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Dear Readers!
Family-run companies generate almost 50% of the German economy’s total turnover and provide over 50% of all jobs in our country. Our ‘Mittelstand’ (i.e. our SMEs) – which, we are constantly being told, is held in envy around the world – is the anchor that gives Europe’s largest national economy the stability it needs, driving growth across the whole of the continent. 83% of all apprenticeship jobs in Germany are created by SMEs. 1,307 of the globally identified 2,700 ‘Hidden Champions’ are German Mittelstand firms. So what have these facts got to do with public private partnerships?
They are an opportunity for local authorities and their companies to become a part of this exceptional success story. Family-owned businesses focus on values, traditions and reliability across generations. More often than not, they are deeply rooted in their regions and actively involved in their communities. And it is this that enables them to enjoy long-term success. We believe it to be a good decision when a municipal partner chooses to have its essential public services provided by a joint venture with a private-sector partner. Learning from mistakes made and drawing the right conclusions for the future are two further strengths of family-run companies that have been able to enjoy decades of success on their markets thanks to their high levels of expertise and their special ethos.
The need for greater efficiency by, on the one hand, dividing up tasks and specialising in specific areas and, on the other, keeping costs under control means that once again public private partnerships are being viewed as a future-proof business model.
For decades now, REMONDIS has been showing every day that better results can be achieved by working together. With 64 PPP companies and a whole range of third-party service provision agreements, we have perfected the public private partnership concept for all essential public services – from waste management, to water management, all the way through to public transport – to the benefit of both parties. Working together with its municipal partners, REMONDIS delivers services to over twelve million people living in Germany. Local authorities and their residents always receive the highest quality of service possible and have the peace of mind that their fees and charges will remain stable over a long period of time.
As a rule, public private partnerships are a real blessing for a council’s budget as they are a reliable source of tax revenue. The most can be made of the opportunities to optimise operations. Successful collaboration work with the private sector preserves public property and creates jobs. Fees and charges are stabilised and the pressure on the public purse is relieved.
This latest special issue is dedicated to the subject of public private partnerships and takes an in-depth look at the various PPP models, the advantages for local authorities and their residents and the positive impact they have on jobs, the environment and the local economy. Councils wishing to achieve long-term budget stability, high quality public services and maximum levels of sustainability by operating an environmentally responsible circular economy will find some valuable suggestions and accounts in this issue to help them with their decision-making processes.
We look forward to working with you!
Yours Ludger Rethmann
Where does your interest in collaboration work between the public and private sectors come from?
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.
“Looking at the results of our analyses, there are many reasons that speak in favour of the foundation of PPPs.”
Prof. Alexander Lahmann
In your opinion, what are the key considerations for or against local authorities delivering public services themselves?
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.
Do you think that the whole subject of taxes is taken sufficiently into account?
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.
Based on these findings, would you recommend to local authorities that their services be provided by the private sector or even that public private partnerships be founded?
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.
Do you believe that the creation of a jointly owned company to provide core services can bring tangible
benefits for both the public purse and the local residents?
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.
If you were approached by a local councillor today who was weighing up whether to bring the provision of core services in house or to set up a PPP, what recommendations would you give them to enable them to make an objective decision?
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.