An Insatiable Appetite for Municipal Businesses in Lithuania

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Rarely does the Lithuanian government adopt a vital decision. That is why recent amendments to the Law on Local Self-Governance aimed at suppressing the insatiable appetite for the establishment and expansion of municipal enterprises were so appropriate. However, the new regulatory safeguards have barely entered into force and now the Parliamentary Committee on State Administration and Local Authorities are forging a different path – a path of virtually absolute liberty to engage in commercial activities.

Under the current legislation, municipal enterprises should meet certain criteria to expand their business operations. First, the proposed activity must be in line with the public interest, meaning that it should focus on the needs of residents of a particular municipality. Second, there should be no other entity able to meet those interests by providing goods or services. Third, there should be no discrimination between municipality-owned and private businesses; both should operate under similar competitive conditions. Fourth, municipal enterprises may offer their services (e.g. waste removal) upon receiving the approval from the Competition Council if they are necessary but otherwise unavailable on the market. All of these measures were taken to curb the tendency of municipalities to establish their “own” businesses, but why is it necessary?

The answer is simple. First, municipal enterprises put taxpayers’ money at risk. Of course, one may suggest that the origin of money makes no difference, but it does. In fact, the difference between using their own and taxpayers’ money is so significant that the primary purpose of a municipal enterprise – the provision of high quality reasonably priced services – is often overlooked as other priorities arise. It is an open secret that such enterprises provide shelter for relatives and political allies of municipal administrations; therefore, many are plagued by a high risk of corruption, professional malpractice and the resulting underperformance.

According to the National Audit Office, as much as 34% of municipal enterprises made losses in 2015. The average return on capital was as low as 0.42% that is not even comparable with the average of 9.2% achieved by private businesses. Regrettably, a bunch of inefficient and highly politicized companies run by incompetent individuals is what the taxpayers get for their money.

Second, publicly owned businesses harm consumers. According to the Competition Council, in 2015, service prices varied up to 100% across municipalities. Municipalities in which the provision of services was concentrated in the hands of municipal enterprises had the highest prices. Their services are expensive, but being inefficient municipal companies are at the very edge of survival; therefore, lowering prices often result in a failure to reach their break-even point that is nothing else but yet another burden on taxpayers. Simply put, in any of the above scenarios the consumer ends up paying more than he would have paid under normal competitive conditions.

Third, the intentions of municipal enterprises to expand their commercial activities thus crowding out private enterprise are evident. In 2015, there were 271 municipal enterprises and only 171 of them had their statutes made publicly available. Moreover, merely 19 statutes provided an exhaustive list of operations whereas the activities of the remaining 152 companies were virtually unlimited, stating that they “may engage in any other activity that is not illegal in the Republic of Lithuania”. This is a clear indication that municipalities already plan the expansion of their companies at the very point of their establishment.

Regrettably, none of the above is enough to convince politicians. They are already looking at repealing the above criteria as well as the requirement on municipal enterprises to obtain a permission from the Competition Council to engage in new activities. If adopted, the proposed amendments will once again give municipalities the freedom to establish new businesses while taking away their chance to become truly transparent citizen-focused institutions.

Therefore, politicians should ask themselves if depriving citizens of their right to choose high quality reasonably priced services while putting private businesses at a competitive disadvantage is the path Lithuania should follow.

Gintare Derzanauskiene
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