As of the beginning of the year 2017, additional restrictions for municipalities on setting up of new commercial undertakings and delegation of new functions to the currently operating undertakings will come into force. Furthermore, from the beginning of the next year, the Lithuanian Competition Council will gain more powers to prevent the activity of the municipal or other public administration entities, which contradicts the Law on Competition.
The EU law recognizes a possibility to grant exclusive rights in the field of providing services of general economic interest
Currently, municipalities may delegate a particular activity to undertakings controlled by them. A possibility to exercise such rights is limited, since the activity is delegated to the controlled entity by non-competitive procedures, for example, without initiating a public procurement procedure.
Such practice is used in the other EU Member States as well. The EU law recognizes a possibility to grant exclusive rights in the field of providing services of general economic interest, if it is necessary for provision of such services at all. Moreover, the public procurement directives lay down a possibility not to initiate a public procurement procedure if a municipality or any other contracting authority controls the other party to the contract (the in-house transactions), i.e. if such party is a service-rendering undertaking and the major part of such undertaking’s activity is related to the contracting authority, which controls it.
In Lithuania, any decision of the municipality or other public entity (a contracting authority) to delegate fulfilment of the activity to its controlled entity without a public procurement procedure shall comply with provisions of the Law on Competition: even if conditions for entering into an in-house transaction are satisfied, i.e. it is intended to acquire fulfilment of the function from the controlled entity the major part of the activity whereof is related to the contracting authority, which controls it.
The Competition Council actively controls whether decisions of the municipalities or other authorities to assign performance of particular activity to their controlled undertakings are in compliance with the principles of fair competition, and it has already identified a number of violations. The most widely known violations are cases where the municipalities used the controlled entities to perform activities of passenger transportation and waste management. The Competition Council and the courts recognised that such activities could be and were provided by private entities without any major difficulties.
Actions of the municipalities or other entities controlled by the public sector when provision of goods or services are organized without any competition have been widely criticized recently, therefore, it is no surprise that measures are taken to reduce the number of such cases.
Setting up of a new undertaking or expanding activities of an existing undertaking is possible only after a public procurement and approval of the Competition Council
According to the amendments to the Law on Local Self-Government which are about to come into force, the entities controlled by municipalities shall be allowed to carry out economic activity satisfying the general principles of the municipal community, if such activity cannot be carried out by other economic entities, and only provided that, as a result whereof, no features of discrimination/favouring one over the other occur.
Before setting up a new undertaking to carry out the permitted economic activity or authorizing the currently existing controlled entity to carry out the permitted economic activity, the municipality will have to make sure by a competitive procedure of selection of economic entities whether other economic entities operating in the market or those potentially capable of operating have no interest in performance of such economic activity. This means that the municipality will have to initiate a public procurement procedure and only after the public procurement procedure has failed to succeed it may consider a possibility to authorize its controlled entity to perform the activity.
Furthermore, the municipality will have to obtain a prior consent of the Competition Council to set up a new undertaking or expand the operation of an existing entity.
Thus, from now on, the municipalities will have to prove that the activity, which they intend to carry out by engaging a controlled entity, is not of economic nature and it will have to expect that such position is not successfully disputed by the Competition Council or private competitors, or it will have to initiate a public procurement and obtain the permission of the Competition Council if such public procurement had failed to be successful.
The aforementioned amendments to the Law on Local Self-Government may limit the municipalities’ possibility to use an exception of the in-house transaction or when establishing a new undertaking in projects of public and private sector partnership. The European Court of Justice could be able to answer, whether the mentioned amendments to the Law on Local Self-Government are in line with the EU directives on public procurement.
Failure to comply with additional requirements to be subject to strict sanctions
Pursuant to the amendments to the Law on Competition to come into force as of 2017, the Competition Council will obtain a right to require that municipalities and other public administration entities amended or repealed legislation or other decisions distorting competition. Failure to comply with this requirement may be subject to a fine of up to six hundred Euros for each day of violation.
In addition to this, the Competition Council will be able to impose a fine on municipalities or other public administration entities for violations of the Law on Competition, amounting to up to 0.5 per cent of the annual budget of the public administration entity of the current year and other annual general income received in the previous year, however not exceeding sixty thousand Euros.
Thus, the municipalities’ failure to comply with new requirements may be subject to strict sanctions.
Intentions to limit the activity of the central government and entities controlled by it
The purpose of amendments to the Law on Public Procurement to be considered in the nearest future is to restrict the procedure of entering into in-house transactions. The intention is to establish that in-house transactions will be possible only with another contracting authority and only provided that the freedom of fair competition laid down by Law on Competition is ensured.
Such amendments are expected to prevent the common practice among the central government entities and state controlled undertakings to provide goods and services by ways that distort competition and, in this way, reduce costs incurred due to provision of goods and services.
By Feliksas Miliutis, Senior Associate, law firm GLIMSTEDT