The Municipal Economic Law: New Developments In Focus

Introduction: Changes in Political Preconditions

In hardly any other sphere of local government have the economic, administrative and political conditions of organization and practice changed as markedly as in the area of municipal economic activity.(1) Municipal enterprises regard themselves as competitors with equal rights in the liberalized single market. Consequently they demand the same unrestricted access to all markets, including new ones,(2) as their competitors (Chapter 1). Financial exigencies compel municipalities to optimize their organization,(3) for example to spin off operations. However, the question remains: how much spin-off can municipal self-government tolerate and still fulfil its constitutional and political mandate? (Chapter 2) In this situation the municipal enterprise (an institution under public law) offers a suitable alternative to private-law forms of incorporation (Chapter 3).

1. Subsidiarity clauses: expanded access to (new) markets?

The prerequisites for municipalities' economic activities are set out in the kommunale Wirtschaftsklausel (municipal economy clause).(4) The three conditions are as follows:

• A public function must justify or necessitate the activity.
• The enterprise must be appropriate to the economic capacity of the municipality.
• It must be impossible to achieve the public function "better and more economically" (qualified subsidiarity clause) or "equally well and economically through a third-party" (simple subsidiarity clause).

The municipalities and their utilities claim the right to operate without restriction in all fields of business. At most they accept the stipulation that their activity should serve a public function. They therefore regard any form of subsidiarity clause as an obstacle to free competition and an infringement of the right to self-government. Craft trade circles, on the other hand, emphasize the inequalities inherent in the system - anyone who wants free competition must entrust the market to private industry.

The public function as a prerequisite for authorization was a legislative initiative (Section 67 of the German Local Government Law (Deutsche Gemeindeordnung -DGO)). At present it is a requirement of the constitution and therefore not at the discretion of the legislative body.(5) If economic activities are undertaken, the basic rights laid down in Articles 12, 14 and 2, Paragraph 1 of the Basic Law (Grundgesetz) are affected. Economic activity therefore also requires legitimization in accordance with the constitutional principles of public benefit and rationality.(6) The municipality retains an assessment prerogative, but no discretion to interpret the public function dynamically.(7)

Neither the qualified nor the simple subsidiarity clause derives from a general requirement of the constitution,(8) nor do they infringe municipal rights to self-government as laid down in Article 28, Paragraph 2 of the Basic Law. Hellermann/Wieland and Püttner have presented their arguments to the contrary, citing Section 68 of the Municipal Code (Gemeindeordnung) of Mecklenburg-West Pomerania (GO-MeVo), and Section 85 of the Municipal Code for the Rhineland-Palatinate (GO-RhPf).(9) In their opinion, the simple, and possibly the qualified subsidiarity clause infringes municipal rights to self-government. They base their arguments on the premise that Article 28, Paragraph 2 of the Basic Law also regulates relations between municipalities and the economy. This is not the case, however. Article 28, Paragraph 2 of the Basic Law is an organizational principle of public administration, but not a principle of division of labour between municipalities and business.(10) It is nonetheless true that both qualified and simple subsidiarity clauses are cumbersome to administer in municipal practice. The constitutional court of the Rhineland-Palatinate has also conceded this point.(11)

According to this ruling, the legislative body is free to revoke or amend the subsidiarity clause. The Länder have made use of this in various ways. North Rhine-Westphalia has expressly excluded energy, water, public transport and the operation of telecommunications networks from the subsidiarity clause.(12) Local councils can now do business in these areas on equal terms with private enterprises.(13) Baden Württemberg, Bavaria and Thuringia have gone even further.(14) Instead of excluding particular economic sectors, they have excluded all public services (Daseinsvorsorge) from the subsidiarity clause. However, the term Daseinsvorsorge is unsuitable for defining a legal concept. In consequence the bill drafted by the government of Baden-Württemberg does not attempt this. Instead it merely names a few (literally) "indisputable" examples. It does not attempt to clarify the content of the term Daseinsvorsorge.

In North Rhine-Westphalia, delimitation of those activities which are no longer to be included in the new subsidiarity clause regulation has sparked considerable discussion. It referred to the craft trades which may be involved in maintaining the supply of energy and water, for example.(15) The debate raged around the words "areas" and "core areas". While the consultants' draft proposed to clarify the limitation of exceptions by insertion of the term "core areas" ('outside the core areas of energy supply'), the subsequent government draft attempted to expand the area of activity by use of the word "areas". The Landtag rejected both proposals. It wanted to prevent the municipalities and their enterprises being squeezed out of their traditional markets as a consequence of liberalization. On the other hand, no additional sources of income from new areas of business (such as building management) were to be opened to them.

Despite all attempts at delimitation, the future probably holds more, rather than fewer, difficulties in classifying activities under the subsidiarity clause. Püttner (16) already considers that the existing subsidiarity clause is too indeterminate and therefore violates the requirement for the rule of law as laid down in Article 20 of the Basic Law. If we follow this interpretation of the law, the same must apply even more to the revised version. Moreover, if no public function legitimizes municipal economic activities, the subsidiarity clause is irrelevant. The Hamm and Düsseldorf Oberlandesgerichte (courts of appeal) (17) have already expressly denied any such public function for new areas of business such as horticulture, building management and private tuition. Application of the subsidiarity clause was already inadmissible on these grounds. This is yet another strong reason to doubt the applicability of the subsidiarity clause.

In conclusion, all subsidiarity clauses in the Municipal Economic Law are at the disposal of the legislative body. By limiting the subsidiarity clause, the new Municipal Economic Law guarantees municipalities equal opportunities for access, particularly to the electricity and gas markets. However, they remain excluded from the market in many crafts and trades, although not because the subsidiarity clause prohibits their access to the market, but rather because no "public function" necessitates municipal involvement.

2. Organizational freedom: how much spin-off can municipal self-government tolerate?

2.1 Problem

"The discussion about appropriate legal forms for economic or entrepreneurial activity on the part of municipalities is" - in the opinion of Pielow (18)- "as old as the municipal economy itself." But, we could add, it has never been as important as it is today. All the signs indicate (19) that the organization of municipal obligations is undergoing a fundamental transformation. Whereas previously the organization of economic activities, such as the operating form of the municipal works, was the chief focus of interest, now all aspects of municipal activity are affected (e.g., the organization office, social services, office for cultural affairs). Spin-off is no longer regarded as "relinquishing" the performance of municipal obligations and the responsibility for control, but as an organizational instrument of modern management in the "municipality as a corporation". The Bundesbank has studied the effects of divestiture on municipal finance in Frankfurt am Main.(20) Its findings were not entirely positive. A report by the North Rhine-Westphalian Ministry of the Interior (21) on the administration of holdings paints a similar picture of the effects of spin-off on municipal government control and organization. This gives rise to the question of how much spin-off municipal self-government can tolerate.(22)

The progress of the Municipal Economic Law is evidence of efforts on the part of the legislative body to provide appropriate models for entrepreneurial control, faced with the conflicting interests of economic business administration and responsibility for public services. Owner-operated municipal public utilities (Eigenbetriebe) were introduced a while back for municipal economic activity. They were intended to render further spin-off in private-law forms superfluous, "since that would impair the coherence of local government".(23) Not-for-profit operations were conducted almost as a matter of course by an administrative agency in the form of Regiebetriebe.

In some Länder, including Bavaria, Baden-Württemberg, Mecklenburg-West Pomerania, Saxony-Anhalt, Thuringia, Schleswig-Holstein and Lower Saxony, Eigenbetriebe, as a public-law form of organization, took or still take priority (24) over private-law companies. In other cases the Municipal Economic Law requires a "significant interest",(25) to justify the establishment of not-for-profit operations in any other form than that of the Regiebetrieb. In Schleswig-Holstein and Lower Saxony the priority principle has given way to the obligation to consider the relative merits, a more open form. This means that any form of organization other than that of public law is only permissible after careful consideration of the advantages and disadvantages of the private-law form. In Saxony-Anhalt, organization of the service, whether income-generating or not-for-profit, is left to the authority's discretion, without any particular preconditions for authorization. The range of organization forms has recently been extended to include the Anstalt des öffentlichen Rechts (Kommunalunternehmen) (institution under public law (municipal enterprise)) (cf. Chapter 3).

The municipalities have made diverse use of these possibilities and recently more frequently established not-for-profit institutions in the form of companies under civil law.(26)

2.2 Limited suitability of private-law organizational forms

There may be some doubt as to the appropriateness of this development on constitutional (principle of democracy) or municipal (coherence of local government) policy grounds. Whether and how municipal tasks are performed is the decision of the elected council and the mayor. Any spin-off, however, lengthens the legitimization procedure and increases the loss of control. The ground rules change most depending on whether a task is carried out under civil law, i.e. under company law, or via public-law organizational forms and thus in accordance with public law. The influence a municipality can actually have, for example in a joint stock company (Aktiengesellschaft - AG), is very limited, as was recently highlighted by the Düsseldorf Oberlandesgericht in the case of Innovatio Gebäudemanagement GmbH.(27) The municipal works, most of whose shares were owned by Düsseldorf City Council, had set up Innovatio Gebäudemanagement GmbH. The Oberlandesgericht correctly argues that the establishment of this limited liability company (Gesellschaft mit beschränkter Haftung - GmbH) would contravene the Municipal Economic Law, had it been founded directly by the city council. However, since Düsseldorf City Council was not able to control resolutions passed by Innovatio's supervisory board because of company law, the city council's violation of the law was not causal in the establishment of the company. Therefore Innovatio Gebäudemanagement GmbH could not be held responsible for the city council's violation of the law, including an offence under Section 1 of the Fair Trade Law (Gesetz gegen den unlauteren Wettbewerb - UWG) and the establishment by the city-owned company is legal. This just goes to show that if two different parties do the same thing, it is not the same at all.

These conditions do not apply in this form to the limited liability company, because, unlike in joint stock companies, management competences and the powers of the boards in the GmbH are laid down in its Articles.(28) Nonetheless, here too, the organizational environment differs from that of a public-law organization such as a Regiebetrieb (agency-administered enterprise), an Eigenbetrieb (owner-operated municipal enterprise) or a municipal company.

In the GmbH the managing director bears responsibility. In local government it is the mayor. In private-law organizations supervisory boards and advisory councils take the place of local council committees. The principle of transparency in local government sessions is replaced in private companies by the principle of confidentiality. Even council members cannot attend meetings of the supervisory board of a municipally owned GmbH, whereas they are legally entitled to participate in council committee discussions.(29)

2.3 Compensating for loss of democratic control

Länder such as Bavaria and Baden-Württemberg can point to the fact that to compensate for the loss of democratic control when setting up a private-law company, the municipalities are obliged to ensure that they "retain adequate influence, especially on the supervisory board or similar supervisory organ of the enterprise."(30) Baden-Württemberg also stipulates that the legal form AG can only be chosen as an exception and the GmbH is to be preferred.

Whether this in itself is sufficient to compensate adequately for the loss of control on the part of the municipality,(31) or whether other levers are necessary before this solution fulfils the requirement for democracy needs careful consideration. Following the arguments developed by Püttner pursuant to the guarantor's obligations arising from preceding action (Ingerenzpflichten),(32) considerable doubt remains. This applies even when we take account of the Bavarian regulation whereby the municipality "should" guarantee that the general meeting of shareholders decides on the sale of companies and the conclusion of corporate contracts.(33) The mere possibility - "should" - of this form of control through the general shareholders does not appear sufficient to guarantee the required democratic control. This hardly seems adequate to ensure Püttner's (34) "permanent monitoring and supervision". The lack of democratic control is particularly significant when, as in Baden-Württemberg, no such supplementary regulation exists.

Bavarian and Baden-Württemberg regulations do not compare with those of North Rhine-Westphalia.(35) As in Baden-Württemberg, a North Rhine-Westphalian municipality may only set up a joint-stock company in exceptional cases.(36) However, it may only set up a GmbH if the form of its Articles guarantees that the shareholders' general meeting, and not the supervisory board, decides the appointment and dismissal of the general manager, the annual plan and the allocation of profit. This gives municipalities in North Rhine-Westphalia - unlike those in Bavaria and Baden-Württemberg - the statutory instruments of control which, according to Püttner, are necessary to fulfil the requirements of the principle of democracy enshrined in Article 20, Paragraph 1 of the Basic Law.

The fact remains that private company forms do not exhibit the democratic substance recognized by municipal law for consultations and resolutions. Every spin-off is a loss of municipal influence. This applies least, however, when a public-law organization performs municipal tasks. The conflict between the responsibility for democratic control and the flexibility necessary for optimal organizational control has given rise to the institution under public law (municipal undertaking), which has been incorporated into the Municipal Economic Law (see Chapter 3 below). Thus the municipalities have at their disposal a form of organization which guarantees economic performance of their tasks combined with responsible democratic control.

One answer to the original question is therefore: if municipal tasks are spun off to a private-law company, issues of democratic legitimacy arise when the necessary information and monitoring rights are not expressly and separately regulated in the company Articles. The preconditions for authorization, as laid down inter alia in the Bavarian and Baden-Württemberg Municipal Economic Law, do not meet the requirements for democracy demanded by Articles 20 and 28 of the Basic Law. The municipal enterprise (an institution under public law) therefore proves to be the legitimizing form of organization for both the income-generating and not-for-profit performance of municipal tasks.

2.4 Statutory restrictions on spin-off (Ausgliederungsverbot)

The question of how much spin-off local self-government can tolerate does not, however, refer only to the kind, but also to the scope of spin-offs. Even where it is permissible,(37) can every municipal task really be hived off? Where are the limits?

The council and the mayor could end up retaining only a kind of "corporate group responsibility" - a concept which can clearly conflict with the traditional image of municipal self-government.(38)

The Bavarian legislature probably shared this opinion. For the first time in the history of the Municipal Economic Law the Bavarian (and more recently also the Thuringian) Municipal Code expressly contains a directive stating that "tasks to be delegated must be suitable to be performed outside the general administration".(39) According to the preamble, this is designed to achieve two things. On the one hand the municipalities should not be able to delegate municipal tasks to private enterprises at will (for example internal organisation, budgetary affairs). On the other hand municipalities should not "be able to reduce their own role to that of a mere holding through excessive spin-off".(40)

The prohibition on spin-off is welcome from a municipal policy and constitutional perspective. According to its wording, the prohibition includes all municipal tasks, not only those within its own sphere of activity, but also those delegated. The examples cited in the preamble (internal organization, budgetary affairs) indicate that the statutory restrictions on spin-off only affect the tasks within the municipality's own sphere of activity. Nonetheless both are possible, because in Länder such as Bavaria sovereign duties can also be separated off and delegated to a municipal enterprise, for example, as a public-law institution (Article 89 Bavarian Municipal Code).

Irrespective of this, we must consider that the criterion "suitable to be performed outside the general administration" is proving too vague to wield normative force. Fear therefore exists that this regulation will experience a similar fate to other norms laid down in municipal economic law. In conflicts of interest they prove ineffectual. There is a solution, however, which is simple to implement - the priority of municipal enterprises as public-law institutions over private-law company forms.(41) Municipal enterprises ensure the necessary flexibility, including performance of income-generating tasks, and provide for democratic control by the council (cf. Chapter 3). The organization of the municipal enterprise allows the institution to take on both income-generating and not-for-profit tasks (e.g. museums, music centres).

This does not solve all the problems which delegating municipal tasks poses to municipal self-government coherence, such as business accounting in the public-law organisations as opposed to cameralistics in the core government organs, but it does solve the main ones. The important thing is that the organizational framework conditions adhere to public-law norms. It is then up to the local council to coordinate organization and task performance. Much could be organized similarly in the legal form of a GmbH, but company law and its environment follow civil and not public-law principles.

Up to now the Länder have used instruments other than the prohibition on spin-off to ward off a sellout of municipal self-government. This is the holding report,(42) which can subsume all kinds of municipal spin-off. The holding report is an essential tool for ensuring municipal coherence and authority where the Municipal Economic Law gives the municipality discretion to choose the form. For this reason it is aimed at councillors and residents, those who control and are affected by municipal service organization. However, the holding report is always based on organizational decisions and attempts to confine the effects of spin-off. The prohibition on spin-off or the primacy of the municipal enterprise over private-law forms of organization, in contrast, are intended to prevent disintegration and loss of authority before they occur. The prohibition on spin-off and primacy of the municipal enterprise should not prevent a situation where a holding report is necessary to prevent the loss of democratic authority and the coherence of municipal self-government.

We must remember that municipalities perceive hiving off their tasks as a way of optimizing performance. This is why the democratic control of municipal organization is of such great importance for local self-government, which is hardly possible in private-law companies, unlike in public-law forms of organization (Regiebetriebe, Eigenbetriebe, public-law institutions). A prohibition of spin-off such as exists in Bavaria is not needed, because the public-law institution is a suitable organizational form for both income-generating and not-for-profit activity. This is why it should be given priority over private-law companies. The holding report is an important instrument for compensating any loss of organizational control and securing municipal coherence, but its potential is limited.

3. Municipal enterprises: the competitive alternative

3.1 The idea for a new legal form

The idea for a new legal form in municipal economic law is spreading throughout Germany. Following initiatives in the city Länder of Berlin (43) and Hamburg (44), Bavaria (45), Rhineland Palatinate (46) and Saxony-Anhalt (47) have incorporated it into their municipal economic law as a municipal enterprise with the legal form of an institution under public law.

In North Rhine-Westphalia (48) the First Law on the Modernization of Government and Administration (Gesetz zur Modernisierung von Regierung und Verwaltung), enacted on 15 June 1999, has given its municipalities the opportunity to establish new enterprises (Unternehmen) and organizations (49) (Einrichtungen) in the legal form of a public-law institution, or to convert existing Regiebetriebe and Eigenbetriebe to public-law institutions with legal status.

The starting point for all legislative initiatives was the finding that the organizational forms in the public and private regulations covering the municipal economy were inadequate to achieve a satisfactory balance between entrepreneurial autonomy and public-law integration.(50) While the Regiebetriebe and Eigenbetriebe do make it possible to reap the benefits of public law (e.g. no taxability qua legal form, delegation of sovereign obligations and powers, direct control by the local council), the close administrative integration and lack of legal autonomy can impede efficient flexible solutions and decision-making.(51) While private-law forms of organization such as the GmbH or AG provide a greater degree of decision-making autonomy and flexibility, due to their legal and organizational independence, these benefits are obtained at the cost of the control and monitoring powers required by the constitution for the municipal shareholders (cf. Chapter 2.2). These deficits have given rise to the demand for a new form of organization,(52) which would allow the municipalities to enjoy the benefits without "drifting into a market economy".(53) This demand has highlighted the legal form of the autonomous public-law institution, already familiar in federal and Länder law. It offers the following main advantages:(54)

• The institution remains subject to the law of the Länder, which gives the municipalities effective aids to control municipal enterprises.
• The municipal enterprise can act in its own capacity and thus exercise the power to levy municipal charges. Participation and consultation can be made compulsory where this is to its advantage.
• An institution under public law is taxed as an Eigenbetrieb.

In Bavaria nearly 50 cities and towns have grasped the opportunity to set up a municipal enterprise.(55) At least five such enterprises have been established in North Rhine-Westphalia, in Bottrop, Hürth, Moers, Cologne and Wetter. As in Bavaria, the municipal enterprises set up in North Rhine-Westphalia mainly pursue not-for-profit activities.

3.2 Establishment and powers

The Municipal Code of North Rhine-Westphalia provides two options for setting up a municipal enterprise. Existing Regiebetriebe, Eigenbetriebe and similar entities can be converted to public-law institutions by process of universal succession. Alternatively, the local council can establish the institution by virtue of singular succession.

It would be desirable to simplify restoration of private forms of organization, in particular GmbHs and AGs (wholly in the hands of a public authority) to the sphere of public law. Municipalities should thus be able to restore municipal control lost through privatization without financial damage. Unfortunately, the tax disadvantages, in particular, (inter alia the disclosure of so-called hidden reserves) could considerably impede the return of private organization to the public-law domain.

Special powers: One important advantage of the municipal institution under public law over private-law organizations derives from its public-law status. This even allows the local council to delegate sovereignty to the municipal enterprise. In the case of solid and effluent waste disposal, for instance, the municipal enterprise can fully assume the legal duties of the local council. The municipality is not obliged to transfer the responsibility to act as an executor or administrative agent. This avoids organizational interfaces between the municipal enterprise and the local council. In addition, the local council can prescribe compulsory subscription and use of the municipal enterprise's services and authorize it to issue rates for the assigned operation. This also makes it easier for a single organization to manage a particular municipal task. The municipal enterprise is entitled to establish any administrative act necessary for the enforcement of the statutory regulations and to enforce them with the instruments of administrative power, on behalf of the local council.

3.3 Public authority supporting the institution

The assignment of the institution to one particular supporting agency is always mandatory. Currently, no provision is made for support by several public-law authorities. If several municipalities wish to amalgamate in a joint form of organization, they must establish an association to this end.(56) Municipal experience and further development of the law on municipal enterprises will show whether a practical need for joint support by several municipalities exists. The participation of private individuals in the support of a public-law institution is also impossible at present the motives and objectives of this new public-law form, to create a genuine alternative to the private-law GmbH, furnish significant grounds for involving private partners. It would indeed have been legally possible to do so. In principle, public institutional law provides for the involvement of private persons,(57) but as yet no Land legislature has availed itself of this option. At present the institution can only take a detour and buy into another private-law enterprise. This solution has the crucial disadvantage, however, that the participants come under private law and must accept the restrictions on municipal control imposed by company law.

3.4 Legal relationship to the supporting agency

The local council is the founding corporation of the municipal institution under public law. It determines the purpose of the enterprise and its internal structure in the foundation document. This authority remains with the local council throughout the existence of the municipal enterprise and does not pass to an organ of the enterprise, as is the case with private-law enterprises. This enables the local council to adapt the purpose and structure of the municipal enterprise to changing circumstances.

Maintenance obligation and guarantee obligation are elementary principles of German institutional law. Local councils are obliged to guarantee the economic viability of the municipal public-law institution. To this end it must provide sufficient funding to allow the municipal enterprise to perform the tasks assigned to it.(58)

The permissibility of a public-law guarantee obligation was the subject of a complaint filed by the EU Commission against the Westdeutsche Landesbank, concerning a subsidy not permitted under European law (Article 87 of the Treaty Establishing the European Community). The outcome of this suit could only affect the guarantee obligation of a municipal enterprise if it were in competition with other private companies. This does not apply strictly to any known municipal enterprises. At least in the case of a not-for-profit activity (e.g. museums, waste water), the exception specified in Article 86, Paragraph 2 of the Treaty Establishing the European Community should take effect. The services provided by the municipal enterprise then qualify as "services of public economic interest" and are exempt from the subsidy rules of European law.(59)

The internal structure of municipal enterprises is based on the structure of the private-law company forms GmbH and AG. The public-law model permits very flexible solutions. The agency supporting the institution enjoys considerable discretionary powers. It is therefore able to adapt the organizational structure to task-related requirements.(60) This is a distinct advantage compared with the forms of organization permitted under private law, because the structures of private-law companies are prescribed by federal law.

The special rights of the agency to access information and issue instructions to the board of trustees can also be specified in the enterprise's Articles.(61) Here, too, the agency enjoys considerable discretionary powers. Although under Section 4 of the Municipal Enterprise Ordinance of North Rhine-Westphalia (KUV NW) no member of a municipal enterprise's organs may disclose any confidential information, trade or operational secrets, this expressly exempts disclosure to municipal organs. There is no threat of a conflict of interests with the private-law confidentiality requirements of company law (Section 116 in conjunction with Section 93, Paragraph 1 (2) Act, 52(1) GmbHs) and the exemption of Section 394 Act in the sphere of public law. Here, too, the public-law enterprises has an advantage over private-law companies. Public law gives the local council the opportunity to decide for itself how strict its monitoring must be and how much autonomy is justified. Particular forms of employee cooperation and involvement in managing the institution are not regulated by law. The motives for this "silence" are not found in either the preamble or deliberations prior to its enactment. The Eigenbetrieb law could have served as a model for income-generating municipal enterprises.(62) Whether and to what extent the participation of employees in the board of trustees of the municipal enterprise is permissible when the institution operates on a not-for-profit basis (e.g. solid and effluent waste disposal), is unclear. In a similar situation the North Rhine-Westphalian Ministry of the Interior has exceptionally allowed trilateral parity in enterprises which are similar to Eigenbetriebe (Section 107 (2) GO-NW) with reference to Section 4 of the Municipalization Model Law (Kommunalisierungsmodellgesetzes - KommG) in the form of an experiment in the works committee.(63)

Results: The municipal enterprise as a new legal form permits positive organizational structures to reconcile flexibility and "entrepreneurial" independence with the responsibility for democratic control and accountability to the municipality. Legislators made a crucial decision in giving private-sector regulatory bodies only a rough framework within which they are entitled to organize the concrete structure of the municipal enterprise themselves. Here the municipal institution under public law has an important advantage over both the Eigenbetriebe and private-law forms of organization. To avoid the circuitous route via the "eroded" special-purpose association, the formation of municipal enterprises jointly by several local councils should be made legally possible. Special regulations on employee cooperation and participation in the municipal enterprise are still lacking.

References

(1) Schulze-Fielitz, "Die kommunale Selbstverwaltung zwischen Diversifizierung und Einheit der Verwaltung", Professorengespräch 1997, Vol. 6, Stuttgart 1998, p. 223 ff.; Held, "Ist das kommunale Wirtschaftsrecht noch zeitgemäß?", Wirtschaft und Verwaltung (WiVerw) 1998, p. 264; Schuppert, "Rückzug des Staates", Die Öffentliche Verwaltung (DÖV) 1995, p. 761; Ehlers, "Die Auswirkungen des europäischen Energierechts auf die Kommunen", Professorengespräch 1999, Stuttgart 1999, p. 97 ff.; Materialien des Städtetages Nordrhein-Westfalen, Cologne July 1998; Schneider, "Energierechtsreform", Städte- und Gemeinderat 1996, p. 442; Dedy, "Vom Regiebetrieb zur Aktiengesellschaft", Demokratische Gemeinde 1999, p. 37.

(2) Cf. activities of Düsseldorf municipal works such as: "Special offers on coffins" (Särge im Angebot); "Your move is our move" (Ihr Umzug ist unsere Sache) (advertising campaign).

(3) Held, "Reform der Strukturprinzipien kommunalwirtschaftlicher Betätigung", Schiller-Dickhut/Murawski (eds.), Kommunale Unternehmen auf der Flucht nach vorn, Bielefeld 1999, p. 23; "Konkurrieren statt privatisieren?" is the title of the KWJ-Arbeitsheftes 3 (2002), University of Potsdam.

(4) Schmidt-Jortzig, "Zulässigkeit und Grenzen der Gründung öffentlicher Unternehmen durch die Kommunen", Eildienst Landkreistag 1989, p. 73; Held, Held/Becker et al., "Kommunalverfassungsrecht Nordrhein-Westfalen", 11th instalment, May 2002, before paragraph 107, comment 3.3; ibid. (fn 1), WiVerw. 1998, p. 273.

(5) Heintzen, Rechtliche Grenzen und Vorgaben für eine wirtschaftliche Betätigung von Kommunen im Bereich der gewerblichen Gebäudereinigung, Berlin 1999, p. 41; Grawert, Zuständigkeitsgrenzen der Kommunalwirtschaft, festschrift for Blümel, Berlin 1999, p. 123; Ehlers, Gutachten Deutscher Juristentag, Berlin 2002, p. E 72.

(6) Ehlers, "Rechtsprobleme der Kommunalwirtschaft", Deutsches Verwaltungsblatt (DVBl.), 1998, p. 497; Heintzen (fn 5), Rechtliche Grenzen, p. 41; Pielow, "Gemeindewirtschaft im Gegenwind", NWVBl. 1999, p. 369 (376); Kluth, "Öffentlichrechtliche Zulässigkeit gewinnorientierter staatlicher und kommunaler Tätigkeit", Stober/Vogel (eds.), Wirtschaftliche Betätigung der öffentlichen Hand, Munich 2000, p. 28.

(7) Henneke, "Das Recht der Kommunalwirtschaft in Gegenwart und Zukunft", Niedersächsische Verwaltungsblätter (Nds VBl) 1999, p. 8; for a different opinion see Cronauge, "Benötigen die Kommunen ein neues Gemeindewirtschaftsrecht?", Der Gemeindehaushalt 1997, p. 265 (269); Dedy/Sonnenschein, "Kommunale Wirtschaft vor neuen Herausforderungen" Stadt und Gemeinde 1998, special issue, p. 4.

(8) For a different opinion see Heintzen (fn 5), Rechtliche Grenzen, p. 52, who, however, deduces this view from Article 3 a, Paragraph 2 and 102a of the Treaty Establishing the European Community and from Article 1, Paragraph 3 of the International Treaty on Economic and Monetary Union.

(9) Wieland/Hellermann, Der Schutz des Selbstverwaltungsrechts der Kommunen gegenüber Einschränkungen ihrer wirtschaftlichen Betätigung im nationalen und europäischen Recht, Cologne 1995, p. 32, 63; Püttner, Zur Reform des Kommunalwirtschaftsrechts in Rheinland-Pfalz (expert opinion), Tübingen 1997, VKU-Nachrichten, issue 587, p. 4.

(10) VerfGH RhPf DVBl. 2000, p. 992, endorsed by Henneke, p. 997.

(11) VerfGH RhPf DVBl. 2000, p. 992 (997); see also Gabler/Oster, Gemeindeordnung Rheinland-Pfalz, commentary Section 85, notes 2-3.

(12) Section 107, Paragraph 1 GO-NW.

(13) In North Rhine-Westphalia a consultants' draft bill of a law on small and medium-sized enterprises is currently under discussion. The bill passed by the Land government includes the following regulation (Section 7, Clause 1): "In principle public funds should finance economic activities only if the public function they are designed to fulfil cannot be performed better and more economically by private companies." Page 6 gives the following reasons, inter alia: "… that Section 107 GO-NW, which represents a successful compromise between conflicting interests, shall not be affected by this regulation."

(14) Section 102 (Paragraph 1, (3) GO-BW; Article 87, Paragraph 1, (4) GO-Bay; Section 71, Paragraph 1, (4) Thür.

(15) Including electrical installations, delivery and connection of appliances. For the current state of debate see the arguments in the draft amendment submitted by the coalition group (Drs 12/3947 of 4 June 1999 NRW Landtag) p. 94/95 reprinted in Held (fn 4) Kommunalverfassungsrecht, Section 107 comment 7.2.

(16) Püttner (fn 9), Reform des Kommunalwirtschaftsrechts, p. 6; for a different conclusion see Verf.GH RhPf DVBl. 2000, p. 992 (997) with reference to the procedural regulation in Section 7, of the Federal Budget Code (Bundeshaushaltsordnung - BHO).

(17) OLG Hamm (Gelsengrün) DVBl. 1998, p. 792 (793); OLG Düsseldorf (private tuition) NWVBl. 1997, p. 353; see also Hösch, "Öffentlicher Zweck und wirtschaftliche Betätigung von Kommunen", DÖV 2000, p. 393 (402) "...the idea of subsidiarity is already contained in the concept 'public function'. The establishment and operation of a municipal business undertaking does not fulfil a public function if the intended operation is being or can be fulfilled just as effectively by private enterprise". See also Ehlers (fn 6), Rechtsprobleme, p. 501"... If private enterprise can serve the urgent public benefit purpose, municipal business activities are hardly 'necessary'."

(18) Pielow, Zwischen Flexibilität und demokratischer Legitimität. Neue Rechtsformen für kommunale Unternehmen, festschrift for Knut Ipsen, Munich 2000, p. 725 (731).

(19) Cf. report on the comparative study Beteiligungsverwaltung (administration of holdings), North Rhine-Westphalian Ministry of the Interior, September 2001, "As yet a minor part of municipal government is conducted in private companies. Its economic significance is, however, considerable (budget volume in 1999 among the towns not belonging to a district: : DM 46.5 billion , in municipal companies, DM 18.8 billion) ... and evidently not growing ... Wuppertal is the only city in the Land to employ more people in municipal companies (5836) than in government offices (5375)", p. 30/31; Schoepke, "Zur Problematik der Gesellschaftsform für kommunale Unternehmen", VWBl. BW 1994, p. 81; Ehlers (fn 6), Rechtsprobleme, p. 497 (508).

(20) Monthly Report of the Bundesbank, June 2000, p. 54.

(21) Report on the comparative study "Beteiligungsverwaltung", Düsseldorf 2001, summary pp. 13-19; Organisation im Spannungsfeld von Unternehmensführung und öffentlicher Aufgabenverantwortung.

(22) Ehlers (fn 6), Rechtsprobleme, p. 508 "Up to now the issue of how best to organize the municipal economy has not been resolved. The increasing complexity of municipal companies is giving cause for concern."

(23) Surén/Loschelder, Deutsche Gemeindeordnung, Berlin 1940, commentary Section 74, note 1.

(24) Section 69, Paragraph 1 (1) GO-MeVo; Section 117, Paragraph 1 (1) GO-SachsAn; Section 73, Paragraph 1 (2) ThürKO; Section 102, Paragraph 1 (1) GO-SchlH; Section 109, Paragraph 1 (1) GO-Nds, abandoned for not-for-profit activities by a law enacted in Bavaria on 26 July 1995 and in Baden-Württemberg on 15 September 2000. For constitutional priority of public-law forms of organization over private-law forms see Ehlers, "Die Entscheidung der Kommunen für eine öffentlich-rechtliche oder privatrechtliche Organisation", DÖV 1986, p. 897 (903); Scholz/Pitschas, "Kriterien für die Wahl der Rechtsform", Handbuch der kommunalen Wissenschaft und Praxis (HdkWP), Vol. 5, 2nd edition 1984, p. 128 (147); Schoepke (fn 19), Zur Problematik, p. 85; Schoch, "Der Beitrag des kommunalen Wirtschaftsrechts zur Privatisierung öffentlicher Aufgaben", DÖV 1993, p. 377 (383); Held, "Änderungsnotwendigkeiten und Änderungsmöglichkeiten des Gemeindewirtschaftsrechts", Professorengespräch 1998, Vol. 6, p. 126; in particular Püttner, "Zur Wahl der Privatrechtsform für kommunale Unternehmen und Einrichtungen", VKU, issue 80 (1993), p. 27 according to which "the principle, in the sense of a quasi natural law, that the Eigenbetrieb should have priority, cannot be recognized" with further notes (p. 24).

(25) Section 109, Paragraph 1 (1) GO-Nds "… proved a significant interest in the establishment and participation ..."; Section 108, Paragraph 1 (2) GO-NW for institutions "... having significant interest"; Section 109, Paragraph 1 (1) GO-Nds (obligation to consider); Section 102, Paragraph 1 (1) GO-SH (obligation to consider); Sections 121, 122 GO-Hessen.

(26) Cf. "Sozialholding" (social holding) and "Rathaus ohne Ämter" (town council without offices) in Held (fn 1), Kommunales Wirtschaftrecht, p. 275; for trends in spin-off see also the Report of the North Rhine-Westphalian Ministry of the Interior on the administration of holdings (fn 21), p. 31; Kuban, "Konzern Stadt - Die Steuerung der Beteiligungen", Reformen im Rathaus, Cologne 1996, p. 99 (100).

(27) OLG Düsseldorf, DÖV 2001, p. 912; cf. also discussion in Wolfers, http://www.der-syndikus.de, which does not, however, take into account the necessity for the municipalities to give up their holdings in utilities in AG form to comply with this argumentation.

(28) Noack, "Gesellschaftsrechtliche Fragen kommunaler Beteiligung an Gesellschaften des Privatrechts", Städte und Gemeinderat, 1995, p. 379 (380).

(29) OVG Münster, NWVBl. 1997, p. 67.

(30) Section 103, Paragraph 1 (3) GO-BW; Article 92, Paragraph 1 (2) GO-Bay.

(31) Schoch, "Der Beitrag des kommunalen Wirtschaftsrechts zur Privatisierung öffentlicher Aufgaben", DÖV 1993, p. 377 (383); quotes from the Essen City Council holding report, 1997, p. 9: "… sent council delegates who were often more interested in the particular needs of the holding than the benefit to the city. This was encouraged by the fact that the meetings of the organs were held behind closed doors ...".

(32) Püttner, "Die Einwirkungspflicht", DVBl. 1975, p. 353 (356); in the same vein: Mayen, "Privatisierung öffentlicher Aufgaben", DÖV 2001, p. 110 (113); Pielow, Zwischen Flexibilität und demokratischer Legitimität: Neue Rechtsformen für kommunale Unternehmen, festschrift for Knut Ipsen, Munich 2000, p. 725 (734).

(33) Article 92, Paragraph 1, p. 2 GO-Bay.

(34) Püttner (fn 32), Die Einwirkungspflicht, p. 356.

(35) Section 108, Paragraph 4 GO-NW.

(36) Section 108, Paragraph 3 GO-NW.

(37) This refers to the diverse types of responsibility: voluntary and original self-government responsibilities, duties to execute and manage, tasks in assigned spheres of activity.

(38) Dieckmann, "Konzern Kommunalverwaltung, Zwischen Diversifizierung und Einheit der Verwaltung", Verwaltung und Management, 1996, p. 340 (341) ... "The danger of unchecked spin-off" which could lead to "municipality dismemberment." Further considerations: Reasoning behind Section 87 GO-Bay in the draft bill on the amendment of municipal law regulations, as of 20 February 1998, p. 12. "Neither would it be compatible with the model of municipal self-government given by the constitution if, through excessive spin-off, the municipalities were to reduce their own role to that of a mere holding." Cf. also resolution of the North Rhine-Westphalian executive committee of the convention of municipal authorities dated 20 May 1997 - Eildienst Städtetag p. 311 (313): "Spin-off and privatization affect the overall responsibility of the council, its control and autonomy, as well as the citizenship element of local self-government"; Schoch, "Der Beitrag des kommunalen Wirtschaftsrechts zur Privatisierung öffentlicher Aufgaben", DÖV 1993, p. 377 (383); Ehlers (fn 5) expert opinion, E 106.

(39) Article 87, Paragraph 1 (4) GO-Bay; Section 71, Paragraph 1 (3) Thür KO.

(40) Draft bill setting out grounds for the amendment of Article 87 GO-Bay, p. 12 (fn 38).

(41) Schoepke (fn 19), Zur Problematik, p. 81.

(42) Section 105, Paragraph 3 GO-Bran; Section 73, Paragraph 3 GO-MV; Section 112, Paragraph 3 GO-NW; Section 109, Paragraph 3 GO-Nds; Section 115, Paragraph 2 GO-Saarl; Section 90, Paragraph 2 GO-RhPf; Article 94, Paragraph 3 GO-Bay; cf. also Schefzyk, Der kommunale Beteiligungsbericht - Ein Instrument zur verbesserten Berichterstattung über die Unternehmenstätigkeit der Kommunen, Cologne 2000, with a research study into city holding reports. In addition to the holding report, Saxony-Anhalt also requires a "qualified person" in the town council to manage the holding, Section 118, Paragraph 4 GO-SachsAn.

(43) GVBl des Landes Berlin 1993, p. 319.

(44) GVBl der Hansestadt Hamburg 1994, p. 79, 435; 1995, p. 77.

(45) Article 89 GO-Bay; for the history and motivation behind the Bavarian regulation see Schulz, "Neue Entwicklungen im kommunalen Wirtschaftsrecht Bayerns", Bay VWBl. 1996, pp. 129

(46) Section 86a GO-RhPf.

(47) Section 116, Paragraph 1 GO-SachsAn.

(48) Section 114 a GO-NW; Lux, "Das neue kommunale Wirtschaftsrecht in Nordrhein-Westfalen", NWVBl. 2000, p. 7 (11); Held, "Die Zukunft der Kommunalwirtschaft im Wettbewerb mit der privaten Wirtschaft", NWVBl. 2000, p. 201 (204); Menzel/Hornig, "Die Anstalt öffentlichen Rechts - eine neue Rechtsform für gemeindliche Betriebe in Nordrhein-Westfalen", ZKF 2000, p. 178 (Part I), p. 199 (Part II).

(49) The term Unternehmen refers to organizations conducting income-generating operations and Einrichtung to those pursuing not-for-profit activities (Sections 107, (Paragraph 2 and 108 GO-NW). However, not all Länder adhere consistently to this systematic legal differentiation.

(50) Cf., for example, Ehlers, "Das selbständige Kommunalunternehmen des öffentlichen Rechts," Professorengespräch 2000, Stuttgart 2000, p. 50 for further evidence; Schmiing/Neusinger/Lindt, "Neue Form effektiver Kommunalwirtschaft", der städtetag 2000, p. 22 (23).

(51) Schraffer, Der kommunale Eigenbetrieb, 1992, p. 33.

(52) Cf. in particular overview Ehlers, Verwaltung in Privatrechtsform, 1984, p. 383-389 and Schraffer, Der kommunale Eigenbetrieb, 1992, p. 97-118; also Thode/Peres, "Die Rechtsform Anstalt nach dem kommunalen Wirtschaftsrecht des Freistaates Bayern", Bay VBl. 1999, p. 6; Ehlers, "Das selbständige Kommunalunternehmen des öffentlichen Rechts", Professorengespräch 2000, Cologne 2000, p. 47 ff.

(53) Knemeyer, Das Kommunalunternehmen, Stuttgart/Dresden 1997, p. 6; ibid. "Das selbständige Kommunalunternehmen des Öffentlichen Rechts in Bayern", Professorengespräch 1997, Cologne 1998, pp. 313; Northoff/Wollert, Das selbständige Kommunalunternehmen, 1998, p. 1.

(54) Cf. also the arguments set out in the draft bill of the First Modernization Law NRW, enacted 25 February 1999 (Drs. 12/3730), p. 107.

(55) Speech by State Minister Dr. Günther Beckstein, "Keine Aushöhlung der kommunalen Selbstverwaltung", BayGTzeitung, No 12 (2001).

(56) Ehlers (fn 50), Kommunalunternehmen, p. 53/54; Schulz, "Neue Entwicklungen im kommunalen Wirtschaftsrecht Bayerns", Bay VBl. 1996, p. 129 (130); Menzel/Hornig, "Die Anstalt öffentlichen Rechts - Eine neue Rechtsform für gemeindliche Betriebe in Nordrhein-Westfalen", ZKF 2000, p. 179.

(57) Thus too Thode/Peres (fn 52), Die Rechtsform, p. 10; Schulz, "Neue Entwicklungen im kommunalen Wirtschaftsrecht Bayerns", BayVbl. 1996, p. 97 (113).

(58) Thode/Peres (fn 52), Die Rechtsform, p. 8; Münstermann, "Die Sparkassen auf dem Weg in die Zukunft", Gemeindehaushalt 2002, p. 11 (12).

(59) Henneke, "Beeilt euch zu handeln, bevor es zu spät ist zu bereuen", Nds.VBl. 2002, p 113; Albin, "Daseinsvorsorge und EG-Beihilferecht", DÖV 2001, p. 890 (891); Tettinger, "Dienstleistungen von allgemeinem wirtschaftlichem Interesse in der öffentlichen Versorgungswirtschaft, Entwicklungslinien im primären Gemeinschaftsrecht", Cox (ed.), Daseinsvorsorge und öffentliche Dienstleistungen in der Europäischen Union, Baden-Baden 2000, p. 97 (109).

(60) Schulz (fn 57), Neue Entwicklungen, p. 133.

(61) Ehlers (fn 50), Kommunalunternehmen, p. 59; Mann, "Das Kommunalunternehmen - Rechtsformalternative im kommunalen Wirtschaftsrecht", NVwZ 1996, p. 558.

(62) Ehlers (fn 50), Kommunalunternehmen, p. 61; the North Rhine-Westphalian League of Cities did speak against participation in the works committee with reference to the principles of democracy, cf. letter 9/2799 to the NW Landtag p. 3.

(63) On the scope of the principles of democracy and the compatibility with employee participatory rights, see. Verf.GH NW JZ 1987, p. 242 ff. (available from Sparkassen); OLG Bremen NJW 1977, p. 1153 (1156); BVerfGE 93, 37 (p. 70).