Please fill out all the fields marked with an asterisk * and then click on "Send form".
The article has been sent
Thank you for your recommendationClose window
Prof. Lahmann: There has been a noticeable – and recurring – tendency among many local authorities to reclaim essential services from private operators and bring them in-house, in particular since the beginning of the 2000s. The motives behind this are complex and have changed as the years have gone by. Numerous factors that are important for the decision-making process and that should be of particular relevance to local authorities are often ignored. One of the goals of my team at the HHL Leipzig Graduate School of Management is to identify which factors have so far been disregarded or incorrectly evaluated and then shed light on the effect this has had.
Prof. Alexander Lahmann
Prof. Lahmann: The decision as to whether services should be provided by the public sector or private sector or jointly as a public private partnership (PPP) depends on a whole number of factors and these differ from case to case. Political and social factors play a decisive role here as, of course, do economic considerations.
When private sector operators deliver the services – and this is also true for PPPs – then the underlying goal is to make a profit. In practice, this leads to a growth in efficiency. Moreover, the council’s coffers benefit from the tax payments and, in the case of a PPP, from a share of the profits. When the public sector provides such services, it is actually forbidden by law for the municipal company’s express goal to be to make a profit; what’s more, loss-making activities must be given financial support. This plays a considerable role if, in special cases, a private sector firm is not available, especially if the service operator is not making a profit.
Political aspects, such as exercising control and assuring quality, are playing an increasingly important role, as is the social issue of protecting jobs. All of these, however, can be sorted out in the contract with the private sector operator and in a PPP. Economic viability should, therefore, be the issue that is uppermost in people’s mind when they make their decision. Having said that, though, political and social aspects must not be ignored as they are becoming ever more important. At the end of the day, the solution that is found must always be able to be “sold” to the local residents.
Prof. Lahmann: No, I don’t. The money coming in from taxes is often disregarded or too little weight is attached to it. Many of the discussions about (re)municipalisation plans did not include the advantages and disadvantages of taxation because the issue is so complex. In many cases, people even mistakenly talk about the so-called ‘system-related tax disadvantages’ of PPPs as the prospects of profit-sharing is limited.
In Germany, private sector operators delivering public services must pay turnover tax, corporation tax and business tax. On the surface, it would appear that the majority of the business tax payments and a small share of the turnover tax payments end up in the hands of the local authority. Corporation tax payments and most of the turnover tax payments are split between the German states and central government. However, if the complex system of financial compensation mechanisms in Germany is taken into account, then local authorities do, in fact, benefit from a considerable share of the turnover and corporation tax payments. How the revenue is actually distributed depends on each individual case but it can certainly be concluded that councils that have their services provided by public sector operators forgo both direct and indirect tax revenue. The actual shortfall in the local authorities’ revenue is much higher than assumed as the official distribution scheme only includes the first of the five tiers of the (re)distribution system. This can be seen in the comprehensive assessment that my team at HHL carried out on how tax revenue is distributed in Germany.
Prof. Lahmann: Looking at the results of our analyses, there are many reasons that speak in favour of the foundation of PPPs. Collaboration work between local authorities and the private sector creates advantages for both sides and helps sidestep each other’s weaknesses. On the one hand, you’ve got the drive towards greater efficiency of a profit-oriented private sector business and the potential revenue connected to this as dividends and tax payments. On the other, local authorities are able to maintain their “control” by owning a majority share in the company. As a result, they can ensure their skills and viewpoints are included in the decision-making processes and can react flexibly to new requirements.
Prof. Lahmann: This process creates several advantages for local authorities and their residents. By growing its revenue, the council can invest in other essential projects. Moreover, other municipal services and facilities can also be maintained, extended or even offered for the first time.
What’s more, this is an opportunity to transform a publicly owned core service provider – one that may be loss making and in need of subsidies – into a profitable company that can provide supply and waste management services in a cost-effective and uncomplicated way within its own district as well as to other councils as well.
Prof. Lahmann: Such a decision should always be taken on a case-by-case basis and only after all factors have been taken into account. The effects that it will have on the council’s budget should be calculated as extensively as possible and included in the decision-making process.
If the best results – regarding both the council’s budget and the quality of service and levels of fees for local residents – are to be achieved, then the decision-makers should, as a basic principle, always have economic considerations uppermost in their minds and not be influenced by some kind of ideology. Ideally, any political and social elements can be covered in the contract and, in the case of a PPP, control can be safeguarded by the local authority retaining a majority share.