Municipality economic activity

According to the provisions of the Bavarian Local Government Law municipalities may only participate in economic life in exceptional cases. The intention of this is, on the one hand, to protect private sector companies because local authority economic enterprises should not be in competition with the private sector in the free market economy. On the other hand, this type of activity and involvement in competition are associated with risks for the municipality, which local authorities should not expose themselves to. Under this condition the municipality can only set up, take over or expand an economic enterprise if the public wellbeing requires this company, if the size and type of the company is in relation to the capacity of the municipality and its probable need and if the purpose cannot be fulfilled just as well and economically by another party.

A large area of economic activity is covered by the savings banks (Sparkassen). In line with the provisions of the Savings Bank Act (Sparkassengesetz) of the Land of Bavaria, local authority administrations can set up and operate savings banks with permission from the supervisory authorities.

The savings banks

- are founded by municipalities and associations of municipalities

- are based on the liability of these municipalities (guaranty authorities)

- pass on some of their annual net profit to the municipality

- are largely administered by the representatives of the guaranty authority (municipality council) in key fundamental decisions

- are subject to the supervision of the regional government.

The savings banks are operated in the form of an institution under public law and are independent vis-à-vis the municipality. The bank transactions with the customer are carried out in private law forms. According to the Federal Administrative Court the savings bank is a financial institution of a unique kind and is therefore a special form of bank. It is supposed to offer the public the opportunity of safe, interest bearing investment of their savings and other moneys as well as satisfy local needs for loans. Furthermore, the savings banks must use suitable institutions to encourage the public's sense for saving and promote electronic means of payment.

The so-called regional principle applies to the savings banks. This principle states that the area of business of a savings bank is restricted to the territory of the guaranty authority (= municipality or district). According to this, the head office and branches of a savings bank may only be set up within the municipality (district) territory. The point behind this regulation is to eliminate competition between the public savings banks. The regionally limited area of business must be separated from the (unlimited) area of activity which is determined by the rules of the market. Thus, for example, the savings bank can accept savings deposits from anyone. When investing the savings bank stock in securities, accounts receivables and other values it can also participate in foreign market developments. To this extent, their area of activity is based on the ”world principle”.

Even though the savings banks are part of a banking and currency system they differ from banks in terms of

- ownership (= local authority),

- a local and regional focus,

- the factual main focus of business relations to the public living in the immediate vicinity,

- the exclusion of competition in the territory of a municipality or district.

The second large branch of local authority business is the local supply industry. All larger towns and many municipalities belonging to a district operate energy, gas or water supply companies, either alone or in conjunction with other local authorities.

The third major pillar of the local authority economy is the transport sector. Larger towns in particular have their own local public transport companies. Other opportunities within the transport sector include the operation of sea or inland ports, airports, mountain railways, etc.

Educational and cultural institutions, such as schools, museums, theatres, and welfare institutions such as youth centres, kindergartens, children's homes and sports fields, are generally not counted as economic companies.

However, this is more of a formal classification. Aspects of efficiency must always be taken into account and also play a major role. ”Economic companies” is taken to mean those institutions whose main purpose is to make a profit. But one can hardly say this about theatres, for example.

From http://www.iuscomp.org/gla/literature/localgov.htm#ToC26