State Favoritism Private Firms Battle Public Rivals

Public companies are pushing private competitors out of business in Germany – and now the government is planning to help them even more.
Earthly delights don't include taxes.

Everything in life is fleeting. As a cemetery gardener, Anja Qayyum-Kocks especially knows that. But why should her family business also have to die?

The Kocks cemetery gardening company has existed more than a century, since 1901, when her great-grandfather started grave maintenance in Mülheim an der Ruhr, in North Rhine-Westphalia. But the fourth-generation private business faces an uncertain future if it can’t compete with tax advantages offered to public companies.

“The times in our industry have been difficult for a long time,” said Ms. Qayyum-Kocks. “But if proposed changes to the value added tax go through, it could finally mean the death blow for small businesses like mine.”

The German federal government plans to introduce a tax privilege this year for public companies such as communal horticultural businesses. Details are unclear, but a general exemption would guarantee public businesses a price advantage of about 19 percent – and immensely strengthen their market power.

This kind of privilege for public companies has been going on in Germany for a while.

“We have been living in a renaissance of the state in nearly all areas of the economy in recent years,” said Daniel Zimmer, chairman of the monopoly commission and a law professor at the University of Bonn.

Between 2000 and 2012, the sales of public companies have doubled. Whether they remove garbage, build roads or supply electricity, if there is money to be made, public companies are getting involved in more and more businesses.

Federal policy supports this trend with new laws. The pending new regulation on the value added tax is one incentive for public companies. Others include a planned amendment of the procurement law and also new regulations for allocating network licenses.

While the cartel office and monopoly commission advocate for a free market, Germany's federal government has broadly ignored their recommendations

Basically, public companies are promised competitive advantages – and it comes at a cost to private businesses, efficiency and jobs.

The family business of Ms. Qayyum-Kocks is an example of how public influence can systemically undermine a private business model.

First, the municipality raised cemetery fees because of budgetary problems. With that, many graves remained empty. In cemeteries in large urban areas, only about half of graves are occupied, and in some places hardly a quarter. Cemetery gardeners feel the consequences directly because, in the end, grave maintenance depends on more burials.

Then the municipal government in Mülheim got even more creative.

“Whoever pays for a grass grave at the cemetery gets grass maintenance included in the cost,” said Ms. Qayyum-Kocks.

In other words: a complete market segment is disappearing in the municipal scale of charges and fees.

“If municipal operations are now getting a tax advantage, they will underbid us in grave maintenance,” predicted the gardener from Mülheim.

What happens in cemeteries is repeated in nearly all areas of the economy where municipalities actively become employers and providers.

Often, affected businesses only complain behind closed doors because they also depend on public contracts. But Wolfgang Lieb, who has a construction business in the Swabian town of Gammertingen, doesn’t hesitate to complain.

“Municipalities are taking more and more street-building contracts away from us,” he said. “And they are being shamelessly favored.”

In his case, the public competitor is the road equipment association, Albrand, which was created by several municipalities to maintain forest roads. Now Albrand also develops construction areas and builds streets.

“Often, it is not explicitly written out,” said Mr. Lieb. But the goal is “to save the value added tax.”

Mr. Zimmer, the competition regulator, sees a clear competitive advantage for public companies since the world financial crisis.

“Since then, many citizens trust the state much more than the market,” he said.

The trend has been biggest in the energy sector in recent years due to Germany’s transition to renewable energies. To advance the federal energy policy, municipalities across the country bought back their public utilities or established new ones. Also, towns and cities are in charge of calling for bids on new or improved networks – and often public utilities end up winning contracts over private bidders.

Earlier this year, the Federal Cartel Office stepped in to halt the bidding process in one city. At Titisee-Neustadt in the Black Forest, the contract allocation had to completely be restarted. The cartel office charged that the city had “abused its dominant market position” with a “discriminatory selection process.” The city granted a “preference without objective reason,” the cartel authorities said.

More interventions could follow. But while the cartel office and monopoly commission advocate for a free market, the German government broadly ignored the main report of the monopoly commission on the topic. In 2013, it even revoked authority of the cartel office to determine whether water fees are appropriate.

“The market entrance of a state business is not necessarily a bad thing,” said Mr. Zimmer, the monopoly commission chair. “But because municipalities negotiate as employers and providers, the temptation for unfavorable competition behavior is great.”

On the federal level, the proposed tax exemption would apply to public companies that operate mostly under the keyword “intercommunal cooperation.” It sounds harmless. Who could have anything against more cooperation between communities?

Actually, though, the tax exemption creates not only a relief in the cooperation of municipal operations, but also a financial advantage in the market. Advocates of the law are still playing down the issue, which would limit the regulations to a sovereign area. Lawyers, however, are skeptical it could be clearly demarcated.

Entrepreneurs such as Anja Qayyum-Kocks, the cemetery gardener, don’t trust such assurances. And they speak from experience. In the past, many municipalities did not hold to their tax obligations for their businesses. Until today, they have used the vague legal situation to defer taxes and sometimes not.

Ms. Qayyum-Kocks still does not want to give up, but she does have alternatives. She is not only a cemetery gardener and florist, but also a consultant in demand for training, as well as a trainer at the vocational school. It could lead to a career in public service – and finally she would have the trend in Germany on her side.

 

This article first appeared in business weekly WirtschaftsWoche. To contact the author: [email protected]