The municipal union for waste water serving the
town and district of Preetz was founded in January
2004, with the participation of HSE, notwithstanding the
distance of 60 km and a provincial border between the
two locations.
This construction also achieves a VAT privilege. No VAT
is collected on fees charged by the municipal union. It is
not possible for private companies to offer a comparable
cooperative model with tax advantages. They must
always add 19% VAT to their offers. The market shares
won in this way by municipal unions are excluded from
fair competition from the outset.
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BDI – Federation of German Industries
Services of general interest: the state as beneficiary?
C. Individual services of general interest and other economic sectors
21
C. Individual services of general interest and other economic sectors
Liberalisation and privatisation of energy and telecommunications markets
has been successful. These successes must be replicated in transport, in postal
services and in the waste management and water sectors. What is essentially
needed in all sectors is more competition, in order to promote efficiency and
effectiveness in the basic supply of services and to realise an attractive level
of prices and charges. Public authorities should not be involved in purely
economic activities such as in the construction industry or engineering
services.
1. Energy
The supply of electricity and gas are
economic activities which can best be
carried out by private companies in
competition.
Energy is the basis for life and economy. It is only the use
of energy that makes it possible to satisfy the central
needs of humankind – such as eating, clothing, housing,
communication and travel. All goods production requires
the use of energy. It is therefore astonishing that, in Germany, only the supply of electricity and gas has traditionally been regarded as an essential service, but not supply
of petrol, diesel or heating materials such as wood, coal or
fuel oil. Ernst Forsthoff certainly contributed to this situation with his list of examples. The reason may also be
that, in Germany, the dependence of the said services on
transmission and distribution networks has tacitly been
pushed into the foreground. In any event, federal German
jurisprudence has always meant the supply of electricity
and gas when it has had to decide on services of general
interest.
In the debate on the energy sector, those who call for an
extension of economic activity by public authorities with a
reference to services of general interest, disregard the fact
that Forsthoff himself only developed the concept of »services of general interest« to describe the basic relationship
between citizen and state. The citizen should have the
right of access to important services and institutions.
Forsthoff wanted to give this right of access the protection
of public law. The 1935 law on the energy sector
enshrined this right, which gave them rights not only
against the state but also against energy supply undertakings, regardless of whether they are organised under pub-
lic or private law. The law demonstrates in an exemplary
manner how services of general interest can be regulated,
namely with a legally backed right of access on the one
hand – the right of every citizen to connection and supply
of electricity and gas under general conditions and at general tariffs, a right which is valid not only vis-à-vis the
state but also vis-à-vis any energy supply business – and
state supervision on the other hand.
Even today, the 1935 law on the supply of electricity and
gas is still applicable, although now in the version enacted
during the 2005 energy law reform. Neither the 1935 law
nor the 2005 energy law reform contains a decision that
the production and distribution of electricity and gas is a
state or municipal task. Rather, the law is neutral and
makes no judgement on who should be responsible for
production and supply of electricity and gas. It is true that
the right to operate as an energy supply business is linked
to certain conditions and requirements, and is supervised
by the state. But it is a right that in open to »everyman«
and is not assigned to a state institution. The law on the
energy sector exhibits all the typical characteristics of a
framework law and makes it clear that the state meets its
responsibility for the supply of services of general interest
by standardising framework conditions and providing
state supervision, without at the same time performing the
tasks itself or through state agencies. The legislator lays
down the rules and then acts as referee, ensuring that
these rules are followed without joining in as a competitor.
In other words, energy legislation works on the assumption that the provision of electricity and gas (production
and distribution) is fundamentally an economic activity
like any other. Above all, the requirement of subsidiarity
places tight constraints on economic activity by municipalities in the energy sector. Given a highly integrated
energy supply landscape in Germany, a need for towns
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BDI – Federation of German Industries
and municipalities to carry out their own economic activities in the area of energy supply cannot be discerned.
The 2005 reform of legislation on the energy sector has
assigned the supply of electricity and gas even more clearly to the private sector. This is contradicted by the practice
of some Länder which extend possibilities for municipal
activity in electricity and gas supply in particular beyond
the boundaries of the municipality by way of amending
their municipal ordinances. Experience with liberalisation
of electricity and gas supply shows that the increasing
competition has not had a negative effect on public interests such as security of supply, quality and reliability of
supply, environmental protection, efficient use of
resources or horizontal supply. On the contrary: the pressure of competition obliges undertakings to produce,
transport and distribute energy as rationally as possible. In
its role as new supervisory and permitting instrument, the
federal network agency ensures efficient operation of networks and performs functions vis-à-vis the »natural«
monopoly which are otherwise performed by competition.
Efficiency improvements in power plants increase not
only the cost-effectiveness of electricity generation but
also contribute to efficient use of resources and climate
protection. In addition, consumers have noticed that electricity prices have fallen considerably. The electricity
prices paid by household customers have reduced by up to
20% and those paid by industry by an average of 35%. As
a result, the objective of supplying broad swathes of the
population with energy at the best possible prices is met
better in the liberalised market than under a monopoly.
The legislator takes account of the public service aspect by
ensuring that each citizen has a statutory right to have
electricity and gas connections and supply from any energy undertaking. In addition, the competitive conditions for
production are guaranteed by antitrust law and network
access by state supervision.
After two years of liberalisation, industry finally had electricity at internationally competitive prices. It was in a better position to offer its products in global competition,
with positive effects for existing and new jobs.
Services of general interest: the state as beneficiary?
C. Individual services of general interest and other economic sectors
This is not negated by the fact that electricity and gas
prices in Germany have been rising in the meantime. This
price increase can be traced to policy decisions including
the introduction of ecotax, support for co-generation and
renewable energy sources for electricity generation, and
an increase in energy taxes as well as the introduction of
emission trading and, not least the decision to shut down
nuclear energy plants – which reduces the offer of attractively priced electricity. Politically determined levies on
energy prices have virtually wiped out the advantages of
competition.
Industrial customers now pay more for electricity and gas
than they did before liberalisation. Policy-makers have
demoted the objective of attractively priced energy supplies to second place, behind the financing of public interests such as climate protection and support for technology
by energy consumers.
Comparison of electricity prices paid by industry in the EU
In euro cents per kWh, including levies and other taxes but
excluding VAT
14.00
12.00
10.00
8.00
6.00
4.00
2.00
10,000,000 kWh
50,000,000 kWh
Source: BDI calculations
24,000,000 kWh
70,000,000 kWh
d
an
nl
Fr
Fi
ce
e
te
ni
U
1,250,000 kWh
an
en
ec
ed
re
G
n
ay
w
or
N
Sw
l
ai
Sp
ga
Po
rtu
k
ria
ar
st
m
en
D
Au
s
m
nd
do
rla
he
Ki
d
et
ng
y
m
iu
lg
Be
an
N
G
er
m
la
Ita
ly
nd
0
Ire
Non-discriminatory access to networks in the European
internal market and the possibility to buy energy from any
supplier are the best guarantee for meeting energy demand
in quantitative terms but also at competitive prices. The
competition rules governing liberalised energy markets
ensure a stable supply more efficiently than economic
activity by public authorities. Public undertakings should
definitively withdraw from the grid-based electricity and
gas market via privatisation.
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BDI – Federation of German Industries
Example: Since electricity and gas markets were liberalised in 1998, politically imposed levies on the electricity market have increased from around two billion euros
to around thirteen billion euros. This millstone undermines the competitiveness of Germany as a location for
business. Research has shown that electricity costs
which have increased more sharply in Germany than
those elsewhere generate higher costs for the economy
as a whole (see »Effects of electricity price increases on
prices, growth and competitiveness«, Hamburgisches
WeltWirtschafts Institut, Hamburg; Macro-economic
effects of lower electricity prices in Germany,
Gesellschaft für Wirtschaftliche Strukturforschung mbH,
Osnabrück). Making the assumption that electricity
prices were around 30% too high in 2006, model calculations show that German economic growth of 2.7% in
2006 could have been higher by 0.37 to 0.47 percentage
points with competitive price formation on the electricity
market. The level of employment would have been
83,000 to 106,000 persons higher. The cost of living
index could have been between 0.5 and 0.65% lower.
Alongside these short-term effects, uncompetitive electricity prices lead to business relocations in the longer
term. This has direct negative consequences for production and employment in Germany. Indirectly, energyintensive industries can be expected to emigrate.
Domestic value creation chains are broken, limiting the
transfer of knowledge and technology, which in turn will
lead to more business relocations. All in all, a slow erosion of Germany’s attractiveness as a business location
can be feared. Conclusion: state interference in the liberalised electricity market must be avoided.
Services of general interest: the state as beneficiary?
C. Individual services of general interest and other economic sectors
23
German energy prices from 1995 to 2007
In euro cents per kWh;
Off-take: 4 MW x 6000 h/a = 24 million kWh
12
9.79
10
8.97
8
Euro cents per kWh
80209_BDI_Dasein_Engl
6
7.99
7.82
7.4
6.21 6.21 6.23
6.71
6.2
5.23 5.29
4.38
4
2
0
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Year
Source: Eurostat, statistics in brief, environment and energy from 1995 to 2007
2. Telecommunications and postal services
Liberalisation of telecommunications
markets has led to growth, innovation and low prices. A development
that still needs to be fully completed
for postal markets in form of a complete liberalisation. Outdated rules on
universal services should be examined critically and scaled back.
Post and telecommunications were long regarded as services of general interest. It was thought that public demand
for these essential services can only be met by a single
provider at low cost. They were therefore regarded as a
public task.
A mere ten years after complete opening of telecommunications markets, the picture has changed completely: there
is distinctive and sometimes aggressive competition for
many communications services. This has caused, for
instance, the cost of speech telephony on working days to
fall to only 4% of the amount during the monopoly period. Other services as well are continuously improved and
offered at ever lower prices. Hence, the price level for
mobile telephone services has fallen by around 70% since
1995 and the consumer price index for Internet use by
44% since 2000. In addition, many new products and
services have been made available to customers in all
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BDI – Federation of German Industries
areas of telecommunications and IT services. The opening
of markets has also led to an increase in new jobs. And
free competition has made an essential contribution to
allowing the innovative potential of the communications
sector to develop freely. It should be remembered that the
innovative technologies in this area continue to be of central importance in the industrial value creation chain. As
an engine of innovation, the positive development in
telecommunications stimulates growth across many sectors. This development would not have been achieved to
the same extent or at the same speed in the framework of
public provision of these services. Only private competition has proved able to achieve these successes.
Despite the achievements which today are obvious to
everybody, backward-looking demands are sometimes
heard: for instance that a range of new communication
services such as broadband services or mobile telephony
should be included in the so-called universal service
regime in order to ensure that all end users have access to
a fixed minimum service offer at an affordable price. This
demand, influenced by the concept of public services of
general interest, denies the fact that it is precisely intensive competition that has led to the wider range of new
products and services, a markedly improved quality of
service and sharply lower prices. It is therefore more useful to review the existing universal service requirements in
the communications sector to see whether they are still
necessary and relevant.
In the postal market, liberalisation has only been half
completed. Whereas some segments such as parcel and
express services have already been open to competition
for many years, there is still a legally protected monopoly
on the national level in the form of an exclusivity licence
for Deutsche Post AG in the market for letters (up to 50
grams). Under the current postal law, this monopoly will
expire at the end of 2007 so that opening of the postal
market in Germany will be (formally) completed from
2008. The ultimate gainers will be all users of postal services who will then be able to choose the cheapest and/or
best quality service offer from a wide range of different
suppliers.
From then onwards, an area-wide service will be provided
by the sum of competing market competitors. The federal
network agency (»Bundesnetzagentur«) supervises and
guarantees this level of service and can make rapid rectifications if there is inadequate provision of some services in
some regions, using a range of instruments (tender procedure, pay-as-you-go financing, compulsion). Experience
from Great Britain and the Scandinavian countries, which
Services of general interest: the state as beneficiary?
C. Individual services of general interest and other economic sectors
have already liberalised their letter markets, show that
efficiency and reliability of postal services has increased as
a result of market opening. Regardless of the form of provision, the scale of guaranteed postal services in the
framework of universal service should be reviewed regularly, to take account of changing communication needs
and increasing digitisation.
At the level of the European Union, the projected liberalisation of postal markets is now in a decisive phase. Following presentation of the European Commission’s draft
directive in autumn 2006, European postal markets
should be completely opened by 2009. The draft specifies
extensive fail-safe mechanisms which guarantee an areawide universal service. Bearing in mind various reservations in some Member States, it should be made even
clearer that competition is ultimately the best form of consumer protection also in the postal sector. To that end, the
user of postal services – as the main target group and beneficiary of liberalisation – should become an even stronger
focus in the debate.
Neither theoretically nor empirically are there plausible
arguments that postal services can be provided better or
more securely in a monopoly than under competitive conditions. It is all the more important to complete the liberalisation of postal markets in the near future and with
binding provisions for all Member States and to establish
a common internal market for postal services.
Internet tariffs fall sharply
Consumer price index for Internet use*
100
95
90
85
80
Intensive users
75
70
65
-47 %
60
All Internet users
55
50
-44 %
2001
2003
Source: Destatis, in-house calculations
2005
Mai 2007
*index 2000 = 100
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Services of general interest: the state as beneficiary?
C. Individual services of general interest and other economic sectors
Telephone calls – never so cheap
Consumer price index for telephone calls* including VAT
3. Transport
120
Mobile telephony
prices
150.2
Fixed line
prices
140
25
Sustainable mobility requires more
competition.
-42 %
120
110
100
87.3
103.1
‘98
‘00
‘02
‘04
‘06
100
88.6
90
-12 %
January 05
Source: Federal Statistics Agency
January 06
*index: 2000 = 100
October 06
2006 = October
Example: The number of broadband connections has
tripled in Germany over the last three years. At the end
of 2006 37% of households had rapid Internet access.
At the end of 2003 the corresponding figure was 12%.
On average, 42% of households in western European
countries had a broadband connection at the end of
2006. The world leader in this area is South Korea with a
share of 83%. The sharp further growth forecast also for
Germany is stimulated by increasing competition among
suppliers, which results in lower prices with a simultaneous growth in bandwidths. At present, transmission
rates of over 384 kilobits a second are considered to be
broadband. When the Internet was starting up, only 1
kilobit a second was sent. In the meantime, broadband
connections with at least two megabits a second are the
rule and the starting signal for service offers with 50
megabits a second has already been given.
With its division of labour, our economy rests to a considerable degree on the fact that people and goods can cover
distances. This mobility is based on transport routes and
means of transport. There is no doubt that a needs-related
provision of transport infrastructure and public passenger
transport services requires a long-term commitment from
the state. Hence, discussions about services of general
interest rightly pay close attention to the transport sector.
But this does not mean that private businesses must be
excluded from access to these markets. On the contrary.
Wherever the private sector provides transport services
under fair contractual conditions, efficiency increases: for
instance town buses in Frankfurt am Main today drive
850,000 km more than they did in 2002. This improvement in the service offer could only be financed thanks to
savings made when bus transport was put out to tender.
The decisive condition for more quality and efficiency in
public local transport lies in the combination of state-provided services of general interest and stronger competition. The entity responsible for the task should restrict
itself to the commissioning function and leave the choice
of suitable transport businesses to the market, instead of
offering transport services itself through its own public
undertakings. A measured but complete transition to competition through tenders is the only way to realise lower
fares, productivity improvements and cost savings. Competition between private transport businesses must be
driven forward, not economic activity by public authorities. The BDI therefore calls for European and national
transport policy to be aligned consistently on liberalisation
principles and competition, especially for rail.
Yet even after three packages of measures, the liberalisation process for rail transport has still not been completed.
Complete market opening, including domestic traffic, is
still not in place. In the debate on the current third package of measures, the European Parliament had at first
come out in favour of liberalisation of all passenger transport. Yet neither the European Commission nor the European Council wanted to follow this line. The negotiated
compromise only provides for the opening of cross-border
passenger transport markets. The argument that there
would be an absence of security on the supply side is
being deployed to delay the liberalisation process. Several
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BDI – Federation of German Industries
degrees of market opening continue to exist, although
some Member States – including Germany – have already
made their infrastructure available to all competitors for
years. The BDI urges the European Commission to present a proposal for conclusive liberalisation of rail transport as rapidly as possible.
At national level, transparent structures still need to be
created in local rail passenger transport. At the present
time, DB Regio’s competitors account for a market share
of only 6.9% of passenger kilometres. According to the latest special report by the monopoly commission »Competition and regulatory efforts in rail transport«, the reason
for that lies above all in how the Länder award public
contracts. Only 19% of the service awards since local rail
passenger transport was regionalised in 1996 have been
put out to tender. Large service packages are often allocated to rail subsidiary DB Regio without a tender procedure,
while at the same time network operator DB AG decides
on investments in regional infrastructure or locations.
Hence, in order to have dynamic competition, the competences for the network must be clearly regulated in the
framework of the planned rail privatisation. The BDI calls
for regional infrastructure to be transferred to the Länder,
inter alia in the framework of federalism reform II.
The revision of the EU regulation on public passenger
transport services on rail and road runs the risk of thwarting progress in open competitive bidding. The competent
authorities would continue to have discretion to decide
whether they award public contracts directly or through a
tendering procedure. This means that direct awards without competition would completely squeeze out the applicable provisions of EU public procurement legislation,
which currently take precedence. That runs counter to the
underlying principle of European rail policy of promoting
competition in the rail market through market-opening
initiatives to stimulate fair and transparent selection procedures. The European Parliament’s transport committee
has taken up the BDI’s criticism and defined narrow limits for direct awards. Unfortunately, MEPs did not follow
this vote in the second reading. This has thrown away the
opportunity to create more competition in rail transport
on a sustained basis. The person who suffers – in addition
to the private sector – is the consumer, who ultimately has
to pay for unduly high prices and inefficiency.
Services of general interest: the state as beneficiary?
C. Individual services of general interest and other economic sectors
Example: There is an attractive market for local rail passenger transport in Germany. Each year customers pay
around 5 billion euros for some 43.3 billion passenger
kilometres (2006). Free market access is in place in
purely formal terms. Altogether, more than sixty private
railways are active alongside DB AG subsidiary DB
Regio. But they account for a mere 3 billion passenger
kilometres or a market share of 6.9%. Since 1996 only
19% of transport service awards have been allocated via
a tendering procedure. More than half of these tender
competitions were won by DG Regio’s competitors.
Experience in Hessen, Lower Saxony and SchleswigHolstein shows that the efficiency potential is around
20%. In total, tender procedures could save per annum
around 1 billion euros on regionalisation funds. Nevertheless, the lion’s share of local passenger rail transport
services are awarded directly (generally to DB Regio).
The reason for this is essentially DB AG’s negotiating
muscle. As rail network operator, it decides on infrastructure investments and maintaining the local economic fabric and jobs.
Market shares in local rail passenger transport
100%
Competitors
6.9%
80%
60%
DB AG
93.1%
40%
20%
0%
2000
Source: DB AG 2007
2001
2002
2003
2004
2005
2006
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BDI – Federation of German Industries
Services of general interest: the state as beneficiary?
C. Individual services of general interest and other economic sectors
4. Waste
requirements (§§ 5, 11 KrW-/AbfG). The same applies for
producers who take back and dispose of their products
voluntarily or on the basis of a duty (§ 26 KrW-/AbfG). In
other words, the recycling and waste law has opened the
waste industry for the market. However, market opening
is still restricted by the existing collection and disposal
obligations. Household refuse and waste for elimination
from all sources has to be offered for collection and disposal by waste processors organised under public law. In
addition, laws in the Länder provide frameworks for the
collection and disposal of waste that requires particularly
close supervision.
Waste management tasks should be
placed in the market and the state
should be restricted to its partial
function of ensuring provision.
The waste management sector is today increasingly understood to be a component of resource and climate protection policy. The most recent initiatives of both the German and European legislators demonstrate this. Examples
include implementation of the landfill ban for untreated
waste in Germany or the European Commission’s thematic strategy for waste avoidance and recycling. The
resource aspect is now placed on an equal footing with
safe waste disposal. In recent years private waste management businesses have invested considerably and with their
innovations have ensured that the availability of resources
increases continuously. Private waste management businesses thus not only contribute to resource security but
have also greatly improved the quality of waste disposal
services and constant environmental standards.
Safe waste disposal has both a health aspect and an environmental protection aspect. In the past, people felt that
rubbish is »dirty« and needs to be eliminated. Until a few
years ago and against the background of an increasing
population density, it was assumed that growing mountains of refuse would constitute the most burning environmental problem of the future. For that reason, public
authorities still regard environment-friendly waste disposal
as an essential service and include it in their purview.
However, the fears of that time in no way correspond to
today’s waste management industry. Instead of ever higher
mountains of waste, volumes are stable or even reducing.
Thanks to efficient waste management with modern technology, more and more waste is being reused to the benefit of environment and the economy and ever less eliminated. An important reason for this development is the
privatisation and deregulation of the waste industry provided for in the recycling and waste law (Act for Promoting Closed Substance Cycle Waste Management and
Ensuring Environmentally Compatible Waste Disposal,
KrW-/AbfG).
By contrast with the previous waste law, KrW-/AbfG provides that in principle it should no longer be the public
authority but the producer or owner of waste who should
be responsible for disposing of it in line with the legal
27
On the pretext of security of disposal as well as ecologically sound processing and elimination of waste, municipalities in particular are concerned to bring recycling back
into the sovereign framework. However, by contrast with
what public authorities would have us believe, security of
disposal or the environment is not the main reason but
the interest of municipalities in penetrating the lucrative
market for waste disposal services. Increasingly, public
authorities are extending their waste disposal monopoly,
which is based on collection and disposal obligations, to
include the hitherto privately served waste processing
markets. By so doing, the municipalities are depriving private waste processors of waste materials capable of reuse
and thereby robbing the private recycling sector of the
basis for their business. In addition, municipalities are
concerned to participate in the lucrative reuse market
through their own undertakings or stakes in undertakings
or businesses.
In particular, cooperation between municipalities gives
municipalities greater scope to fence off the market for
management of residential waste in long term. Originally
conceived as a possibility for creating synergies in administration, such cooperation is being used increasingly in
the waste management sector precisely to squeeze the
market share of private waste management firms. Several
municipal undertakings are not being merged, but one
municipal waste management business uses the cloak of a
municipal union established under public law to take over
waste management for other municipalities involved in
the municipal union – principally the classical form of a
contractual relationship but wearing the clothes of a public organisational form.
The problem is made even worse because policy-makers
often accept the ideas of municipalities and districts.
Strong voices call for correction of the privatisation and
liberalisation potential provided for in law. Municipal
ordinances extend the scope of municipal tasks to include
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the waste sector. As part of the debate on the fifth revision
of the packaging decree, one of the core demands of
municipalities – with some support from politicians – was
that the collection and treatment of packaging waste successfully wrested from the free market should become a
monopoly of the public authorities. However, in the end
there was no majority behind this demand. At European
level, too, municipalities are striving to have successful
European waste policy aligned on their own economic
interests. Public waste management undertakings in Germany have identified the internal market as a particular
danger to their activities. As a result of the increasing
rational use of wastes in a European market, municipalities see their waste activities slipping away Therefore, they
are pushing for the revision of European waste legislation
to be used to protect and strengthen municipal waste
management structures in Germany. The division of the
German waste market should be enshrined in European
law and waste management by municipalities should be
strengthened in its continuing right to exist, its legal
framework and its planning certainty vis-à-vis developments in the waste management sector.
The associated demand for an extension of collection and
disposal obligations to include all household waste, household-type industrial waste and mixed waste targets a paradigm change in the waste sector, away from privatisation
and liberalisation, back to sovereign waste processing. The
background to these efforts is no more than the economic
interest of public authorities in making full use of their
existing elimination infrastructure and entering the lucrative processing business. The priority for waste processing
and/or the primacy of recycling for waste from other
sources in recent years has led to the development of a
thriving processing industry. Private players, who must
meet the strict requirements of KrW-/AbfG and the high
standards of the decree on specialist waste processors,
today ensure comprehensive waste processing that is ecologically and economically sound. Commissioned by
municipalities, private processors deal with the household
refuse of 63% of the population. In the areas of industrial
and special waste, waste producers and/or owners use
almost exclusively the services of private undertakings.
The supervision mechanisms contained in KrW-/AbfG
guarantee that the producers and owners of this waste
meet their responsibility for high-quality, safe processing.
We should not jeopardise these structures, but extend
them. Additional activity by municipalities is not necessary on either security or ecological grounds. It is a step
backwards.
Services of general interest: the state as beneficiary?
C. Individual services of general interest and other economic sectors
The BDI rejects the idea of extending collection and disposal obligations and the associated restriction of individual responsibility. The responsibility of waste producers
and owners as well as product manufacturers for proper
processing ensures a large share of reuse in the area of
industrial waste. In addition, private processors already
deal with waste processing to an overwhelming extent.
Municipalities have yet to provide proof for the assertion
that security of processing is at risk.
Waste is today an economic good in the first instance. An
extension of disposal obligations is therefore open not
only to constitutional objections. EU law is also against
the extension. Waste for reuse is covered by European
legal provisions on the free movement of goods. Thus, the
European acceptability of an autarky for waste for reuse is
extremely questionable from the angle of free movement
of goods and services as well as competition law. Provisions which regulate the market principally represent an
infringement of primary European law. Europe sets standards for a recycling sector run on market lines. Competition – in this case between several processors – is a central element of the market economy. It stimulates innovation and the quest for the optimal processing and reuse
solution. That is good for the environment, since more
environment-friendly technologies can be developed. This
also benefits waste producers and owners, who can utilise
the cost advantages of functioning competition. The market mechanism must be used to exploit these effects to the
full.
Public authorities should not restrict the privatisation and
deregulation concepts laid down in the recycling law.
Additional collection and disposal obligations cannot be
justified on either ecological or economic grounds.
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Services of general interest: the state as beneficiary?
C. Individual services of general interest and other economic sectors
29
5. Water
Nationalisation in the waste management sector
The return of waste disposal to municipalities and its
implementation under the direct management of municipalities is usually not based on municipalities not being
satisfied with the services of private waste businesses.
The decisive factor for the corresponding municipal
decision is often the wish to gain control and to exercise
a business activity without risk.
In the calculation examples prepared by public authorities in this context, privileges are deployed and the
costs of public and private provision of services are
compared in a distorted way. Instead of current waste
disposal prices, historical waste disposal prices are
adduced. Yet competition via a tendering procedure
shows that cost reductions of more than 30% are now
possible. In addition, in-house undertakings, municipal
unions and public law corporations have the advantage
that they do not have to pay VAT. With the VAT increase
from 16% to 19%, the competitive advantage enjoyed
by public authorities and the associated distortions of
competition as compared with the private waste management sector is even greater.
Municipalities: bubbly sources of revenues
Municipal revenues from direct economic activity,
in million euros
2004
Change between 1999
and 2004, in %
West
East
Germany
Germany
West
Germany
East
Germany
2,738.5
501.5
22.3
20.6
123.2
9.4
239.4
276.0
Waste disposal
54.3
16.4
43.7
-15.9
Tourism
40.5
7.5
2.8
-2.6
5.6
1.6
5.7
0
164.4
19.9
8.7
-4.8
Supply undertakings
Waste water disposal
Agriculture and forestry
Other community services
In selected areas; other community services: for instance municipal abattoirs and funeral
services; source data: Federal Statistics Agency
iwd: Institut der deutschen Wirtschaft, Cologne
© 35/2007 Deutscher Instituts-Verlag
The German water sector faces major
challenges: implementation of the
EU water framework directive, climate change, demographic change
and clean-up of existing installations
require high investments. To come to
grips with these challenges, we need
transparent and fair competition.
Water is an indispensable condition for human existence.
At the same time, water is the most important element in
the natural balance. Access to and use of water has long
been extensively regulated, even in countries with an
abundance of water. Pollution of drinking water, also
known as well poisoning, is probably the oldest environmental crime. Similarly, water legislation is the oldest discipline in modern environmental law. In earlier times the
focus of protection concentrated on drinking water. At the
latest in the age of industrialisation it was recognised that
the issue of drinking water could not be separated from
the issue of waste water.
As a consequence, public authorities today influence both
areas – directly or indirectly. Municipalities now recognise
that the provision of drinking water and disposal of waste
water is far from being merely an irksome duty but can
easily be organised as a lucrative business. Whereas water
provision is now mostly in the hands of companies governed by private law, these in turn are in general dominated by municipal authorities.
But water is also an economic good and its use is a fundamental condition for national economies. Water has
always been an essential component of doing business, in
the form of water mills, water transport routes, water for
cooling, in fisheries or as an ancillary in production. As
with all resources, standards of sustainability have to be in
place for its use and understood to be a basic condition.
These standards have to balance the various use interests
and identify solutions as to how a resource can simultaneously be a living environment, foodstuff and economic
good.
Waste water disposal and the supply of water are essential
basic supply services for citizens and are subject to economic criteria. Transparency and fair competition in the
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BDI – Federation of German Industries
planning, construction and operation of installations in
the water sector are indispensable. In the areas of environmental and resource protection, efficient businesses
are of particular importance. Resource efficiency and
energy efficiency are not merely empty phrases, but a
basic condition for sustainable business and protection of
natural resources. Hence, it is of central importance that
businesses use their resources – be they economic or environmental – efficiently.
The generally public undertakings in the water sector,
whose activity is rightly restricted to the territory of the
municipality, are protected against competition from other
and private suppliers by the territorial monopolies granted
in §§ 103, 103 a GWB (old version), which continue to
apply. The concessions model offers municipalities and
private service suppliers yet more potential.
Services of general interest: the state as beneficiary?
C. Individual services of general interest and other economic sectors
benefit water quality and the environment simultaneously.
Innovation potential can best be realised through fair
competition between private and public undertakings for
the best economic solution.
To date there are insufficient data on the waste water sector. Without an analysis of these data, the potential of the
waste water sector cannot be adequately measured in the
future either. The task of policy-makers is to find a framework which addresses the specific features of the waste
water and water sector, in order to stimulate innovations
and efficiency. What is decisive is that secure services are
offered at attractive prices, independent of the legal form
of businesses which supply or dispose of water.
Results on the Unterwarnow
Drinking water has always been traded, but disposal of
waste water was regarded as a public duty. This can still
be deduced from differences in taxation. The delivery of
drinking water – just like the sale of foodstuffs – is not
exempt from VAT, but disposal of waste water is defined
as a sovereign task and not taxable, as long as it is provided by public undertakings. Disposal of waste water is protected as a sovereign task, whereas drinking water is not.
The largest sewage plant in Germany is not operated by a
municipality but by a private business in Ludwigshafen.
For decades it has been a tried and tested practice
enshrined in law that waste water at industrial locations is
treated by private businesses before being channelled back
into the environment. Alongside waste water from production, municipal waste water is also treated in these installations. Sewage plants shared between companies and
municipalities in Leverkusen or in Schwarzheide are further good examples of how private businesses can perform
to a high level of responsibility and provide reliable waste
water disposal services on a consensual basis.
The organisation of the waste water sector currently offers
few incentives for competition. Charges are purely costbased. More incentives for competition are indispensable
for the water sector. A regulatory framework which governs both quality and careful use of the resource while at
the same time leaving the greatest possible scope for market forces will underpin the high standard of the German
water sector. Public undertakings do not automatically
provide more reliable delivery of drinking water and disposal of waste water. Neither does private suppliers’ profit
motive mean a loss of quality and lowering of environmental standards. Technological improvements promise to
Sewage plant with the Unterwarnow prior to the introduction of biological
cleaning
Sewage plant with the Unterwarnow today
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Example: The central sewage plant in Rostock needed to
be modernised to meet the requirements of HELKOM
(Helsinki Convention on the protection of the marine
environment of the Baltic Sea). When it could not be
brought into operation in 1992 as planned due to a serious construction error, in 1993 the local water and waste
water association entrusted EUROWASSER Aufbereitungs- und Entsorgungs GmbH Rostock with the tasks
of providing drinking water and treating waste water for
the Hanseatic city of Rostock and surrounding area. This
company was also asked to complete extension of Rostock’s central sewage plant as a contribution to meeting
the HELKOM requirements by the end of 1995. Despite a
disadvantageous situation (limited space for expansion,
continued operation of the plant during construction
work, a poor substructure in the river basin), the plant
was completed and brought into operation within only
two years and on budget thanks to close cooperation
between the public principals and the private businesses
involved in the modernisation work. In order to be able to
meet the HELKOM requirements despite the restrictions
on space, a completely new innovative process concept
for waste water treatment was developed – a first in
Europe – which has since proved to be completely efficient. According to studies by the University of Rostock,
water quality in the Unterwarnow river improved considerably after the modernised sewage plant came into
operation, and it proved possible to meet the HELKOM
targets as early as 1996 and not only in 1998.
6. Construction
Construction contracts are not among
the state’s obligatory tasks in the
framework of services of general interest. They should therefore be left
exclusively to the private sector, which
as a rule can provide these services
more cost-effectively and more professionally than public authorities.
Economic activity by municipalities has also assumed a
scale in the construction sector that is no longer compatible with the basic principles of the market economy and
Services of general interest: the state as beneficiary?
C. Individual services of general interest and other economic sectors
31
that massively threatens small and medium-sized enterprises in particular.
As an important customer for construction services, the
state has a direct influence on the situation in the building
sector. In 2006 alone public contracts accounted for just
under 30% of turnover in the mainstream construction
sector. If public authorities perform construction services
themselves, they are always in direct competition with private service providers and active to the detriment of the
volume of private contracts.
In this regard, a distinction should be made between
municipal undertakings organised under private law
which provide construction services and operate openly
on the market, and building yards paid directly out of
administrations’ budgets. The latter provide construction
services for municipalities directly and are therefore not
exposed to the market, competition and efficiency control.
These two manifestations of economic activity by municipalities interfere massively in the construction market and
deprive the private sector of construction work.
Municipal undertakings and building yards perform construction services which relate to works of all kinds and
encompass virtually the entire spectrum of construction
contracts: overground and underground, new construction
and renovation, demolition work and transport, road
building and agricultural construction.
It is particularly problematic if either municipalities award
their construction contracts directly and without a public
tender call to their own undertakings or municipal undertakings take part in public tender calls and possible generate anti-competitive contests with local private businesses
by making cross-subsidised offers.
The negative consequences for the construction sector are
regional but also cross-regional, far-reaching in many
respects. For instance, the sector finds it vastly more difficult to adjust to cyclical and in particular structural
adjustment processes due to the activities of municipal
undertakings. Furthermore, the potential of the private
construction sector to win contracts and generate
turnover is reduced, and hence insolvency is encouraged
and competitive jobs are jeopardised. The described activities of municipal undertakings alone (taking no account of
building yards) deprive the construction sector of an estimated 3.4 billion euros in turnover every year. If the state
were to abstain from such interference in the construction
market, a cautious estimate of 35,000 workers would have
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employment with small and medium-sized private construction businesses.
Services of general interest: the state as beneficiary?
C. Individual services of general interest and other economic sectors
Turnover of municipal undertakings in the construction
sector in 2002, per inhabitant (in euros)
80
This development is the wrong route and detrimental to
the private construction sector. Private initiative and
potential is lost, employment and sectoral structures are
distorted, inefficient performance of services is fostered
and as a result tax revenues are wasted, and restrictions
are placed on individual responsibility and entrepreneurial
freedom.
Political decision-makers are invited to use all available
powers and resources to strengthen investment- and
employment-friendly framework conditions as well as to
activate the available innovation and value creation
potential. The fundamental values of the market economy
including competition, property and individual responsibility need once more to be moved more sharply into the
focus of action by society as a whole.
70.42
60
New Länder
34.26
40
Old Länder
20
0
Turnover of municipal undertakings in the construction
sector in 2002, per inhabitant (in million euros)
1,187
2,248
New Länder
Old Länder
Calculations by Bauindustrieverband Sachsen/Sachsen-Anhalt e.V. excluding building yards
Example: In the Free State of Saxony, more than twenty
municipal undertakings perform construction services
directly, inter alia in the form of integration plants (»Integrationswerke«), structural plants (»Aufbauwerke«) or
urban development companies. According to calculations in a study commissioned by the construction
industry federation representing Saxony and SaxonyAnhalt, the turnover losses to the construction sector in
Saxony alone mount up to a total of 250 million euros a
year because of the activities of municipal undertakings.
If the activities of municipal building yards were included, the turnover loss to private construction businesses
would be many times higher. The construction volume
generated by municipal undertakings in Saxony corresponds to around 3,500 jobs. The payroll of building
yards is approximately estimated to be 4,000 employees. In theory, up to 7,500 additional jobs could be created in the private construction sector in Saxony if the
state were to withdraw from performing construction
services itself.
7. Engineering and consulting services
The primary task of municipalities is
to create a reliable framework within
which the private sector can operate,
and to award public contracts in fair
and open competition. Economic
activity by public authorities should
be scaled back to the lowest possible
level.
The engineering and consulting sector is a significant economic factor in Germany. Its companies perform important work in preparing infrastructure and industrial projects, and represent enormous investment volumes with
their planning and preparatory work on projects. Both
industry and public authorities are important customers of
advisory engineers and consultants.
Yet, in recent years in-house economic activity by public
authorities has continuously been extended in the area of
engineering and consulting services. This relates to all
areas in which engineers and consultants are active: provision of water, waste management, traffic planning, engineering, geosciences, communications, urban planning,
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BDI – Federation of German Industries
Services of general interest: the state as beneficiary?
C. Individual services of general interest and other economic sectors
agriculture, logistics, energy, IT and management consultancy.
tomers. The latter for services for which their own capacities are insufficient or which they have no interest in providing. In addition, these companies increasingly offer
themselves as cooperation partners for foreign contracts.
It is not easy to refuse these cooperation wishes, although
the expertise and capacities for execution of the contract
are exclusively on the private side. In this way, public
authorities profit enormously from the know-how of the
private consulting sector without this being matched by
any obvious advantage for the private sector.
For instance, municipal building departments have been
formally transformed into privately organised undertakings or hived off without genuinely being privatised. The
municipalities in question continue to be the sole owners
or at least majority shareholders in the company. The new
company often even has its headquarters in the old premises. The spectrum of support provided to the new company by the public authorities is wide and ranges from guaranteed contracts to profit guarantees. In this way, municipalities’ own undertakings act without the pressure of a
balanced business situation and – in the absence of tendering procedures – often without competition. They do
not run the risk of either insolvency or poor results.
Financial deficiencies are offset with taxpayers’ money or
by increasing charges, e.g. waste water disposal charges.
As a result, these units are in a position to offer planning
services at prices which the market could not have
matched. In addition, they have the major advantage that
they generally receive preferential treatment in contract
awards. Contracts are often awarded freely, without a tendering procedure for the service. Moreover, the considerable contractual risk normally associated with performance is limited because public authorities have no interest
in acting against their own undertakings.
Although the disadvantages for the private sector of such
pseudo-privatisations, and the negative consequences for
the economy generally, are clear for all to see, there is
apparently insufficient political interest in putting a stop
to economic activity by public authorities.
Furthermore, these companies which are privatised only
in formal organisational terms often argue that their status
as private legal entities means that they are therefore not
obliged to apply, for example, German construction contract procedures (»VOB/A«) and the fee structure
imposed on architects and engineers acting as public contractors (»HOAI«). However, the definition of the »public
contractor« is specified clearly in the wording of § 98
GWB and also covers formally privatised municipal companies. The view of municipal companies that they are not
bound by this rule effectively results in further distortion
of competition with the private sector.
The situation is made worse by the fact that public authorities’ formally privatised companies act vis-à-vis independent engineering and consulting businesses on the one
hand as competitors and on the other hand also as cus-
33
The BDI argues in favour of fair and transparent competition in the area of engineering and consulting services.
Any privileges to public authorities’ companies which are
privatised only in formal terms must be ruled out. This
applies particularly to provision of drinking water and
waste water disposal, whose installations are financed
directly with taxpayers’ money.
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Services of general interest: the state as beneficiary?
D. Summary
D. Summary
German Länder and municipalities use the vague concept
of services of general interest primarily as a cloak for an
extension of economic activity by public authorities. This
brochure highlights the problems associated with services
of general interest. It is not only an issue of EU state aid
law but also of law governing economic activity by municipalities, tax policy, public procurement law and award
practices. The private sector is increasingly being squeezed
out by the policies for services of general interest pursued
by German Länder and municipalities. Many jobs in small
and medium-sized enterprises are at risk. Policy-makers
are falling back into state-operated structures which we
thought were a thing of the past. We have shown how
important services, such as energy, telecommunications,
transport, waste, water, construction and engineering and
consulting services, can be provided better in competition..
The European Commission should continue to clamp
down on open and covert state aid to public undertakings.
Instead of incorporating further exemptions for services of
general interest in the EC treaty, policy-makers should
work to enshrine at European level the primacy of the private sector over public authorities, drawing inspiration
from the principle of subsidiarity. Public authorities
should only be active if an urgent public purpose dictates
action by the state and private businesses cannot perform
the service to the same level of excellence.
German Länder and municipalities should not deal with
their understandable concern about tight budgets at the
expense of the private sector. The constitutionally
enshrined concept of the state as a taxing entity protects
private businesses against entrepreneurial action by the
state. The practice of public authorities must comply with
this concept. Instead of creating businesses, public authorities at all levels should reduce public expenditure, secure
the financing of municipal duties and improve the framework conditions for competition between private firms.
The BDI wants Germany and Europe finally to open further markets to competition. Consumers will benefit from
a rich service offer and attractive prices. Jobs will be created. Only if the principle of competition is applied will we
enjoy a leading position on an international comparison –
in both economic and social terms.
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Services of general interest: the state as beneficiary?
Imprint
Imprint
BDI Imprint No 403 – E
November 2007
Publisher:
Bundesverband der Deutschen Industrie e.V.
Federation of German Industries
Haus der Deutschen Wirtschaft
Breite Straße 29
10178 Berlin
Germany
Postal Address:
11053 Berlin
T: +49.30.2028-0 or extension
www.bdi.eu
Editor-in-chief:
Dr. Ulrike Suchsland-Maser
T: +49.30.2028-1408
F: +49.30.2028-2408
[email protected]
A publication of:
Industrie-Förderung GmbH, Berlin
Contact persons:
BDI:
Dr. Ulrike Suchsland-Maser
Anja Mundt
Michael Herzog
Wolfgang Heller
Dr. Carsten Rolle
Petra Richter
Dr. Gregor Strauch
(-1408)
(-1512)
(-1430)
(-1542)
(-1595)
(-1514)
(-1537)
Competition, State Aid, Municipal Commercial Law
Public Procurement
Tax
Energy
Telecommunications/Postal Services
Transport
Waste, Water
VUBIC:
Klaus-Martin-Bauer
(+49 30 278732-11)
Engineering and Consulting Services
BDE:
Dr. Dagmar Thimm
Helge Kleinwege
(+49 30 5900 335-32) Public Procurement, Water
(0032-2-5483 895)
Waste
HDB:
Dr. Robert Momberg
(+49 341 33 637-0)
Print:
DCM – Druck Center Meckenheim
Construction
Economy, Locational Policy
and Competition
Services of general interest: the state as beneficiary?
For fair competition between state and private sector,
as well as more investments, greater efficiency and
optimisation of charging structures