8. PPP and Public Enterprises in Germany

Certain articles of the German Basic Law, e.g. Article 87(e)(3) with regard to the federal railroads, stipulate that the state may operate commercially. Apart from those provisions, the German Basic Law does not contain any prohibition or explicit requirements regarding the permissibility of public enterprises (Burgi, 2019, 264). Accordingly, the state is, in principle, free to decide whether and how the public sector engages in economic activity. Nevertheless, state and municipal economic activity must comply with the Basic Law (Wollenschläger, 2021, 37–38). Since the entrepreneurial activity of the state is merely a mode of fulfilling state tasks, public enterprises must serve a public purpose and may not be purely for profit (Burgi, 2019, 264–265). Furthermore, the principle of democracy demands that a local government must maintain sufficient rights of influence and control over its legally independent public enterprises (for example, reporting obligations, rights to information, and issuing instructions can contribute to this, Gaß, 2023, 491–492).

Regarding the entrepreneurial activities of local governments, the guarantee of Article 28(2) of the BL is of particular relevance: The guarantee of local self-government also includes the so-called organizational autonomy, which grants local governments the right to decide independently on their internal administrative organization (this is recognized in the case law of the Federal Constitutional Court 2014, paragraph 49). This includes the decision to involve a municipal enterprise in the performance of a public task. Against this background, the legal framework must leave municipalities sufficient scope for dealing with local matters, including by means of economic activity (Wollenschläger, 2021, 40).

Local governments could also operate economically through their own administrative bodies. In practice, however, the performance of the respective tasks is typically transferred to a public enterprise of the municipality (Burgi, 2019, 287).

More detailed are the local government regulations of the federal states, which provide general conditions regarding the permissibility of a local authority’s economic activity. In general, the regulations of all federal states prescribe that a municipality may only establish or significantly expand an enterprise if it can be justified by a public purpose, the nature and scope of the enterprise is in reasonable proportion to the municipality’s capacity as well as its anticipated needs and the purpose is not or cannot be fulfilled better and more economically by another party (Gaß & Popp, 2021, 11). In general, the county codes contain identical provisions on the economic activities of counties (Gaß, 2023, 488).

If a local government has decided to perform a task through a public company, in principle, it is free to choose between public-law and private-law forms of organization. When choosing a form of organization under private law, the municipality remains subject to its obligations under public law, while at the same time being subject to the relevant regulations under private (commercial) law (Burgi, 2019, 288). The municipal codes of the federal states stipulate special rules for the establishment of a company under private law or participation in such companies, which require, for example, that the fulfilment of the public purpose must be ensured in the company agreement (Gaß & Popp, 2021, 40–43). In 2021, more than 70% of all public enterprises were organized under private law (Statistisches Bundesamt, 2023). The most common legal form of public companies is the limited liability company (GmbH) (Warm et al., 2018, 549). Smaller municipalities have often chosen the organizational form of the so-called “Eigenbetrieb”, especially in the water supply and wastewater disposal sectors. This legal form is not independent in legal terms, but largely independent from the municipal administration in organizational and financial terms (Cronauge, 2016, 157).

The constitutional guarantee of self-government applies to all local governments regardless of their size or economic importance (Burgi, 2009, 143). Furthermore, the regulations on the entrepreneurial activities of local governments apply regardless of their size. However, since the entrepreneurial activity of local governments is regarded as a mode of fulfilling public tasks, local governments are not permitted to extend the scope of their responsibilities by setting up a company (Gaß, 2023, 490). In this context, the principle of general competence becomes relevant for municipalities, according to which they may deal with all matters of the local community that are not already assigned to another public authority by law (Gaß, 2023, 503).

In rural regions, public services are provided by individual (smaller) municipalities and counties (Burgi, 2009, 140). As mentioned above, self-administration is constitutionally guaranteed to the individual municipalities as well as the counties. However, unlike municipalities, counties do not enjoy general competence for all local matters. Therefore, the counties’ right to self-administration depends on the allocation of tasks by the legislator (Wollenschläger, 2021, 40). The respective state laws define the exact distribution of tasks between counties and municipalities. As a rule, counties are responsible for tasks that exceed the capacity of the individual municipality (this is due to reasons of administrative efficiency, see Burgi, 2009, 140). For example, tasks such as the provision of local public transport in rural areas or running hospitals fall within the responsibility of the counties and may therefore be performed by a public enterprise owned by the respective county (Ruge & Ritgen, 2021, 129).

Apart from that, some cities do not belong to a county. Due to their size, the administrations of the so-called county-free cities have the capacity to provide all public services themselves (Burgi, 2009, 140). As a result, larger municipalities provide a broader range of services for their citizens and regularly have a larger number of outsourced tasks (Bremeier et al., 2006, 31). In large cities, the result is the formation of complex municipal groups with interwoven shareholding structures. Grossi and Reichard (Grossi & Reichard, 2017, 106) point out that the control of these corporations is not always unproblematic. For example, the City of Munich alone runs 248 associated companies to provide various services of general interest (Landeshauptstadt München, 2021, 2).

Irrespective of the legal framework, rural and urban local governments encounter different challenges. Especially smaller cities and municipalities often face the problem that the responsible municipal administrations do not have the necessary knowledge and experience to handle the legal, organizational, or business management challenges arising from the establishment of a municipal enterprise (Cronauge, 2016, 373). Nevertheless, participating in public enterprises is an important instrument for the provision of public services, even for smaller municipalities (Bremeier et al., 2006, 52–53).

Until about 20 years ago, PPPs had not been used frequently in Germany—in contrast to other EU member states, which had gained extensive positive experience with such projects in the 1990s. Even when the Federal Government of Germany drafted its “Law to accelerate the implementation of Public Private Partnerships and to improve the legal framework for Public Private Partnerships” (“PPP Acceleration Act”, in German: “Gesetz zur Beschleunigung der Umsetzung von Öffentlich Privaten Partnerschaften und zur Verbesserung gesetzlicher Rahmenbedingungen für Öffentlich Private Partnerschaften”—“ÖPP-Beschleunigungsgesetz”) in 2005, the explanatory memorandum of the law still stated at BT-Drucks 15/5668, page 1: “Positive experiences [with PPP] are available in Europe—in Great Britain, the Netherlands, Denmark, Sweden, France, Portugal, and Greece. Savings potentials in the amount of 10–20% in relation to conventional public infrastructure projects are realizable. In Germany, however, methods of public-private partnerships have so far only been pursued occasionally.” In the early 2000s, in the context of the general privatization efforts at that time, various initiatives were launched at the federal and state levels to promote and standardize PPP structures in Germany as well (Redlich & Unbehauen, 2017, 446). As a consequence, PPPs quickly became a well-recognized form of delivering public services in Germany, even compared to other EU member states. According to a special report of the European Court of Auditors (European Court of Auditors, 2018, 16), in the EU market for PPP between 1990 and 2016, Germany ranked 4th. The United Kingdom launched the most projects by far. In France and Spain, the PPP investment sums were still twice as high as in Germany. Accordingly, most of the fundamental scholarly (Ziekow & Windoffer, 2008; Burgi, 2008, D33–D41, D109–D113; Yu, 2009) and practical (Meyer-Hofmann et al., 2005; Weber et al., 2005) writings on PPP in Germany were made in the mid-2000s and shortly thereafter. Today, PPPs play a considerable role as an option to provide public services at all levels of administration in Germany—at the federal, state and municipal level. Bonhage and Roberts (2020) state that, despite the rather negative signal sent out by Article 90(2) of the German Basic Law, a reform of the German highway administration was passed by the German legislator in 2017 and that this reform “may lead to substantially more PPP projects with regard to the construction and operation of German motorways”; they argue that it “may well be an indication of a more active PPP market in Germany in the years to come”. In relation to the investment sums, the most important areas in which PPP projects have been applied are certainly the construction and operation of transport infrastructure (above all: federal highways) and the construction and managements of public buildings (e.g. schools, cultural and sport facilities as well as administrative buildings).

Between 2002 and 2017, a total of 210 projects were launched nationwide in these areas alone, with investment volumes of 6.05 billion EUR in building construction (191 projects) and 3.84 billion EUR (19 projects) in road construction (PPP-Projektdatenbank, 2017).

Of course, the strength and performance of Germany’s public enterprises (see above in Sect. 8.3) is likely to be a key factor in preventing PPPs from achieving a major breakthrough in Germany, similar to their relevance in other member states. In fact, many public-sector companies in Germany are actually mixed companies and could hence count as institutionalized PPPs. The airport of Frankfurt, for example, is operated by Fraport AG, a mixed company with two public (State of Hessen: 31.31%; Frankfurt’s municipal public enterprise “Stadtwerke Frankfurt GmbH”: 20%) and several private shareholders.

A legal instrument that is often used but not restricted to PPP projects is the award of concessions. Concession contracts are widely used in German administrative practice, including projects that are much simpler than PPPs. When it comes to practical applications of concession agreements in Germany, there are many areas in which concessions are being awarded, including but by no means limited to (more complex) PPP projects. There are no robust data concerning the actual number of concessions awarded in Germany, but concession contracts are generally regarded as a “booming” form of procurement in Germany (Burgi, 2005, 610; Opitz, 2014, 754). The countless examples of successful concessions involve, for instance,With regard to other important cases of licensing, it is controversial in German jurisprudence whether these fall under the concept of a concession within the meaning of the Directive. This applies in particular to contracts concluded by energy supply companies with municipalities for the use of public transport routes for the laying and operation of lines belonging to an energy supply network for the general supply in a certain municipal area. The German legislator took the view that those contracts were not to be classified as concessions within the meaning of Directive 2014/23/EU (cf. the reasoning in BR-Drucks 73/16, 9 and 10). There are specific rules governing these contracts set out in Section 46 of the German Energy Sector Act (“Energiewirtschaftsgesetz”).

As such, PPPs are only addressed by legal norms in exceptional cases, e.g. in Article 90(2) of the German Basic Law. Special codifications of PPP-related regulations exist, as far as can be seen, only in one of the 16 German federal states. PPPs are therefore predominantly governed by the general rules applicable to privatizations, which may include the general rules on public contracts as well as other, more specific rules such as the provisions of the Act on Private Financing of Federal Highways (“Fernstraßenbauprivatfinanzierungsgesetz”) in the context of PPPs for the purpose of constructing and maintaining federal highways. Even though there are only a few formal rules specifically addressing PPPs, many local and national bodies have been issuing working instructions and guides on PPP since their emergence in the early 2000s (Fischer & Schubert, 2017, 362). One important example of these PPP soft laws is the 2007 Guide on “Public Private Partnership – Economic Viability Studies” created by the German Finance Ministers Conference (“FMC”, in German: “Finanzministerkonferenz”—“FMK”) (FMK, 2007). The guidelines contained therein were made legally binding for administrative bodies as the Federal Ministry of Finance (“MoF”, German: “Bundesministerium der Finanzen”—“BMF”) and the ministries of the Länder respectively issued the guide as a whole as “internal administrative rules” (“Verwaltungsvorschriften”) for the purpose of interpreting and applying Section 7(2) of the German Federal Budget Code (“FBC”, in German: “Bundeshaushaltsordnung”—“BHO”; the rules were formally published as “BMF-Rds. II A 3 H 1000/06/0003 vom 20. August 2007”) and incorporated the guide’s principles into the general administrative rules on economic viability studies.² Internal administrative rules are binding upon the administration but do not have external legal effects. This means that individual citizens or companies cannot invoke the provisions of internal administrative rules.

In contrast, there are specific laws in Germany with regard to the award of concessions within the meaning of and for the purpose of implementing Directive 2014/23/EU. The basic requirements are contained in the German Act against Restraints of Competition (ARC), together with the fundamental rules on public procurement. More detailed provisions are set out in the Procurement Regulation (PReg), i.e. a specific regulation issued by the Federal Government in order to implement Directive 2014/23/EU. Below the EU thresholds, however, the (autonomous) German rules on public contracting only apply to works concessions, as stated in Section 23(2) of the first section of part A of the Award and Contract Regulation for Construction Services (“Vergabe- und Vertragsordnung für Bauleistungen”—“VOB/A”). The first section of part A of the VOB/A rules apply by virtue of references in the budget and procurement laws of the Länder. The VOB/A rules are rules specifically designed for public procurement in the field of construction works and services, and they were drafted by the German Procurement and Contract Committee for Construction Services (“Deutsche Vergabe- und Vertragsausschuss für Bauleistungen”—“DVA”). The award of service concessions below the relevant threshold of around 5,400,000 EUR per concession are hence not subject to specific national public procurement rules. Issues other than the decision on the award of works and services concession contracts (e.g. on the substantive legality of the contract and on the contract performance) are covered, in principle, by the general rules applicable to public contracts.

In Germany the rules on public contracts need to be carefully distinguished from the public procurement rules. The latter rules only concern the award of the contract and are hence covered by the European procurement directives. The rules on public contracts (i.e. contracts concluded by an administrative body) concern the substance of the contract and the modalities of its performance. Public contracts in Germany are either governed by German civil law or by Sections 54–62 of the German Federal Act on Administrative Procedure (“Verwaltungsverfahrensgesetz”—“VwVfG”) and the corresponding administrative procedure laws of the Länder.

Empirical data on differences in the use of PPPs and concessions in urban and rural areas in Germany does not yet exist, as far as can be seen. However, the legal differentiations suggest that municipalities in rural areas will predominantly fall back on (simple) concession contracts and try to avoid Europe-wide tenders for larger PPP projects. It is likely that players from urban areas will venture into much more complex projects.