AS375 - IN-HOUSE CONTRACTING OF LOCAL PUBLIC SERVICES AND SOME COMMENTS ON THE CONTENTS OF THE GOVERNMENT'S BILL COVERING SUCH SERVICES
PRESS RELEASE
PRESS RELEASE
LOCAL PUBLIC SERVICES: ANTITRUST AUTHORITY POINTS TO WIDESPREAD DISTORTIONS
TOO MANY CONTRACTS AWARDED DIRECTLY
Urgent reform needed to open up the market and protect consumers
Awarding of contracts directly to publicly-owned companies must be the exception and not the rule
The regulation of local public services must be reviewed to provide for an effective opening up of the market and the introduction of greater competition in order to protect citizens in their role as consumers. This is the thrust of a report by the Italian Competition Authority sent to the Presidents of the House and Senate, to the Prime Minister and to the Ministers of Industry and Regional Affairs as well as to the National Conference on State Relations with the Regions, Municipalities and Local Councils.
In the Authority's view, a reform of local public services is even more urgent given the distorted interpretation of the current regulations: that interpretation must be corrected. For this reason, the report insists that local councils should interpret the current regulations in a rigorous manner consistent with the principles of competition enshrined in EU and national legislation.
The Antitrust Authority believes the draft bill on public services approved by Cabinet last June is a step in the right direction. Nevertheless the Authority suggests that that text should include more precise indications as to the exceptional circumstances which may justify the letting of a contract "in-house". Furthermore, independent highly specialized bodies should be set up to overcome those cases of conflict of interest which today are the rule by controlling the methodology for letting of services contracts and especially the costs and quality of the services rendered.
DISTORTIONS OBSERVED
The Authority emphasizes that, ever more often, it receives complaints about situations where local councils assign contracts for public services to businesses they themselves control, or situations in which publicly-owned companies which have been awarded in-house contracts for public services increase their size and range of activities by way of mergers and acquisitions: this undermines precisely those characteristics of social and organizational proximity which were used to justify the direct awarding of contracts. Faced with constantly growing businesses of this size and nature, it is difficult to maintain the theory of effective control by the local authorities that own shares in them: these are at best majority shareholders but in any case without decisive influence either as to strategic objectives or important decisions. The result is that businesses reorganize the same services over a wider territory; the legitimacy of this approach, in the Authority's view, is open to doubt.
The suggestions contained in the report, then, are intended to act as a bulwark against the distortions caused by an operational tool like in-house contracting that is used to avoid the competitive comparisons necessary in the awarding of public contracts by way of a bidding process.
Local public services, the Authority points out, are contract services offered to users under a monopoly system: for this reason, it is essential that there be the broadest possible openness to the market by way of competitive procedures to select the supplier who can offer the best service at the lowest price.
In addition, only market forces applied by way of a tender process can resolve the conflict of interest that direct contracting poses in the case of local authorities that are at the same time the buyers of the service, shareholders and directors of the service company and members of the bodies responsible for overseeing and regulating it. The same conflict of interest is inherent in the case of businesses with mixed shareholdings, or so-called public-private partnerships.
THE GOVERNMENT'S DRAFT REFORM BILL
In the Authority's opinion, the draft reform bill introduced by the Government last June has the potential to succeed in really opening up the market for local public services to competition. The draft bill calls for the Government to adopt a specific decree to permit only “by way of exception the awarding of contracts to companies which are entirely publicly owned and part-owned by the local council, and which have the qualifications required by EU law for in-house contracting”, at the same time forbidding such companies to “offer, either directly or as partners in a bid, services or activities for other public or private entities”.
Nevertheless, the report suggests, a few changes are needed to avoid the risk that the current lamentable distortions in interpretation might be perpetuated under the new regulations.
In particular, the reform should be more specific as to the legitimacy of in-house contracting and should clarify that this is justified only when it is impossible to find a better solution in the marketplace, so that public intervention is strictly limited by the principle of subsidiarity.
On the other hand, the Authority shares the reform project's position as to the exceptional and residual nature of the public-private partnership model; this should be used only in exceptional cases precisely because it implies the maintenance of a situation of conflict of interest involving the contracting public entity, the service company and the regulator.
The Authority also recommends stipulating the methodology for managing the tender procedure based on economically justified and proportional requirements for guaranteeing an effective and competitive method for selecting suitable candidates. By the same token, the question must be broached of the costs and quality of service to be provided by the contractor. In order to resolve both these two important aspects satisfactorily, regulatory bodies must be set up with a high degree of specialization and autonomy and entirely independent of both the contractors and the relevant local government entities; these must be able to stimulate and monitor the quality of the service and the level of investments made, irrespective of whether the contractor is publicly or privately owned.
These bodies, each in its own area of expertise, must be given control over the methods for awarding contracts and managing the provision of services. This will make it possible to avoid situations of conflict of interest or having a captive regulator, which can create distortions of competition and lead, amongst other things, to higher charges, lower-quality services and/or lower levels of investment, clearly prejudicing the interests of the citizens as consumers.
The Authority also finds it hard to understand the need for the clause reserving water resources and services for public management: in this way, the water sector is subjected to precisely the organizational solution, in-house contracting, which for other services is considered exceptional and subject to a rigorous justification procedure. The public interest in water-related services is already sufficiently covered by the definition of the public nature of water resources stipulated in Act no. 36 of 5 January 1994. The management aspect, instead, should be defined from time to time as a function of administrative efficiency in the pursuit of constant improvement in the service offered to users, applying charges which are related to costs, and so without excluding the possibility that, in addition to public entities, the management of water services may be contracted out to private companies, selected by way of procedures which are publicly seen to be transparent and genuinely competitive.
Finally, the Authority recommends setting the shortest possible time-scale for the transition phase for moving from the current system of managing local public services to the new system of regulation.
Rome, 28 December 2006