“Local authorities and public utilities” - CPL (9) 4 Part II

Rapporteur: Arno SCHREIBER (Germany)

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EXPLANATORY MEMORANDUM

The various systems for the provision of local public services (in particular water supply, power supply and transport), new financial management strategies in public services and the problem of consumer protection are the subject of wide public debate in Europe today. Legislative decisions are in the pipeline at European Union level concerning liberalisation of markets, privatisation and competition policy. As in the past, some decisions will be taken by the Community authorities, but they will directly or indirectly affect the responsibilities and duties of local authorities.

The Congress thought it necessary to consult local authorities in order to enable them to compare different modes of management of local public utilities and spell out their main wishes in this area. For this purpose, in co-operation with the City of Innsbruck and the Committee of Regions, the first Conference on “Local authorities and public utilities in Europe” was held on 10-12 October 2001. The proceedings of this conference, attended by leading figures from 28 European countries, formed the basis for preparing the Recommendation and Resolution.

The texts drawn up by the Committee on Sustainable Development of the Chamber of Local Authorities state the main positions expressed by local authority representatives at the Innsbruck Conference and at the meeting of the Committee. The draft Recommendation and draft Resolution were adopted unanimously, less 2 abstentions, by the Committee at its meeting in Strasbourg on 20 March 2002.

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The outcome of the Conference, summarised in a final declaration, showed the scale of the interests at stake and it was agreed that analysis of the public services legislation being prepared in the European Union was a matter of priority.

At the same time, the draft Recommendation mentions a number of problems peculiar to the countries of central and eastern Europe which are not yet members of the European Union; paragraphs 10-12 of the Recommendation refer, for example, to the dilapidated condition of certain transport and water supply infrastructures and the practice of selling off infrastructures to private investors at prices below their market value.

The majority feeling that emerged from the discussions was that it was wrong to privatise and liberalise public utilities whatever the cost. No one doubts that private enterprise can contribute to the efficiency of public service provision but there are a number of dangers. One of the main risks of privatisation, mentioned in the Recommendation, and which the local authorities wished to emphasise, is the concentration of public utility production and distribution in the hands of powerful oligopolies or monopolies - which is what is happening at European level.

The Committee on Sustainable Development of the Chamber of Local Authorities came out in favour of a balanced combination of public and private components - the one meeting the obligation to protect social interests, the other answering to criteria of efficiency and free choice of supply – through the establishment of joint public-private corporations.

A formal request was also made for the introduction of procedures for consulting and informing consumer associations, in order to help match public service provision to the population’s actual needs.

On a topical note, the Committee wished to emphasise the need adequately to protect and make secure the installations used to supply public services against the risks of natural disasters and terrorist attacks.

The key points of the debate

A) Municipalities’ freedom to organise public utilities

The Recommendation and the Resolution state repeatedly that the local authorities must have the necessary freedom and political autonomy to choose how to deliver public services.

Paragraph 13 of the Recommendation is not a proposal to distribute tasks between the public and the private sectors (whereby provision would be guaranteed by the public sector and delivered by the private sector). On the contrary, it seeks to promote the preservation and creation of municipal enterprises by encouraging them to combine the advantages of both the public and the private sectors.

The provision of local public services is a matter of local authorities’ administrative autonomy and they must be allowed freedom to organise such services. In principle, local authorities decide for themselves what services to provide and how. It is also up to them to decide whether to provide services directly through a municipal enterprise or to contract them out.

Paragraph 17 of the Recommendation explicitly asks for municipal enterprises to be allowed to continue providing services without being subject to compulsory tendering.

The local authorities’ fear is as follows: We start from the principle that the member States are free to decide who should provide a given service; but if they have recourse to a third party - and municipal enterprises would fall into this category – they might have to submit to the rules governing the award of public contracts (the assumption being that public tendering should benefit the taxpayer). It is to be feared that compulsory tendering will eventually become the rule. In practice, the growing number of situations in which local authorities are required to use tendering restricts the freedom which is part of their autonomy. There is a danger that the discretion which local authorities currently enjoy in deciding whether, how and by whom a particular service will be provided in their territory, will be restricted by growing Community powers. These fears are based both on the undue increase in tendering in the public utilities field and in the growing absorption of public utilities into the sphere of action of the Union, which is apparently to be given corresponding regulatory powers. Furthermore, public service enterprises which are partially or wholly owned by local authorities very often perform social functions and so need not necessarily obey the logic and meet the conditions of the lowest bid.

B) Public utilities and legal certainty

Public utilities are a highly topical issue for member States of the European Union as well as for prospective members. Participants at the Innsbruck Conference, including representatives of central and eastern European countries, were uneasy about the impact which future decisions by the European Union may have on local authorities.

Local authority representatives who follow the debate closely realise that the crucial point will be how competition policy evolves over the next few years, because that will have an effect on public utilities.

Articles 15 and 16 of the Recommendation refer directly to this problem: the provision of public services depends directly on establishing legal certainty as regards competition.

What Europe’s local authorities expect primarily from the public utilities debate is greater certainty both as to the legal position and with regard to their planning. The simplest solution would surely be to insert in European competition law a sectoral exception for public utilities provided by local authorities and to amend the Treaty establishing the European Community accordingly. A more realistic course would be to find a solution in the systematic framework laid down by the Treaty, i.e. a solution in terms of derived European law. What is important to the local authorities is that it should be made clear (by means of exemptions by category, communications and orientations) in what circumstances and to what extent European competition law applies to them.

This entails fixing a legal framework to determine the conditions under which state aid may be granted. After the operation of this framework has been evaluated, category exemptions should be provided for from Community rules on state aid.

It is very important for local authorities to know exactly what constitutes restriction of trade in relation to exclusively local activities.

It is vital to determine unequivocally the scope of competition law. It is not enough to publish a list of cases in which a decision has been handed down, from which to deduce whether a particular activity may be regarded as “non-economic”. The position of the European Commission, which does not want to have its hands tied by an exhaustive list of « non-economic” activities, is understandable; but its refusal to give an abstract definition is much less so. Only such a definition could provide effective legal certainty and greater predictability as a basis for planning. With appropriate regulations, the local authorities would know, from the planning stage of a new activity, to what extent they would be concerned by European legal provisions governing state aid. They could then avoid embarking upon futile investment. This is made possible only partially by the publication of decisions. It is accordingly necessary to produce a general definition of “non-economic” activity in order to determine with certainty the scope of competition law.

For the time being, admittedly, the Recommendation and Resolution prepared by the Committee on Sustainable Development of the Chamber of Local Authorities do not take a stand on the possible definitions of, and distinctions between « public  services », « public utilities », « municipal public utility infrastructure » or « municipal economic activity ». At this stage, the Committee on Sustainable Development wishes rather to emphasise the diversity of situations facing local authorities in meeting their citizens’ collective needs; continuation of discussion on these subjects in the Congress, as proposed in the Resolution, will surely help to shape the local authorities point of view on the possibility of finding a precise definition of these concepts.

C) Crucial points for the future

The last paragraph of the Recommendation draws attention to implementation of the principles stated in Article 16 of the EC Treaty regarding municipalities’ organisational freedom. In our view, this article should be so interpreted as to place a more binding construction on the member States’ wish to give the interests of the community priority over the principles of competition by adopting corresponding provisions concerning utilities. There is a risk, by transferring them to Europe, of restricting local authorities ‘ powers to choose the services they wish to provide and how they wish to provide them.

The idea of supplementing Article 3 of the EC Treaty with a provision including the proper functioning of public utilities among the aims of the Community would effectively justify new Community powers in relation to public utilities, to the detriment of powers exercised hitherto by the local authorities. Article 3, which states the aims of the Treaty, describes the Community’s spheres of activity, but it also, in the light of other provisions, constitutes an enumeration of its powers.

Finally, a subject discussed both in the Committee and at the Innsbruck Conference was the evaluation of basic public services.

The Rapporteur believes that evaluation and feedback are practices which already form an integral part of local authorities’ political culture. Public utilities run by the local authorities are also covered by them.

The proposals envisaged at European level for establishing comparative performance evaluation are unacceptable. The European authorities ought to have powers in relation to public utilities only in very exceptional circumstances, where uniform European regulation is necessary for provision of the service concerned. Where this is not the case, there is no need for the European authorities to compare performance. If it is up to the local authorities to define and organise public utilities, they must have the powers not only to evaluate performance, but also, without interference from any other body, to make comparisons (which are closely related to evaluation). The Rapporteur believes it would be wrong to impose on the whole of Europe a single standard for public services provided by the local authorities; the local authorities are obviously against this idea.

There is no denying that many questions remain open. In making specific requests to national governments and the European Union institutions, the Committee on Sustainable Development wishes to highlight the problems facing local authorities in relation to public utilities and to draw attention to the consequences which the planned regulations will have for local authorities in the European Union member countries, and for the countries of central and eastern Europe.

Be that as it may, the conclusions of the draft Resolution clearly state the Committee’s intention to continue to closely monitor legislative developments at European level concerning public utilities and competition.

NON-OFFICIAL TRANSLATION - European Union legislative framework in the field of public procurement

European Union legislative framework in the field of public procurement has been adopted.

In this respect, the following procurement directives can be considered:

These Directives aim to guarantee "the attainment of free movement of goods" and "the attainment of freedom of establishment and freedom to provide services in respect of public work contracts". For the attainment of these objectives the European Commission wishes to co-ordinate public procurement procedures in order to ensure effective competition and non-discrimination in respect of such procedures and optimal allocation of public funds through the choice of the best tender.

As a matter of fact, national laws will affect Local and Regional Authorities as far as these last detain large responsibilities in providing services.

For Local and Regional Authorities, the Directive 93/38 EEC of 14.06.1993 amended by the Directives 98/4EC coordinating the procurement procedures of entities operating in the water, energy, transport and telecommunications sectors is the most relevant.

This Directive shall apply to:

1. Contracts awarded by contracting entities carrying out activities on production, transport or distribution of drinking water; production, transport or distribution of electricity; contracting entities in the field of urban railway, tramway, trolleybus or bus services; contracting entities in the field of airport facilities; contracting entities in the field of maritime or inland port or other terminal facilities provided that the estimated value, net of VAT, is not less than: (values expressed in ECUS)

2. Contracts awarded by contracting entities carrying out activities on the operation of telecommunication networks or provision of telecommunication services provided that the estimated value, net of value added tax (VAT), is not less than:

3. Contracts awarded by contracting entities carrying out activities on transport or distribution of gas or heat exploration for an extraction of oil or gas, exploration for and extraction of coal or other solid fuels, contracting entities in the field of railway services provided that the estimated value, net of VAT, is not less than:

There are certain rules for calculating the estimated value of the contract; the contracting authority shall include (Article 14 93/38):

the value in national currencies of the thresholds laid down, specified in paragraph 1, shall, in principle, be revised every two years with effect from 1 January 1996. The calculation of such a value shall be based on the average daily values of those currencies expressed in ECUS over 24 months terminating on the last day of August preceding the revision with effect from 1 January. These values shall be published in the Official Journal of the European Communities at the beginning of November.

The method of calculation shall be reviewed, on a proposal from the Commission, by the Advisory Committee for Public Contracts, in principle two years after its initial application (in the case of work contracts (Article 22 (1) b), in the case of design contests organised as part of a procedure (23 (1), (2)).

Implementation

1. member States shall bring into force the laws, regulations and administrative provisions necessary to comply with this Directive by 16 February 1999. They shall forthwith inform the Commission thereof.
2. However, the Hellenic Republic and the Portuguese Republic may provide that the provisions referred to in paragraph 1 shall apply no later than 16 February 2000.
3. When member States adopt the provisions referred to in paragraph 1, they shall contain a reference to this Directive or be accompanied by such reference on the occasion of their official publication. The methods of making such a reference shall be laid down by the member States.
4. member States shall communicate to the Commission the main provisions of national law which they adopt in the field covered by this Directive together with a correlation table between this Directive and the national measures adopted.

Notes on public procurement contracts not covered by the Directives (from Green Paper)

Public procurement contracts below the thresholds laid down in the Directives (Green paper)
The procedures provided for by the Community Directives apply exclusively to public procurement contracts whose estimated value exceeds the specified thresholds. Some contracting authorities consider that, for procurement contracts below these thresholds, no Community provision applies; as a result, some procurement contracts are sometimes awarded without being put out to tender. The European Commission considers that, as in the case of the granting of concessions and similar rights, these contracts must be awarded in accordance with the provisions of the EC Treaty concerning the free movement of goods and services as well as its underlying fundamental principles of non-discrimination, equality of treatment and transparency.
As far as future perspectives are concerned where it is felt that the current framework is not flexible enough to take into account new practices or market realities, the Commission intends to propose amendments through a legislative package. This package will in particular include proposals to:

For the moment, those countries that have not implemented the public procurement directives are free of duties on that question; those who had implemented the rules, can use the “right of below threshold contracts”; the rules of evaluation of the contract can be interpreted flexibly according to the value of the contract and the sum of the contract can be split; “restricted” and “negotiated” procedures can be used as often as possible with the explanation of necessity.

The European Union, in the field of public procurement policies, insists on the statement that the contracts must be awarded in accordance with the provisions of the EC Treaty concerning the free movement of goods and services, as well as, its underlying fundamental principles of non-discrimination, equality of treatment and transparency.