Shortcomings in municipal compliance with incorporation requirement

The FCCA has assessed how well the municipalities have complied with the incorporation obligation based on the Local Government Act. The assessment has revealed shortcomings in the actions of the municipalities, which the FCCA will investigate more closely.

Under the Local Government Act, the municipalities were required to incorporate all functions they perform on the same market as private enterprises by the end of 2014. The aim of the Act has been to ensure equal operating conditions, i.e. competitive neutrality between public and private business activities.

The FCCA can, under the conditions and restrictions laid down in the Competition Act, intervene in the economic activities of a municipality if such activities are preventing or distorting competition on the market. Furthermore, the Authority monitors whether the municipality´s pricing is market based in situations where, on account of exceptions under the Local Government Act, there is no requirement for incorporation.

Preliminary estimate: dozens of corporate entities were not incorporated

In collaboration with the state regional administrative authorities, the FCCA has ascertained how well the incorporation requirement is being realised within municipalities. In April 2015, the FCCA requested information from all municipalities in Finland on their municipal enterprises and on business activities conducted in the form of undertakings controlled by the public sector. A total of 286 municipalities responded to this request for information.

The responses show that the municipalities conduct business activities in a form other than as incorporated entities in areas such as water supply, meal and food services, the renting of real estate and apartments, public utilities and real estate services, occupational healthcare and waste management, as well as in financial and information management and in other administrative services. The municipalities have cited e.g. an insufficient level of activity, the internal operations of the municipality, a natural monopoly or lack of a market within the area as reasons for leaving activities unincorporated. The municipalities’ port and energy activities, in particular, have been incorporated.

According to a preliminary estimate by the FCCA, of the municipal enterprises and other activities notified by the municipalities, several dozen may still be operating on the same market as private enterprises, in which case they may fall within the sphere of the incorporation requirement. However, the FCCA will have to assess fulfilment of the incorporation requirement on a case-by-case basis, as some of the activities may not necessarily have to be incorporated on account of the exceptions listed in the Local Government Act or a transition period.

The responses received by the FCCA suggest that the municipalities lack the prerequisites to achieve certainty that their pricing is market based, as required under the Act. Many of the municipalities were unclear about what was meant by market-based pricing and about when the services would have to be priced on a market basis.

Some of the municipalities´responses were sufficiently incomplete to prevent an assessment of whether the municipality operates on the same market as private enterprises, or whether its activities significantly distort competition. The FCCA can provide municipalities with advice on the content of the competition neutrality provision, but the municipality itself must ensure that its operations comply with the Act and must monitor developments in the markets in their area.

The FCCA will continue to analyse the key deficiencies that have come to light. The results will be used in targeting competition neutrality supervision at municipal activities viewed as having the most distorting effect on competition and at tackling cases of neglect of the incorporation requirement.

Read more about the report (in Finnish)

Further information:
Sari Valliluoto, Senior Research Officer, tel. +358 29 505 3319