In 2020 and 2021, the Competition Council (the CC), when evaluating the revaluations of participation in a capital company prepared by public administrative bodies - state and local municipalities - has issued opinions on public transport services provided by six capital companies. The CC has prepared a summary with the most important conclusions about the public transport services provided by local municipalities, the justification and necessity of their provision, as well as the possibility to involve the private sector in the provision of services.
In order for a public administrative body to operate in the market through a capital company owned by it, it must reassess its shareholding in the capital company every five years, which also includes an assessment of the effects on competition. Furthermore, according to Article 88 of the State Administration Structure Law, a public administrative body is obliged to conduct a study of the market situation regarding the justification and usefulness of the provision of certain services, including determining the existence of a possible market failure. When performing the relevant assessment, a public administrative body is obliged to consult with the NGO’s representing merchants and then with the CC, submitting the performed assessment and receiving the opinion of the CC.
Basic services provided by capital companies - strategically important
The CC, evaluating the services provided by local municipalities in the public transport sector, has acknowledged that the essential services provided by capital companies are generally considered to be strategically important, except when a capital company established by a local municipality provides public transport services on regional routes. However, in some instances, private market participants can also provide strategically important services. Therefore, when a public administrative body considers its service to be strategically important, it is also necessary to conduct market research to demonstrate that there is a market failure and that these services cannot be effectively provided in other ways, such as involving private service providers.
Private service providers can also provide services in State cities
In the opinion of the CC, there is no market failure in State cities, where municipal capital companies provide passenger transport by bus. There are many private market participants in Latvia with equivalent experience in providing passenger transport by bus. Therefore, it would be desirable to select a service provider in a competitive environment by organizing a procurement procedure. Fair and equal procurement conditions allow a wider number of market participants to participate in the procurement and provide the local government as a customer with the opportunity to choose the most economically advantageous offer.
The need for services on regional routes must be assessed
On the other hand, public transport services provided by municipal capital companies on regional routes, in the opinion of the CC, do not comply with the exceptions specified by law. Therefore, the municipal capital company should assess the possibility of terminating the provision of that service and terminate the capital company's participation accordingly. Also, capital companies that will continue to provide this service based on the results of the procurement organized by Ltd “Autotransporta direkcija” should evaluate the possibilities to terminate the participation, for example, by disposing of the capital company or part of its assets. At the same time, the CC understands that a municipal capital company may have obligations that currently restrict its alienation or waiver of specific services, however, this does not preclude that after the restrictions expire, the capital company should assess the need to continue providing the specific service in the future.
Competitive neutrality in the public transport sector
The obligation to ensure compliance with Article 88 of the State Administration Structure Law and to decide regarding business activities through a capital company is within the competence of the local government. Unreasonable participation of a public administrative body person in a capital company does not create incompatibility with the neutrality of competition, but the conduct of a public administrative body that restricts or distorts competition may be assessed in accordance with competition neutrality.
To obtain the most complete and comprehensive information about the industry, public administrative bodies must perform an appropriate economic and legal assessment of all types of activities of the capital company, incl. additional services. The CC invites public administrative bodies to independently and regularly assess the risks of competition neutrality in consultation with NGO’s representing undertakings, including the undertakings themselves, taking into account that the assessment of the risks of violation of competition neutrality is recognized as an essential component of the economic assessment, and by applying it, a public administrative body can identify possible risks of violation of competition neutrality and prevent violations of competition neutrality.